-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QoxKmaVIdCqVefqLXMgGsmQGp8NeAFex5kALdH52x8FaLGksuVzAOpeF//7ze+KF rsS+PBtNP2euyPR3n4sqQA== 0001047469-98-042510.txt : 19981201 0001047469-98-042510.hdr.sgml : 19981201 ACCESSION NUMBER: 0001047469-98-042510 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19981130 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: CIRCON CORP CENTRAL INDEX KEY: 0000719727 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 953079904 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 SEC ACT: SEC FILE NUMBER: 005-36096 FILM NUMBER: 98761097 BUSINESS ADDRESS: STREET 1: 6500 HOLLISTER AVE CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8059670404 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: CIRCON CORP CENTRAL INDEX KEY: 0000719727 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 953079904 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 BUSINESS ADDRESS: STREET 1: 6500 HOLLISTER AVE CITY: SANTA BARBARA STATE: CA ZIP: 93111 BUSINESS PHONE: 8059670404 SC 14D9 1 SCHEDULE 14D - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 CIRCON CORPORATION (Name of Subject Company) CIRCON CORPORATION (Name of Person(s) Filing Statement) COMMON STOCK, $.01 PAR VALUE (Title of Class of Securities) 172736 10 0 (CUSIP Number of Class of Securities) ------------------------ GEORGE A. CLOUTIER PRESIDENT AND CHIEF EXECUTIVE OFFICER CIRCON CORPORATION 6500 HOLLISTER AVENUE SANTA BARBARA, CALIFORNIA 93117 (805) 685-5100 (Name, address and telephone number of person authorized to receive notice and communications on behalf of person filing statement) COPY TO: ROBERT B. JACK, ESQ. WILSON SONSINI GOODRICH & ROSATI 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94304-1050 (650) 493-9300 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 1. SECURITY AND SUBJECT COMPANY The name of the subject company is Circon Corporation, a Delaware corporation (the "Company" or "Circon"), and the address of the principal executive offices of the Company is 6500 Hollister Avenue, Santa Barbara, California 93117. The title and the class of equity securities to which this statement relates is the Company's common stock, par value $.01 per share (including the associated preferred stock purchase rights issued pursuant to the Rights Agreement, as defined below) (the "Rights," and, together with the Common Stock, the "Shares"). ITEM 2. TENDER OFFER OF THE BIDDER This statement relates to the tender offer (the "Offer") disclosed in a Schedule 14D-1, dated November 30, 1998 (the "Schedule 14D-1"), filed with the Securities and Exchange Commission (the "SEC") by Maxxim Medical, Inc., a Texas corporation ("Maxxim"), Maxxim Medical, Inc., a Delaware corporation ("Parent") and a wholly-owned subsidiary of Maxxim, and MMI Acquisition Corp. (the "Purchaser"), a Delaware corporation and a wholly-owned subsidiary of Parent relating to an offer by Purchaser to purchase all outstanding Shares at a price of $15.00 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Purchaser's Offer to Purchase and the related Letter of Transmittal (which together, as they may be amended and supplemented from time to time, constitute the "Offer"). The principal executive offices of each of Maxxim, Parent and the Purchaser are located at 10300 49th Street North, Clearwater, Florida 33762. The Offer is being made pursuant to an Agreement and Plan of Merger dated as of November 21, 1998 (the "Merger Agreement") among the Company, Parent and the Purchaser. A copy of the Merger Agreement is filed as Exhibit 3.1 to this Schedule 14D-9 and is hereby incorporated by reference. The Merger Agreement provides, among other things, that as soon as practicable after the purchase of all tendered Shares pursuant to the Offer, and the satisfaction of the other conditions set forth in the Merger Agreement and in accordance with the relevant provisions of the General Corporation Law of the State of Delaware ("Delaware Law" or the "DGCL"), Purchaser will be merged into the Company (the "Merger"). Following consummation of the Merger, the Company will be a wholly owned subsidiary of Parent. At the effective time of the Merger (the "Effective Time"), each Share then issued and outstanding immediately prior to the Effective Time (other than Shares held by Circon or by any subsidiary of Circon, or owned by Maxxim, Parent, Purchaser or any other subsidiary of Maxxim or Shares held by stockholders who shall have demanded and perfected appraisal rights under Delaware Law) will be canceled and converted into the right to receive the price per Share paid pursuant to the Offer in cash, without interest (the "Merger Consideration"). The Merger Agreement is summarized in Item 3 of this Schedule 14D-9. ITEM 3. IDENTITY AND BACKGROUND (a) The name and business address of the Company, which is the entity filing this statement, are set forth in Item 1 above. (b) Except as described herein, or in the Information Statement of the Company attached to this Schedule 14D-9 as Annex B (which is hereby incorporated by reference), to the knowledge of the Company, as of the date hereof, there are no material contracts, agreements, arrangements or understandings, or any actual or potential conflicts of interest between the Company or its affiliates and (i) the Company's executive officers, directors or affiliates or (ii) Maxxim, Parent, Purchaser or their respective executive officers, directors or affiliates. THE MERGER AGREEMENT On November 21, 1998, Parent, Purchaser and Circon entered into the Merger Agreement. The Merger Agreement provides for Purchaser to make the Offer, upon the terms and subject to the Offer conditions set forth in the Merger Agreement, and further provides for the Merger to occur as soon as practicable after the purchase of the tendered Shares and the satisfaction of the conditions to the Merger set forth in the Merger Agreement. The following summary of certain provisions of the Merger Agreement is not a complete description of its terms and conditions and is qualified in its entirety by reference to the full text filed as an exhibit to this Schedule 14D-9, which is incorporated by reference. As used in the following summary, capitalized terms used but not defined herein have the meanings set forth in the Merger Agreement. CONDITIONS OF THE OFFER. Purchaser is not required to accept for payment or, subject to any applicable rules and regulations of the SEC, to pay for any Shares tendered pursuant to the Offer and may amend or terminate the Offer, consistent with the terms of the Merger Agreement, unless (i) there shall have been validly tendered and not withdrawn prior to the expiration of the Offer such number of Shares that would constitute at least a majority of the outstanding Shares, determined on a fully diluted basis (the "Minimum Condition"), and (ii) any waiting period under the HSR Act applicable to the purchase of Shares pursuant to the Offer shall have expired or been terminated; or if, upon the scheduled expiration date of the Offer and before the acceptance of such Shares for payment or the payment therefor, any of the following conditions exists which, in the reasonable judgment of Parent or Purchaser, in its sole discretion, make it inadvisable to proceed with such acceptance of Shares for payment or the payment therefor: (a) there shall be instituted or pending by any Governmental Entity any suit, action or proceeding challenging the acquisition of any Shares under the Offer, seeking to restrain or prohibit the making or consummation of the Offer or the Merger, seeking in any of various ways described in the Merger Agreement to deprive Parent of the benefits of acquiring Circon or seeking damages that could have a material adverse effect on Circon; (b) there shall be any statute, rule, regulation, judgment, order or injunction enacted, entered, enforced, promulgated or deemed applicable to the Offer or the Merger, by any Governmental Entity or court, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that would result in any of the consequences referred to in paragraph (a) above; (c) the Merger Agreement shall have been terminated in accordance with its terms; (d) (i) the Board of Directors of the Company shall have withdrawn or modified its approval or recommendation of the Offer or the Merger, or approved or recommended any Takeover Proposal by another person or group, (ii) the Company shall have entered into any agreement with respect to any such Takeover Proposal, or (iii) the Board of Directors of the Company shall have resolved to take any of the foregoing actions; (e) in the event any of the material representations and warranties of the Company set forth in the Merger Agreement shall not be true and correct in any material respect, at the date of the Merger Agreement, or if the Company shall have failed to perform in any material respect any obligation or to comply in any material respect with any agreement or covenant of the Company to be performed or complied with by it under the Merger Agreement; (f) there shall have occurred (1) any general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange for a period in excess of three hours (excluding suspensions or limitations resulting solely from physical damage or interference with such exchanges not related to marked conditions), (2) a declaration of a banking moratorium or any suspension of payments in respect to banks in the United States (whether or not mandatory) by any Governmental Entity, (3) any limitation or proposed limitation (whether or not mandatory) by any United Stated governmental authority or agency that has a material adverse effect generally on the extension of credit by banks or other financial institutions, (4) any change in general financial, bank or capital market conditions such that banks are unwilling to extend credit to borrowers similar to Parent generally or (5) any decline in either the Dow Jones Industrial Average or the Standard & Poor's Index of 500 Industrial Companies in excess of 20% from the close of business on November 21, 1998; 2 (g) there shall have occurred any events or changes which constitute or which are reasonably likely to constitute, individually or in the aggregate, a material adverse change in the condition of the Company (financial or otherwise); (h) (i) a tender offer for any securities of the Company shall have been commenced or publicly proposed to be made by another person, (ii) any person or group, other than Parent and Purchaser and other than any person or group which prior to the date hereof has publicly disclosed beneficial ownership of 10% or more of the outstanding voting securities of the Company (a "Significant Shareholder"), shall have acquired directly or indirectly beneficial ownership of 10% or more of the outstanding voting securities of the Company, including through the formation of a group, or otherwise, or (iii) any Significant Shareholder or group that together would constitute a Significant Shareholder shall have beneficially acquired additional voting securities of the Company, representing 2% or more of the outstanding voting securities of the Company; provided that in Parent's reasonable judgment any such event described in clause (ii) or (iii) makes the successful completion of the Offer unlikely or materially more burdensome to Parent or Purchaser. NO SOLICITATION. Pursuant to the Merger Agreement, the Company has agreed that it shall not, nor shall it permit any of its subsidiaries to, nor shall it authorize or permit any of its officers, directors or employees or any investment banker, financial advisor, attorney, accountant or other representative or agent retained by it or any subsidiary to, directly or indirectly, (i) solicit, initiate or encourage the submission of any Takeover Proposal (as defined below), (ii) participate in any discussions or negotiations regarding, or furnish to any person any nonpublic information with respect to, or take any other action designed or reasonably likely to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, a Takeover Proposal, or (iii) except as specifically provided in the applicable provisions of the Merger Agreement and provided that the Company shall have first complied with all its obligations under the provisions relating to termination fees and expenses, enter into any agreement with respect to any Takeover Proposal or approve or resolve to approve any Takeover Proposal. Upon execution of the Merger Agreement, the Company agreed to cease any then existing activities, discussions or negotiations with any parties conducted with respect to any of the foregoing. Notwithstanding the foregoing, the Merger Agreement provides that if, at any time prior to the acceptance for payment of Shares pursuant to the Offer, the Company Board determines in good faith after consultation with outside counsel, that such action may reasonably be required to discharge the Company Board's fiduciary duties to the Company's stockholders under applicable law, the Company may, in response to an unsolicited Takeover Proposal which constitutes a Superior Proposal (as defined below) made subsequent to the date of the Merger Agreement, and subject to compliance with the applicable provisions of the Merger Agreement, (x) furnish information with respect to the Company to any person that has submitted a Takeover Proposal that constitutes a Superior Proposal pursuant to a customary confidentiality agreement in form and substance reasonably satisfactory to Parent and (y) participate in discussions and negotiations regarding such Takeover Proposal which constitutes a Superior Proposal. Pursuant to the Merger Agreement, any violation of the restrictions set forth in the preceding sentence by any director or officer of the Company or any subsidiary or any investment banker, financial advisor, attorney, accountant or other representative or agent of the Company or any subsidiary will be deemed to be a breach of the Merger Agreement by the Company. The term "Takeover Proposal" means any proposal or offer from any person, in each case, in writing, relating to any direct or indirect acquisition or purchase of a substantial amount of assets of the Company and its subsidiaries, taken as a whole (other than the purchase of the Company's products in the ordinary course of business), or more than a 30% interest in the total voting securities of the Company or any tender offer or exchange offer that if consummated would result in any person beneficially owning 30% or more of any class of equity securities of the Company or any merger, consolidation, business combination, sale of substantially all assets, recapitalization, liquidation, dissolution or similar transaction involving the Company other than the transactions contemplated by the Merger Agreement. 3 Pursuant to the Merger Agreement, except as set forth in this paragraph, neither the Company Board nor any committee thereof shall (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Parent the approval or recommendation by such Board of Directors or such committee of the Offer, the Merger or the Merger Agreement, (ii) approve or recommend, or propose publicly to approve or recommend, any Takeover Proposal, (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement (each, an "Acquisition Agreement") related to any Takeover Proposal or (iv) resolve to take any of the foregoing actions. Notwithstanding the foregoing, in the event that, prior to the acceptance for payment of Shares pursuant to the Offer, the Company Board determines in good faith, after consultation with outside counsel, that such action may reasonably be required to discharge the Company Board's fiduciary duties to the Company's stockholders under applicable law, the Company Board may, in response to an unsolicited Superior Proposal (subject to the following proviso), (x) withdraw or modify its approval or recommendation of the Offer, the Merger or the Merger Agreement or (y) approve or recommend any such Superior Proposal; provided, that in the case of clause (y), such approval or recommendation shall occur only at a time that is after the later of (i) the fifth business day following Parent's receipt of written notice advising Parent that the Company Board has received a Superior Proposal, specifying the material terms of such Superior Proposal and identifying the person making such Superior Proposal and (ii) in the event of any amendment to the price or any material term of a Superior Proposal, three business days following Parent's receipt of written notice containing the material terms of such amendment, including any change in price (it being understood that each further amendment to the price or any material terms of a Superior Proposal shall necessitate an additional written notice to Parent and additional three business day period prior to which the Company can take the actions set forth in clause (y) above). All notices referred to in the prior sentence shall include a copy of any such Takeover Proposal or Superior Proposal. The term "Superior Proposal" means any bona fide Takeover Proposal made by a third party (i) that is on terms which the Company Board determines in its good faith judgment (based on the written opinion of the Company's financial advisors as to the financial terms of such Superior Proposal and after consultation with the Company's legal advisors) to be more favorable to the Company's stockholders than the Offer and the Merger and (ii) for which financing, to the extent required, is available pursuant to definitive agreements with respect thereto. The Merger Agreement further provides that in addition to the obligations of the Company set forth in the preceding two paragraphs, the Company will promptly advise Parent orally and in writing of any request for nonpublic information (except requests not of a transactional or financial nature by companies with established commercial relationships with the Company, made in the ordinary course of business and not in connection with a possible Takeover Proposal) or of any Takeover Proposal, the material terms and conditions of such request or Takeover Proposal and the identity of the person making such request or Takeover Proposal. The Company will promptly inform Parent of any material change in the details (including amendments or proposed amendments) of any such request or Takeover Proposal. TERMINATION. The Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the terms of the Merger Agreement by the stockholders of the Company: (a) by mutual written consent of Parent and the Company; (b) by either Parent or the Company: (i) if (x) Purchaser shall not have accepted for payment any Shares pursuant to the Offer prior to February 26, 1999 (the "Deadline Condition") as a result of the failure, occurrence or existence of any of the Conditions of the Offer set forth above or (y) the Offer shall have terminated or expired in accordance with its terms without Purchaser having accepted for payment any Shares pursuant to the Offer; provided, however, that the right to terminate the Merger Agreement pursuant to this paragraph is not available to any party whose failure to 4 perform any of its obligations under the Merger Agreement results in the failure of the satisfaction of any such conditions; provided, that if the Offer is extended, as provided for in the Merger Agreement, to a date later than the date of the Deadline Condition, the date of the Deadline Condition shall automatically be extended to the first business day following the extended expiration date of the Offer; (ii) if any Governmental Entity (as defined in the Merger Agreement) shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the acceptance for payment of, or payment for, Shares pursuant to the Offer or the Merger on the terms contemplated in the Merger Agreement, and such order, decree or ruling or other action shall have become final and nonappealable; (c) by Parent or Purchaser if, prior to the purchase of Shares pursuant to the Offer, any of the material representations and warranties of the Company set forth in the Merger Agreement shall not be true and correct in any material respect, as of the date of the Merger Agreement, or if the Company shall have failed to perform in any material respect any obligation or to comply in any material respect with any agreement or covenant of the Company to be performed or complied with by it under the Merger Agreement; (d) by Parent or Purchaser if either Parent or Purchaser is entitled to terminate the Offer as a result of the occurrence of any event described in paragraphs (d), (e), (f) or (g) under the heading Conditions of the Offer; (e) by the Company in connection with entering into a definitive agreement with respect to a Superior Proposal, in accordance with the provisions summarized under the heading "No Solicitation" above, provided that the Company has complied with all provisions thereof, including the notice provisions therein and that the Company has made the payments summarized under the heading "Termination Fee" below; (f) by the Company if, prior to the purchase of Shares pursuant to the Offer, any of the material representations and warranties of the Parent or Purchaser set forth in the Merger Agreement shall not be true and correct in any material respect, at the date of the Merger Agreement, or if the Parent or Purchaser shall have failed to perform in any material respect any obligation or to comply with in any material respect any agreement or covenant of Parent or Purchaser to be performed or complied with by them under the Merger Agreement; or (g) by Parent or Purchaser if (i) a tender offer for any securities of the Company shall have been commenced or publicly proposed to be made by another person (including the Company or its subsidiaries or affiliates), (ii) any person or group (as defined in Section 13(d)(3) of the Exchange Act), other than Parent and Purchaser and other than any person or group which prior to the date hereof has publicly disclosed beneficial ownership of 10% or more of the outstanding voting securities of the Company (a "Significant Shareholder") shall have acquired directly or indirectly beneficial ownership of 10% or more of the outstanding voting securities of the Company or any of its subsidiaries, whether through the acquisition of securities, the exercise of rights under options, warrants or similar instruments, the formation of a group, or otherwise, or (iii) any Significant Shareholder or group that together would constitute a Significant Shareholder shall have beneficially acquired additional voting securities of the Company, whether through the acquisition of securities, the exercise of rights under options, warrants or similar instruments, the formation of a group or otherwise, representing 2% or more of the outstanding voting securities of the Company; provided that in Parent's reasonable judgment any such event described in clause (ii) or (iii) makes the successful completion of the Offer unlikely or materially more burdensome to Parent or Purchaser. TERMINATION FEE. Pursuant to the Merger Agreement the Company shall pay, or cause to be paid, in same day funds to Parent the sum of (x) all of Parent's reasonable out-of-pocket expenses incurred or to be 5 incurred in connection with the Offer, the Merger or the Merger Agreement or the preparation therefor, such amount not to exceed $3,000,000 (the "Expenses"), and (y) $8,800,000 (the "Termination Fee") if (i) the Company terminates the Merger Agreement pursuant to clause (e) under the heading "Termination" above, or (ii) prior to termination of the Merger Agreement, a Takeover Proposal (whether or not such Takeover Proposal constitutes a Superior Proposal) shall have been received and within twelve months of such termination such proposal is consummated or the Company enters into an agreement to consummate or approves or recommends to its stockholders such proposal. The payment shall be made in the case of a termination described in clause (i) immediately prior to termination and in the case of a termination described in clause (ii) concurrently with the earlier of any such recommendation or the consummation of any such transaction by the Company. The Company shall pay, or cause to be paid, in same day funds to Parent all of Parent's Expenses if Parent or Purchaser shall terminate the Merger Agreement pursuant to clause (c) under the heading "Termination" above, such payment to be made promptly upon such termination. REPRESENTATIONS AND WARRANTIES. In the Merger Agreement, the Company has made customary representations and warranties to Parent and Purchaser with respect to, among other things, corporate organization, subsidiaries, capital structure, options or other rights to acquire Shares, authority to enter into the Merger Agreement, no conflicts between the Merger Agreement and applicable laws and certain agreements to which the Company or its assets may be subject, financial statements, filings with the SEC, disclosures to be made in the Proxy Statement (as defined below) and tender offer documents, absence of certain changes or events, litigation and investigation, absence of changes in benefit plans, labor relations, ERISA compliance, tax matters, compliance with applicable laws, intellectual property, material contracts, applicability of state takeover statutes, absence of excess parachute payments, brokers' and finders' fees, receipt of the Bear, Stearns & Co. Inc. opinion, the Stockholders Rights Plan, products liability and insurance matters. In the Merger Agreement, each of Parent and Purchaser has made customary representations and warranties to the Company with respect to, among other things, corporate organization, authority to enter into the Merger Agreement, no conflicts between the Merger Agreement and the certificate of incorporation and by-laws of Parent and Purchaser, or laws applicable to Parent or Purchaser, disclosures to be made in the Proxy Statement and tender offer documents, interim operations of Purchaser, brokers' and finders' fees and financing. THE COMPANY BOARD. The Merger Agreement provides that promptly upon the acceptance for payment of, and payment for, Shares by Purchaser pursuant to the Offer, Purchaser shall be entitled to designate such number of directors on the Company Board as will give Purchaser a majority of such directors and the Company shall, at such time, cause Purchaser's designees to be so elected; provided, however, that in the event that Purchaser's designees are elected to the Company Board, until the Effective Time such Board of Directors shall have at least two directors who are directors of the Company on the date of the Merger Agreement and who are not officers of the Company or any of its subsidiaries (the "Independent Directors"). Purchaser has identified five officers of Maxxim whom it may so designate to become directors of the Company and its subsidiaries. These five persons are identified as "Purchaser Designees" on page B-2 of the Information Statement attached as Annex B hereto. The Merger Agreement further provides that, notwithstanding the foregoing, if the number of Independent Directors shall be reduced below two for any reason whatsoever, the remaining Independent Director shall designate a person to fill such vacancy who shall be deemed to be an Independent Director for purposes of the Merger Agreement or, if no Independent Directors then remain, the other directors of the Company on the date of the Merger Agreement shall designate two persons to fill such vacancies who shall not be officers or affiliates of the Company or any of its subsidiaries, or officers or affiliates of Parent or any of its subsidiaries, and such persons shall be deemed to be Independent Directors. The Company shall, if requested by the Parent, also cause directors designated by the Parent to constitute at least a majority of (i) each committee of the Company's Board, (ii) each board of directors (or similar body) of 6 each subsidiary of the Company, and (iii) each committee (or similar body) of each such board. Subject to applicable law, the Company shall take all action requested by Parent necessary to effect any such election, including mailing the Information Statement to its stockholders. In connection with the foregoing, the Company will promptly, at the option of Parent, either increase the size of the Company's Board, any subsidiary or any committee thereof and/or obtain the resignation of such number of current directors or committee members as is necessary to enable Purchaser's designees to be elected or appointed to, and to constitute a majority of such boards and committees and as provided above. CONDITIONS TO THE MERGER. The respective obligations of Parent and Purchaser, on the one hand, and the Company, on the other hand, to effect the Merger are subject to the satisfaction or waiver of each of the following conditions: (i) the Merger Agreement shall have been approved and adopted by the requisite vote of the holders of Shares, if required by applicable law, in order to consummate the Merger; (ii) no statute, rule, regulation, order, decree, temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other governmental entity or other legal restraint or prohibition preventing consummation of the Merger shall be in effect; provided, however, that each of the parties shall have used reasonable efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any injunction or other order that may be entered; and (iii) Purchaser shall have previously accepted for payment and paid for Shares pursuant to the Offer. STOCKHOLDERS' MEETING. If required by applicable law in order to consummate the Merger, the Company, acting through the Company Board, shall (i) as promptly as practicable following the expiration of the Offer, duly call, give notice of, convene and hold a special meeting of its stockholders for the purposes of obtaining approval of the Merger by an affirmative vote of the holders of a majority of the Shares outstanding and the approval and adoption of the Merger Agreement; and (ii) prepare, file with the SEC, and mail to its stockholders a proxy or information statement relating to the Merger and the Merger Agreement and (iii) use its reasonable best efforts to obtain the necessary approvals of the Merger and the Merger Agreement by its stockholders. Parent has agreed to vote, or cause to be voted, all of the Shares then owned by it, Purchaser or any of its other subsidiaries in favor of the approval of the Merger and the approval and adoption of the Merger Agreement. OPTIONS. The Merger Agreement provides that immediately prior to the Effective Time, each then outstanding Circon stock option ("Option"), whether or not then vested or exercisable, shall, effective as of the commencement of the Offer, become fully exercisable. Upon the commencement of the Offer, the Company Board or an appropriate committee thereof shall provide notice to each employee of the Company or its subsidiaries or a member of the Company Board (each, an "Optionce"), that any Company Stock Option (as defined in the Merger Agreement) not exercised within 15 days (10 days in the case of Company Stock Options granted under the Company 1984 Directors Stock Option Plan) from the date of such notice shall thereupon be cancelled. The notice may provide each Optionee with an opportunity to avoid the tendering of the exercise price and receiving in lieu thereof an amount per option share equal to the excess, if any, of the Offer Price over the exercise price of the Option. Notwithstanding anything to the contrary set forth in this paragraph, any such acceleration, exercise or cancellation shall be conditioned upon the effectiveness of the Merger. The Merger Agreement further provides that prior to the commencement of the Offer, the Company shall (i) obtain any consents from holders of Company Stock Options and (ii) amend the terms of its equity incentive plans or arrangements, in each case as is necessary to give effect to the provisions described herein and to ensure that at the Effective Time, no holder of any Company Stock Option shall have the right to purchase or receive any Shares. STOCKHOLDERS RIGHTS PLAN. Pursuant to the Merger Agreement, the Preferred Shares Rights Agreement, dated as of August 14, 1996, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (the "Rights Agreement" or the "Stockholders Rights Plan") has been amended (i) to render the Rights Agreement inapplicable to the Offer, the Merger, the Merger Agreement and the acquisition of Shares by Purchaser pursuant to the Offer, (ii) to ensure that (y) none of Parent, Purchaser 7 or any of their respective affiliates shall constitute an Acquiring Person (as defined in the Rights Agreement) pursuant to the Rights Agreement by virtue of the execution of the Merger Agreement, commencement and consummation of the Offer, the acquisition of Shares by Purchaser pursuant to the Offer and the consummation of the Merger and (z) a Distribution Date or a Shares Acquisition Date (as such terms are defined in the Rights Agreement) does not occur by reason of the Offer, the Merger, the execution of the Merger Agreement, the acquisition of the Shares by Purchaser pursuant to the Offer, or the consummation of the Merger and (iii) to provide that the Final Expiration Date (as defined in the Rights Agreement) shall occur immediately prior to the Effective Time. In the Merger Agreement, the Company has agreed that such amendment will not be further amended by the Company without the prior consent of Parent in its sole discretion. CONDUCT OF BUSINESS BY THE COMPANY. The Merger Agreement provides that the Company shall carry on its business in the ordinary course consistent with the manner as currently conducted and use commercially reasonable efforts to (a) preserve intact the current business organization, (b) keep available the services of current officers and employees and (c) preserve relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with Circon. Without limiting the generality of the foregoing the Company shall not, and shall not permit any of its subsidiaries to, without Parent's prior written consent: (i) (x) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property), in respect of any of its capital stock, (y) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock (other than the issuance of Shares upon the exercise of Options or Warrants outstanding on the date of the Merger Agreement and in accordance with their terms on the date of the Merger Agreement) or (z) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (ii) issue, deliver, sell, pledge or otherwise encumber any shares of its capital stock or any shares of capital stock of its subsidiaries, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities (other than (y) pursuant to the Rights Agreement or (z) the issuance of Shares upon the exercise of Options or Warrants outstanding on the date of the Merger Agreement and in accordance with their present terms); (iii) amend its Certificate of Incorporation, By-Laws or other comparable charter or organizational documents or those of any of its subsidiaries; (iv) acquire or agree to acquire (including, without limitation, by merger, consolidation or acquisition of stock or assets) any business, including through the acquisition of any interest in any corporation, partnership, joint venture, association or other business organization or division thereof; (v) sell, lease, license, mortgage or otherwise encumber or otherwise dispose of any of its material properties or assets, other than in the ordinary course of business consistent with past practice; (vi) incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or any of its subsidiaries, or guarantee any debt securities of another person, other than short-term bank financing in the ordinary course of business consistent with past practice; or make any loans, advances or capital contributions to, or investments in, any other person, other than in the ordinary course of business consistent with past practice and in any event not in excess, individually or in the aggregate, of $100,000; 8 (vii) make or agree to make any material capital expenditure, individually or in the aggregate, in excess of $25,000. (viii) except as required to comply with applicable law (in which case the Company will notify Parent) (A) adopt, enter into, terminate or amend in any material respect any employment, severance or similar contract, collective bargaining agreement or Benefit Plan, (B) increase in any manner the compensation or fringe benefits of, or pay any bonus to, any director, officer or employee, (C) pay any benefit not provided for under any Benefit Plan or any other benefit plan or arrangement of the Company or its subsidiaries, (D) increase in any manner the severance or termination pay of any officer or employee, (E) grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or Benefit Plan (including the grant of stock options, stock appreciation rights, stock based or stock related awards, performance units or restricted stock or the removal of existing restrictions in any Benefit Plans or agreements or awards made thereunder), (F) take any action to fund or in any other way secure the payment of compensation or benefits under any employee plan, agreement, contract or arrangement or Benefit Plan or (G) take any action to accelerate the vesting of, or cash out rights associated with, any Options or other benefits; (ix) enter into any agreement of a nature that would be required to be filed as an exhibit to Form 10-K under the Exchange Act; (x) except as required by Generally Accepted Accounting Principles, make any material change in accounting methods, principles or practices; (xi) make any tax election, make a claim for any tax refund or enter into any settlement or compromise with respect to any material tax liability; (xii) amend or terminate any material contract, or waive, release, assign or settle any material rights or claims; (xiii) hire or fire or agree to hire any officers; (xiv) take any action that may reasonably be expected to result in (i) any of the representations and warranties by the Company becoming untrue, (ii) any breach of the Company's covenants under the Merger Agreement or (iii) any of the conditions of the Offer not being satisfied; or (xv) authorize any of, or commit or agree to take any of, the foregoing actions. INDEMNIFICATION. The Merger Agreement provides that from and after the consummation of the Offer, Parent will, and will cause the Surviving Corporation to, fulfill and honor in all respects the obligations of the Company pursuant to (i) each indemnification agreement in effect at such time between the Company and each person who is or was a director or officer of the Company at or prior to the Effective Time and (ii) any indemnification provisions under the Company's Certificate of Incorporation or By-laws as each is in effect on the date of the Merger Agreement (the persons to be indemnified pursuant to the agreements or provisions referred to in clauses (i) and (ii) of this sentence shall be referred to as, collectively, the "Indemnified Parties"). In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) any counsel retained by the Indemnified Parties for any period after the Effective Time must be reasonably satisfactory to the Surviving Corporation, (ii) after the Effective Time, the Surviving Corporation shall pay the reasonable fees and expenses of such counsel; provided, however, that the Surviving Corporation shall not be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld) and; provided, further, that the Indemnified Parties as a group may retain only one law firm to represent them with respect to any single action unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties. The Certificate of Incorporation and By-laws of the Surviving Corporation shall contain the provisions with 9 respect to indemnification and exculpation from liability set forth in the Company's Certificate of Incorporation and By-laws on the date of the Merger Agreement, which provisions shall not be amended, repealed or otherwise modified for a period of six years after the Effective Time in any manner that would adversely affect the rights thereunder of any Indemnified Party. The Merger Agreement further provides that the foregoing indemnification provisions shall survive the consummation of the Merger at the Effective Time, are intended to be for the benefit of, and enforceable by, the Company, Parent, the Surviving Corporation and each Indemnified Party and such Indemnified Party's heirs and representatives, and shall be binding on all successors and assigns of Parent and the Surviving Corporation. MANAGEMENT RETENTION PLANS As a result of the Company's concern about the disruptive effects on the Company's employees of the tender offer commenced by United States Surgical Corporation and its subsidiary USS Acquisition Corp. in August 1996 (the "USS Offer"), the Company retained the consulting firm of William M. Mercer, Incorporated ("Mercer") to advise the Board of Directors of the Company (the "Board") and to evaluate the possibility of implementing an employee retention program. In accordance with a recommendation from the Board's Compensation Committee, the Board authorized the Company to implement a management retention plan for executive officers (the "Management Retention Plan"). The Board also authorized the Company to implement similar plans for the Company's sales force, and for managers, professionals and key contributors. The purpose of the plans is to retain key employees of the Company during times of uncertainty, and to keep such persons focused on their jobs and the business of the Company during such times. Mercer assisted and advised the Board and its Compensation Committee in formulating the terms of the plans. The following summary is qualified in its entirety by reference to the full text of the Management Retention Plan, a copy of which is filed as Exhibit 3.6 to this Schedule 14D-9 and is incorporated by reference. Under the Management Retention Plan, executive officers are entitled to certain "retention" payments for remaining with the Company through the date of a "change in control" (as defined in the Management Retention Plan). The executive officers are also entitled to certain additional "severance" payments in the event they are terminated for any reason other than cause or are constructively terminated within a 24 month period following a change in control. All payments under the Management Retention Plan are calculated based on the executive's annual base salary and target bonus for the year (the "Annual Compensation"). The retention benefit is eight months of the executive's Annual Compensation and the severance benefit is sixteen months of the executive's Annual Compensation. The executive officers are also entitled to a prorated portion of their target bonus for the year that the change in control occurs and continuation of healthcare and related benefits for 24 months. The Management Retention Plan also provides for a non-compete agreement which becomes effective only in the event that an executive is terminated within 24 months following a change in control. Under the terms of the non-compete agreement, the executive agrees to not work for a principal competitor of the company for a one year period from the executive's termination date and receives as consideration therefor an amount equal to one half of the executive's Annual Compensation payable in 12 equal increments over the one year term of the non-compete agreement. In general, benefits and payments under the Management Retention Plan are subject to reduction, if, in the opinion of the Company's independent accountants, the golden parachute excise tax and non-deductibility provisions of the Internal Revenue Code would otherwise be triggered. In such event, a participant's benefits will be reduced to the largest amount that would not trigger the golden parachute excise tax and non-deductibility provisions. 10 ACCELERATION OF STOCK OPTION VESTING In September 1997, the Board amended the Company's stock option plans, including the stock option plans for directors, to provide that in the event of a change of control (by merger or otherwise), each option then outstanding would, in the event of the involuntary termination of services of the optionee without cause or in the event of a constructive termination within 12 months after such change of control, become fully exercisable as to all shares then subject to the option, including the otherwise unvested portion. The Merger Agreement provides for the acceleration of all outstanding stock options, conditioned upon the consummation of the Merger, regardless of whether an optionee's services are terminated. Each optionee will be afforded the opportunity, in lieu of paying the exercise price for the optioned shares and then receiving payment for the shares pursuant to the Merger, to receive for each optioned share a payment equal to the excess of the Offer Price over the exercise price, without the need for tendering payment for the exercise price. All options will terminate if not exercised during a 10 or 15 day period (depending on the option plan under which the option was issued) commencing on the date of commencement of the Offer, but only if the Merger is consummated. INDEMNITY AND LIMITATION OF LIABILITY The Company has indemnification agreements with its officers and directors by which the Company provides such persons with the maximum indemnification allowed under applicable law, with regard to any liability, claim, cost or expense (including attorney fees) incurred by such persons by reason of any action or inaction on their part while serving in such capacities, with certain limitations and exceptions. A copy of the form of such indemnification agreement is filed as Exhibit 3.5 to this statement and is incorporated by reference. The agreements provide to the indemnitees the right, to the extent the Company maintains liability insurance applicable to directors or officers, the right to be covered by such insurance in such a manner as to provide the indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors or officers, as the case may be. The agreements are binding upon any successor to the Company, including any direct or indirect successor by purchase, merger, consolidation or otherwise, which successor is required to expressly assume and agree to perform the agreement to the same extent that the Company would be required to perform it. The agreements continue in effect regardless of whether the indemnitee continues to serve as a director or officer of the Company. Subject to certain limitations, Article V of the Bylaws of the Company also provides for indemnification of officers and directors of the Company. A copy of Article V is filed as Exhibit 3.4 to this Schedule 14D-9 and is incorporated by reference. The Merger Agreement obligates the Company, as the Surviving Company in the Merger, to fulfill and honor after the consummation of the Offer its current obligations under the indemnification agreements and the bylaws. See "The Merger Agreement--Indemnification" above. In accordance with Delaware Law, Article Ninth of the Certificate of Incorporation of the Company, as amended, eliminates the personal liability of a director to the Company and its stockholders for monetary damages for breaches of fiduciary duty as a director. Delaware Law prescribes certain limitations on such exculpatory provisions. A copy of Article Ninth is filed as Exhibit 3.3 to this Schedule 14D-9 and is incorporated by reference herein. LIABILITY INSURANCE Each of the Company's directors and executive officers is insured against liabilities incurred by them in connection with their service in such capacities. The insurance policy provides aggregate coverage of $15,000,000 for claims made during the effective period of the policy. Prior to a change of control of the Company resulting from Purchaser's purchase of at least a majority of the Shares pursuant to the Offer, the Company intends to purchase an additional liability insurance policy for the directors and officers 11 extending the term of the coverage; however, the Merger Agreement prohibits any expenditure in excess of $300,000 for this extended coverage (except with Parent's prior written consent). SEVERANCE PAYMENT TO FORMER PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN Richard A. Auhll, who had been the President, Chief Executive Officer and Chairman of the Board of Circon since its founding, resigned as an executive officer on October 19, 1998, but retained his seat on the Board and participated in the Board's approval of the Merger Agreement on November 20, 1998. Mr. Auhll ceased to be a director when his term expired on November 24, 1998. At the time of Mr. Auhll's resignation, the Board agreed to pay him appropriate severance based on consultation with independent consultants. On November 20, 1998, the Board approved a severance payment to Mr. Auhll of $627,000 and agreed to continue his group health insurance coverage for three years. On November 21, 1998, Mr. Auhll entered into an agreement with Circon providing for such payment and benefits, as well as a mutual release and other normal severance terms. A copy of the agreement is filed as Exhibit 3.7 to this Schedule 14D-9 and is incorporated by reference. The amount of the payment and benefits was based on the lower of two recommendations made by two independent consulting firms. BONUS TO INTERIM PRESIDENT AND CHIEF EXECUTIVE OFFICER The Board appointed George A. Cloutier, a non-employee member of the Board, to be the interim President and Chief Executive Officer following Mr. Auhll's resignation. His agreed compensation was $25,000 per month and bonus to be determined at the Board's discretion. The Board also granted Mr. Cloutier an option to purchase 10,000 shares of Common Stock at $9.9375 per share, the market price on the date of grant. At its meeting on November 20, 1998, at which the Merger Agreement was approved, the Board determined the amount of Mr. Cloutier's bonus to be $240,000, contingent upon the successful completion of the Offer. Mr. Cloutier is not entitled to any benefits under the Management Retention Plan. OTHER MATERIAL 1998 TRANSACTIONS WITH CIRCON DIRECTORS AND EXECUTIVE OFFICERS The standard compensation and stock option grant policies for Circon Board members, and the 1997 compensation and option grants to certain executive officers, are described in the Information Statement attached as Annex B to this Schedule 14D-9. Alain Oberrotman, who was elected to the Board on October 19, 1998, received on that date an option to purchase 11,000 shares of Common Stock at $9.9375, the market price on that day. ITEM 4. THE SOLICITATION OR RECOMMENDATION (a) RECOMMENDATION OF THE BOARD OF DIRECTORS THE CIRCON BOARD HAS UNANIMOUSLY APPROVED THE OFFER AND THE MERGER AND DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF THE COMPANY AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES. (b) BACKGROUND OF THE OFFER; REASONS FOR THE RECOMMENDATION BACKGROUND OF THE OFFER U.S. SURGICAL OFFER In August 1996, United States Surgical Corporation ("U.S. Surgical") commenced a tender offer for all outstanding shares of Circon Common Stock at a price of $18.00 per share (the "USS Offer"). The USS 12 Offer was made without prior negotiation or discussion with Circon. At the time of the USS Offer, the market price of Circon shares had declined substantially from a high price of $23.50 in December 1995, to a low price of $8.50 in July 1996, and a closing price of $12.125 on the trading day immediately preceding the announcement of the USS Offer. Although the USS Offer represented a substantial premium over the market price, the Circon Board believed that the timing of the USS Offer was opportunistic and that the market price reflected factors, including problems associated with Circon's acquisition of Cabot Medical Corporation ("Cabot") in August 1995, that could be successfully resolved, resulting in greater stockholder value, whether the Company were to remain independent or be acquired at a future time. After consideration of the USS Offer and consultation with Circon's financial and legal advisors, the Board determined that the USS Offer was inadequate and not in the best interests of the Company and its stockholders. In particular, the Board concluded that the Company's strategic plan provided the potential for greater long-term benefits for the stockholders than the USS Offer based on, among other things, opportunities for revenue and earnings growth, expansion of the business, and cost savings and other benefits following the full integration of the business of Cabot into the Company. Among the factors considered was the opinion of Bear, Stearns & Co. Inc. ("Bear Stearns"), the Company's financial advisor, that, as of the date of the opinion and based upon the assumptions stated in the opinion, including the financial projections provided by Circon, the $18.00 consideration in the USS Offer was inadequate from a financial point of view to the Company's stockholders. Following the commencement of the USS Offer, the Board adopted the Management Retention Plan (described above) and retention plans applicable to other key employees. The Board also adopted a Stockholders Rights Plan (the "Rights Plan"). Under the Rights Plan, in the event a person or group were to acquire ownership of 15% or more of the Circon Common Stock, each other stockholder would be entitled to purchase shares of Common Stock having a market value equal to twice the cost of those shares to such stockholder. U.S. Surgical and certain other stockholders initiated litigation claiming, among other things, violations of fiduciary duty by the Board. During the remainder of 1996 and during 1997, Circon's business and financial performance fell short of the objectives in the strategic plan and its financial projections. Various changes were made to the strategic plan, including substantial cost reduction measures. Earnings increased in 1997 from the depressed levels of 1996, but failed to approach targeted levels. Revenues were particularly disappointing, which the Company attributed in significant part to an unexpectedly high turnover in the U.S. sales force related to uncertainty concerning the USS Offer and to the actions taken at the 1997 Annual Meeting of stockholders described below. Sales were also adversely affected by the fact that the Company was unable to recruit a qualified national sales manager to fill the vacancy in this key position that existed at the commencement of the USS Offer. Foreign sales decreased, which the Company attributed to the unsettling effect on foreign dealers from a possible takeover by U.S. Surgical, the strength of the U.S. dollar which made the Company's products less competitive in Europe, and delays in dealer orders pending ISO certification of the Company's products, which did not occur until 1998. During 1997, the Company undertook to explore with certain medical products companies the potential for a strategic commercial alliance or transaction. Although some of these contacts provided encouraging indications of interest, none ever progressed to an advanced stage of negotiations. In August 1997, the Company also initiated an extensive cost-cutting program. U.S. Surgical in December 1996 decreased the price of the USS Offer from $18 to $17, stating that the reduction was in response to Circon's financial performance. In June 1997, U.S. Surgical terminated the USS Offer and commenced a new tender offer at $14.50 per share with the objective of increasing its ownership of Circon shares from the 7.6% that it owned immediately before the USS Offer to a percentage just below the 15% that would activate the Rights Plan. This $14.50 tender offer was successfully completed. In August 1997, U.S. Surgical commenced a new tender offer for all outstanding shares at $16.50 per share (the "Final USS Offer"). 13 On August 15, 1997, the Board determined that the $16.50 Final USS Offer was inadequate and not in the best interests of the Company and its stockholders. In particular, the Board concluded that the best means for providing value to its stockholders was for the Company to continue to pursue the strategic plan and not to be put up for sale at that time. The Board believed that the Company's disappointing financial performance could be substantially improved by various actions being undertaken, including the comprehensive cost-cutting program, and that the Company would be in a better position to negotiate with any potential acquirer if it could demonstrate improved financial performance. Bear Stearns provided its opinion to the Board that the Final USS Offer was inadequate, from a financial point of view, to the Circon stockholders. The opinion was based in large part on Bear Stearns' view as to the consideration that might be paid by a strategic buyer for the entire Company in a negotiated transaction, taking into account the synergies and cost savings that might be achieved by such a transaction, and other relevant considerations. In rendering its opinion, Bear Stearns stated that it had relied on, and assumed the accuracy and completeness of, the financial information, including the financial projections, provided by Circon to Bear Stearns. At the Annual Meeting of Circon stockholders in October 1997, two persons nominated by U.S. Surgical for election as directors were elected to the two seats on Circon's classified Board to be filled at that meeting. The Board's two nominees, including Mr. Auhll, the then Chief Executive Officer and Chairman, failed to win re-election, although the Board subsequently elected Mr. Auhll to the Board when an incumbent director resigned for personal reasons. The stockholders at the 1997 Annual Meeting also approved an advisory resolution sponsored by U.S. Surgical urging the Board to take measures to sell the Company. SOLICITATION OF ACQUISITION PROPOSALS During the months following the 1997 Annual Meeting, the Board continued to closely monitor the Company's financial performance. The financial results for the quarter ended March 31, 1998 fell significantly below management's targets. The Company attributed the shortfall from targeted levels of sales and income to a recurrence of high turnover in the U.S. sales force and increased international dealer anxieties resulting from the events at the Annual Meeting and heightened expectations of a takeover by U.S. Surgical. The Board in April 1998 requested Bear Stearns to contact a substantial number of companies on a confidential basis to ascertain the potential for a strategic transaction, including a merger. Bear Stearns and Circon management identified a list of companies that might be interested in exploring a potential merger or other strategic transaction. Bear Stearns contacted 31 such companies during the period of May through September 1998. Of these companies, 19 signed confidentiality agreements and were provided non-public information concerning Circon. Seven of these companies participated in significant further due diligence activities, including Tyco International, which had entered into an agreement to acquire U.S. Surgical. Although the Company received some encouraging indications of interest, including a preliminary proposal at a price range in excess of the USS Final Offer, these indications of interest did not ripen into offers. In August 1998, Bear Stearns notified those companies that continued to express an interest that they should submit detailed proposals. Only two acquisition proposals were received, which were at prices of $10.00 and $10.125 per share. Another proposal was for the acquisition of a majority of the outstanding shares at $13.00 per share. In September, U.S. Surgical allowed the Final USS Offer to expire, and subsequently withdrew its lawsuit against Circon. On October 19, 1998, Circon announced the resignation of Mr. Auhll, the election of Mr. Cloutier as interim CEO, and the Board's determination not to continue actively soliciting new acquisition proposals at that time. The announcement did, however, contemplate that further discussions could take place with companies that had previously expressed an interest in Circon and indicated the Board's receptivity to any new unsolicited proposals that might be received in the future. On November 9, 1998, Circon reached an agreement with a group of Circon stockholders that had announced its intention to nominate and solicit proxies to elect three persons as directors at the 1998 14 Annual Meeting. Under the agreement, one of the stockholder group's nominees was elected to the Board, and, in the event the Merger were not to occur, the classified Board structure would be changed to an annually elected Board, subject to stockholder approval. Subsequent to the announcement of the Circon management changes and concurrently with a partial recovery in the depressed equity markets, Circon received additional acquisition inquiries from certain companies that had previously expressed interest. One acquisition offer received was at a price in excess of the $13.00 previously offered for majority control but below the $15.00 Offer by Maxxim discussed below. MAXXIM CONTACTS AND NEGOTIATIONS In May 1998, Bear Stearns contacted Maxxim as one of the companies identified that might be interested in exploring a potential merger or other strategic transaction. At Maxxim's request, Bear Stearns sent to Maxxim a form of confidentiality agreement, which Maxxim executed and returned to Bear Stearns. In May 1998, a confidential information memorandum containing non-public information about Circon was sent to Maxxim and its financial advisor Donaldson, Lufkin & Jenrette. There were no further indications of interest by Maxxim until it submitted to Bear Stearns on October 29, 1998, a preliminary indication that Maxxim could make an offer of between $13.00 and $15.00 per Share, depending on the results of its due diligence investigation and other factors. On November 4, 1998, representatives of Maxxim met with representatives of Circon to obtain further information about Circon's business. On November 5, 1998, a form of acquisition agreement prepared by Circon's counsel was sent to Maxxim for consideration. On November 13, 1998, Maxxim delivered a letter to Circon proposing $15.00 per Share through a tender offer for all outstanding Shares, subject to negotiation of a satisfactory definitive agreement. Maxxim also delivered on that date a proposed exclusivity agreement whereby Circon would agree not to engage in takeover discussions with any other party or solicit, initiate or encourage any acquisition proposal from or provide non-public information to any other party, for a period during which the parties would attempt in good faith to negotiate a definitive agreement. Maxxim also returned the form of definitive acquisition agreement, with various changes proposed by Maxxim. On November 16, Circon requested minor changes to the exclusivity agreement, primarily to shorten the exclusivity period to one week. This change was accepted by Maxxim, and the exclusivity agreement was signed on November 17. Negotiation of the definitive Merger Agreement took place during the period November 17-21. The Circon Board approved the Merger Agreement at a meeting on November 20, but with instructions to its Chief Executive Officer to negotiate changes to certain provisions. The meeting was adjourned and reconvened later in the evening, at which time the final negotiated changes were approved. The Chief Executive Officer was authorized to execute the definitive agreement, which he did on November 21, concurrently with the President of Parent and Purchaser. REASONS FOR THE RECOMMENDATION In reaching its determination described in Item 4(a) above, the Board took into consideration a number of factors including (among others) the following: (i) information concerning Circon's business and operations, future prospects, past, recent and current financial performance, financial condition, management (including the need to obtain a permanent chief executive officer), competitive position, industry consolidation and conditions; 15 (ii) potential financial operating results in the fourth quarter, in 1999 and beyond, and the assumptions, variables and risks affecting such potential financial results; (iii) the extensive past activities conducted through Bear Stearns soliciting proposals from numerous other companies concerning a merger or other strategic transactions and the results of those activities; (iv) the amount ($15.00) and type of consideration (cash) offered; (v) the terms of the tender offer and merger, including Parent's termination rights, the non-solicitation covenant and the exception to satisfy the Board's fiduciary duties, termination fees, operating and other covenants, representations to be made by Circon, and the views of Circon's legal and financial advisors regarding certain of such terms; (vi) alternatives to the tender offer and merger, including remaining independent, strategic alliances and sale to or merger with a company other than Parent, including the advantages and disadvantages of each and the likelihood of achieving transactions with other companies in the time required; (vii) the information presented by Bear Stearns, including comparable merger data, and its opinion that the terms of the tender offer and merger at this time, and in light of Circon's financial performance, are fair, from a financial point of view, to Circon stockholders; (viii) the effects of the announcement of the tender offer on Circon employees, dealers and customers, and the potential resulting effects on stockholder value; (ix) the likelihood of the successful completion of the tender offer, and the risks of non-completion; (x) current stock market conditions, Circon's market price and related data; (xi) the election of designees of Parent to a majority of Board seats after the tender offer is completed, and the retention of at least two independent directors to protect minority stockholder's rights until the merger; and (xii) the availability of dissenter's rights of appraisal under Delaware law. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED The Company retained Bear Stearns to provide financial advisory services in connection with a possible business transaction for the Company. Pursuant to a letter agreement dated August 8, 1996 between the Company and Bear Stearns, the Company, as compensation for such services, has agreed to pay Bear Stearns, upon any "Acquisition Transaction" (defined as one or a series of related transactions, including, but not limited to, transactions of the type contemplated by the Merger Agreement) a transaction fee equal to 1.0% of the aggregate consideration received by the stockholders of the Company in the Offer and the Merger. The Company has agreed to reimburse Bear Stearns for its reasonable out-of-pocket expenses incurred in connection with rendering financial advisory services, including fees and disbursements of its legal counsel. The Company has also agreed to indemnify Bear Stearns and its directors, officers, agents, employees and controlling persons for certain costs, expenses and liabilities, including certain liabilities under the federal securities laws. Except as set forth above, neither the Company nor any person acting on its behalf has or currently intends to employ, retain or compensate any person to make solicitations or recommendations to the stockholders of the Company on its behalf with respect to the Offer, except that such solicitations or recommendations may be made by directors, officers or employees of the Company, for which services no additional compensation will be paid. 16 ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES (a) During the past 60 days, no transactions in Shares have been effected by the Company or, to the Company's knowledge, by any of its executive officers, directors, affiliates or subsidiaries, except as follows: 1. The Company has granted stock options to, and sold stock upon exercise of stock options held by, employees and consultants under its stock plans. 2. The Company granted options to purchase Shares to directors George Cloutier and Alain Oberrotman as disclosed in Item 3. (b) To the Company's knowledge, all of the Company's executive officers and directors who own Shares currently intend to tender all of their Shares. ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY (a) Except as set forth herein, no negotiation is being undertaken or is underway by the Company in response to the Offer that relates to or would result in (i) an extraordinary transaction, such as a merger or reorganization involving the Company or any subsidiary thereof; (ii) a purchase, sale of transfer of a material amount of assets by the Company or any subsidiary thereof, (iii) a tender offer for or other acquisition of securities by or of the Company; or (iv) any material change in the present capitalization or dividend policy of the Company. (b) Except as set forth herein, there is no transaction, board resolution, agreement in principle or signed contract in response to the Offer that relates to or would result in one or more of the events referred to in Item 7(a) above. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED Not applicable ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
1.1 Letter to Stockholders dated November 30, 1998 from George A. Cloutier, President and Chief Executive Officer of the Company.* 1.2(A) Opinion of Bear, Stearns & Co. Inc.* 3.1 Agreement and Plan of Merger, dated as of November 21, 1998 among Parent, Purchaser and the Company. 3.2(B) The Company's Information Statement pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 thereunder.* 3.3(C) Certificate of Incorporation of the Company, as amended to date. 3.4(D) Bylaws of the Company, as amended to date. 3.5(E) Form of Indemnification Agreement 3.6(F) Management Retention Plan 3.7 Severance Agreement and Mutual Release between the Company and Richard Auhll.
- ------------------------ * Included in copies mailed to stockholders (A) Attached hereto as Annex A. (B) Attached hereto as Annex B. (C) Incorporated by reference to exhibits the Company's Annual Reports on Form 10-K for the fiscal years ended December 31, 1988 and 1992; and the Company's Quarterly Reports on Form 10-Q for the quarter ended June 30, 1996. (D) Incorporated by reference to an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (E) Incorporated by reference to an exhibit to the Company's Schedule 14D-9 filed August 15, 1996. (F) Incorporated by reference to an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 17 SIGNATURE After reasonable inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct. Dated: November 30, 1998 CIRCON CORPORATION By: /s/ GEORGE A. CLOUTIER ----------------------------------------- George A. Cloutier PRESIDENT AND CHIEF EXECUTIVE OFFICER 18 BEAR, STEARNS & CO. INC. [LOGO] 245 PARK AVENUE NEW YORK, NEW YORK 10167 (212)272-2000 ATLANTA - BOSTON CHICAGO - DALLAS - LOS ANGELES NEW YORK - SAN FRANCISCO GENEVA - HONG KONG LONDON - PARIS - TOKYO ANNEX A NOVEMBER 20, 1998 BOARD OF DIRECTORS CIRCON CORPORATION 6500 HOLLISTER AVENUE SANTA BARBARA, CA 93117 ATTENTION: MR. GEORGE CLOUTIER CHIEF EXECUTIVE OFFICER Ladies and Gentlemen: We understand that Circon Corporation ("Circon") has received an offer from Maxxim Medical, Inc. ("Maxxim") to acquire all of the outstanding shares of common stock (the "Shares") of Circon. You have provided us with a draft Agreement and Plan of Merger in substantially final form (the "Merger Agreement") among Circon, Maxxim and a wholly-owned subsidiary of Maxxim ("Subsidiary"). As more fully described in the Merger Agreement, Subsidiary (i) would promptly commence a tender offer to purchase all Shares for $15.00 per share in cash and (ii) as promptly thereafter as practicable, would merge with Maxxim and each outstanding Share not previously tendered would be converted into the right to receive $15.00 in cash (collectively, the "Transaction"). You have asked us to render our opinion as to whether the consideration to be received in the Transaction is fair, from a financial point of view, to the public shareholders of Circon. In the course of performing our review and analyses for rendering this opinion, we have: 1. reviewed the Merger Agreement; 2. reviewed Circon's Annual Reports to Shareholders and Annual Reports on Form 10-K for the years ended December 31, 1995 through December 31, 1997 and its Quarterly Reports on Form 10-Q for the periods ended March 31, 1998, June 30, 1998 and September 30, 1998; 3. reviewed certain operating and financial information, including projections, provided to us by management relating to Circon's business and prospects; 4. met with certain members of Circon's senior management to discuss Circon's operations, historical financial performance, current financial condition and future prospects; 5. reviewed the historical prices, valuation multiples and trading volume of the Shares; 6. reviewed publicly available financial data, stock market performance data and valuation parameters of companies which we deemed generally comparable to Circon; 7. reviewed the terms of selected precedent mergers and acquisitions of companies which we deemed generally comparable to Circon; and 8. conducted such other studies, analyses, inquiries and investigations as we deemed appropriate. Circon Corporation November 20, 1998 Page 2 In the course of our review, we have relied upon and assumed, without independent verification, the accuracy and completeness of the financial and other information provided to us by Circon. With respect to Circon's projected financial results, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the senior management of Circon as to the expected future performance of Circon. With respect to the Merger Agreement, we have assumed that the final agreement to be entered into by Circon will not differ in any material respect from the draft provided to us. We have not assumed any responsibility for the independent verification of any such information or of the projections provided to us and we have further relied upon the assurances of the senior management of Circon that it is unaware of any facts that would make the information or projections provided to us incomplete or misleading. In the course of our engagement, at the request of Circon we solicited indications of interest from potential buyers of Circon (including United States Surgical Corporation), and we met with certain interested parties to review such indications. In arriving at our opinion, we have not performed or obtained any independent appraisal of the assets or liabilities of Circon, nor have we been furnished with any such appraisals. Our opinion is necessarily based on economic, market and other conditions, and the information made available to us, as of the date hereof. We have acted as a financial advisor to Circon in connection with the Transaction and will receive a fee for such services. Bear Stearns has been previously engaged by Circon to provide certain investment banking and financial advisory services for which Bear Stearns has been compensated. In the ordinary course of business, Bear Stearns may actively trade the equity securities of Circon for its own account and for the account of its customers and, accordingly, may at any time hold a long or short position in such securities. It is understood that this letter is intended for the benefit and use of the Board of Directors of Circon and does not constitute a recommendation to the Board of Directors of Circon as to whether to approve the Transaction or to any holders of the Shares as to whether to tender such Shares pursuant to the tender offer. This opinion does not address Circon's underlying business decision to pursue the Transaction. This letter is not to be used for any other purpose, or reproduced, disseminated, quoted to or referred to at any time, in whole or in part, without our prior written consent; provided, however, that this letter may be included in its entirety in any tender offer documentation or joint proxy statement/prospectus to be distributed to the holders of the Shares in connection with the Transaction. Based on and subject to the foregoing, it is our opinion that the consideration to be received in the Transaction is fair, from a financial point of view, to the public shareholders of Circon. Very truly yours, Bear, Stearns & Co. Inc. By: /s/ BRIAN A. MCCARTHY - -------------------------------------- Brian A. McCarthy Senior Managing Director A-2 ANNEX B CIRCON CORPORATION INFORMATION STATEMENT PURSUANT TO SECTION 14(f) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND RULE 14F-1 THEREUNDER This Information Statement is being mailed on or about November 30, 1998 as a part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") of Circon Corporation (the "Company") to the holders of record of shares of Common Stock, par value $.01 per share, of the Company (the "Shares"). You are receiving this Information Statement in connection with the possible appointment of persons designated by the Purchaser (as defined below) to a majority of the seats on the Board of Directors of the Company. On November 21, 1998 the Company, Maxxim Medical, Inc., a Delaware corporation ("Parent") and MMI Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Parent (the "Purchaser"), entered into an Agreement and Plan of Merger (the "Merger Agreement") in accordance with the terms and subject to the conditions of which (i) Parent will cause the Purchaser to commence a tender offer (the "Offer") for all outstanding Shares at a price of $15.00 per Share, net to the seller in cash and without interest thereon, and (ii) the Purchaser will be merged into the Company (the "Merger"). As a result of the Offer and the Merger, the Company will become a wholly owned subsidiary of Parent. The Merger Agreement requires the Company to cause the directors designated by Parent to be elected to the Board of Directors under the circumstances described therein. This Information Statement is required by Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 thereunder. You are urged to read this Information Statement carefully. You are not, however, required to take any action at this time. Capitalized terms used herein and not otherwise defined herein shall have the meaning set forth in the Schedule 14D-9. GENERAL The Shares are the only class of voting securities of the Company outstanding. Each Share has one vote. As of November 20, 1998, there were 13,440,490 Shares outstanding. The Company's Board of Directors currently consists of seven directors. The Company's Board of Directors is divided into three classes. The term of one of the three classes expires each year. The term of the Class I Directors expires in 2000 and each third year thereafter, the term of the Class II Directors expires in 1998 and each third year thereafter, and the term of the Class III Directors expires in 1999 and each third year thereafter. Pursuant to the Merger Agreement, upon the acceptance for payment of, and payment for, Shares by Purchaser pursuant to the Offer, Purchaser shall be entitled to designate such number of directors on the Board of Directors of the Company (the "Purchaser Designees"), as will give Purchaser, subject to compliance with Section 14(f) of the Exchange Act, a majority of such directors, and the Company shall, at such time, cause the Parent Designees to be so elected by its existing Board of Directors; provided, however, that in the event that the Parent Designees are elected to the Board of Directors of the Company, until the Effective Time such Board of Directors shall have at least two directors who are directors of the Company on the date of the Merger Agreement and who are not officers of the Company or any of its subsidiaries (the "Independent Directors") and; provided, further that, in such event, if the number of Independent Directors shall be reduced below two for any reason whatsoever, the remaining Independent Director shall designate a person to fill such vacancy who shall be deemed to be an Independent Director for purposes of the Merger Agreement or, if no Independent Directors then remain, the other directors of the Company shall designate two persons to fill such vacancies who shall not be officers or affiliates of the Company or any of its subsidiaries, or officers of affiliates of Parent or any of its subsidiaries, and such persons shall be deemed to be Independent Directors for purposes of the Merger Agreement. Purchaser has informed the Company that it will choose the Purchaser Designees from persons listed below. Purchaser has informed the Company that each of the Purchaser Designees has consented to act as a director, if so designated. Biographical information concerning each of the Purchaser Designees is presented below. Such biographical information has been furnished by Purchaser, and the Company assumes no responsibility for the accuracy or completeness of such information. The reference below to "Maxxim" is to Maxxim Medical, Inc., a Texas corporation, the indirect parent of Purchaser.
POSITION WITH MAXXIM; PRINCIPAL OCCUPATION OR EMPLOYMENT; NAME FIVE-YEAR EMPLOYMENT HISTORY - ---------------------------------------------- ---------------------------------------------- Kenneth W. Davidson Director since 1982 and Chairman of the Board of Directors, Chief Executive Officer and President since November 1, 1986. Mr. Davidson is also a director of Henley Healthcare, Inc., a manufacturer of products used in physical therapy, and of Encore Orthopedics, Inc., a designer and manufacturer of implantable orthopedic devices and of Bovie Medical Corp., a supplier of electrosurgery generators and accessories. Peter M. Graham Executive Vice President and Chief Operating Officer since January 1986, and Secretary since July 1997. Mr. Graham also served as Treasurer from April 1986 through June 1997. Alan S. Blazei Vice President and Controller since December 1990, and Treasurer since July 1997. David L. Lamont Vice President since March 1998 and Group Vice President since July 1993. From January 1992 to July 1993, Mr. Lamont was President, Argon Medical division of Maxxim. Henry T. DeHart Vice President since November 1993. Since June 1995 Mr. DeHart has served as Executive Vice President of Operations of Case Management division. From December 1992 through July 1995, he served as President, Boundary Healthcare division of Maxxim.
Messrs. Davidson, Graham and Lamont are citizens of Canada. Messrs. Blazei and DeHart are citizens of the United States. None of the Purchaser Designees (i) is currently a director of, or holds any position with, the Company, (ii) has a familial relationship with any of the directors or executive officers of the Company or (iii) to Purchaser's knowledge, beneficially owns any securities (or rights to acquire any securities) of the Company. The Company has been advised by Purchaser that, to Purchaser's knowledge, none of the Purchaser Designees has been involved in any transaction with the Company or any of its directors, executive officers or affiliates which is required to be disclosed pursuant to the rules and B-2 regulations of the Commission, except transactions between Parent and/or Purchaser and the Company disclosed in the Schedule 14D-9. CURRENT DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS The following table sets forth certain information concerning each current director of the Company.
DIRECTOR NAME PRINCIPAL OCCUPATION CLASS AGE SINCE - ------------------------------------------------------------------------------ ----- --- -------- John F. Blokker Chairman of the Board of the Company; President and Chief Executive Officer, Luxcom, Inc. III 68 1991 George A. Cloutier Chief Executive Officer and President of the Company; Chairman of the Board, President and Chief Executive Officer of American Management Services, Inc. II 53 1997 Charles M. Elson Professor or Law, Stetson College of Law I 38 1997 Harold R. Frank Investor III 74 1984 Victor H. Krulak President of Words Limited I 85 1997 Joseph R. Hardiman Investor III 61 1998 Alain M. Oberrotman Independent Management Consultant II 47 1998
Mr. Blokker serves as Chairman of the Board for the Company. He is President and Chief Executive Officer of Luxcom, Inc., a telecommunications company. He was a general partner of Hambrecht & Quist Venture Partners, an investment banking firm, from February 1985 to February 1988. Prior to 1985, he served for twenty-seven years in various executive and management positions including Vice President, General Manager with Hewlett-Packard Company, a manufacturer of computers and electronic test and measurement instruments. He is a member of the Boards of Directors of Mid-Peninsula Bank of Palo Alto and Whittier Trust Company. Mr. Cloutier is serving as interim Chief Executive Officer and President of the Company. He is also Chairman of the Board, President and Chief Executive Officer of American Management Services, Inc., a consulting firm for small to mid-size businesses. Prior to founding American Management Services in 1986, Mr. Cloutier held a number of executive positions with companies providing a broad range of business consulting and management services. Mr. Elson has been a Professor of Law at Stetson University College of Law in St. Petersburg, Florida since 1990. He has served as "of Counsel" to the law firm of Holland & Knight since 1995. Mr. Elson serves as a director on the Boards of Sunbeam Corporation and Nuevo Energy Company. Mr. Frank is the founder of Applied Magnetics Corporation, a manufacturer of magnetic recording heads. He served as Chairman of its Board of Directors from inception until February, 1996, and continues to serve as a Director. Mr. Frank currently serves on the Board of Directors of Trust Company of the West and as Chairman of the Board of Key Technology, Inc. Mr. Frank is past Chairman of the Board of the American Electronics Association. Lt. Gen. Krulak has served as President of Words Limited, an editorial and feature syndicate, since 1988. Prior to 1988, he served a distinguished career with the U.S. Marine Corps from 1934 until his retirement as Lieutenant General in 1968. Lt. Gen. Krulak held positions with Copley News Service from 1968 until 1977, serving as Vice President and then President prior to his retirement in 1977. Joseph R. Hardiman is currently a private investor. From September 1987 through January 1997 Mr. Hardiman served as the President and Chief Executive Officer of the National Association of B-3 Securities Dealers, Inc., and its wholly owned subsidiary, the NASDAQ Stock Market, Inc. Prior to that, Mr. Hardiman served as Chief Operating Officer and a member of the Board of Directors of Alex. Brown & Sons. Mr. Oberrotman has been an independent management consultant since 1997. From 1992 to 1997 Mr. Oberrotman was a principal in the private equity group of Odyssey Partners, L.P., involved with, among other things, acquisitions, financings and restructurings of Odyssey's portfolio companies. Mr. Oberrotman currently serves on the Board of Directors of Eagle Food Centers, Inc. BOARD MEETINGS AND COMMITTEES During 1997, the Board of Directors met on eleven occasions. In addition, significant communications occurred between the Directors and the Company apart from meetings of the Board and the Board Committees. During 1997, none of the incumbent Directors attended fewer than 90% of the total number of Board meetings and the total number of Committee meetings on which he served. The Company has an Audit Committee and a Compensation Committee. The function that would be performed by a nominating committee is performed by the Board of Directors as a whole. The Audit Committee, which consisted of Directors Blokker, Cloutier and Frank, held two meetings in 1997. The Audit Committee currently consists of Directors Blokker and Frank. The Audit Committee recommends the appointment of independent auditors for the Company, approves the services performed by the Company's independent auditors, reviews the Company's accounting principles and consults with the independent auditors on matters relating to internal financial controls and procedures. The Compensation Committee, which consisted of Directors Auhll, Cloutier and Frank during 1997, held one meeting in 1997. The Compensation Committee currently consists of Directors Blokker, Elson and Oberrotman. The Compensation Committee reviews and makes recommendations to the Board concerning the Company's executive compensation policy, bonus plans and equity incentive plans. The Compensation Committee, as well as the full Board, also administers the Company's stock option plans. DIRECTORS' COMPENSATION The compensation for outside Directors was modified effective July 1, 1997. First, annual cash fees for services as a director were increased from $2,500 to $10,000. Second, provision was made for annual grants of Common Stock options to directors. These changes were made to bring the Company's Directors within comparable levels of compensation for companies similar in size, capital structure and board structure. The new compensation program is designed to ensure that a significant portion of a non-employee directors compensation is equity-based and, therefore, highly dependent on the performance of Circon Common Stock. Thus, the program is designed to align the interests of Circon's non-employee directors and its shareholders. Each director who is not an employee of the Company receives cash fees of $2,500 per quarter for serving as a director. These fees are paid quarterly in cash. In addition, directors receive a fee of $500 for each Board and committee meeting attended (whether in person or by telephone) and reimbursement for expenses incurred in connection with attendance at Board and committee meetings. The 1995 Directors Stock Option Plan (the "1995 Plan") is administered by the Board or a committee appointed by the Board for such purpose. Under the 1995 Plan, options for up to 200,000 shares of Common Stock may be granted to directors who are not officers of the Company ("Outside Directors"), for a price not less than 85% of the fair market value of the Common Stock on the date of grant. All option grants to date have been made at the market price on the date of grant. All options currently held by Outside Directors are fully vested. The maximum option term is ten years. If the optionee ceases to be a director for any reason, any options granted which have not been exercised will be canceled according to B-4 the terms of the stock option agreement. In July 1997, each Outside Director had his options accelerated or received new options or both. The number of accelerated options or new options granted in July 1997 to each director was determined by using a schedule designed to bring each director's total stock options vesting in 1997 to 11,000 shares. Incumbent directors receive subsequent option grants not to exceed 5,000 shares, on an annual basis. In October 1997, new directors Elson and Krulak received option grants of 11,000 shares each. In November 1998, new director Oberrotman received an option grant of 11,000 shares. The Company also provides director liability insurance for all directors. EXECUTIVE OFFICERS The Executive Officers of the Company are elected by and serve at the discretion of the Board of Directors. As of November 30, 1998, the Executive Officers of the Company were as follows:
OFFICER NAME POSITION AGE SINCE - ---------------------------------------------------------------------------- --- ------- George A. Cloutier Chief Executive Officer 53 1998 Winton L. Berci Vice President, Sales and Marketing 43 1989 Frank D. D'Amelio Vice President and Chief Manufacturing Officer 40 1989 Gary J. Menichini Vice President, Sales 41 1998 Andrew D. Simons Vice President, General Counsel and Secretary 37 1996 R. Bruce Thompson Executive Vice President and Chief Financial Officer 54 1982 David P. Zielinski Vice President, ACMI Division General Manager 55 1994
Winton Berci joined the Company as Vice President, Sales and Marketing, in 1989. Prior to joining Circon, Mr. Berci worked for fourteen years with Karl Storz Endoscopy America, Inc., a major Circon competitor. He held various positions with Karl Storz including Director of Marketing for six years. Frank D'Amelio was appointed Vice President, Chief Manufacturing Officer in 1994, prior to which he was Vice President, General Manager of the Video Division since 1993, and Vice President, CIRCON ACMI Engineering and Quality Control, beginning in 1989. Prior to 1989, Mr. D'Amelio held various positions with the Company including Director of Quality Assurance. He joined ACMI in 1982. Gary Menichini joined the Company as Vice President of Sales in 1998. Prior to joining Circon, Mr. Menichini worked for six years at Cordis Corporation, a division of Johnson & Johnson Company, including five years as West Region Manager. Prior to 1992, Mr. Menichini held senior sales positions with Quiena International, Inc. from 1991 to 1992 and General Electric Medical Systems from 1984 to 1991. Andrew Simons joined the Company as Vice President, Secretary and General Counsel in 1996. From 1992 until joining Circon, Mr. Simons worked for Tokos Medical Corporation in various capacities, including Vice President, General Counsel and Corporate Secretary. Prior to 1992, Mr. Simons was an Associate at the law firm of Gibson, Dunn & Crutcher. Mr. Thompson has been Executive Vice President and Chief Financial Officer of the Company since 1985, and Vice President since 1982. He joined the Company in 1977 as Controller. Prior to 1977, Mr. Thompson held positions with Heyer-Schulte Corporation, a subsidiary of American Hospital Supply Corporation, and Cutter Laboratories Inc. David Zielinski was appointed Vice President, ACMI Division General Manager in 1994, prior to which he was Vice President of Manufacturing for Circon ACMI. Prior to 1986, Mr. Zielinski held various B-5 positions with the Company including Director of Manufacturing for ACMI. He joined ACMI in 1982. Prior to joining ACMI, Mr. Zielinski held various positions with General Electric. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership as well as changes in ownership with the Securities and Exchange Commission ("SEC") and the National Association of Securities Dealers, Inc. ("NASDAQ"). Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon its review of the copies of such forms received by it, or written representations from certain reporting persons that no forms were required for such persons, the Company believes that during the fiscal year ended December 31, 1997 all filing requirements applicable to its executive officers, directors and greater than ten percent beneficial owners were complied with. REMUNERATION OF OFFICERS COMPENSATION TABLES SUMMARY COMPENSATION TABLE. The following table sets forth three years of compensation history for the Chief Executive Officer and each of the other four most highly compensated executive officers of the Company as of the last completed fiscal year:
LONG-TERM COMPENSATION -------------------------- AWARDS ----------- PAYOUTS ANNUAL COMPENSATION(1) SECURITIES ------------- ALL OTHER ------------------------------------- UNDERLYING LTIP PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) OTHER($) OPTIONS(#) ($) ($)(5) - --------------------------------- --------- --------- ----------- ------------- ----------- ------------- ------------- R. Auhll (3)..................... 1997 265,860 121,171 -- -- -- 10,538 President, CEO and 1996 316,500 39,274 -- -- -- 10,538 Chairman of the Board 1995 298,000 136,739 -- -- -- 10,408 F. D'Amelio...................... 1997 171,045 52,794 -- 10,000 -- 4,344 Vice President 1996 181,000 43,365 -- -- -- 4,432 Chief Manufacturing 1995 169,000 58,000 -- -- -- 3,672 Officer R. B. Thompson................... 1997 166,320 60,695 -- 10,000 -- 5,454 Executive Vice President 1996 176,000 26,860 -- -- -- 5,312 Chief Financial Officer 1995 166,000 64,840 -- -- -- 4,192 W. Berci......................... 1997 154,262 48,388 -- 10,000 -- 3,741 Vice President 1996 163,240 39,329 -- -- -- 3,621 Sales and Marketing 1995 154,000 45,500 -- -- -- 3,283 A. Simons........................ 1997 146,806 49,636 -- 10,000 -- 1,766 Vice President 1996 155,350 9,519(4) -- 10,000 -- 1,704 Secretary and 1995 n/a n/a -- -- -- n/a General Counsel
- ------------------------ (1) Includes amounts earned in fiscal year, whether or not deferred. B-6 (2) Includes Management Incentive Bonus payment plus incentive payments earned as part of cost cutting incentive program implemented in August 1997. As part of the August 1997 cost reduction program, Mr. Auhll's salary was reduced by 20% and other executive officers' salaries were reduced by 10%. (3) Mr. Auhll resigned his position from the Company on October 19, 1998. (4) Mr. Simons' bonus for 1996 was prorated based on date of hire (4/1/96). (5) "All Other Compensation" consists of Company match of employee contributions to 401(k) plans and premiums paid on life insurance by the Company on behalf of the named individuals. OPTION/SAR GRANTS IN LAST FISCAL YEAR. The following table sets forth, for each of the executive officers named in the Summary Compensation Table, stock options granted during the year ended December 31, 1997. The Company has never granted stock appreciation rights (SARs).
POTENTIAL REALIZABLE VALUE AT NUMBER OF ASSUMED ANNUAL RATES OF STOCK SECURITIES % OF TOTAL PRICE APPRECIATION FOR OPTION UNDERLYING OPTIONS GRANTED EXERCISE TERM OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ------------------------------ NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($) - ------------------------------ ----------- --------------- ----------- ----------- -------------- -------------- All Shareholders (1).......... n/a n/a n/a n/a $ 135,856,617 $ 344,287,331 R. Auhll (2).................. n/a n/a n/a n/a n/a n/a F. D'Amelio................... 10,000(3) 6.86% $ 16.25 10/09/07 $ 102,195 $ 258,983 R. B. Thompson................ 10,000(3) 6.86% $ 16.25 10/09/07 $ 102,195 $ 258,983 W. Berci...................... 10,000(3) 6.86% $ 16.25 10/09/07 $ 102,195 $ 258,983 A. Simons..................... 10,000(3) 6.86% $ 16.25 10/09/07 $ 102,195 $ 258,983
- ------------------------ (1) Total dollar gain based on assumed annual rate of stock appreciation shown here and calculated on 13,293,812 shares outstanding as of December 31, 1997, based on a ten-year term. (2) Mr. Auhll resigned his position from the Company on October 19, 1998. (3) Options were granted on 10/09/97 and are exercisable on 12/31/98. Options expire ten years from grant date. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES. The following table sets forth, for each of the executive officers named in the Summary Compensation Table above, each exercise of stock options during the year ended December 31, 1997 and the year-end value of unexercised options:
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE (1) OF UNEXERCISED OPTIONS AT FISCAL YEAR END IN- THE-MONEY OPTIONS AT 1997 FISCAL YEAR END 1997 SHARES ACQUIRED VALUE -------------------------- -------------------------- NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------- --------------- --------------- ----------- ------------- ----------- ------------- R. Auhll (2).................... n/a n/a 40,000(3) -- $ 200,000 -- R. Thompson..................... n/a n/a 8,571 21,429 $ 51,426 $ 68,754 F. D'Amelio..................... n/a n/a 29,377 28,252 $ 268,974 $ 111,171 W. Berci........................ n/a n/a 19,771 21,429 $ 177,426 $ 68,574 A. Simons....................... n/a n/a 1,429 18,571 $ 9,289 $ 55,712
- ------------------------ (1) Excess of $15.25 (market price at year end) over exercise price. (2) Mr. Auhll resigned his position from the Company on October 19, 1998. B-7 (3) Mr. Auhll exercised his options to purchase 40,000 shares on July 20, 1998. In addition to his outstanding options, Mr. Auhll also held warrants to purchase 100,000 shares which were fully exercisable at year end. The value of these warrants, computed as above, was $1,064,000. The warrants were issued in 1990 in connection with Mr. Auhll's guarantee of certain indebtedness of the Company and not in connection with his performance of services to the Company. MANAGEMENT AGREEMENTS MANAGEMENT RETENTION PLAN. The Company has a Management Retention Plan (the "Plan") covering all executive officers and certain other key employees. Under the Plan, executive officers are entitled to certain "retention" payments for remaining with the Company through the date of a "change in control" (as defined in the Plan). The executive officers are also entitled to certain additional "severance" payments in the event they are terminated for any reason other than cause within a 24 month period following a change in control. All payments under the Plan are calculated based on the executive's annual base salary and target bonus for the year (the "Annual Compensation"). The retention benefit is eight months of the executive's Annual Compensation and the severance benefit is sixteen months of the executive's Annual Compensation. The executive officers are also entitled to a prorated portion of their target bonus for the year that the change in control occurs and continuation of healthcare and related benefits for 24 months. The Management Retention Plan expires on August 20, 1999, unless a change of control occurs prior to such date. Until such expiration, the program cannot be revoked or amended to the detriment of participants. INTERIM CEO. The Board has agreed to pay Mr. Cloutier $25,000 per month and a bonus of $240,000 contingent upon successful completion of the tender offer by a subsidiary of Maxxim Medical, Inc. for the outstanding shares, for his services as interim CEO of the Company. The Board also granted Mr. Cloutier a stock option to purchase 10,000 shares of Circon Common Stock which vests in six months, at the time a permanent CEO is retained, or upon a change in control, whichever shall first occur. The Board consulted with certain benefits experts before reaching this agreement with Mr. Cloutier FORMER CEO. In connection with Mr. Auhll's resignation, the Board agreed to pay Mr. Auhll a severance package that is customary for executives under similar circumstances in the same situation. The severance agreement subsequently executed between Mr. Auhll and the Company provides for a lump-sum payment of $627,000 and the continuance of group health insurance coverage for three years, as well as other normal severance terms. REPORT OF THE COMPENSATION COMMITTEE COMPENSATION PRINCIPLES The compensation policies of the Company for all employees, including executive officers, are guided by the following principles: - Attract, retain and motivate well qualified employees who contribute to the long-term success of the Company. - Encourage the development and achievement of objectives that enhance long-term shareholder value. B-8 - Relate compensation to the overall success of the Company which includes providing sales growth coupled with sound financial performance, quality products and services for customers, and fostering an environment which enables employees to achieve objectives. EXECUTIVE COMPENSATION PRACTICES The Company's executive compensation program consists primarily of cash and equity based elements. Salary and annual bonus awards, if warranted, under the Management Incentive Compensation Program ("MICP") comprise the cash elements. The equity based elements consist of grants of stock options under the Company's employee stock option plans and participation in the Company's employee stock purchase plan which is available to all employees. The Company also provides health and welfare benefits to the named officers through programs that are generally available to all employees. In addition, all Company officers are entitled to have life insurance up to four times their annual base salary. CASH COMPONENTS It is the Company's intent to provide a compensation program that can attract, motivate and retain high performance executives who are critical to the long-term success of the Company. Salary levels and MICP bonus target levels are established annually for executive officers by the Compensation Committee, after a review of a compensation survey for the medical/dental equipment and supply industry. For 1997, the survey group consisted of 359 publicly traded companies whose principal business was the manufacture or distribution of medical/dental equipment and supplies. Of these companies, 170 are included in the NASDAQ index covering medical stocks (see "Stock Performance Graph"). Salaries for the Company's executive officers are established after comparing the responsibilities of the position held and the experience of the individual to the comparable positions and median compensation indicated in the survey. In addition, the Company periodically modifies its executive compensation due to the competitive marketplace for executive talent. The MICP bonus plan provides for annual awards which are paid after the end of the fiscal year, based on the achievement of pre-established annual increases in specific objectives. The 1997 MICP plan had 95 objectives. For every participant, a total target payout amount is established and a portion of this total target payout is assigned to specific objectives. Examples of typical specific objectives might include: growth in sales of a particular product line, growth in operating income, and reduction in accounts receivable days outstanding. Each MICP participant has a unique set of objectives which constitute his or her specific MICP program. There are also one or two subjective elements in each participant's program. An individual objective has a pre-established minimum performance level before any payment will occur and a maximum performance level where further payment ceases. The range of payouts for each objective is from zero to 200% of a target amount. The Compensation Committee establishes goals for overall growth in sales, gross profit, operating and net income on a Company wide basis. Using these Company wide goals as guidelines, targets are then determined for other business units, and other subsets of sales, gross profit and operating income. The Compensation Committee reviews the complete MICP program each year prior to any payment. In years where there is a significant change in the overall business, or in an individual's responsibility, the MICP targets are modified to make the performance measurements meaningful. Targets and payouts are prorated for participation for less than one year. Employees with other commission or bonus arrangements are generally excluded from participation in the MICP plan. The MICP plan may be modified from time to time, or discontinued at the discretion of the Compensation Committee. During 1997, executive officers had five to fourteen objectives in their individual MICP programs with each objective having a weight of 1% to 41% of their total program, with the total target payout ranging from 31% to 51% of an individual executive officer's salary. The weight assigned to each objective varied widely among the group tailored to the specific responsibilities of the individual. For 1997, actual payouts for the named executive officers' MICP programs averaged 63% of their MICP target amount. B-9 Employees, including executive officers, who participate in the 401(k) plan may receive a Company matching contribution of up to a maximum of 1 1/2% of their salary per year. EQUITY BASED COMPONENTS The Company utilizes equity based compensation in the form of stock options and a 20% matching program for stock purchases under a stock purchase plan for its employees to focus employees and management on creating and enhancing long term shareholder value. The actual value of such equity based compensation correlates directly to the Company's stock price performance. Stock options are an essential element of the Company's compensation program. This component is intended to provide a long term incentive for employees to stay with the Company and to motivate them to work toward appreciation in the price of the Company stock over time. Two hundred eighty-three employees (or approximately 24% of all employees) participate in the various employee stock option plans. Stock options are currently outstanding under the 1979 Employee Stock Option Plan, the 1983 Employee Stock Option Plan, which expired in 1989 and 1993 respectively, the 1993 Stock Option Plan (the "1993 Plan") and the Cabot Stock Option Plan (the "Cabot Plan"). In determining the number of shares subject to options being granted to executive officers, the Compensation Committee considers survey data on options granted to executives with comparable positions at comparable companies, the number of shares subject to options previously granted to the executive, the number of unvested shares subject to outstanding options held by the executive (which is an indicator of the retention value of the outstanding options) and an evaluation of the executive's individual performance. In 1997, options were granted to all executive officers with the exception of Mr. Auhll who was ineligible to receive stock options because of his participating role on the Board's Compensation Committee. In the 1979, 1983 and 1993 Employee Stock Option Plans, options generally become exercisable cumulatively or "vest" at an annual rate of 14.3% of the total shares granted for seven years commencing one year from the date of grant. All outstanding stock options were granted at the "market price" as of the date of grant. Correspondingly, options in the Cabot Plan generally become exercisable over a three year vesting period. The 1979, 1983, 1993 and Cabot Plans provide for full vesting of options in the event there is a change in control of the Company. 1997 CHIEF EXECUTIVE COMPENSATION Mr. Auhll, in his capacity as Chairman of the Board, Chief Executive Officer and President participated in substantially the same compensation programs as the other named officers. In evaluating the performance and setting the compensation of the chief executive officer and the Company's other executive officers, the Compensation Committee has taken note of the additional difficulty faced in operating the Company during a hostile tender offer as well as management's success in cutting operating expenses. After considering all factors, the committee approved a $332,325 salary for Mr. Auhll for 1997, an increase of 5% over his $316,500 salary for the prior year. In August 1997, Mr. Auhll's salary was reduced 20% as part of a cost-reduction program implemented by the Board of Directors. A special cost-cutting incentive program was initiated at the same time, which enabled Mr. Auhll and other executive officers to earn back the salary reductions by achieving the cost-cutting objectives and even exceed the salary reduction with superior cost-cutting performance. The accompanying Compensation Table for Executive Officers on page B-6 of this document shows the resulting compensation for Mr. Auhll in 1997. Mr. Auhll's target bonus for 1997 MICP program was set at $135,000, or 41% of his base salary. Mr. Auhll's base salary falls 9% above and his bonus falls 61% below the 75th percentile compared to the CEOs in the survey B-10 group. Mr. Auhll's MICP program consisted of twelve objectives covering sales growth, operating performance and financial ratios, each having a weight of 1% to 41% of his total program. Mr. Auhll's bonus program had payouts for individual factors that range from 0% to 200% of the target values for 1997. This resulted in an actual payout of $75,855 or 56% of his target bonus. COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m) Section 162(m) of the Internal Revenue Code, enacted in 1993, generally disallows a tax deduction to publicly-held corporations for compensation exceeding $1 million paid to certain of the Company's executive officers. In 1997, the performance-based compensation paid to the Company's executive officers did not exceed the $1 million limit per officer. It is the Compensation Committee's intention to review the Company's compensation policies and regulate compensation levels in order to comply with the statute and avoid non-deductible compensation payments. Respectfully submitted, Richard A. Auhll George A. Cloutier Harold R. Frank COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Directors Auhll, Cloutier and Frank comprised the Compensation Committee in 1997. Prior to Mr. Auhll's resignation in October, 1998, Mr. Auhll participated in discussions regarding compensation for executive officers, except discussions regarding his own compensation. As a concurrent member of the Compensation Committee and employee of the Company, Mr. Auhll was ineligible to receive stock option grants under the Company's stock option plans. The Compensation Committee currently consists of Directors Blokker, Elson and Oberrotman. No other member of the Compensation Committee is a former or current officer or employee of the Company or any of its subsidiaries. Furthermore, there are no compensation committee interlocks between Circon and other entities involving the Company's executive officers and board members. B-11 BENEFICIAL OWNERSHIP OF COMMON STOCK The following table sets forth certain information as of October 23, 1998, except as otherwise indicated, regarding the beneficial ownership of Common Stock of Circon by (i) each person who is known to Circon to be the beneficial owner of 5% or more of Circon's Common Stock, (ii) each Director of Circon, (iii) certain executive officers of Circon and (iv) all directors and executive officers as a group. To the Company's knowledge, the beneficial owners named in the table have sole voting and investment power with respect to the shares.
SHARES BENEFICIALLY PERCENT OF NAME OWNED CLASS(1) - ---------------------------------------------------- ------------ ----------- Tyco International Ltd. (2)......................... 1,959,348(2) 14.3% c/o Tyco International (US) Inc. One Tyco Park Exeter, NH 03833 Richard A. Auhll.................................... 1,558,142(3) 11.3% 6500 Hollister Avenue Santa Barbara, CA 93117 Circon Shareholders Committee (4)................... 1,230,715(4) 9.0% c/o Mackenzie Partners Inc. 156 Fifth Avenue New York, NY 10010 Harold R. Frank..................................... 53,277(5) * John F. Blokker..................................... 50,000(6) * R. Bruce Thompson................................... 44,774(7) * Frank D. D'Amelio................................... 33,937(8) * Winton L. Berci..................................... 23,128(9) * Charles M. Elson.................................... 17,963(10) * George A. Cloutier.................................. 16,000(11) * Victor H. Krulak.................................... 15,463(12) * Andrew D. Simons.................................... 3,158(13) * All directors and executive officers as a group (11 persons).......................................... 1,831,414(14) 13.3%
- ------------------------ * Less than 1% (1) Percent of the outstanding shares of Common Stock, treating as outstanding all shares issuable upon exercise of options held by the particular beneficial owners that are included in the first column. (2) Information given is based on a Form 3 Initial Statement of Beneficial Ownership of Securities dated October 13, 1998 as filed with the Securities and Exchange Commission. (3) Includes 100,000 shares subject to warrants exercisable currently or within 60 days. (4) The Circon Shareholders Committee members include Castlerigg Master Investments, Ltd., Sandell Asset Management Corp., Metropolitan Capital Advisors, Inc., Metropolitan Capital III, Inc., and P. Schoenfeld Asset Management, Inc. Information given is based on a Form 13D dated October 20, 1998 and an amended Form 13D/A dated November 2, 1998 as filed with the Securities and Exchange Commission. (5) Includes 18,858 shares subject to options exercisable currently or within 60 days. (6) Includes 50,000 shares subject to options exercisable currently or within 60 days. (7) Includes 11,428 shares subject to options exercisable currently or within 60 days. (8) Includes 33,937 shares subject to options exercisable currently or within 60 days. B-12 (9) Includes 22,628 shares subject to options exercisable currently or within 60 days. (10) Includes 11,000 shares subject to options exercisable currently or within 60 days. (11) Includes 16,000 shares subject to options exercisable currently or within 60 days. (12) Includes 11,000 shares subject to options exercisable currently or within 60 days. (13) Includes 2,858 shares subject to options exercisable currently or within 60 days. (14) Includes 291,281 shares subject to options exercisable currently or within 60 days. STOCK PERFORMANCE GRAPH The following graph shows the cumulative performance for the Company's Common Stock over the last five years compared with the performance of the NASDAQ Composite index (U.S. companies) and an index of NASDAQ-listed companies with standard industrial classification codes beginning with "38" (SIC 3800-3899, Measuring, analyzing, and controlling instruments; photographic, medical and optical goods; watches and clocks), published by the Center for Research in Security Prices, University of Chicago. The price of the Common Stock, and the levels of such indices, on December 31, 1992, have been converted to a base of 100 in the graph. The performance shown is not necessarily indicative of future performance. Shareholders interested in obtaining a list of companies included in the industry index may do so by written request to the Company. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS Dollars CIRCON CORPORATION Nasdaq Stock Market (US Companies) 12/31/92 100.0 100.0 12/31/93 52.3 114.8 12/31/94 48.9 112.2 12/31/95 92.0 158.7 12/31/96 69.3 195.2 12/31/97 69.3 239.5 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS Dollars NASDAQ Stocks (SIC 3800-3899) 12/31/92 100.0 12/31/93 84.6 12/31/94 91.2 12/31/95 134.2 12/31/96 139.8 12/31/97 158.9
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 CIRCON CORPORATION 100 52.3 48.9 92.0 69.3 69.3 Nasdaq Stock Mkt (US Companies) 100 114.8 112.2 158.7 195.2 239.5 NASDAQ Stocks (SIC 3800-3899) 100 84.6 91.2 134.2 139.8 158.9
B-13 EX-1.1 2 EXHIBIT 1.1 EXHIBIT 1.1 [LOGO] November 30, 1998 TO THE STOCKHOLDERS OF CIRCON CORPORATION Dear Stockholder: On November 21, 1998, Circon Corporation entered into an agreement with Maxxim Medical, Inc. and its wholly owned subsidiary that provides for the acquisition of Circon for a price of $15 per share in cash. Under the terms of the proposed transaction, Maxxim's subsidiary has commenced a tender offer (the "Tender Offer") for all outstanding shares of Circon Common Stock at $15 per share. The Tender Offer is currently scheduled to expire at 5:00 p.m., New York City time, on Thursday, January 5, 1999. Completion of the Tender Offer is conditioned, among other things, upon the tender of at least a majority of the outstanding Circon shares. Following successful completion of the Tender Offer, all Circon shares not tendered and purchased in the Tender Offer will be converted into the right to receive $15 per share in cash pursuant to a merger of Circon with Maxxim's subsidiary. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TENDER OFFER AND THE MERGER AND DETERMINED THAT THE TERMS OF THE TENDER OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, CIRCON STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS ACCEPT THE TENDER OFFER AND TENDER THEIR SHARES. The recommendation of the Board of Directors is described in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by Circon with the Securities and Exchange Commission and enclosed with this letter. In arriving at its recommendation, the Board of Directors gave careful consideration to a number of factors, including the opinion of Bear, Stearns & Co. Inc., financial advisors to Circon, a copy of which is attached as Annex A to the Schedule 14D-9. We urge you to read carefully the Schedule 14D-9 in its entirety to that you will be more informed as to the Board's recommendation. Also accompanying this letter is a copy of the Offer to Purchase and related materials, including a Letter of Transmittal for tendering your shares. These documents set forth the terms and conditions of the Offer and provide instructions as to how to tender your shares. We urge you to read each of the enclosed materials carefully. On behalf of the Board of Directors, George A. Cloutier President and Chief Executive Officer EX-3.1 3 EXHIBIT 3.1 AGREEMENT AND PLAN OF MERGER AMONG MAXXIM MEDICAL, INC., MMI ACQUISITION CORP. AND CIRCON CORPORATION TABLE OF CONTENTS
PAGE ARTICLE I The Offer .............................................. 2 SECTION 1.01. The Offer ...................................... 2 SECTION 1.02. Company Actions ................................ 3 ARTICLE II The Merger ............................................. 5 SECTION 2.01. The Merger ..................................... 5 SECTION 2.02. Closing ........................................ 5 SECTION 2.03. Effective Time ................................. 6 SECTION 2.04. Effects of the Merger .......................... 6 SECTION 2.05. Certificate of Incorporation and Bylaws ........ 6 SECTION 2.06. Directors ...................................... 6 SECTION 2.07. Officers ....................................... 7 ARTICLE III Effect of the Merger on the Capital Stock of the Constituent Corporations; Payment of Merger Consideration ......................................... 7 SECTION 3.01. Effect on Capital Stock ........................ 7 SECTION 3.02. Payment of Merger Consideration ................ 8 ARTICLE IV Representations and Warranties of the Company ........... 10 SECTION 4.01. Organization, Standing and Corporate Power ...... 10 SECTION 4.02. Subsidiaries .................................... 10 SECTION 4.03. Capital Structure ............................... 11 SECTION 4.04. Authority; Noncontravention ..................... 12 SECTION 4.05. SEC Documents; Financial Statements ............. 14 SECTION 4.06. Information Supplied ............................ 14 SECTION 4.07. Absence of Certain Changes or Events ............ 15 SECTION 4.08. Litigation; Investigation ....................... 15 SECTION 4.09. Contracts ....................................... 16 SECTION 4.10. Compliance with Laws ............................ 16 SECTION 4.11. Absence of Changes in Benefit Plans; Labor Relations ....................................... 18 SECTION 4.12. ERISA Compliance ................................ 19 SECTION 4.13. Taxes ........................................... 21 SECTION 4.14. No Excess Parachute Payments .................... 21 SECTION 4.15. Intellectual Property ........................... 22 SECTION 4.16. State Takeover Statutes ......................... 25 SECTION 4.17. Rights Agreement ................................ 25 SECTION 4.18. Brokers; Schedule of Fees and Expenses .......... 25 SECTION 4.19. Opinion of Financial Advisor .................... 26 SECTION 4.20. Annual Meeting .................................. 26 SECTION 4.21. Products Liability .............................. 26 SECTION 4.22. Insurance ........................................ 27 ARTICLE V Representations and Warranties of Parent and Sub ......... 28 SECTION 5.01. Organization, Standing and Corporate Power ...... 28 SECTION 5.02. Authority; Noncontravention ..................... 28 SECTION 5.03. Information Supplied ............................ 29 SECTION 5.04. Interim Operations of Sub ....................... 30 SECTION 5.05. Brokers ......................................... 30 SECTION 5.06. Financing ....................................... 30 ARTICLE VI Covenants ............................................... 30 SECTION 6.01. Covenants of the Company ........................ 30 SECTION 6.02. No Solicitation ................................. 33
i TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE VII Additional Agreements .................................. 36 SECTION 7.01. Stockholder Approval; Preparation of Proxy Statement ....................................... 36 SECTION 7.02. Access to Information ........................... 37 SECTION 7.03. State Takeover Laws ............................. 37 SECTION 7.04. Reasonable Efforts .............................. 38 SECTION 7.05. Company Stock Options ........................... 39 SECTION 7.06. Directors ....................................... 39 SECTION 7.07. Fees and Expenses ............................... 40 SECTION 7.08. Indemnification ................................. 41 SECTION 7.09. Certain Litigation .............................. 42 SECTION 7.10. Rights Agreement ................................ 42 SECTION 7.11. Notification of Certain Matters ................. 42 ARTICLE VIII Conditions ............................................ 43 SECTION 8.01. Conditions to Each Party's Obligation To Effect the Merger ...................................... 43 ARTICLE IX Termination and Amendment ............................... 43 SECTION 9.01. Termination ..................................... 43 SECTION 9.02. Effect of Termination ........................... 45 SECTION 9.03. Amendment ....................................... 45 SECTION 9.04. Extension; Waiver ............................... 46 ARTICLE X Miscellaneous ............................................ 46 SECTION 10.01. Nonsurvival of Representations, Warranties and Agreements ..................................... 46 SECTION 10.02. Notices ........................................ 46 SECTION 10.03. Interpretation ................................. 48 SECTION 10.04. Counterparts ................................... 48 SECTION 10.05. Entire Agreement; No Third Party Beneficiaries . 48 SECTION 10.06. Governing Law .................................. 48 SECTION 10.07. Publicity ...................................... 48 SECTION 10.08. Assignment ..................................... 49 SECTION 10.09. Enforcement .................................... 49 SECTION 10.10. Severability ................................... 49
ii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER dated as of November 21, 1998, by and among Maxxim Medical, Inc., a Delaware corporation ("Parent"), MMI Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), and Circon Corporation, a Delaware corporation (the "Company"). WHEREAS, in furtherance of the acquisition of the Company by Parent on the terms and subject to the conditions set forth in this Agreement, Parent proposes to cause Sub to make a tender offer (as it may be amended from time to time as permitted under this Agreement, the "Offer") to purchase all the outstanding shares of Common Stock, par value $.01 per share, of the Company (together with any associated Rights (as defined in the Rights Agreement (as defined)), the "Company Common Stock"; the shares of Company Common Stock being hereinafter collectively referred to as the "Shares"), at a purchase price (the "Offer Price") of $15 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in this Agreement and in Annex A attached hereto (the "Offer Conditions"); WHEREAS, the respective Boards of Directors of Parent, Sub and the Company have approved the Offer and the merger of Sub with and into the Company (the "Merger") upon the terms and subject to the conditions set forth in this Agreement and the Offer Conditions, whereby each issued and outstanding Share, other than Shares owned directly or indirectly by Parent or the Company and Dissenting Shares (as defined in Section 3.01(d)), will be converted into the right to receive the price per Share paid in the Offer; and WHEREAS, Parent, Sub and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Offer and the Merger and also to prescribe various conditions to the Offer and the Merger. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Sub and the Company hereby agree as follows: ARTICLE I THE OFFER SECTION I.1. THE OFFER. (1) Subject to the provisions of this Agreement and the satisfaction or waiver of the conditions set forth in Annex A, as promptly as practicable but in no event later than five business days after the date of the public announcement by Parent and the Company of this Agreement, Sub shall, and Parent shall cause Sub to, commence the Offer. The initial scheduled expiration date for the Offer shall be January 5, 1999. Sub shall be obligated to, and Parent shall cause Sub to, accept for payment, and pay for as promptly as practicable after the expiration of the Offer all Shares validly tendered pursuant to the Offer and not withdrawn subject only to the conditions set forth in Exhibit A (the "Offer Conditions") (any of which may be waived in whole or in part by Sub in its sole discretion, provided that, without the consent of the Company, Sub shall not waive the Minimum Condition (as defined in Exhibit A)) and to the terms and conditions of this Agreement. Sub expressly reserves the right to modify the terms of the Offer, except that, without the consent of the Company, Sub shall not (i) reduce the number of Shares subject to the Offer, (ii) reduce the Offer Price, (iii) add to the Offer Conditions, (iv) except as provided in the next sentence, extend the Offer, (v) change the form of consideration payable in the Offer or (vi) amend any other term of the Offer in any manner adverse to the holders of the Shares. Notwithstanding the foregoing, Sub may, without the consent of the Company, (A) extend the Offer, if at the initial scheduled or extended expiration date of the Offer any of the Offer Conditions shall not be satisfied or waived, until such time as such conditions are satisfied or waived, (B) extend the Offer for any period required by any rule, regulation, interpretation or position of the Securities and Exchange Commission (the "SEC") or the staff thereof applicable to the Offer and (C) extend the Offer on one or more occasions for an aggregate period of not more than 10 business days beyond the latest expiration date that would otherwise be permitted under clauses (A) or (B) of this sentence, if on such expiration date there shall not have been tendered at least 90% of the outstanding Shares. (2) On the date of commencement of the Offer, Parent and Sub shall file with the SEC a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") with respect to the Offer, which shall contain an offer to purchase and a related letter of transmittal and summary advertisement (such Schedule 14D-1 and the documents included therein pursuant to which the Offer will be made, together with any supplements or amendments thereto, the "Offer Documents"). Parent and Sub agree that the Offer Documents shall comply as to form in all material respects with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder and the Offer Documents, on the date first published, sent or given to the Company's stockholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation or warranty is made by Parent or Sub with respect to information supplied by the Company or any of its stockholders specifically for inclusion or incorporation by reference in the Offer Documents. Each of Parent, Sub and the Company agree promptly to correct any information provided by it for use in the Offer Documents if and to the extent that such information shall have become false or misleading in any material respect, and Parent and Sub further agree to take all steps necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC and the other Offer Documents as so corrected to be disseminated to the Company's stockholders, in each case as and to the extent required by applicable federal securities laws. The Company and its counsel shall be given reasonable opportunity to review and comment upon the Offer Documents prior to their filing with the SEC or dissemination to the stockholders of the Company. Parent and Sub agree to provide the Company and its counsel any comments Parent, Sub or their counsel may receive from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments. (3) Parent shall provide or cause to be provided to Sub on a timely basis the funds necessary to accept for payment, and pay for, any Shares that Sub becomes obligated to accept for payment, and pay for, pursuant to the Offer. SECTION I.2. COMPANY ACTIONS. (1) The Company hereby approves of and consents to the Offer and represents that the Board of Directors of the Company, at a meeting duly called and held, duly and unanimously adopted resolutions approving this Agreement, the Offer and the Merger (including but not limited to the approval for purposes of section 203 of the Delaware General Corporation Law (the "DGCL") hereinafter referred to as the "203 Approval"), determining, as of the date of such resolutions, that the terms of the Offer and the Merger are fair to, and in the best interests of, the Company's stockholders, recommending that the Company's stockholders accept the Offer, tender their shares pursuant to the Offer and approve this Agreement (if required) and approving the acquisition of Shares by Sub pursuant to the Offer and the other transactions contemplated by this Agreement. The Company believes that each of its directors currently intends to tender all Shares (other than Shares, if any, held by such person that, if tendered, could cause such person to incur liability under the provisions of Section 16(b) of the Exchange Act) owned by such person pursuant to the Offer. (2) On the date the Offer Documents are filed with the SEC, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the Offer (such Schedule 14D-9, as supplemented or amended from time to time, the "Schedule 14D-9") containing, subject to the terms of this Agreement, the recommendation described in paragraph (a) and shall mail the Schedule 14D-9 to the stockholders of the Company. The Schedule 14D-9 shall comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder and, on the date filed with the SEC and on the date first published, sent or given to the Company's stockholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, -2- not misleading, except that no representation or warranty is made by the Company with respect to information supplied by Parent or Sub specifically for inclusion or incorporation by reference in the Schedule 14D-9. Each of the Company, Parent and Sub agrees promptly to correct any information provided by it for use in the Schedule 14D-9 if and to the extent that such information shall have become false or misleading in any material respect, and the Company further agrees to take all steps necessary to amend or supplement the Schedule 14D-9 and to cause the Schedule 14D-9 as so amended or supplemented to be filed with the SEC and disseminated to the Company's stockholders, in each case as and to the extent required by applicable federal securities laws. Parent and its counsel shall be given reasonable opportunity to review and comment upon the Schedule 14D-9 prior to its filing with the SEC or dissemination to stockholders of the Company. The Company agrees to provide Parent and its counsel any comments the Company or its counsel may receive from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments. (3) In connection with the Offer and the Merger, the Company shall cause its transfer agent to furnish Sub promptly with mailing labels containing the names and addresses of the record holders of Shares as of a recent date and of those persons becoming record holders subsequent to such date, together with copies of all lists of stockholders, security position listings and computer files and all other information in the Company's possession or control regarding the beneficial owners of Shares, and shall furnish to Sub such information and assistance (including updated lists of stockholders, security position listings and computer files) as Parent may reasonably request in communicating the Offer to the Company's stockholders. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Merger, Parent and Sub and their agents shall hold in confidence the information contained in any such labels, listings and files, will use such information only in connection with the Offer and the Merger and, if this Agreement shall be terminated, will deliver, and will use their reasonable efforts to cause their agents to deliver, to the Company all copies and any extracts or summaries from such information then in their possession or control. ARTICLE II THE MERGER SECTION II.1. THE MERGER. Subject to the last two sentences of this Section 2.01, upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, Sub shall be merged with and into the Company at the Effective Time (as defined in Section 2.03). Following the Effective Time, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation") and shall succeed to and assume all the rights and obligations of Sub in accordance with the DGCL. At the election of Parent, to the extent that any such action would not cause a failure of a condition to the Offer or the Merger, (i) any direct or indirect wholly owned subsidiary (as defined in Section 10.03) of Parent may be substituted for and assume all of the rights and obligations of Sub as a constituent corporation in the Merger or (ii) the Company may be merged with and into Sub with Sub continuing as the Surviving Corporation with the effects set forth above and in Section 2.04. In either such event, the parties agree to execute an appropriate amendment to this Agreement in order to reflect the foregoing. SECTION II.2. CLOSING. The closing of the Merger will take place at 10:00 a.m. (New York time) on a date to be specified by Parent or Sub, which shall be no later than the second business day after satisfaction or waiver of the conditions set forth in Article VIII (the "Closing Date"), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, unless another date, time or place is agreed to in writing by the parties hereto. SECTION II.3. EFFECTIVE TIME. Subject to the provisions of this Agreement, as soon as practicable on or after the Closing Date, the parties shall file with the Delaware Secretary of State a certificate of merger or other appropriate documents (in any such case, the "Certificate of Merger") executed in accordance with the relevant provisions of the DGCL and shall make all other filings or recordings required under the DGCL. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Delaware Secretary of State, or at such other time as Sub and the Company shall agree should be specified in the Certificate of Merger (the time the Merger becomes effective being hereinafter referred to as the "Effective Time"). -3- SECTION II.4. EFFECTS OF THE MERGER. The Merger shall have the effects set forth in Section 259 of the DGCL. SECTION II.5. CERTIFICATE OF INCORPORATION AND BYLAWS. (1) The Certificate of Incorporation of the Company as in effect immediately prior to the Effective Time shall be amended as of the Effective Time so that Article fourth thereof shall read in its entirety as follows: "The total number of shares of stock which the Corporation shall have the authority to issue is 1,000." As so amended, such certificate of incorporation shall be the certificate of incorporation of the Surviving Corporation, until thereafter changed or amended, subject to Section 7.08, as provided therein or by applicable law. (2) The Bylaws of the Company as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation, until thereafter changed or amended, subject to Section 7.08, as provided therein or by applicable law. SECTION II.6. DIRECTORS. The directors of Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, until the earlier of their resignation or removal or their respective successors are duly elected and qualified, as the case may be. SECTION II.7. OFFICERS. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation, until the earlier of their resignation or removal or their respective successors are duly elected and qualified, as the case may be. ARTICLE III EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; PAYMENT OF MERGER CONSIDERATION SECTION III.1. EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any Shares or any shares of capital stock of Sub: (1) CAPITAL STOCK OF SUB. Each issued and outstanding share of capital stock of Sub shall be converted into and become one fully paid and nonassessable share of Common Stock, par value $.01 per share, of the Surviving Corporation. (2) CANCELLATION OF TREASURY STOCK AND PARENT OWNED STOCK. Each Share that is owned by the Company or by any subsidiary of the Company and each Share that is owned by Parent, Sub or any other subsidiary of Parent shall automatically be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor. (3) CONVERSION OF SHARES. Subject to Section 3.01(d), each issued and outstanding Share (other than Shares to be canceled in accordance with Section 3.01(b)) shall be converted into the right to receive from the Surviving Corporation in cash, without interest, the price per share paid in the Offer (the "Merger Consideration"). As of the Effective Time, all such Shares shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration, without interest. (4) SHARES OF DISSENTING STOCKHOLDERS. Notwithstanding anything in this Agreement to the contrary, any issued and outstanding Shares held by a person (a "Dissenting Stockholder") who objects to the Merger and complies with all the provisions of Delaware law concerning the right of holders of Shares to dissent from the Merger and require appraisal of their Shares ("Dissenting Shares") shall not be converted as described in Section 3.01(c), but shall be converted into the right to receive such consideration as may be determined to be due to such Dissenting Stockholder pursuant to Delaware law. If, after the Effective Time, such Dissenting Stockholder withdraws his demand for appraisal or fails to perfect or otherwise loses his right to appraisal, in any case pursuant to the DGCL, his Shares shall be deemed to be converted as of the Effective Time into the right to receive the Merger -4- Consideration, without interest. The Company shall give Parent (i) prompt notice of any demands for appraisal of Shares received by the Company or the receipt by the Company of any documents or instruments with respect to stockholder's rights of appraisal pursuant to the DGCL and (ii) the opportunity to participate in and direct all negotiations and proceedings with respect to any such demands. The Company shall not, without the prior written consent of Parent, make any payment with respect to, or settle, offer to settle or otherwise negotiate, any such demands. SECTION III.2. PAYMENT OF MERGER CONSIDERATION. (1) PAYING AGENT. Prior to the Effective Time, Parent shall designate a bank or trust company to act as paying agent in the Merger (the "Paying Agent"), and, from time to time on, prior to or after the Effective Time, Parent shall make available, or cause the Surviving Corporation to make available, to the Paying Agent cash in amounts and at the times necessary for the prompt payment of the Merger Consideration upon surrender of certificates representing Shares as part of the Merger pursuant to Section 3.01 (it being understood that any and all interest earned on funds made available to the Paying Agent pursuant to this Agreement shall be turned over to Parent). (2) SURRENDER OF CERTIFICATES. As soon as reasonably practicable after the Effective Time, the Paying Agent shall mail to each holder of record of a certificate or certificates that immediately prior to the Effective Time represented Shares (the "Certificates"), (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in a form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Paying Agent, the holder of such Certificate shall be entitled to receive in exchange therefor the amount of cash into which the Shares theretofore represented by such Certificate shall have been converted pursuant to Section 3.01, and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Shares that is not registered in the transfer records of the Company, payment may be made to a person other than the person in whose name the Certificate so surrendered is registered, if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of such Certificate or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 3.02, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the amount of cash, without interest, into which the Shares theretofore represented by such Certificate shall have been converted pursuant to Section 3.01. No interest will be paid or will accrue on the cash payable upon the surrender of any Certificate. (3) NO FURTHER OWNERSHIP RIGHTS IN SHARES. All cash paid upon the surrender of Certificates in accordance with the terms of this Article III shall be deemed to have been paid in full satisfaction of all rights pertaining to the Shares theretofore represented by such Certificates. At the Effective Time, the stock transfer books of the Company shall be closed, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the Shares. If thereafter Certificates are presented to the Surviving Corporation or the Paying Agent for any reason, they shall be canceled and exchanged as provided in this Article III. (4) NO LIABILITY; TERMINATION OF FUND. At any time following six months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) which had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat, or other similar Laws) only as general creditors thereof with respect to the Merger Consideration payable upon due surrender of their Certificates, without any interest thereon. None of Parent, Sub, the Company or the Paying Agent shall be liable to any person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. -5- (5) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any certificates evidencing Shares shall have been lost, stolen or destroyed, the Paying Agent shall pay to such holder the Merger Consideration required pursuant to Section 3.01, in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof with such assurances as the Paying Agent, in its discretion and as a condition precedent to the payment of the Merger Consideration, may reasonably require of the holder of such lost, stolen or destroyed certificates. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Sub as follows: SECTION IV.1. ORGANIZATION, STANDING AND CORPORATE POWER. Each of the Company and its subsidiaries (as defined in Section 10.03) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has all requisite corporate power and authority to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed individually or in the aggregate would not have a material adverse effect (as defined in Section 10.03) on the Company. The Company has delivered to Parent complete and correct copies of the certificate of incorporation and by-laws of the Company and each of its subsidiaries, in each case as amended to the date hereof. SECTION IV.2. SUBSIDIARIES. Exhibit B to this Agreement lists as to each subsidiary (as defined in Section 10.03) of the Company, the number of shares of capital outstanding and the holders of securities of such capital stock. All the outstanding shares of capital stock of, or other equity interests in, each such subsidiary have been validly issued and are fully paid and nonassessable and are owned directly or indirectly by the Company, free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens") and free of any other restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests). Other than with respect to the subsidiaries listed on Exhibit B and as set forth in Section 4.02 of the confidential memorandum of the Company as of the date hereof delivered to Parent (the "Disclosure Schedule"), the Company does not directly or indirectly own any securities or other beneficial ownership interests in any other entity (including through joint ventures or partnership arrangements), or have any investment in any other person. SECTION IV.3. CAPITAL STRUCTURE. The authorized capital stock of the Company consists of 50,000,000 shares of Company Common Stock and 1,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"). At the close of business on November 20, 1998, (i) 13,440,490 shares of Company Common Stock and no shares of Preferred Stock were issued and outstanding, (ii) no shares of Company Common Stock were held by the Company in its treasury, (iii) 960,881 shares of Company Common Stock were reserved for issuance pursuant to outstanding Stock Options under Stock Option Plans (as defined in Section 7.04) and 226,767 shares of Company Common Stock were reserved for issuance pursuant to outstanding warrants described in Schedule 4.03 (the "Warrants"), and (iv) shares of Series A Participating Preferred Stock, par value $.01 per share (the "Series A Preferred Stock") were reserved for issuance in connection with the Company's Preferred Shares Rights Agreement dated August 14, 1996 (the "Rights Agreement"). The "In the Money Value" of a Stock Option or a Warrant means the product of (x) the number of shares subject to such Stock Option or Warrant, multiplied by (y) the excess (if any) of the Offer Price over the exercise price thereof. The aggregate In-the-Money Value of all Stock Options and Warrants on November 20, 1998 was $2,680,696. Except as set forth above, no shares of capital stock or other voting securities of the Company were issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company are, and all shares which may be issued pursuant to the Stock Option Plans will be, when issued in accordance with the terms thereof, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or other -6- indebtedness of the Company having the right to vote (or convertible into securities having the right to vote) on any matters on which stockholders of the Company may vote. Except as set forth above, there are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company or any of its subsidiaries is a party, or by which the Company or any of its subsidiaries are bound, obligating the Company or any of its subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of the Company or any of its subsidiaries or obligating the Company or any of its subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. The Company is not a party to any voting agreement with respect to the voting of any of its securities or the securities of any of its subsidiaries. There are not any outstanding contractual obligations of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its subsidiaries. Following the consummation of the Merger, there will not be outstanding any rights, warrants, options or other securities entitling the holder thereof to purchase, acquire or otherwise receive any shares of the capital stock of the Company (or any other securities exercisable for or convertible into such Shares). SECTION IV.4. AUTHORITY; NONCONTRAVENTION. The Company has the requisite corporate power and authority to enter into this Agreement and, subject to, if required by law, approval of the Merger by an affirmative vote of the holders of a majority of the Shares (the "Company Stockholder Approval"), to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Company, subject, in the case of this Agreement, to the Company Stockholder Approval if such approval is required by law. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The Company Stockholder Approval is the only vote of the holders of any class or series of the Company's capital stock which is necessary to approve this Agreement and the transactions contemplated hereby. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Liens in or upon any of the properties or assets of the Company or any of its subsidiaries under any provision of (i) the Certificate of Incorporation or Bylaws of the Company (each as amended) or the comparable organizational documents of any of its subsidiaries, (ii) except as set forth in Section 4.04 of the Disclosure Schedule, any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Company or any of its subsidiaries or any of their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the second following sentence, any (A) statute, law, ordinance, rule or regulation or (B) judgment, order or decree applicable to the Company or any of its subsidiaries or any of their respective properties or assets, other than, in the case of clauses (ii) and (iii), any such conflicts, violations, defaults, rights or Liens that individually or in the aggregate would not (x) have a material adverse effect on the Company, (y) impair the ability of the Company to perform its obligations under this Agreement or to carry on its business as currently conducted or (z) prevent or materially delay the consummation of any of the transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will breach, or with notice, the passage of time or otherwise result in a breach of, any of the Company's obligations under the agreement dated November 9, 1998 between the Company, the Circon Shareholders Committee and the other signatories thereto. No consent, approval, order or authorization of, or registration, declaration or filing with, any Federal, state or local government or any court, administrative agency or commission or other governmental authority or agency, domestic or foreign (a "Governmental Entity"), is required by or with respect to the Company or any of its subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company -7- of the Merger or the transactions contemplated by this Agreement, except for (1) the filing of a premerger notification and report form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and filings under similar laws of certain foreign jurisdictions as may be required ("Foreign Filings"), (2) the filing with the SEC and the Nasdaq Stock Market, Inc. of (A) the Schedule 14D-9, (B) a proxy statement relating to the Company Stockholder Approval, if such approval is required by law (as amended or supplemented from time to time, the "Proxy Statement") and (C) such reports under Section 13(a) of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (3) the filing of the Certificate of Merger with the Delaware Secretary of State and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business and (4) such other consents, approvals, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate, have a material adverse effect on the Company or prevent or materially delay the consummation of any of the transactions contemplated by this Agreement or impair the ability of the Company to carry on its business as presently conducted. SECTION IV.5. SEC DOCUMENTS; FINANCIAL STATEMENTS. The Company has filed all required reports, schedules, forms, statements and other documents with the SEC since January 1, 1996 (the "SEC Documents"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act of 1933 (the "Securities Act"), or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Documents, and none of the SEC Documents at the time they were filed contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles ("GAAP") (except, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented the financial position of the Company and its consolidated subsidiaries as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments and the absence of footnotes). Except as set forth in the Filed SEC Documents (as defined in Section 4.07) or as incurred in the ordinary course of business consistent with past practice since the date of the most recent financial statements included in the Filed SEC Documents, neither the Company nor any of its subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) which would be required under GAAP to be set forth on a consolidated balance sheet of the Company and its subsidiaries taken as a whole. SECTION IV.6. INFORMATION SUPPLIED. None of the information supplied or to be supplied by the Company specifically for inclusion or incorporation by reference in (i) the Offer Documents, (ii) the Schedule 14D-9 or the Proxy Statement or (iii) the information to be filed by the Company in connection with the Offer pursuant to Rule 14f-1 promulgated under the Exchange Act (the "Information Statement"), will, in the case of the Offer Documents, the Schedule 14D-9 and the Information Statement, at the respective times the Offer Documents, the Schedule 14D-9 and the Information Statement are filed with the SEC or first published, sent or given to the Company's stockholders, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Schedule 14D-9 and the Information Statement will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, except that no representation or warranty is made by the Company with respect to statements made or incorporated by reference therein based on information supplied by Parent or Sub specifically for inclusion or incorporation by reference therein. -8- SECTION IV.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997 the Company and its subsidiaries have conducted their respective businesses only in the ordinary course consistent with past practice, and there has not been (i) any material adverse change (as defined in Section 10.03) in the Company, (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any of the Company's capital stock (other than the Rights issued or to be issued pursuant to the Rights Agreement), (iii) any split, combination or reclassification of any of its capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (iv) except as set forth in Section 4.07 of the Disclosure Schedule, (w) any granting by the Company or any of its subsidiaries to any director or officer of the Company or its subsidiaries of any increase in compensation, except in the ordinary course of business consistent with prior practice or as required under employment agreements in effect as of December 31, 1997, (x) any granting by the Company or any of its subsidiaries to any director, officer or employee of any stock options, (y) any granting by the Company or any of its subsidiaries to any officer of any increase in severance or termination pay, or (z) any entry by the Company or any of its subsidiaries into any employment, severance, termination or similar agreement with any officer, director or employee, (v) any damage, destruction or loss, whether or not covered by insurance, that individually or in the aggregate would exceed $100,000, (vi) any change in accounting methods, principles or practices or (vii) any tax election. SECTION IV.8. LITIGATION; INVESTIGATION. Except as set forth in Section 4.08 of the Disclosure Schedule, there is no suit, action or proceeding or investigation by or before any court or administrative agency or arbitral tribunal pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its subsidiaries as to which there is a reasonable likelihood of an adverse determination that individually or in the aggregate would have a material adverse effect on the Company, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against, or, to the knowledge of the Company, investigation by any Governmental Entity involving, the Company or any of its subsidiaries that individually or in the aggregate would have a material adverse effect on the Company. SECTION IV.9. CONTRACTS. Except as disclosed in the Company's annual report on form 10-K for the year ended December 31, 1997 and quarterly reports on Form 10-Q for calendar quarters in 1998 (the "Filed SEC Documents") and as set forth in item A of Section 4.09 of the Disclosure Schedule, there are no contracts or agreements that are of a nature required to be filed as an exhibit under the Exchange Act and the rules and regulations promulgated thereunder. Except as set forth in item B of Section 4.09 of the Disclosure Schedule, neither the Company nor any of its subsidiaries is in violation of nor in default under (nor does there exist any condition, event or occurrence which upon the passage of time or the giving of notice or both would cause such a violation of or default under) any lease, permit, concession, franchise, license or any other contract, agreement, arrangement or understanding to which it is a party or by which it or any of its properties or assets is bound, except for violations or defaults that individually or in the aggregate would not have a material adverse effect on the Company. Except as set forth in item C of Section 4.09 of the Disclosure Schedule, as of the date hereof, the Company is not bound by any contract, agreement, arrangement or understanding with any affiliate of the Company that is currently in effect other than (i) agreements that are disclosed in the Filed SEC Documents or (ii) agreements in an aggregate amount not to exceed $150,000. Except as set forth in item D of Section 4.09 of the Disclosure Schedule, the Company is not a party to or otherwise bound by any agreement or covenant not to compete or by any agreement or covenant restricting in any material respect the development, marketing or distribution of the Company's products and services. -9- SECTION IV.10. COMPLIANCE WITH LAWS. (1) Except as set forth in Section 4.10 of the Disclosure Schedule, each of the Company and its subsidiaries are in compliance with all applicable statutes, laws, ordinances, regulations, rules, judgments, decrees and orders of any Governmental Entity (collectively, "Legal Provisions") applicable to their business or operations, except for instances of possible noncompliance that individually or in the aggregate would not have a material adverse effect on the Company or prevent or materially delay the consummation of the Merger or the transactions contemplated by this Agreement. Each of the Company and its subsidiaries has in effect all Federal, state, local and foreign governmental approvals, authorizations, certificates, filings, franchises, licenses, notices, permits and rights, including but not limited to all authorizations under Environmental Laws (as hereinafter defined), the applicable regulations adopted by the U.S. Food and Drug Administration and the U.S. Food, Drug and Cosmetic Act, and the regulations thereunder ("Permits"), necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted, and there has not occurred any material default under, or violation of, any such Permit. (2) The term "Environmental Laws" means any Federal, state or local or foreign statute, ordinance, rule, regulation, policy, permit, consent, approval, license, judgment, order, decree or injunction ("Laws") relating to pollution or protection of the environment including, but not limited to: (A) Releases (as defined in 42 U.S.C. Section 9601(22)) or threatened Releases of Hazardous Material (as hereinafter defined) into the environment, (B) the generation, treatment, storage, disposal, use, handling, manufacturing, transportation or shipment of Hazardous Material, (C) the health or safety of employees in the workplace environment or of persons exposed to Hazardous Materials, or (D) any laws requiring record keeping, notification, disclosure and reporting requirements related to Hazardous Material or endangered species, wildlife and plants and the management and use of natural resources. The term "Hazardous Material" means (1) hazardous substances (as defined in 42 U.S.C. Section 9601(14)), (2) petroleum, including crude oil and any fractions thereof, (3) natural gas, synthetic gas and any mixtures thereof, (4) asbestos and/or asbestos containing material, (5) PCBs or materials containing PCBs and (6) any material regulated as a medical waste or infectious waste, pollutant or contaminant. (3) There have been no Releases of Hazardous Material in, on, under or affecting any of the current or previously owned or leased properties of the Company or any of its subsidiaries or any surrounding site, and there has been no disposal on any such properties of any Hazardous Material in a manner that has led, or could reasonably be anticipated to lead to a Release, except in each case for those which individually or in the aggregate would not have a material adverse effect on the Company. The Company and its subsidiaries have not received any written notice of, or entered into any order, settlement or decree relating to: (A) any violation of any Environmental Laws or the institution or pendency of any suit, action, claim, proceeding or investigation by any Governmental Entity or any third party in connection with any alleged violation of Environmental Laws, (B) the response to or remediation of Hazardous Material at or arising from any of the Company's properties or any subsidiary's properties or at any property to which the Company transported or arranged for transportation of Hazardous Materials or (C) payment for, response to or remediation of Hazardous Material at or arising from any of the Company's properties or any subsidiary's properties, except in each case for any such notices, orders, settlements or decrees which individually or in the aggregate would not have a material adverse effect on the Company. -10- SECTION IV.11. ABSENCE OF CHANGES IN BENEFIT PLANS; LABOR RELATIONS. Except as required to comply with applicable laws or to make changes which do not, individually or in the aggregate, have a material financial impact on the Company or the Plans (as defined below), since December 31, 1997, there has not been any adoption or amendment (or any agreement to adopt or to amend) any deferred compensation and any incentive compensation, stock purchase, stock option or other equity compensation plan, program, agreement or arrangement; any severance or termination pay, medical, surgical, hospitalization, life insurance or other "welfare" plan, fund or program (within the meaning of section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")); any profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of section 3(2) of ERISA); any employment, termination, severance or similar agreement; or any other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by the Company or by any trade or business, whether or not incorporated (an "ERISA Affiliate"), that together with the Company would be deemed a "single employer" within the meaning of section 4001(b) of ERISA, or to which the Company or an ERISA Affiliate is party, whether written or oral, ffor the benefit of any employee or former employee of the Company or any Subsidiary (collectively, the "Benefit Plans" and each Benefit Plan that is subject to Section 302 or Title IV of ERISA or Section 412 of the Internal Revenue Code of 1986, as amended (the "Code"), a "Pension Plan"). Except as set forth in Section 4.11 of the Disclosure Schedule, neither the Company, any Subsidiary nor any ERISA Affiliate has any commitment or formal plan, whether legally binding or not, to create any additional employee benefit plan or modify or change any existing Plan that would affect any employee or former employee of the Company or any Subsidiary, except as required to comply with applicable law. Except as set forth on Section 4.11 of the Disclosure Schedule, (i) there exist, as of the date hereof, no employment, consulting, severance, termination or indemnification agreements, arrangements or understandings between the Company or any of its subsidiaries, and any current employee, officer or director of the Company, (ii) there are no collective bargaining or other labor union agreements to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound and (iii) during the last 3 years, neither the Company nor any of its subsidiaries has encountered any labor union organizing activity, nor had any actual or threatened employee strikes, work stoppages, slowdowns or lockouts. Except as set forth in Section 4.11 of the Disclosure Schedule, since the enactment of the Worker Adjustment and Retraining Notification Act (the "WARN Act"), the Company has not effectuated a "plant closing" or "mass layoff" (as defined in the WARN Act or any similar state, local or foreign law or regulation) affecting any site of employment or one of more facilities or operating units within any site of employment or facility of the Company or its subsidiaries, without complying with the WARN Act or similar state, local or foreign law or regulation. In addition, except as set forth in Section 4.11 of the Disclosure Schedule, none of the Company's employees has suffered an "employment loss" (as defined in the WARN Act or any similar state, local or foreign law or regulation) during the ninety day period prior to the date of this Agreement. SECTION IV.12. ERISA COMPLIANCE. (1) Section 4.12(i) of the Disclosure Schedule contains a list of all Benefit Plans. The Company has made available to Parent true, complete and correct copies of (1) each Benefit Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof), (2) the most recent annual report on Form Series 5500 filed with the Internal Revenue Service with respect to each Benefit Plan (if any such report was required), (3) the most recent summary plan description for each Benefit Plan for which such summary plan description is required, (4) each trust agreement and group annuity contract relating to any Benefit Plan and (5) the most recent determination letter received from the Internal Revenue Service with respect to each Benefit Plan intended to be qualified under the Code. (2) Except as set forth in Section 4.12(ii) of the Disclosure Schedule, each Benefit Plan has been operated and administered in all material respects in accordance with its terms and applicable law, including but not limited to ERISA and the Code. -11- (3) No liability under Title IV or section 302 or ERISA has been incurred by the Company or any ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to the Company or any ERISA Affiliate of incurring any such liability, other than liability for premiums due the Pension Benefit Guaranty Corporation (which premiums have been paid when due and owing). (4) Except as set forth in Section 4.12(iv) of the Disclosure Schedule, with respect to each Pension Plan, the present value of accrued benefits under such plan, based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared by such plan=s actuary with respect to such plan did not exceed, as of its latest valuation date, the then current value of the assets of such plan allocable to such accrued benefits. (5) Except as set forth in Section 4.12(v) of the Disclosure Schedule, no Pension Plan is a Plan described in Section 4063(1) of ERISA. With respect to any Benefit Plan that is a "multiemployer pension plan" as defined in Section 3(37) of ERISA, (i) neither the Company nor any ERISA Affiliate has made or suffered a "complete withdrawal" or a "partial withdrawal," as such terms are respectively defined in sections 4203 and 4205 of ERISA (or any liability resulting therefrom has been satisfied in full), (ii) no event has occurred that presents a material risk of a partial withdrawal, (iii) neither the Company nor any ERISA Affiliate has any contingent liability under section 4204 of ERISA, and (iv) such Benefit Plan is not in reorganization and no circumstances exist that present a material risk that any such plan will go into reorganization. With respect to any Benefit Plan that is a "multiemployer pension plan," the aggregate withdrawal liability of the Company and its ERISA Affiliates, computed as if a complete withdrawal by the Company and the ERISA Affiliates had occurred under each such Plan on the date hereof, would not exceed $500,000. (6) All Pension Plans have been the subject of determination or opinion letters, as applicable from the Internal Revenue Service to the effect that such Pension Plans are qualified and exempt from Federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, and no such letter has been revoked nor has any event occurred since the date of its most recent letter or application therefor that would adversely affect its qualification (unless the effect of such event is correctable under any available IRS correction program) or materially increase its costs. (7) Except as set forth in Section 4.12(vii) of the Disclosure Schedule, neither the Company, nor any of its subsidiaries, nor any Commonly Controlled Entity has maintained, contributed or been obligated to contribute to any Benefit Plan that is subject to Title IV of ERISA. (8) Section 4.12(viii) of the Disclosure Schedule lists all outstanding Stock Options as of November 20, 1998, showing for each such option: (1) the number of shares issuable, (2) the number of vested shares, (3) the date of expiration and (4) the exercise price. (9) Except as set forth in Section 4.12(ix) of the Disclosure Schedule, the consummation of the Merger or the Offer will not (a) entitle any current or former employee or officer of the Company or any subsidiary to severance pay, unemployment compensation retention bonus or other similar payments, (b) accelerate the term of payment or vesting, or increase the amount of compensation or benefits due to any such employee or officer or (c) require the Company or any ERISA Affiliate to fund or make or make any payments to any trust or other funding vehicle in respect of any Benefit Plan. (10) There are no pending or, to the knowledge of the Company, anticipated or threatened claims by or on behalf of any Benefit Plan, by any employee or beneficiary covered under any such Benefit Plan, or otherwise involving any such Benefit Plan (other than routine claims for benefits) which would have a material adverse plan effective on the Company or its subsidiaries. -12- (11) The deduction of any amount payable pursuant to the terms of the Benefit Plans will not be subject to disallowance under Section 162(m) of the Code. SECTION IV.13. TAXES. Each of the Company and its subsidiaries has timely filed all material tax returns and reports required to be filed by it, correct and complete, and has paid, or established adequate reserves for, all taxes required to be paid by it. No material deficiencies for any taxes have been proposed, asserted or assessed against the Company which have not been fully paid or satisfied, and no requests for waivers of the time to assess any such taxes are pending. The Federal income tax returns of the Company and each of its subsidiaries consolidated in such returns have been examined by and settled with the United States Internal Revenue Service for all years through the fiscal year ended December 31, 1995. The statute of limitations on assessment or collection of any Federal income taxes due from the Company or any of its subsidiaries has expired for all taxable years of the Company or such subsidiaries through the fiscal year ended December 31, 1995. As used in this Agreement, "taxes" shall include all Federal, state, local and foreign income, property, sales, excise and other taxes, tariffs or governmental charges of any nature whatsoever. SECTION IV.14. NO EXCESS PARACHUTE PAYMENTS. Except as set forth in Section 4.14 of the Disclosure Schedule, no amount that could be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of the Company or any of its subsidiaries who is a "disqualified individual" (as such term is defined in proposed Treasury Regulation Section 1.28OG-1) under any employment, severance or termination agreement, other compensation arrangement or Benefit Plan currently in effect would be an "excess parachute payment" (as such term is defined in Section 28OG(b)(1) of the Code). No disqualified individual is entitled to receive any additional payment from the Company or any of its subsidiaries, the Surviving Corporation or any other person (a "Parachute Gross-Up Payment") in the event that the excise tax of Section 4999(a) of the Code is imposed on such person. The Board of Directors of the Company has not granted to any officer, director or employee of the Company any right to receive any Parachute Gross-Up Payment. SECTION IV.15. INTELLECTUAL PROPERTY. (1) The Company and its subsidiaries own, or are validly licensed or otherwise have the right to use, free and clear or all liens, all patents, patent rights, trademarks, trade secrets, trademark rights, trade names, trade name rights, service marks, service mark rights, copyrights, Internet domain names, designs, logos, slogans, and general intangibles of like nature, Software (as defined below), "mask works" (as defined under 17 USC Section 901), technology, trade secrets and other confidential information, know-how, proprietary processes, formulae, algorithms, models, and methodologies, rights of publicity and privacy relating to the use of the names, likenesses and biographical information of real persons and other proprietary intellectual property rights (collectively "Intellectual Property Rights") which are used or held for use in the business of the Company provided, however, the Company does not give any representation as to the Intellectual Property Rights of any third party. For purposes of this Section 4.15, "Software" means any and all (i) computer programs, whether in source code or object code form, (ii) databases and compilations, and (iii) all documentation, including user manuals and training materials, relating to any of the foregoing. (2) Schedule 4.15(b) sets forth, for the Intellectual Property Rights owned or licensed by Company or any subsidiary, a complete and accurate list of all material U.S. and foreign (i) patents and patent applications; (ii) trademark registrations (including Internet domain registrations), trademark applications, and material unregistered trademarks; (iii) copyright and mask work registrations, copyright and mask work applications; and (iv) all Software. (3) Schedule 4.15(c) sets forth a complete and accurate list of all agreements, whether oral or written, and whether between the Company or any subsidiaries and third parties or inter-corporate, (other than licenses of readily available commercial software programs having an acquisition price of less than $10,000) to which Company or any subsidiary is a party or otherwise bound, (i) granting or obtaining any right to use or practice any rights under any Intellectual Property Right or (ii) restricting the -13- Company's or any subsidiary's rights to use any Intellectual Property Right, including but not limited to license agreements, development agreements, distribution agreements, settlement agreements, consent to use agreements, and covenants not to sue (collectively, the "Intellectual Property Agreements"). The Intellectual Property Agreements are valid and binding obligations of all parties thereto, enforceable in accordance with their terms, and there exists no event or condition which will result in a violation or breach of, or constitute (with or without due notice of lapse of time or both) a default under any such Intellectual Property Agreement by (i) the Company or any subsidiary, or (ii) to the knowledge of the Company, any third party. No royalties, honoraria or other fees are payable by Company or any subsidiary to any third parties for the use of or right to use any Intellectual Property Right except pursuant to the Intellectual Property Agreements. (4) Except as set forth in Schedule 4.15(b) or 4.15(d): (1) The Company or a subsidiary is listed in the records of the appropriate United States, state, or foreign registry as the sole current owner of record for each application and registration listed on Section 4.15(b) of the Disclosure Schedule. (2) The Intellectual Property Rights owned by Company or any subsidiary and, to the Company's knowledge, any Intellectual Property Right used by Company or any subsidiary, are subsisting and are valid and enforceable. (3) There are no settlements, forebearances to sue, consents, judgments, or orders or similar obligations (other than the Intellectual Property Agreements) which (a) restrict Company's or any subsidiary's rights to use any Intellectual Property Right, (b) restrict Company's or any subsidiary's business in order to accommodate a third party's intellectual property rights or (c) permit third parties to use any Intellectual Property Right owned or controlled by the Company or any subsidiary. (4) To the Company's knowledge, the conduct of Company's and any subsidiary's business as currently and heretofore conducted does not infringe upon (either directly or indirectly such as through contributory infringement or inducement to infringe) any Intellectual Property Right owned or controlled by any third party. (5) Company and each subsidiary takes reasonable measures to protect the secrecy of its confidential technology, trade secrets, know-how, proprietary processes, formulae, algorithms, models, and methodologies (collectively "Trade Secrets"), including requiring its employees and other parties having access thereto to execute written non-disclosure agreements. To the Company's knowledge since December 31, 1997, no Trade Secret has been disclosed or authorized to be disclosed to any third party other than pursuant to a non-disclosure agreement. With respect to any non-disclosure agreement relating to its Trade Secrets, the Company is not, and to the Company's knowledge the other party is not, in breach or default thereof. (6) With respect to the Software set forth in Section 4.15(b) of the Disclosure Schedule which Company purports to own, such Software was either developed (a) by employees of Company or any subsidiary within the scope of their employment or (b) by independent contractors who have assigned their rights to Company or any subsidiary pursuant to written agreements. Each agreement in which the Company or any subsidiary has licensed products containing owned software to third parties contains provisions (y) limiting the Company's or its subsidiary's liability to the amount of the fees paid pursuant to the agreement; or (z) disclaiming any warranties as to the performance of functionality of the software, other than stating that the software would perform in accordance with its documentation and/or specifications. (7) The Company's Intellectual Property Rights will not be adversely affected because of the consummation of the Offer and the Merger. (8) No claim of any infringement, misappropriation, unauthorized use or dilution of any Intellectual Property Rights of any third party has been made or asserted against the Company or any of its subsidiaries in respect of the operation of the Company's or any subsidiary's business. -14- (9) To the knowledge of the Company, no person is infringing the rights of the Company or any subsidiary with respect to any Intellectual Property Right. Neither the Company nor any subsidiary has licensed, or otherwise granted, to any third party, any material rights in or to any Intellectual Property Rights. SECTION IV.16. STATE TAKEOVER STATUTES. The Board of Directors of the Company has approved the Offer, the Merger and this Agreement, and such approval is sufficient to render inapplicable to the Offer, the Merger, this Agreement and the transactions contemplated by this Agreement the provisions of Section 203 of the DGCL to the extent, if any, such Section is applicable to the Offer, the Merger, this Agreement and the transactions contemplated by this Agreement. SECTION IV.17. RIGHTS AGREEMENT. The Board of Directors of the Company has adopted resolutions providing that the Rights Agreement shall be amended, and the Rights Agreement shall be so amended, within two business days following the date hereof, to (i) render the Rights Agreement inapplicable to the Offer, the Merger, this Agreement and the acquisition of Shares by Sub pursuant to the Offer, (ii) ensure that (y) none of Parent, Sub or any of their respective affiliates is an Acquiring Person (as defined in the Rights Agreement) pursuant to the Rights Agreement solely by virtue of the execution of this Agreement, commencement and consummation of the Offer, the acquisition of Shares by Sub pursuant to the Offer and the consummation of the Merger and (z) a Distribution Date or a Shares Acquisition Date (as such terms are defined in the Rights Agreement) does not occur by reason of the Offer, the Merger, the execution of this Agreement, the acquisition of the Shares by Sub pursuant to the Offer, or the consummation of the Merger and (iii) provide that the Final Expiration Date (as defined in the Rights Agreement) shall occur immediately prior to the Effective Time, and such amendment will not be further amended by the Company without the prior consent of Parent in its sole discretion. SECTION IV.18. BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker, financial advisor or other person, other than Bear, Stearns & Co. Inc., the fees and expenses of which will be paid by the Company, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The Company has furnished to Parent true and complete copies of all agreements under which any such fees or expenses are payable and all indemnification and other agreements related to the engagement of the persons to whom such fees are payable. SECTION IV.19. OPINION OF FINANCIAL ADVISOR. The Company has received the opinion of Bear, Stearns & Co. Inc., dated the date hereof, to the effect that, as of such date, the consideration to be received in the Offer and the Merger by the Company's stockholders is fair to the Company's stockholders from a financial point of view, a signed copy of which opinion is currently being delivered to Parent. SECTION IV.20. ANNUAL MEETING. No shareholder of the Company has given the notice required under the Company's By-laws to present at the Company's November 24, 1998 Annual Meeting of Shareholders any business not set forth in the notice to shareholders relating to such meeting and as a result the only business that may be conducted at such meeting in accordance with this Agreement and the Company's By-laws are the items specifically set forth in the notice relating to the Annual Meeting. SECTION IV.21. PRODUCTS LIABILITY. (1) Except as set forth in Section 4.21 of the Disclosure Schedule, (i) there is no notice, demand, claim action, suit inquiry, hearing, proceeding, notice of violation or investigation of a civil, criminal or administrative nature by or before any court or governmental or other regulatory or administrative agency, commission or authority pending against or involving the Company or any of its Subsidiaries (past or present) or concerning any product relating to the businesses of the Company and its Subsidiaries (past or present which is pending or threatened, relating to or resulting from an alleged defect in design, manufacture, materials or workmanship of any product designed, -15- manufactured, distributed, or sold by or on behalf of the Company or any of its Subsidiaries (past or present), or any alleged failure to warn, or from any alleged breach of express or implied warranties or representations, (ii) since December 31, 1997 there has not been any Occurrence (as defined in this Section 4.21 herein); (iii) during the last five years, there has not been any product recall or post-sale warning (collectively, "Recalls") by the Company or any of its Subsidiaries (past or present) concerning any products relating to the businesses of the Company and its Subsidiaries (past or present) which were designed, manufactured, distributed, or sold by the businesses of the Company and its Subsidiaries (past or present), or to the best of the Company's knowledge, after due inquiry, any investigation or any action that would require the consideration by the Company's corrective action committee, made by any person or entity concerning whether to undertake or not to undertake any Recalls. For purposes of this Section 4.21 and Section 4.22, the term "Occurrence" shall mean any accident, happening or event which is caused or allegedly caused by any alleged hazard or alleged defect in manufacture, design, materials or workmanship including, without limitation, any alleged failure to warn or any breach of express or implied warranties or representations with respect to, or any accident, happening or event otherwise involving, a product (including any parts or components) relating to the businesses of the Company and its Subsidiaries (past or present) designed, manufactured, distributed, or sold by or on behalf of the Company and its Subsidiaries (past or present) which results or is alleged to have resulted in injury or death to any person or damage to or destruction of property, or other consequential damages, at any time. SECTION IV.22. INSURANCE. Section 4.22 of the Disclosure Schedule contains a complete and accurate list of: (i) all primary, excess and umbrella policies of general liability, fire, products liability, completed operations, employers' liability, workers' compensation, bonds and other forms of insurance owned or held by or on behalf of and/or providing insurance coverage to the Company as of August 1, 1998, including the following information for each such policy: type(s) of insurance coverage provided; name of insurer; effective dates; policy number; per occurrence and annual aggregate deductibles or self-insured retentions; per occurrence and annual aggregate limits of liability; the extent, if any, to which the limits of liability have been invaded or exhausted; and (ii) all claims and lawsuits in excess of $100,000 made or filed since December 31, 1997 with respect to the businesses of the Company or its subsidiaries, and the total number and amount of all claims and lawsuits, including the following information: names of claimants/plaintiffs; event or accident; nature of the claim and product involved, if any; and amount paid to satisfy, compromise or otherwise dispose of the claim or lawsuit and the source of such payment. All current policies set forth on Schedule 4.21 are in full force and effect, and with respect to all policies, all premiums currently payable or previously due and payable with respect to all periods up to and including the date of Closing have been paid, and no notice of cancellation or termination has been received with respect to any such policy. To the Company's knowledge, all such policies are sufficient for compliance with all requirements of law and of all agreements to which the Company or any of its subsidiaries is a party; are valid, outstanding, collectible and enforceable policies; provide adequate insurance coverage; will remain in full force and effect through the respective dates set forth in Schedule 4.22 without the payment of additional premiums. None of such policies contains a provision that would permit the termination, limitation, lapse, exclusion, or change in the terms of coverage (including, without limitation, a change in the limits of liability) by reason of consummation of the transactions contemplated by this Agreement. The Company has not been refused any insurance with respect to its products or operations, nor has any coverage been limited by any insurance carrier to which the Company has applied for any such insurance or with which they have carried insurance during the last 3 years. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB Parent and Sub represent and warrant to the Company as follows: -16- SECTION V.1. ORGANIZATION, STANDING AND CORPORATE POWER. Each of Parent and Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has all requisite corporate power and authority to carry on its business as now being conducted. Each of Parent and Sub is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed individually or in the aggregate would not have a material adverse effect on Parent. Parent has delivered to the Company complete and correct copies of its Certificate of Incorporation and By-Laws and the Certificate of Incorporation and By-Laws of Sub, in each case as amended to the date hereof. SECTION V.2. AUTHORITY; NONCONTRAVENTION. Parent and Sub have all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of Parent and Sub. This Agreement has been duly executed and delivered by Parent and Sub, and constitutes a valid and binding obligation of each such party, enforceable against each such party in accordance with its terms. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of Parent or Sub under, any provision of (i) the Certificate of Incorporation or By-Laws of Parent or Sub, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to Parent or Sub or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any (A) statute, law, ordinance, rule or regulation or (B) judgment, order or decree applicable to Parent or Sub or their respective properties or assets, other than, in the case of clauses (ii) and (iii), any such conflicts, violations, defaults, rights or Liens that individually or in the aggregate would not (x) have a material adverse effect on Parent, (y) impair in any material respect the ability of each of Parent and Sub to perform its obligations under this Agreement, as the case may be, or (z) prevent or materially delay the consumma-tion of any of the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Parent or Sub in connection with the execution and delivery of this Agreement by Parent and Sub or the consummation by Parent and Sub of the transactions contemplated by this Agreement, except for (1) Foreign Filings and the filing of a premerger notification and report form under the HSR Act, (2) the filing with the SEC of (A) the Offer Documents and (B) such reports under Sections 13(a), 13(d) and 16(a) of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated by this Agreement (3) the filing of the Certificate of Merger with the Delaware Secretary of State and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business and (4) such other consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under the "blue sky" laws of various states, the failure of which to be obtained or made would not, individually or in the aggregate, have a material adverse effect on Parent or prevent or materially delay the consummation of any of the transactions contemplated by this Agreement. SECTION V.3. INFORMATION SUPPLIED. None of the information supplied or to be supplied by Parent or Sub specifically for inclusion or incorporation by reference in (i) the Offer Documents, (ii) the Schedule 14D-9, (iii) the Information Statement or (iv) the Proxy Statement will, in the case of the Offer Documents, the Schedule 14D-9 and the Information Statement, at the respective times the Offer Documents, the Schedule 14D-9 and the Information Statement are filed with the SEC or first published, sent or given to the Company's stockholders, or, in the case of the Proxy Statement, at the time the Proxy Statement is first mailed to the Company's stockholders or at the time of the Stockholders Meeting, contain any untrue statement of a material -17- fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Offer Documents will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, except that (other than with respect to the Proxy Statement) no representation or warranty is made by Parent or Sub with respect to statements made or incorporated by reference therein based on information supplied by the Company specifically for inclusion or incorporation by reference therein. SECTION V.4. INTERIM OPERATIONS OF SUB. Sub was formed solely for the purpose of engaging in the transactions contemplated hereby, has engaged in no other business activities and has conducted its operations only as contemplated hereby. SECTION V.5. BROKERS. No broker, investment banker, financial advisor or other person, other than Donaldson, Lufkin & Jenrette, the fees and expenses of which will be paid by Parent, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or Sub. SECTION V.6. FINANCING. At the expiration of the Offer and the Effective Time, Parent and Sub will have available all the funds necessary for the acquisition of all Shares pursuant to the Offer and to perform their respective obligations under this Agreement, including without limitation payment in full for all shares of Company Common Stock validly tendered into the Offer or outstanding at the Effective Time. ARTICLE VI COVENANTS SECTION VI.1. COVENANTS OF THE COMPANY. (1) CONDUCT OF THE BUSINESS BY THE COMPANY. The Company shall, and shall cause its subsidiaries to, carry on their respective businesses in the ordinary course consistent with the manner as heretofore conducted and use commercially reasonable efforts to (x) preserve intact their current business organization, (y) keep available the services of their current officers and employees and (z) preserve their relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with them. Without limiting the generality of the foregoing, other than as set forth in Section 6.01 of the Disclosure Schedule or as otherwise contemplated by this Agreement, the Company shall not, and shall not permit any of its subsidiaries to, without Parent's prior written consent (which shall not be unreasonably withheld): (1) other than dividends and distributions by a direct or indirect wholly owned subsidiary of the Company to its parent or pursuant to the Rights Agreement, (x) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property), in respect of, any of its capital stock, (y) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock (other than the issuance of shares of Company Common Stock upon the exercise of Stock Options outstanding on the date of this Agreement and in accordance with their present terms) or (z) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (2) issue, deliver, sell, pledge or otherwise encumber any shares of its capital stock or any shares of capital stock of its subsidiaries, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities (other than (y) pursuant to the Rights Agreement or (z) the issuance of shares of Company Common Stock upon the exercise of Stock Options and Warrants outstanding on the date of this Agreement and in accordance with their present terms); (3) amend its Certificate of Incorporation, By-Laws or other comparable charter or organizational documents or those of any of its subsidiaries; -18- (4) acquire or agree to acquire (including, without limitation, by merger, consolidation or acquisition of stock or assets) any business, including through the acquisition of any interest in any corporation, partnership, joint venture, association or other business organization or division thereof; (5) sell, lease, license, mortgage or otherwise encumber or otherwise dispose of any of its material properties or assets, other than in the ordinary course of business consistent with past practice; (6) incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or any of its subsidiaries, or guarantee any debt securities of another person, other than short-term bank financing in the ordinary course of business consistent with past practice; or make any loans, advances or capital contributions to, or investments in, any other person, other than in the ordinary course of business consistent with past practice and in any event not in excess, individually or in the aggregate, of $100,000 ; (7) make any material capital expenditure, individually or in the aggregate, in excess of $25,000; (8) except as required to comply with applicable law (in which case the Company will notify Parent) (A) adopt, enter into, terminate or amend in any material respect any employment, severance or similar contract, collective bargaining agreement or Benefit Plan, (B) increase in any manner the compensation or fringe benefits of, or pay any bonus to, any director, officer or employee (except for normal increases of cash compensation or cash bonuses in the ordinary course of business consistent with past practice), (C) pay any benefit not provided for under any Benefit Plan or any other benefit plan or arrangement of the Company or its subsidiaries, (D) increase in any manner the severance or termination pay of any officer or employee, (E) grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or Benefit Plan (including the grant of stock options, stock appreciation rights, stock based or stock related awards, performance units or restricted stock or the removal of existing restrictions in any Benefit Plans or agreements or awards made thereunder), (F) take any action to fund or in any other way secure the payment of compensation or benefits under any employee plan, agreement, contract or arrangement or Benefit Plan or (G) take any action to accelerate the vesting of, or cash out rights associated with, any Stock Options or other benefits; (9) enter into any agreement of a nature that would be required to be filed as an exhibit to Form 10-K under the Exchange Act; (10) except as required by GAAP, make any material change in accounting methods, principles or practices; (11) make any tax election, make a claim for any Tax Refund or enter into any settlement or compromise with respect to any material tax liability; (12) amend or terminate any material contract in a manner materially detrimental to the Company, or waive, release, assign or settle any material rights or claims; (13) hire or fire or agree to hire any officers; (14) take any action that may reasonably be expected to result in (i) any of the representations and warranties by the Company becoming untrue in any material respect (ii) any breach of the Company's covenants under this Agreement or (iii) any of the conditions of the Offer set forth in Exhibit A not being satisfied; or (15) authorize any of, or commit or agree to take any of, the foregoing actions. -19- SECTION VI.2. NO SOLICITATION. (1) The Company shall not, nor shall it permit any of its subsidiaries to, nor shall it authorize or permit any of its officers, directors or employees or any investment banker, financial advisor, attorney, accountant or other representative or agent retained by it or any subsidiary to, directly or indirectly, (i) solicit, initiate or encourage the submission of any Takeover Proposal (as defined below), (ii) participate in any discussions or negotiations regarding, or furnish to any person any nonpublic information with respect to, or take any other action designed or reasonably likely to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to a Takeover Proposal, or (iii) except as specifically provided in Section 6.02 and provided that the Company shall have first complied with all its obligations under this Section 6.02 and Section 7.07(b), enter into any agreement with respect to any Takeover Proposal or approve or resolve to approve any Takeover Proposal. Upon execution of this Agreement, the Company will cease any existing activities, discussions or negotiations with any parties conducted with respect to any of the foregoing. Notwithstanding the foregoing, if, at any time prior to the acceptance for payment of Shares pursuant to the Offer, the Board of Directors of the Company determines in good faith after consultation with outside counsel, that such action may reasonably be required to discharge the Board of Director's fiduciary duties to the Company's stockholders under applicable law, the Company may, in response to an unsolicited Takeover Proposal, which constitutes a Superior Proposal made subsequent to the date hereof, and subject to compliance with Section 6.02(c), (x) furnish information with respect to the Company to any person that has submitted a Takeover Proposal that constitutes a Superior Proposal pursuant to a customary confidentiality agreement in form and substance reasonably satisfactory to Parent and (y) participate in discussions and negotiations regarding such Takeover Proposal that which constitutes a Superior Proposal. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding sentence by any director or officer of the Company or any subsidiary or any investment banker, financial advisor, attorney, accountant or other authorized representative or agent of the Company or any subsidiary shall be deemed to be a breach of this Section 6.02(a) by the Company. For purposes of this Agreement, "Takeover Proposal" means any proposal or offer from any person in each case, in writing, relating to any direct or indirect acquisition or purchase of a substantial amount of assets of the Company and its subsidiaries, taken as a whole (other than the purchase of the Company's products in the ordinary course of business), or more than a 30% interest in the total voting securities of the Company or any tender offer or exchange offer that if consummated would result in any person beneficially owning 30% or more of any class of equity securities of the Company or any merger, consolidation, business combination, sale of substantially all assets, recapitalization, liquidation, dissolution or similar transaction involving the Company, other than the transactions contemplated by this Agreement. (2) Except as set forth in this Section 6.02, neither the Board of Directors of the Company nor any committee thereof shall (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Parent, the approval or recommendation by such Board of Directors or such committee of the Offer, the Merger or this Agreement, (ii) approve or recommend, or propose to approve or recommend, any Takeover Proposal, (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement (each, an "Acquisition Agreement") related to any Takeover Proposal or (iv) resolve to take any of the foregoing actions. Notwithstanding the foregoing, in the event that prior to the acceptance for payment of Shares pursuant to the Offer the Board of Directors of the Company determines in good faith, after consultation with outside counsel, that such action may reasonably be required to discharge the Board of Director's fiduciary duties to the Company's stockholders under applicable law, the Board of Directors of the Company may, in response to an unsolicited Superior Proposal (as defined below) (subject to the following -20- proviso), (x) withdraw or modify its approval or recommendation of the Offer, the Merger or this Agreement or (y) approve or recommend any such Superior Proposal; provided, that in the case of this clause (y), such approval or recommendation shall occur only at a time that is after the later of (i) the fifth business day following Parent's receipt of written notice advising Parent that the Board of Directors of the Company has received a Superior Proposal, specifying the material terms of such Superior Proposal and identifying the person making such Superior Proposal and (ii) in the event of any amendment to the price or any material term of a Superior Proposal, three business days following Parent's receipt of written notice containing the material terms of such amendment, including any change in price (it being understood that each further amendment to the price or any material terms of a Superior Proposal shall necessitate an additional written notice to Parent and additional three business day period prior to which the Company can take the actions set forth in clause (y) above). All notices referred to in the prior sentence shall include a copy of any such Takeover Proposal or Superior Proposal. For purposes of this Agreement, a "Superior Proposal" means any bona fide Takeover Proposal made by a third party (i) that is on terms which the Board of Directors of the Company determines in its good faith judgment (based on the written opinion of the Company's financial advisors as to the financial terms of such Superior Proposal and after consultation with the Company's legal advisors) to be more favorable to the Company's stockholders than the Offer and the Merger and (ii) for which financing, to the extent required, is available pursuant to definitive agreements with respect thereto. (3) In addition to the obligations of the Company set forth in paragraphs (a) and (b) of this Section 6.02, the Company shall promptly advise Parent orally and in writing of any request for nonpublic information (except requests not of a transactional or financial nature by companies with established commercial relationships with the Company, made in the ordinary course of business and not in connection with a possible Takeover Proposal) or of any Takeover Proposal the material terms and conditions of such request or Takeover Proposal and the identity of the person making such request or Takeover Proposal. The Company will promptly inform Parent of any material change in the details (including amendments or proposed amendments) of any such request or Takeover Proposal. (4) Nothing contained in this Agreement shall prohibit the Company from taking and disclosing to its stockholders a position contemplated by Rule 14d-9 or Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Company's stockholders if, in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, failure so to disclose would be inconsistent with applicable law; provided, however, neither the Company nor its Board of Directors nor any committee thereof shall, except as permitted by Section 6.02(b), withdraw or modify, or propose to withdraw or modify, its position with respect to the Offer, the Merger or this Agreement or approve or recommend, or propose to approve or recommend, a Takeover Proposal. SECTION VI.3. CERTAIN ACTIONS. The Company will not take any action at the November 24, 1998 Annual Meeting of Shareholders other than the election of the directors set forth in the Company's definitive proxy statement dated November 13, 1998, and the ratification of the Company's auditors. Except for the election of those directors set forth in the Company's definitive proxy statement dated November 13, 1998 at the Company's Annual Meeting to be held on November 24, 1998 and as contemplated in Section 7.06 and for the election of Lester Hill to the Board of Directors, should the Board of Directors determine to do so, the Company will not take any action to modify, change the composition or increase the size of the Board of Directors of the Company. ARTICLE VII ADDITIONAL AGREEMENTS SECTION VII.1. Stockholder Approval; Preparation of Proxy Statement. (1) If the Company Stockholder Approval is required by law, the Company shall, as soon as practicable following the expiration of the Offer, duly call, give notice of, convene and hold a meeting of its stockholders (the "Stockholders Meeting") for the purpose of obtaining the Company Stockholder Approval. The Company shall, through its Board of Directors, recommend to its stockholders that the Company Stockholder Approval be given. -21- Notwithstanding the foregoing, if Parent, Sub or any other subsidiary of Parent shall acquire at least 90% of the outstanding Shares, the parties shall take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after the expiration of the Offer without a Stockholders Meeting in accordance with Section 253 of the DGCL. (2) If the Company Stockholder Approval is required by law, the Company shall, as soon as practicable following the expiration of the Offer, prepare and file a preliminary Proxy Statement with the SEC and shall use its best efforts to respond to any comments of the SEC or its staff and to cause the Proxy Statement to be mailed to the Company's stockholders as promptly as practicable after responding to all such comments to the satisfaction of the staff. The Company shall notify Parent promptly of the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff for amendments or supplements to the Proxy Statement or for additional information and will supply Parent with copies of all correspondence between the Company or any of its representatives, on the one hand, and the SEC or its staff, on the other hand, with respect to the Proxy Statement or the Merger. If at any time prior to the Stockholders Meeting there shall occur any event that should be set forth in an amendment or supplement to the Proxy Statement, the Company shall promptly prepare and mail to its stockholders such an amendment or supplement. (3) Parent agrees to cause all Shares purchased pursuant to the Offer and all other Shares owned by Parent or any subsidiary of Parent to be voted in favor of the Company Stockholder Approval. SECTION VII.2. ACCESS TO INFORMATION. The Company shall, and shall cause each of its subsidiaries to, afford to Parent and to the officers, employees, accountants, counsel and other representatives of Parent reasonable access, during normal business hours during the period prior to the Effective Time, to all their properties, books, contracts, commitments and records and, during such period, the Company shall, and shall cause each of its subsidiaries to, make available promptly to Parent upon request (a) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of the federal or state securities laws or the federal tax laws, or state, local or foreign tax laws and (b) all other information concerning its business, properties and personnel as Parent may reasonably request (including the Company's outside accountants' work papers). Except as otherwise agreed to by the Company, and notwithstanding termination of this Agreement, the terms of the Confidentiality Agreement dated May 21, 1998, between Parent and the Company (the "Confidentiality Agreement") shall apply to all information about the Company which has been furnished under this Agreement by the Company to Parent or Sub. SECTION VII.3. STATE TAKEOVER LAWS. Notwithstanding any other provision in this Agreement, in no event shall the Section 203 Approval be withdrawn, revoked or modified by the Board of Directors of the Company. If any state takeover statute other than Section 203 of the DGCL becomes or is deemed to become applicable to the Company, the Offer, the Merger or this Agreement, the Company shall take all reasonable action necessary to render such statute inapplicable to all of the foregoing. SECTION VII.4. REASONABLE EFFORTS. (1) Upon and subject to the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Offer, the Merger and the other transactions contemplated by this Agreement, including using reasonable efforts to take the following actions: (i) the taking of all reasonable acts necessary to cause the Offer Conditions to be satisfied, (ii) the obtaining of all necessary actions or nonactions, waivers, consents and approvals from Governmental Entities and the making of all necessary registrations and filings (including filings with Governmental Entities, if any) and the taking of all reasonable steps as may be necessary to avoid an action or proceeding by any Governmental Entity including, but not limited to, all filings under the HSR Act which are required in connection with the transactions -22- contemplated by this Agreement. Each party shall cooperate with the other party in connection with the other party's filings under the HSR Act including taking all reasonable actions to cause early termination of all applicable waiting periods, (iii) the obtaining of all necessary consents, approvals or waivers from third parties, (iv) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed, and (v) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. In connection with and without limiting the foregoing, but subject to the terms and conditions hereof, the Company and its Board of Directors shall, if any state takeover statute or similar statute or regulation is or becomes applicable to the Offer, the Merger, this Agreement or any other transactions contemplated by this Agreement, use all reasonable efforts to ensure that the Offer, the Merger and the other transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise to minimize the effect of such statute or regulation on the Offer, the Merger, this Agreement and the other transactions contemplated by this Agreement. (2) The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) any representation or warranty made by it contained in this Agreement that is qualified as to materiality becoming untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becoming untrue or inaccurate in any material respect or (ii) the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. SECTION VII.5. COMPANY STOCK OPTIONS. (1) Each option granted to an employee of the Company or its subsidiaries or a member of the Board of the Company (an "Optionee") to acquire Shares ("Company Stock Option") that is outstanding immediately prior to the commencement of the Offer, whether or not then vested or exercisable, shall, effective as of the commencement of the Offer, become fully exercisable subject to the last sentence of this paragraph. Upon the commencement of the Offer, the Board of the Company or an appropriate committee thereof shall provide notice to each Optionee that any Company Stock Option not exercised within 15 days (10 days in the case of Company Stock Options granted under the Company 1995 Directors Stock Option Plan) from the date of such notice shall thereupon be cancelled. The notice may provide each Optionee with an opportunity to avoid the tendering of the exercise price and receiving in lieu thereof an amount per option share equal to the excess, if any, of the Offer Price over the exercise price of the Option. Notwithstanding anything to the contrary set forth in this Section 7.05, any such acceleration, exercise or cancellation shall be conditioned upon the effectiveness of the Merger. (2) Prior to the commencement of the Offer, the Company shall (i) obtain any consents from holders of Company Stock Options and (ii) amend the terms of its equity incentive plans or arrangements, in each case as is necessary to give effect to the provisions of paragraph (a) of this Section 7.05 and to ensure that at the Effective Time no holder of any Company Stock Option shall have the right to purchase or receive any Shares. SECTION VII.6. DIRECTORS. Promptly upon the acceptance for payment of, and payment for, Shares by Sub pursuant to the Offer, Sub shall be entitled to designate such number of directors on the Board of Directors of the Company as will give Sub, subject to compliance with Section 14(f) of the Exchange Act, a majority of such directors, and the Company shall, at such time, cause Sub's designees to be so elected by its existing Board of Directors; provided, however, that in the event that Sub's designees are elected to the Board of Directors of the Company, until the Effective Time such Board of Directors shall have at least two directors who are directors of the Company on the date of this Agreement and who are not officers of the Company or any of its subsidiaries (the "Independent Directors") and; provided further that, in such event, if the number of Independent Directors shall be reduced below two for any reason whatsoever, the remaining -23- Independent Director shall designate a person to fill such vacancy who shall be deemed to be an Independent Director for purposes of this Agreement or, if no Independent Directors then remain, the other directors of the Company on the date hereof shall designate two persons to fill such vacancies who shall not be officers or affiliates of the Company or any of its subsidiaries, or officers or affiliates of Parent or any of its subsidiaries, and such persons shall be deemed to be Independent Directors for purposes of this Agreement. The Company shall, if requested by the Parent, also cause directors designated by the Parent to constitute at least a majority of (i) each committee of the Company's Board of Directors, (ii) each board of directors (or similar body) of each subsidiary of the Company, and (iii) each committee (or similar body) of each such board. Subject to applicable law, the Company shall take all action requested by Parent necessary to effect any such election, including mailing to its stockholders the Information Statement containing the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, and the Company agrees to make such mailing with the mailing of the Schedule 14D-9 (provided that Sub shall have provided to the Company on a timely basis all information required to be included in the Information Statement with respect to Sub's designees). In connection with the foregoing, the Company will promptly, at the option of Parent, either increase the size of the Board of Directors of the Company, any subsidiary or any committee thereof and/or obtain the resignation of such number of current directors or committee members as is necessary to enable Sub's designees to be elected or appointed to, and to constitute a majority of such boards and committees as provided above. SECTION VII.7. FEES AND EXPENSES. (1) All fees and expenses incurred in connection with the Offer, the Merger, this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such fees or expenses, whether or not the Offer or the Merger is consummated. (2) The Company shall pay, or cause to be paid, in same day funds to Parent the sum of (x) all of Parent=s reasonable out-of-pocket expenses incurred or to be incurred in connection with the Offer, the Merger or this Agreement or the preparation therefor such amount not to exceed $3,000,000 (the "Expenses"), and (y) $8,800,000 (the "Termination Fee") if (i) the Company terminates this Agreement pursuant to Section 9.01(e), or (ii) prior to termination of this Agreement, a Takeover Proposal (whether or not such Takeover Proposal constitutes a Superior Proposal) shall have been received and within twelve months of such termination such proposal is consummated or the Company enters into an agreement to consummate or approves or recommends to its stockholders such proposal. The payment shall be made in the case of a termination described in clause (i) immediately prior to termination and in the case of a termination described in clause (ii) concurrently with the earlier of any such recommendation or the consummation of any such transaction by the Company. The Company shall pay, or cause to be paid, in same day funds to Parent all of Parent's Expenses if Parent or Sub shall terminate this Agreement pursuant to Section 9.01(c), such payment to be made promptly upon such termination. SECTION VII.8. INDEMNIFICATION. (1) From and after the consummation of the Offer, Parent will, and will cause the Surviving Corporation to, fulfill and honor in all respects the obligations of the Company pursuant to (i) each indemnification agreement in effect at such time between the Company and each person who is or was a director or officer of the Company at or prior to the Effective Time and (ii) any indemnification provisions under the Company's Certificate of Incorporation or By-laws as each is in effect on the date hereof (the persons to be indemnified pursuant to the agreements or provisions referred to in clauses (i) and (ii) of this Section 7.08(a) shall be referred to as, collectively, the "Indemnified Parties"). In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) any counsel retained by the Indemnified Parties for any period after the Effective Time must be reasonably satisfactory to the Surviving Corporation, (ii) after the Effective Time, the Surviving Corporation shall pay the reasonable fees and expenses of such counsel PROVIDED, HOWEVER, that the Surviving Corporation shall not be liable for any settlement effected without its written consent (which consent shall not be -24- unreasonably withheld); and PROVIDED, FURTHER, that the Indemnified Parties as a group may retain only one law firm to represent them with respect to any single action unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties. The Certificate of Incorporation and By-laws of the Surviving Corporation shall contain the provisions with respect to indemnification and exculpation from liability set forth in the Company's Certificate of Incorporation and By-laws on the date of this Agreement, which provisions shall not be amended, repealed or otherwise modified for a period of six years after the Effective Time in any manner that would adversely affect the rights thereunder of any Indemnified Party. (2) This Section 7.08 shall survive the consummation of the Merger at the Effective Time, is intended to be for the benefit of, and enforceable by, the Company, Parent, the Surviving Corporation and each Indemnified Party and such Indemnified Party's heirs and representatives, and shall be binding on all successors and assigns of Parent and the Surviving Corporation. SECTION VII.9. CERTAIN LITIGATION. The Company agrees that it shall not settle any litigation against the Company or any of its directors by any stockholder of the Company relating to the Offer, the Merger or this Agreement or any Takeover Proposal made by another party whether before or after the date of this Agreement without the prior written consent of Parent (not to be unreasonably withheld). SECTION VII.10. RIGHTS AGREEMENT. Except as provided above or as requested in writing by Parent, the Board of Directors of the Company shall not (a) amend the Rights Agreement or (b) take any action with respect to, or make any determination under, the Rights Agreement, including a redemption of the Rights or any action to facilitate a Takeover Proposal. SECTION VII.11. NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice to Parent, of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect, and (ii) any failure by the Company to satisfy any covenant condition or agreement to be complied with or satisfied by it hereunder; provided however that the delivery of any notice pursuant to this Section shall not limit or otherwise affect the representations, warranties and covenants set forth in this Agreement or the remedies available hereunder or under applicable law. ARTICLE VIII CONDITIONS SECTION VIII.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective obligation of each party to effect the Merger shall be subject to the satisfaction or waiver prior to the Closing Date of the following conditions: (1) COMPANY STOCKHOLDER APPROVAL. If required by applicable law, the Company Stockholder Approval shall have been obtained. (2) NO INJUNCTIONS OR RESTRAINTS. No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other Governmental Entity or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect; provided, however, that each of the parties shall have used reasonable efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any injunction or other order that may be entered. (3) PURCHASE OF SHARES. Sub shall have previously accepted for payment and paid for Shares pursuant to the Offer. -25- ARTICLE IX TERMINATION AND AMENDMENT SECTION IX.1. TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the terms of this Agreement by the stockholders of the Company: (1) by mutual written consent of Parent and the Company; (2) by either Parent or the Company: (1) if (x) Sub shall not have accepted for payment any Shares pursuant to the Offer prior to February 26, 1999 (the "Deadline Condition") as a result of the failure, occurrence or existence of any of the conditions set forth in Exhibit A to this Agreement or (y) the Offer shall have terminated or expired in accordance with its terms without Sub having accepted for payment any Shares pursuant to the Offer; provided, however, that the right to terminate this Agreement pursuant to this Section 9.01(b)(i) shall not be available to any party whose failure (including, in the case of Parent, a failure by Sub) to perform any of its obligations under this Agreement results in the failure of the satisfaction of any such conditions; provided, that if the Offer is extended pursuant to clause C of the last sentence of Section 1.01(a) to a date later than the date of the Deadline Condition, the date of the Deadline Condition shall automatically be extended to the first business day following the extended expiration date of the Offer. (2) if any Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the acceptance for payment of, or payment for, Shares pursuant to the Offer or the Merger on the terms contemplated in this Agreement and such order, decree or ruling or other action shall have become final and nonappealable; (3) by Parent or Sub if prior to the purchase of Shares pursuant to the Offer, any of the material representations and warranties of the Company set forth in this Agreement shall not be true and correct in any material respect, as of the date of this Agreement, or if the Company shall have failed to perform in any material respect any obligation or to comply in any material respect with any agreement or covenant of the Company to be performed or complied with by it under this Agreement; or; (4) by Parent or Sub if either Parent or Sub is entitled to terminate the Offer as a result of the occurrence of any event set forth in paragraphs (d), (e), (f) or (g) of Exhibit A to this Agreement; (5) by the Company in connection with entering into a definitive agreement with respect to a Superior Proposal, in accordance with Section 6.02(b), provided that the Company has complied with all provisions thereof, including the notice provisions therein and that the Company has made the payments pursuant to Section 7.07(b); or (6) by the Company if prior to the purchase of Shares pursuant to the Offer, any of the material representations and warranties of the Parent or Sub set forth in this Agreement shall not be true and correct in any material respect, at the date of this Agreement, or if the Parent or Sub shall have failed to perform in any material respect any obligation or to comply with in any material respect any agreement or covenant of Parent or Sub to be performed or complied with by them under this Agreement; or (7) By Parent or Sub if (i) a tender offer for any securities of the Company shall have been commenced or publicly proposed to be made by another person (including the Company or its subsidiaries or affiliates), (ii) any person or group (as defined in Section 13(d)(3) of the Exchange Act), other than Parent and Sub and other than any person or group which prior to the date hereof has publicly disclosed beneficial ownership of 10% or more of the outstanding voting securities of the Company (a "Significant Shareholder") shall have acquired directly or indirectly beneficial ownership of 10% or more of the outstanding voting securities of the Company or any of its subsidiaries, whether through the acquisition of securities, the exercise -26- of rights under options, warrants or similar instruments, the formation of a group, or otherwise, or (iii) any Significant Shareholder or group that together would constitute a Significant Shareholder shall have beneficially acquired additional voting securities of the Company, whether through the acquisition of securities, the exercise of rights under options, warrants or similar instruments, the formation of a group or otherwise, representing 2% or more of the outstanding voting securities of the Company; provided that in Parent's reasonable judgment any such event described in clause (ii) or (iii) makes the successful completion of the Offer unlikely or materially more burdensome to Parent or Sub. SECTION IX.2. EFFECT OF TERMINATION. In the event of a termination of this Agreement by either the Company or Parent or Sub as provided in Section 9.01, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Sub or the Company or their respective officers or directors, except with respect to the last sentence of Section 1.02(c), Section 4.18, Section 5.05, the last sentence of Section 7.02, Section 7.07, this Section 9.02 and Article X; provided, however, that nothing herein shall relieve any party for liability for fraud or for breach of the provisions of this Agreement. SECTION IX.3. AMENDMENT. This Agreement may be amended by the parties hereto, by duly authorized action taken, at any time before or after obtaining the Company Stockholder Approval, but, after the purchase of Shares pursuant to the Offer, no amendment shall be made which decreases the Merger Consideration and, after the Company Stockholder Approval, no amendment shall be made which by law requires further approval by such stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Following the election or appointment of Sub's designees pursuant to Section 7.06 and prior to the Effective Time, the affirmative vote of a majority of the Independent Directors then in office shall be required by the Company to (i) amend or terminate this Agreement by the Company, (ii) exercise or waive any of the Company's rights or remedies under this Agreement, (iii) extend the time for performance of Parent and Sub's respective obligations under this Agreement or (iv) take any action to amend or otherwise modify the Company's Certificate of Incorporation or By-laws (or similar governing instruments of the Company's subsidiaries) in violation of Section 7.08 hereof. SECTION IX.4. EXTENSION; WAIVER. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, subject to Section 9.03, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto or (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. ARTICLE X MISCELLANEOUS SECTION X.1. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time or, in the case of the Company, shall survive the acceptance for payment of, and payment for, Shares by Sub pursuant to the Offer. This Section 10.01 shall not limit any covenant or agreement of the parties which by its terms contemplates perfor-mance after the Effective Time, including Section 7.08. SECTION X.2. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed), sent by overnight courier (providing proof of delivery) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): -27- (1) if to Parent or Sub, to Maxxim Medical, Inc. 10300 49th Street North Clearwater, Florida 34622 Attention: Kenneth W. Davidson Telecopy No.: 813-561-2180 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022-3897 Attention: Michael E. Gizang Telecopy No.: 212-735-2000 and (2) if to the Company, to Circon Corporation 6500 Hollister Avenue Santa Barbara, California 93117 Attention: George A. Cloutier Telecopy No.: 805-968-8174 with a copy to: Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attention: Robert Jack Telecopy No.: 650-493-6811 SECTION X.3. INTERPRETATION. When a reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. As used in this Agreement, the term "subsidiary" of any person means another person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests of which) is owned directly or indirectly by such first person. As used in this Agreement, "material adverse change" or "material adverse effect" means, when used in connection with the Company or Parent, as the case may be, any change or effect that is materially adverse to the business, properties, assets, liabilities, financial condition or results of operations of such entity and its subsidiaries taken as a whole. SECTION X.4. COUNTERPARTS. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. SECTION X.5. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement and the Confidentiality Agreement (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Sections 7.05 and 7.08 hereof, are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. SECTION X.6. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without regard to any applicable conflicts of law. -28- SECTION X.7. PUBLICITY. Except as otherwise required by law (including Rule 14d-9 promulgated under the Exchange Act), court process or the rules of the NYSE or the Nasdaq National Market or as contemplated or provided elsewhere herein, for so long as this Agreement is in effect, neither the Company nor Parent shall, or shall permit any of its subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld. SECTION X.8. ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Sub may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent or to any direct or indirect wholly owned subsidiary of Parent. Subject to the preceding sentence but without relieving any party hereof of any obligation hereunder, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. SECTION X.9. ENFORCEMENT. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the partes shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Delaware or in any Delaware state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any court of the United States located in the State of Delaware or of any Delaware state court in the event any dispute arises out of this Agreement or the transactions contemplated by this Agreement, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (c) agrees that it will not bring any action relating to this Agreement or the transactions contemplated by this Agreement in any court other than a court of the United States located in the State of Delaware or a Delaware state court. SECTION X.10. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. MAXXIM MEDICAL, INC. By: /s/ Kenneth W. Davidson ------------------------------------- Name: Kenneth W. Davidson Title: Chairman of the Board, President & Chief Executive Officer MMI ACQUISITION CORP. By: /s/ Kenneth W. Davidson ------------------------------------- Name: Kenneth W. Davidson Title: President CIRCON CORPORATION By: /s/ George Cloutier ------------------------------------- Name: George A. Cloutier Title: Chief Executive Officer -29- EXHIBIT A CONDITIONS OF THE OFFER Notwithstanding any other term of the Offer or this Agreement, Sub shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Sub's obligation to pay for or return tendered Shares after the termination or withdrawal of the Offer), to pay and may delay the acceptance for payment of or the payment for any Shares tendered pursuant to the Offer and may amend or terminate the Offer, consistent with the terms of the Merger Agreement unless (i) there shall have been validly tendered and not withdrawn prior to the expiration of the Offer such number of Shares that would constitute at least a majority of the outstanding Shares, determined on a fully diluted basis (the "Minimum Condition"), and (ii) any waiting period under the HSR Act applicable to the purchase of Shares pursuant to the Offer shall have expired or been terminated. Furthermore, Sub shall not be required to accept for payment or, subject as aforesaid, to pay for any Shares not theretofore accepted for payment or paid for, and may, in accordance with Section 9.01, terminate this Agreement or, amend the Offer with the consent of the Company, if, upon the scheduled expiration date of the Offer and before the acceptance of such Shares for payment or the payment therefor, any of the following conditions exists: (1) there shall be instituted or pending by any Governmental Entity any suit, action or proceeding (i) challenging the acquisition by Parent or Sub of any Shares under the Offer, seeking to restrain or prohibit the making or consum-mation of the Offer or the Merger, (ii) seeking to prohibit or materially limit the ownership or operation by the Company, Parent or any of Parent's subsidiaries of a material portion of the business or assets of the Company or Parent and its subsidiaries, taken as a whole, or to compel the Company or Parent to dispose of or hold separate any material portion of the business or assets of the Company or Parent and its subsidiaries, taken as a whole, in each case as a result of the Offer or the Merger or (iii) seeking to impose material limitations on the ability of Parent or Sub to acquire or hold, or exercise full rights of ownership of, any Shares to be accepted for payment pursuant to the Offer including, without limitation, the right to vote such Shares on all matters properly presented to the stockholders of the Company or (iv) seeking to prohibit Parent or any of its subsidiaries from effectively controlling in any material respect any material portion of the business or operations of the Company or (v) seeking to obtain from the Company any damages that could reasonably be expected to have a material adverse effect on the Company; (2) there shall be any statute, rule, regulation, judgment, order or injunction enacted, entered, enforced, promulgated or deemed applicable to the Offer or the Merger, by any Governmental Entity or court, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that would result in any of the consequences referred to in clauses (i) through (v) of paragraph (a) above; (3) this Agreement shall have been terminated in accordance with its terms; (4) (i) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified its approval or recommendation of the Offer or the Merger or its adoption of this Agreement, or approved or recommended any Takeover Proposal, (ii) the Company shall have entered into any agreement with respect to any Takeover Proposal in accordance with Section 6.02(b) of this Agreement or (iii) the Board of Directors of the Company or any committee thereof shall have resolved to take any of the foregoing actions; (5) in the event any of the material representations and warranties of the Company set forth in this Agreement shall not be true and correct in any material respect, at the date of this Agreement, or if the Company shall have failed to perform in any material respect any obligation or to comply in any material respect with any agreement or covenant of the Company to be performed or complied with by it under this Agreement; A-1 (6) there shall have occurred (1) any general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange for a period in excess of three hours (excluding suspensions or limitations resulting solely from physical damage or interference with such exchanges not related to market conditions), (2) a declaration of a banking moratorium or any suspension of pay-ments in respect of banks in the United States (whether or not mandatory) by any Governmental Entity, (3) any limitation or proposed limitation (whether or not mandatory) by any United States governmental authority or agency that has a material adverse effect generally on the extension of credit by banks or other financial institutions, (4) any change in general financial, bank or capital market conditions such that banks are unwilling to extend credit to borrowers similar to Parent generally or (5) any decline in either the Dow Jones Industrial Average or the Standard & Poor's Index of 500 Industrial Companies in excess of 20% from the close of business on the date hereof; (7) there shall have occurred any events or changes which constitute or which are reasonably likely to constitute, individually or in the aggregate, a material adverse change in the condition of the Company (financial or otherwise); (8) (i) a tender offer for any securities of the Company shall have been commenced or publicly proposed to be made by another person (including the Company or its subsidiaries or affiliates), (ii) any person or group (as defined in Section 13(d)(3) of the Exchange Act), other than Parent and Sub and other than any person or group which prior to the date hereof has publicly disclosed beneficial ownership of 10% or more of the outstanding voting securities of the Company (a "Significant Shareholder"), shall have acquired directly or indirectly beneficial ownership of 10% or more of the outstanding voting securities of the Company or any of its subsidiaries, whether through the acquisition of securities, the exercise of rights under options, warrants or similar instruments, the formation of a group, or otherwise, or (iii) any Significant Shareholder of group that together would constitute a Significant Shareholder shall have beneficially acquired additional voting securities of the Company, whether through the acquisition of securities, the exercise of rights under options, warrants or similar instruments, the formation of a group or otherwise, representing 2% or more of the outstanding voting securities of the Company; provided that in Parent's reasonable judgment any such event described in clause (ii) or (iii) makes the successful completion of the Offer unlikely or materially more burdensome to Parent or Sub. which, in the reasonable judgment of Parent or Sub, in its sole discretion, make it inadvisable to proceed with such acceptance of Shares for payment or the payment therefor. The foregoing conditions are for the sole benefit of Parent and Sub and (except for the Minimum Condition) may, subject to the terms of this Agreement, be waived by Parent and Sub in whole or in part at any time and from time to time in their sole discretion. The failure by Parent or Sub, at any time to exercise any of the foregoing rights shall not be deemed a waiver of any right and all such rights may be asserted at any time or from time to time. Terms used but not defined herein shall have the meanings assigned to such terms in the Agreement to which this Exhibit A is a part. A-2 EXHIBIT B SUBSIDIARIES Citrus Canada Inc. Circon GmbH Circon Export Corporation Cabot Technology Corp. Circon S.A. B-1 EX-3.7 4 EXHIBIT 3.7 CIRCON CORPORATION RICHARD AUHLL SEVERANCE AGREEMENT & MUTUAL RELEASE This Severance Agreement and Mutual Release (the "Agreement") is made by and between Circon Corporation ("Circon") and Richard Auhll ("Executive"). WHEREAS, Executive was employed by Circon; WHEREAS, Executive and Circon have agreed to enter into a severance agreement and mutual release; NOW THEREFORE, in consideration of the mutual promises made herein and the benefits provided pursuant to such promises, Circon and Executive (the "Parties") hereby agree as follows: 1. RESIGNATION; AGREEMENT NOT TO SEEK DIRECTORSHIP. Executive acknowledges his resignation from his employment with Circon as of October 19, 1998 (the "Termination Date"). Executive agrees that he shall not seek election to the Board of Directors of Circon at the 1998 Shareholders Meeting. 2. PAYMENT OF SALARY. Executive acknowledges and represents that Circon has paid all salary, wages, accrued vacation and any and all other benefits (but not including the Executive's 401(k) account) due to Executive as of the Termination Date. 3. CONSIDERATION. As consideration for Executive entering into and abiding by this Agreement, Circon agrees to provide Executive with the following benefits: (a) LUMP-SUM PAYMENT. A lump-sum payment of $627,000, less applicable withholding, payable on or before November 25, 1998. (c) COBRA CONTINUATION. For a period of thirty-six (36) months following the Termination Date, Circon shall pay 100% of the premium cost of continuing coverage under the Circon group health and dental plans for and to the extent that Executive and his spouse and/or dependents were covered immediately prior to the Termination Date. Executive hereby elects and agrees that such continuation coverage shall be under Title X of The Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") or similar California laws to the maximum duration possible. If, after COBRA or similar California continuation coverage is no longer available, the Company, despite its best efforts, is not able to provide any or all of such benefits during the remaining period of promised coverage, the Company shall in lieu of such coverage provide Executive with a lump-sum cash payment equal to the present value of the reasonably anticipated cost of the Company otherwise providing such benefits. 4. MUTUAL RELEASE OF CLAIMS. Executive agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Executive by the Company. Executive and the Company, on behalf of themselves, and their respective heirs, executors, officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations, and assigns, hereby fully and forever release each other and their respective heirs, executors, officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations, and assigns, of and from any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that any of them may possess arising from any omissions, acts or facts that have occurred up until and including the effective date of this Agreement including, without limitation, (a) any and all claims relating to or arising from Executive's employment relationship with the Company and the termination of that relationship; (b) any and all claims for wrongful discharge of employment; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; and defamation; (c) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, and the California Fair Employment and Housing Act; (d) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and (e) any and all claims for attorneys' fees and costs. The Company and Executive agree that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. The Parties acknowledge that they have been advised by legal counsel and are familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. The Parties, being aware of said Code Section, agrees to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect. 5. CONFIDENTIALITY. The Parties hereto each agree to use their best efforts to maintain in confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as "Settlement Information"). Each Party hereto -2- agrees to take every reasonable precaution to prevent disclosure of any Settlement Information to third parties, and each agrees that there will be no publicity, directly or indirectly, concerning any Settlement Information. The Parties hereto agree to take every precaution to disclose Settlement Information only to those Executives, officers, directors, attorneys, accountants, governmental entities, and family members who have a reasonable need to know of such Settlement Information. 6. DISPARAGEMENT. Each Party and their successors in interest agrees to refrain from any disparagement, criticism, defamation, slander of the other, or tortious interference with the contracts and relationships of the other. Each Party to this Agreement also agrees that they will not knowingly encourage, advise or assist any individual or entity to prosecute any claim, charge or complaint against the other Party to this Agreement. 7. TAX CONSEQUENCES. The Company makes no representations or warranties with respect to the tax consequences of the payment of any sums to Executive under the terms of this Agreement. Executive agrees and understands that she is responsible for payment, if any, of local, state and/or federal taxes on the sums paid hereunder by the Company and any penalties or assessments thereon. 8. NO ADMISSION OF LIABILITY. No action taken by the Parties hereto, or either of them, either previously or in connection with this Agreement shall be deemed or construed to be (a) an admission of the truth or falsity of any claims heretofore made or (b) an acknowledgment or admission by either Party of any fault or liability whatsoever to the other Party or to any third party. 9. COSTS. The Parties shall each bear their own costs, expert fees, attorneys' fees and other fees incurred in connection with this Agreement. 10. ARBITRATION AND EQUITABLE RELIEF. (a) The Parties agree that any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof shall be settled by arbitration to be held in Santa Barbara, California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association (the "Rules"). The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. (b) The arbitrator shall apply California law to the merits of any dispute or claim, without reference to rules of conflict of law. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. The Parties hereto hereby expressly consent to the personal jurisdiction of the state and federal courts located in California for any action or proceeding arising from or relating to this Agreement and/or relating to any arbitration in which the Parties are participants. (c) The Company and Executive shall each pay one-half of the costs and expenses of such arbitration, and shall separately pay its counsel fees and expenses. -3- (d) THE PARTIES HERETO HAVE READ AND UNDERSTAND SECTION 10, WHICH DISCUSSES ARBITRATION. THE PARTIES HERETO UNDERSTAND THAT BY SIGNING THIS AGREEMENT, THEY AGREE TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH, OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF THEIR RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS: (i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION. (ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABOR CODE SECTION 201, ET SEQ; (iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION. 11. AUTHORITY. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Executive represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through her to bind them to the terms and conditions of this Agreement. 12. NO REPRESENTATIONS. Each Party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither Party has relied upon any representations or statements made by the other Party hereto which are not specifically set forth in this Agreement. 13. SEVERABILITY. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 14. ENTIRE AGREEMENT. This Agreement, along with the Proprietary Information Agreement previously entered into by and between the Company and Executive (which remains in full force and effect) -4- represent the entire agreement and understanding between the Company and Executive concerning Executive's separation from the Company, and supersede and replace in their entirety any and all prior agreements and understandings concerning Executive's relationship with the Company. 15. NO ORAL MODIFICATION. This Agreement may only be amended in writing signed by Executive and the President or Chief Executive Officer of the Company. 16. EFFECTIVE DATE. This Agreement is effective immediately after it has been signed by both Parties. 17. COUNTERPARTS. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. 18. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that: (a) They have read this Agreement; (b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice; (c) They understand the terms and consequences of this Agreement and of the releases it contains; (d) They are fully aware of the legal and binding effect of this Agreement. IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below. Circon Corporation Dated: November 21, 1998 By /s/ George Cloutier ----------------------------------- George Cloutier Richard Auhll Dated: November 21, 1998 /s/ Richard Auhll ----------------------------------- -5- -----END PRIVACY-ENHANCED MESSAGE-----