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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14D-9/A
(Amendment No. 6)
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)
RICHARD A. AUHLL
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(s) filing statement)
Copy to:
LARRY W. SONSINI, ESQ.
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
(415) 493-9300
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This Amendment No. 6 supplements the Schedule 14D-9 of Circon Corporation, a
Delaware corporation (the "Company"), filed with the Securities and Exchange
Commission ("SEC") on August 15, 1996, and as subsequently amended, relating to
a Tender Offer Statement on Schedule 14D-1, dated August 2, 1996 (the "Schedule
14D-1"), filed with the SEC by USS Acquisition Corp. (the "Purchaser"), a
Delaware corporation and wholly-owned subsidiary of United States Surgical
Corporation, a Delaware corporation ("USS"), relating to an offer the ("Offer")
by Purchaser to purchase all outstanding Shares at a price of $18.00 per Share,
net to the seller in cash, without interest thereon.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
On August 16, 1996 the Company mailed a letter to its employees regarding
the Offer. A copy of the letter is filed as Exhibit 10 to this statement.
On or about August 15, 1996, the Company, certain of the Company's officers
and the individuals who serve on its Board of Directors were named as defendants
in three lawsuits filed in Delaware Chancery Court. The three suits were brought
by individuals who claim to be stockholders of the Company. Each suit seeks to
be certified as a class action of behalf of all the Company's stockholders. The
suits, which are similar in substance, allege that the Company and the named
individuals violated certain fiduciary duties to the Company's stockholders in
connection with the Company's response to the Offer. The complaints seek various
forms of relief, including injunctive relief and unspecified monetary damages.
The Company has reviewed the allegations and claims contained in the plaintiffs'
complaints, and believes that they are without merit. The Company and the named
individuals intend to vigorously defend against these claims. Copies of the
three complaints relating to the three lawsuits are filed as Exhibit 11, Exhibit
12 and Exhibit 13, respectively, to this statement.
On August 19, 1996, the Company issued a press release in connection with
the aforementioned three complaints. A copy of the press release is filed as
Exhibit 14 to this statement.
As a result of the Company's concern about the disruptive effects of the
Offer on the Company's employees, the Company retained, during the week of
August 12, 1996, the consulting firm of William M. Mercer, Incorporated to
advise the Board of Directors of the Company (the "Board") and to evaluate the
possibility of implementing an employee retention program. At a Board meeting
held on August 25, 1996 and pursuant to a recommendation from the Board's
Compensation Committee, the Board authorized the Company to implement three
separate plans (collectively, the "Plans") to assist the Company in retaining
skilled employees, including plans for executives, the Company's sales force,
and managers, professionals and key contributors. The purpose of the Plans is to
retain certain 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 so that the Company can continue to execute its strategic plan.
William M. Mercer, Incorporated, and independent consulting firm, assisted and
advised the Board and its Compensation Committee in formulating the terms of
each Plan. Each Plan is summarized below. Each of the summaries is qualified in
its entirety by reference to the full text of each of the Plans; a copy of each
of the Management Retention Plan, the Sales Force Retention Plan and the
Managers, Professionals and Key Contributors Retention Plan, is filed as Exhibit
15, 16, and 17, respectively, to this statement, and is incorporated by
reference herein.
On August 27, 1996 the Company issued a press release relating to the
implementation of the Plans. A copy of the press release is filed as Exhibit 18
to this statement.
Also on August 27, 1996 the Company sent a letter to its employees who are
participating in the Plans. A copy of the form of such letter is filed as
Exhibit 19 to this statement.
MANAGEMENT RETENTION PLAN
The Management Retention Plan (the "Management Plan") provides retention and
severance benefits for designated executive officers, vice presidents and senior
managers. There are three components to the Management Plan: (i)
retention/severance payments, (ii) post-employment coverage under the Company's
group health and life insurance plans, and (iii) pro-rated annual target bonus
payments.
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ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED (CONTINUED)
RETENTION/SEVERANCE PAYMENTS
The total potential retention/severance payment is based on a multiple of
annual target bonus and/or annual base salary, with the level of payment related
to the participant's job level. The multiplier ranges from 75% of annual base
salary up to 250% of annual base salary and annual target bonus.
The retention payment component is equal to either one-third of the total
cash payment (for executive officers) or one-sixth of the total cash payment
(for vice-presidents and senior managers). It will be paid ninety days following
a change of control of the Company if the participant has remained employed by
the Company or the acquiring entity through such period. The retention payment
is also triggered if a participant is involuntarily terminated without cause or
is constructively terminated following a change of control but prior to ninety
days following a change of control.
The severance payment component is equal to either two-thirds of the total
cash payment (for executive officers) or five-sixths of the total cash payment
(for vice-presidents and senior managers). It will be paid only if the
participant is involuntarily terminated without cause or is constructively
terminated within twenty-four months (for executive officers and
vice-presidents) or twelve months (for senior managers) following a change of
control.
POST-EMPLOYMENT BENEFITS
In the event of an involuntary termination without cause or constructive
termination within twelve or twenty-four months following a change of control,
the participant (and, if covered prior to the change of control, his or her
dependents) receives continued group health, dental and life insurance coverage.
The Company is required to pay the same percentage of the related insurance
premiums as were paid prior to the change of control. The Company continues to
make these premium payments for a period ranging from nine months to two and
one-half years (depending on the participant's job level), or, if earlier, until
the participant becomes covered under comparable benefit plans of another
employer.
PRORATED ANNUAL TARGET INCENTIVE BONUS
Under the Management Plan, executive officers and vice-presidents (but not
senior managers) are eligible to be paid their prorated annual target bonus for
the year in which the change of control occurs. This payment is in lieu of any
bonus otherwise payable under the annual incentive plan. The proration is made
by multiplying the annual target bonus by a fraction, the numerator of which is
the number of days in the Company's fiscal year that have elapsed prior to the
change of control and the denominator of which is three hundred and sixty-five.
The pro-rated bonus is paid to those executive officers and vice-presidents who
remain employed until the last day of the fiscal year in which the change of
control occurs or who are involuntarily terminated without cause or are
constructively terminated prior to the end of the fiscal year, but following a
change of control.
GOLDEN PARACHUTE EXCISE TAX AND NON-DEDUCTIBILITY
In general, benefits and payments under the Management 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. In the case of the
Company's chief executive officer, benefits under the Management Plan are only
reduced to avoid triggering the golden parachute excise tax and
non-deductibility provisions if so doing would maximize the after-tax economic
benefit to the chief executive officer, as determined by the Company's
independent accountants.
SALES FORCE RETENTION PLAN
The Sales Force Retention Plan (the "Sales Force Plan") provides retention
and severance benefits for all territory managers and sales video specialists
who are not on Company probation at
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ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED (CONTINUED)
the time of a change of control. It provides for a maximum payment of twice the
compensation earned in the last two full calendar months preceding the change of
control. Compensation is defined for this purpose as travel allowance, bonus and
commissions.
The retention payment component is equal to the compensation earned in the
last two full calendar months preceding the change of control. It will be paid
ninety days following a change of control if the participant has remained
employed by the Company or the acquiring entity through such period. The
retention payment is also triggered if a participant is involuntarily terminated
without cause following a change of control but prior to ninety days following
such change of control.
The severance payment component is also equal to the compensation earned in
the last two full calendar months preceding the change of control. It will be
paid only if the participant is involuntarily terminated without cause within
twelve months following a change of control.
MANAGERS, PROFESSIONALS AND KEY CONTRIBUTORS RETENTION PLAN
The Managers, Professionals and Key Contributors Retention Plan (the
"Managers Plan") provides retention and severance benefits for managers,
professionals and key contributors. It provides for a potential cash payment of
a minimum of three months' base salary up to a maximum of one year's base
salary. Between these minimum and maximum limits, the Managers Plan provides for
two weeks' base salary for each full year of employment with the Company (or
with an entity acquired by the Company) up to and including the date of a change
of control.
The retention payment component is equal to one-third of the total potential
cash payment. It will be paid ninety days following a change of control if the
participant has remained employed by the Company or the acquiring entity through
such period. The retention payment is also triggered if a participant is
involuntarily terminated without cause following a change of control but prior
to ninety days following a change of control.
The severance payment component is equal to two-thirds of the total
potential cash payment. It will be paid only if the participant is involuntarily
terminated without cause within twelve months following a change of control.
COMPLAINT OF USS AGAINST THE COMPANY
On September 17, 1996, USS filed a complaint in connection with the Offer in
the Delaware Court of Chancery against the Company, certain of its officers and
the individuals who serve on its Board of Directors, a copy of which is filed as
Exhibit 22 to this statement. On September 18, 1996, the Company issued a press
release responding to the complaint which is filed as Exhibit 23 to this
statement.
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ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
<TABLE>
<S> <C>
Exhibit 1(F) The "Board Compensation," "Remuneration of Officers," "Report of the
Compensation Committee" and "Compensation Committee Interlocks and
Insider Participation" sections of the Proxy
Exhibit 2(F) Article Ninth of Certificate of Incorporation, as amended
Exhibit 3(F) Article V of the Bylaws
Exhibit 4(F) Form of Indemnification Agreement
Exhibit 5*(F) Letter to Stockholders regarding Board's Recommendation
Exhibit 6(F) Press Release Announcing Board's Recommendation
Exhibit 7(F) Opinion of Bear, Stearns & Co. Inc.
Exhibit 8*(F) Summary of Stockholders Rights Plan
Exhibit 9(F) Press Release of the Company dated August 5, 1996
Exhibit 10(F) Letter to Employees Regarding the Offer
Exhibit 11(F) Complaint of William Steiner against the Company, its Directors and
certain of its officers, filed on or about August 15, 1996
Exhibit 12(F) Complaint of Charles Miller against the Company, its Directors and
certain of its officers, filed on or about August 15, 1996
Exhibit 13(F) Complaint of F. Richard Manson against the Company, its Directors
and certain of its officers, filed on or about August 15, 1996
Exhibit 14(F) Press Release of the Company dated August 19, 1996
Exhibit 15(F) Management Retention Plan
Exhibit 16(F) Sales Force Retention Plan
Exhibit 17(F) Managers, Professionals and Key Contributors Retention Plan
Exhibit 18(F) Press Release of the Company dated August 27, 1996
Exhibit 19(F) Letter to Employees Regarding the Retention Plans
Exhibit 20(F) Press Release of the Company dated August 30, 1996
Exhibit 21(F) Letter to Employees Regarding the Offer
Exhibit 22 Complaint of USS against the Company and its Directors, filed on or
about September 17, 1996
Exhibit 23 Press Release of the Company dated September 18, 1996
</TABLE>
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* Included in copy mailed to stockholders
(F) Previously filed
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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.
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Dated: September 19, 1996 CIRCON CORPORATION
By: /s/ Richard A. Auhll
Richard A. Auhll
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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IN THE COURT OF CHANCERY FOR THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
UNITED STATES SURGICAL CORPORATION,
a Delaware Corporation, and
USS ACQUISITION CORP., a Delaware
Corporation, Civil Action No.
Plaintiffs, COMPLAINT
-against-
RICHARD A. AUHLL, R. BRUCE
THOMPSON, HAROLD R. FRANK,
RUDOLF R. SCHULTE, PAUL W.
HARTLOFF, JR., JOHN BLOKKER and
CIRCON CORPORATION, a Delaware corporation,
Defendants.
Plaintiffs United States Surgical Corporation and USS Acquisition Corp.
(together, "U.S. Surgical"), for their Complaint, by their undersigned
attorneys, allege, upon knowledge as to themselves and their own acts, and
upon information and belief as to all other matters, as follows:
SUMMARY OF THIS ACTION
1. Plaintiffs bring this action to prevent Circon Corporation
("Circon") and its directors from unlawfully impeding plaintiffs' all-cash
premium tender offer (the "Offer") for Circon's shares. Specifically,
plaintiffs seek to (i) enjoin Circon and its directors from distributing or
triggering the exercise of any rights pursuant to Circon's recently adopted
Preferred Shares Rights Agreement (the "Rights Plan"); (ii) compel defendants
to amend the
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Rights Plan to render it inapplicable to the Offer; (iii) compel the
defendants to terminate the hastily adopted anti-takeover management
compensation plan; and (iv) enjoin defendants from taking any other actions
to interfere with Circon stockholders' right to freely tender their shares
into the Offer.
2. On August 2, 1996, U.S. Surgical commenced an all-cash tender offer
(the "U.S. Surgical Offer" or "Offer") to acquire all outstanding shares of
Circon stock for $18 per share -- an impressive 83% premium to the average
price of Circon's stock for the ten days immediately preceding August 2. The
Offer is fully financed and, therefore, is not conditioned on obtaining
financing.
3. In response to the Offer, Circon's Board of Directors adopted the
Rights Plan, which contains massive dilutive features that make any offer not
blessed by incumbent management prohibitively expensive. It is undisputed
that the Rights Plan was not adopted to provide management with time to
arrange a superior alternative to the Offer, as confirmed by Circon's
announcement that it is not undertaking negotiations concerning any
alternative transactions.
4. Under the facts of this case, there was no justification for
adopting the Rights Plan in the first place; and certainly none for the
Board's refusal to redeem it. To be sure, Circon claimed in its Schedule
14D-9 that the Rights Plan is necessary to protect its so-called "stra-
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tegic plan," which management purportedly believes will SOME DAY result in
shareholder value exceeding the immediately available $18 per share in cash
under the Offer.
5. However, Circon's stated "justification" is merely a contrived
afterthought. In truth, the Rights Plan was designed for the primary purpose
and intent of cementing Richard A. Auhll's control and domination of a
company which he founded and is determined to continue running as his own.
This impermissible purpose was confirmed on August 30, 1996, when Auhll wrote
to all Circon employees that "[w]e have retained expert financial and legal
advisors to HELP US PREVAIL, NO MATTER WHAT USSC DOES." (Emphasis added)
Thus, Circon's incumbent management has already decided to defeat any offer,
regardless of the consequences to Circon's stockholders -- including, for
example, an offer at a price that even management would concede exceeds any
hypothetical or potential future value of its strategic plan. Management's
conclusive prejudgment of any potential future offer, without bothering to
consider the then existing facts and circumstances, violates the fiduciary
duties of care and loyalty imposed upon Delaware directors.
6. Even if protecting Circon's strategic plan were the true motivation
behind the Rights Plan, the Board's adoption of, and failure to redeem, the
Rights Plan under the facts of this case is a breach of fiduciary duty. The
strategic plan, as articulated in Circon's Schedule 14D-9,
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consists primarily of the alleged future synergies and benefits to be derived
from Circon's acquisition in August 1995 (the "Acquisition") of Cabot Medical
Corporation ("Cabot"). Circon claims that these future benefits will, at some
unspecified date in the future, surpass the $18 per share in cash that is
available immediately under the Offer.
7. For some 18 months, Circon has engaged in a public campaign touting
the expected synergies and benefits of the Acquisition -- including the
alleged immediate cost-savings, synergistic integrations of Circon's and
Cabot's sales forces, and steadily improved financial results that would
result from the Acquisition -- precisely the same mantra repeated in the
announcement of the Rights Plan. Yet since the Acquisition was completed, the
actual results have been abysmal. Earnings and sales have been down
substantially; Circon has substantially underperformed relative to its
industry peers; and every earnings report issued since the Acquisition has
been worse than pre-Acquisition earnings and far below Circon's forecasts --
precisely the OPPOSITE of the results Circon had publicly projected. Indeed,
management now has been forced into a humiliating public retreat from its
previous pronouncements on this subject, admitting that the expected benefits
from the Acquisition have not materialized, and may never be obtained.
8. Not surprisingly, the market, which has had ample time to digest the
tangible results of Circon's stra-
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tegic plan, has resoundingly rejected it. Since the Acquisition was completed
in mid-December 1995, the trading price of Circon's shares nose-dived from
$23.50 per share to $8.75 per share in mid-July 1996 -- a loss of more than
60% of its value. In light of this track record, management's incantation of
the same tired refrain concerning the "expected" future benefits of the
Acquisition to justify the Rights Plan lacks any real credibility. Moreover,
it is undeserving of judicial deference, as its sole function and effect is
preclusive and coercive -- I.E., to force upon Circon's stockholders the
company's now discredited strategic plan.
9. In addition, the Rights Plan is thwarting the desires of the
overwhelming majority of shareholders. As of August 30, 1996 (the day U.S.
Surgical announced an extension of the Offer's expiration date until
September 30, 1996), 76% of the shares of Circon stock not owned by U.S.
Surgical or Circon's management had been tendered into the Offer.
10. Indeed, even if Circon's strategic plan was credible -- and it
clearly is not -- the Offer poses no threat to it. The Acquisition has
already occurred, and will not be undone. Moreover, U.S. Surgical is a
strategic buyer operating in the same industry as Circon and, therefore, is
just as capable as Circon's current management of reaping the synergies and
other benefits of the Acquisition
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for the corporation. Thus, the ONLY "threat" posed by the Offer is to
entrenched management's desire to continue running the company. Under these
facts, there is no legal justification for the Rights Plan.
11. The Board's self-serving motivation was further demonstrated by its
hasty adoption on August 25, 1996, of three lucrative employee "incentive"
compensation plans (the "Compensation Plan") which, in truth, provides [sic]
no incentive whatsoever, except to disincentivize any change in control.
Under the Compensation Plan, 300 Circon employees ostensibly would be awarded
bonus payments ranging from 75% (for management employees) of annual base pay
up to 250% of annual base pay and annual target bonus in the event of a
change in control; and these employees would automatically receive
significant portions of these bonus payments within 90 days of a change in
control, even if they thereafter are retained by the acquiror with no
diminution in responsibility, status or pay.
12. Moreover, Circon's current management unilaterally can terminate the
Compensation Plan at any time, or remove any previously designated employee
from participating in the Plan. Thus, in reality, the Compensation Plan
serves neither to "incentivize" employees, nor to eliminate the "distractions"
attendant to a potential change in control -- Circon's publicly stated
justification for implementing this highly unusual package. On the contrary, the
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only effect of the Compensation Plan, and the sole purpose behind its
adoption, is to increase substantially the cost of, and thus further deter,
any control offer deemed unfriendly by Mr. Auhll and his Board.
13. Finally, in order to conceal their true agenda from stockholders,
Circon's directors have made numerous materially false and misleading
statements in opposition to the Offer, in clear violation of their duty of
candor, all as more fully set forth below.
PARTIES
14. Plaintiff U.S. Surgical is a Delaware corporation, and is a leading
multinational developer, manufacturer and marketer of innovative surgical
wound closure products designed for use in the field of minimally invasive
surgery. U.S. Surgical is the beneficial owner of 1,000,100 shares, or
approximately 8%, of Circon's common stock.
15. Plaintiff USS Acquisition is a Delaware corporation and a
wholly-owned subsidiary of U.S. Surgical. USS Acquisition was incorporated as
a vehicle for the acquisition of Circon.
16. Defendant Circon is a Delaware corporation which designs,
manufactures and markets medical endoscope and electro-surgery systems for
diagnosis and minimally invasive surgery.
17. Defendant Richard A. Auhll ("Auhll") is the Chairman of the Board,
President, and Chief Executive Offi-
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cer of Circon. Auhll also is a member of the Compensation Committee that
recommended adoption of the Compensation Plan to the Circon Board. For the
year ended December 31, 1995, Auhll was paid a salary of $298,000, a bonus of
$130,239 and approximately $10,408 in other compensation, including 401K
contributions and insurance premiums paid by Circon on Auhll's behalf. Auhll
engineered a leveraged buyout of Circon in 1977, and took the company public
in 1983. Auhll owns 12% of Circon's outstanding shares of common stock.
18. Defendant R. Bruce Thompson ("Thompson") is Chief Financial Officer
and an Executive Vice President of Circon. For the year ended December 31,
1995, Thompson was paid a salary of $166,000, a bonus of $60,940 and
approximately $4,192 in other compensation, including 401K contributions and
insurance premiums paid by Circon on Thompson's behalf.
19. Defendant Harold R. Frank ("Frank") is a member of the Circon Board
of Directors and has been since 1984. Frank is a member of the Compensation
Committee that recommended adoption of the Compensation Plan to the Board.
20. Defendant Rudolf R. Schulte ("Schulte") is a member of the Circon
Board of Directors and has been since 1977. Schulte is a member of the
Compensation Committee that recommended adoption of the Compensation Plan to
the Board. Schulte also owns 3% of Circon's outstanding shares of common
stock. Schulte has a long personal and profes-
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sional relationship with Thompson who, prior to his joining Circon's board,
held various positions at Heyer-Schulte Corporation, a company founded by
Schulte.
21. Defendant Paul W. Hartloff, Jr. ("Hartloff") is a member of the
Circon Board of Directors and has been since 1991. Hartloff also served as
Circon's Secretary from 1977 to 1988.
22. Defendant John F. Blokker ("Blokker") is a member of the Circon
Board of Directors and has been since 1991.
23. The Circon directors (the "Director Defendants"), by reason of
their management positions and/or their representation on Circon's board of
directors, are liable as direct participants in, and as aiders and abettors
of, the wrongs complained of herein in that they direct the actions taken by
Circon, and control the contents of Circon's public statements and press
releases.
FACTUAL BACKGROUND
CIRCON'S LONG HISTORY INACCURATELY
ASSESSING THE ACQUISITION
24. On April 25, 1995, Circon's management announced that it intended
to acquire Cabot. From that day forward, Circon's management issued numerous
public pronouncements proclaiming the synergies and benefits that were
expected to be achieved in short order following consummation of the
Acquisition.
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25. For example, the July 20, 1995 Circon and Cabot Joint Registration
Statement and Prospectus ("Prospectus") seeking stockholder approval of the
Acquisition, stated as follows:
JOINT REASONS FOR THE MERGER
***
SALES FORCE
The Circon and Cabot managements believe that the effective doubling
of the U.S. direct sales force as a result of the Merger can permit
significantly greater market penetration. Moreover, the broader product
line should potentially enable the combined sales force to increase
sales to existing accounts.
SYNERGIES AND COST SAVINGS
In addition to the potential synergies from broadening the product
line, better utilization of the U.S. direct sales force, and pooling the
complementary technological strengths of the two companies, the
managements of Circon and Cabot anticipate significant cost savings can
be realized from taking actions such as the elimination of duplicate
trade show and marketing expenses, consolidation of certain
administrative and finance functions, and rationalization for the use of
some facilities.
26. On August 31, 1995, Piper Jaffray, after obtaining key financial
information directly from Circon, issued a report forecasting the following
third and fourth quarter 1995 revenues, which turned out to be substantially
higher than actual results:
3rd Qtr. 4th Qtr. 1995 Year
------------- ------------- -----------
Revenues $43.8 million $46.5 million $171 million
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27. Circon's management joined in disseminating bullish forecasts. For
example, on September 20, 1995, R. Bruce Thompson, Circon's Chief Financial
Officer, gave the following interview, broadcast on the DOW JONES INVESTOR
NETWORK, in which he forecast earnings per share for 1995 of "70 to 75 cents"
- -- a figure which, as set forth below, turned out to be MORE THAN TWICE the
actual results:
Turner: Where do you see the cost savings specifically coming
from this merger?
Thompson: Well, as I mentioned earlier, clearly in the marketing and
sales efforts, this duplication of several hundred medical
meetings a year that can be eliminated is a, is a major aspect
of the cost savings. . . . SO, I THINK THERE ARE SEVERAL MILLION
DOLLARS THAT CAN VERY QUICKLY AND EASILY BE ELIMINATED.
(Emphasis added)
* * *
Turner: Can you give us an idea of your earnings outlook for 1995?
Thompson: WELL, 1995, BEFORE THE ACQUISITION, WE WERE LOOKING FOR SALES
GROWTH IN THE, IN THE 15 PERCENT OR SO RANGE AND WE WERE
LOOKING FOR EARNINGS PER SHARE OF APPROXIMATELY 70 TO 75 CENTS,
and I think even with the, if you ignore the one-time charges
that will be associated with the acquisition of Cabot, I THINK
OVERALL WE WILL STILL BE IN THAT RANGE.
(Emphasis added)
28. On September 20, 1995, Piper Jaffray issued a report on Circon
after having consulted with Circon management, which stated, among other
things, "We expect a steady increase in the productivity of the 150 person
direct sales force in the U.S. over the next two to three quarters" -- a view
fully endorsed by Circon.
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29. Finally, after reporting its third quarter 1995 results, Circon
executives spoke with securities analysts and told them, among other things,
that they anticipated strong fourth quarter 1995 revenues of over $45 million
and earnings per share exceeding $.25 per share.
CIRCON FAILS TO ACHIEVE THE PREDICTED
BENEFITS OF THE ACQUISITION.
30. On February 1, 1996, Circon reported its fourth quarter results.
Circon's actual performance was dramatically worse than what had been
publicly forecast only a few months before, and down from previous results
for the comparable period. Specifically, sales were only $38.6 million -- far
short of the $46.5 million forecast, and down from the $41.6 million of
combined Circon/Cabot sales for the comparable period the prior year; and
earnings per share were only $.08 -- a sharp decline from Circon's public
forecast only months before of earnings per share exceeding $.25.
31. Circon's financial results for the full year 1995 were equally
disappointing. Sales totalled $160.4 million -- roughly $20 million LESS than
Thompson had publicly forecast in September; and earnings per share
(exclusive of the one time costs of the Acquisition) were $.33 -- LESS THAN
ONE-HALF of the forecast level of $.70 - $.75.
32. Furthermore, Circon's downward spiral has continued this year.
Sales for the quarter ended June 30, 1996 were $37.06 million, down 11.4%
from 1995 second quar-
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ter sales of $41.83 million; and earnings per share dropped to $.03 from
their already disappointing $.08 level for the fourth quarter of 1995.
33. Circon now has conceded that these poor results were due in large
part to the disappointingly poor productivity of the combined Circon/Cabot U.S.
sales force -- the precise synergy from the Acquisition which Circon had been
trumpeting since April 1995. Moreover, Circon's previously unreserved
optimism has been replaced by their recent public confession, following on
the heels of announcing the company's most recent poor quarterly performance,
that:
The productivity of the combined US Direct sales force has been below
expectations. . . . There can be no assurance that integration
[of product offerings and sales forces] will be accomplished
successfully or achieve the expected synergies. . . . Failure to
effectively accomplish the integration of the two companies could have a
material adverse effect on Circon's results of operations and financial
condition.
(Exhibit A) This, in stark contrast to Circon's previous assurances that
"[t]he integration is well underway." Notably, Circon failed to disclose any
of the above negative facts in its Schedule 14D-9 disclosures to stockholders,
in which it continued to trumpet the expected synergies and benefits of the
Acquisition as the primary reason for opposing the Offer and installing the
Rights Plan.
34. The market reflected Circon's continuing poor post-Acquisition
performance in the valuation of Circon's stock, which fell to $8.75 per share
in mid-July 1996 from its $23.50 per share trading price in mid-December 1995.
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U.S. SURGICAL COMMENCES ITS TENDER OFFER
35. On August 2, 1996, U.S. Surgical commenced a fully financed
all-cash tender offer for all of the shares of Circon common stock for $18
per share -- a premium of $7.50, or 83% above the average price of Circon's
shares during the 10 days before the Offer was commenced. Pursuant to the
terms of the Offer, as soon as practicable following its consummation, U.S.
Surgical will consummate a merger in which all non-tendered shares will be
acquired for the same cash consideration of $18 per share.
CIRCON'S BOARD ADOPTS THE RIGHTS PLAN
36. On August 14, 1996, Circon's Board of Directors adopted the Rights
Plan. Pursuant to the Rights Plan, Circon's Board of Directors declared a
dividend of one preferred stock purchase right per share of common stock (a
"Right"), payable to each of Circon's stockholders of record as of August 26,
1996. Each Right entitles the registered holder thereof to purchase from
Circon, following the Distribution Date (as defined), one one-thousandth of a
share of Circon's Series A Preferred Stock at an exercise price of $70.
Furthermore, following the occurrence of certain other events, including the
acquisition of 15% or more of Circon's common stock, each holder of a Right
will be able to exercise that Right and purchase common stock of Circon (or
the surviving company in the event of a merger) at half price. Because any
current acquiror of 15% or more of Circon's
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common stock would not be entitled to exercise Rights in its possession, the
dilutive effect of the Rights Plan, if implemented, on the value of such
acquiror's common stock is overwhelming; and, as a result of this prohibitive
economic consequence, the Rights Plan effectively precludes the U.S. Surgical
Offer and proposed merger.
CIRCON'S PURPORTED JUSTIFICATION FOR THE RIGHTS PLAN
37. On August 14, 1996, Circon filed a Solicitation/Recommendation
Statement on Schedule 14D-9 (the "Schedule 14D-9") with the Securities and
Exchange Commission, which stated the recommendation of the Circon Board of
Directors that the Circon stockholders should reject the Offer. The 14D-9
sets forth the basis for that decision:
At the August 13, 1996 meeting, the Board determined that the best means
for providing value to its stockholders is for the Company to CONTINUE
TO PURSUE ITS STRATEGIC PLAN and not to be put up for sale at this time.
The Board unanimously concluded that the Offer is inadequate and not in
the best interests of the Company and its stockholders. In particular,
THE BOARD DETERMINED THAT THE COMPANY'S STRATEGIC PLAN OFFERS THE
POTENTIAL FOR GREATER LONG-TERM BENEFITS FOR THE COMPANY'S STOCKHOLDERS
THAN THE OFFER based on, among other things, greater opportunities for
business expansion, revenue and earnings growth, AS WELL AS BENEFITS
FOLLOWING THE FULL INTEGRATION OF THE BUSINESS OF CABOT MEDICAL
CORPORATION ("CABOT") INTO THE COMPANY. (Emphasis added)
A copy of the Circon Schedule 14D-9 is attached as Exhibit B.
38. In addition, the Circon Schedule 14D-9 disclosed that Circon is not
engaged in, and is not undertaking, negotiations on any alternative
transactions to the
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Offer that might benefit Circon's stockholders. Instead, Circon's now firmly
entrenched management has determined to compel its stockholders to stick with
management's strategic plan -- the same plan which caused the value of
Circon's shares to decline by over 60% between December 1995 and July 1996.
THE "REAL" REASON BEHIND THE RIGHTS PLAN
39. On or about August 30, 1996, Circon disseminated a letter signed by
Auhll (the "Auhll Letter") to all Circon employees, and publicly filed the
Letter as an amendment to the Circon Schedule 14D-9. A copy of the Auhll
Letter is attached hereto as Exhibit C. After assuring employees that the
Offer "has very little chance of success due to our defensive positions,"
Auhll showed his and his Board's true colors by declaring that: "We have
retained expert financial and legal advisors TO HELP US PREVAIL, NO MATTER
WHAT USSC DOES." (Exh. C at 1, 3) (emphasis added). Circon's determination,
in advance, to defeat any future offer without first engaging in the careful
analysis of such offer which directors are duty-bound to perform under
Delaware law, convincingly disproves Circon's purported justification for the
Rights Plan. In truth, the adoption of, and refusal to redeem, the Rights
Plan was an act of entrenchment, pure and simple.
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THE CIRCON COMPENSATION PLAN
40. To add to its anti-takeover arsenal, on August 25, 1996, the Circon
Board adopted three new "compensation" plans: the Circon Management Retention
Plan, the Circon Sales Force Retention Plan and the Circon Managers,
Professionals and Key Contributors Retention Plan (collectively, the
"Compensation Plan"). The stated purpose of the Compensation Plan was to
incentivize employees and assuage the "disruptive effects of the Offer" or
any other potential change of control of Circon. (Exh. D at 2) In truth, the
Compensation Plan has nothing to do with incentivizing Circon's workforce --
it was implemented solely to ensure that Circon's incumbent management will
not be replaced.
41. Under the Compensation Plan, 300 employees -- including Circon's
senior executives, sales force, managers and other "professionals" and "key
contributors" -- would be entitled to receive additional payments ranging
from 75% of annual base pay (for management employees) to 250% of combined
annual base salary and target bonus in the event of a change in control.
These payments would not be limited to key employees who are terminated, or
whose responsibilities are diminished, following a change in control. Rather,
employees who remain employed 90 days or more following a change of control
will receive between one-sixth and one-half of their total payments -- even
if their em-
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ployment is not adversely affected at all by the control change.
42. Moreover, the current Circon Board -- and only the current Circon
Board -- is free unilaterally to amend or terminate the Compensation Plan, or
to remove any of its designated employees from participating therein.
Obviously, a benefits plan that can be eliminated at any time provides no
true incentive for Circon's employees to remain with the company, and does
nothing to assuage any fears concerning continued employment in the event of
a change in control. Rather, the only purpose and effect of such a plan is to
substantially increase the acquisition expense to a potential acquiror -- an
expense that would come directly out of the pockets of Circon stockholders,
who otherwise would receive such funds as payments for their shares -- and
thereby further entrench Circon's current management.
43. The Circon Board also was grossly negligent in adopting the
Compensation Plan. Among other things, the Board failed to ascertain the cost
of the Compensation Plan, and therefore could not, and did not, have an
adequate basis to weigh the relative costs and benefits, if any, to the
company of adopting this highly unusual program.
THE CIRCON DIRECTORS' MATERIALLY
FALSE AND MISLEADING DISCLOSURES
44. Circon's disclosures to its stockholders contained numerous
materially false and misleading state-
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ments intended to unfairly prejudice stockholders against the Offer and in
favor of management's ill-conceived agenda. Among other things:
(i) The Schedule 14D-9 discloses management's belief that the
long-term values of the strategic plan exceed the Offer, without
disclosing the Company's previous inability to achieve the expected
benefits and synergies from the Acquisition, which is the centerpiece of
this strategic plan; the fact that the integration of the Cabot/Circon
operations, to date, has fallen well short of expectations; and that,
based on the continuing downward trend of their business, management is
concerned about their ability ever to achieve the highly publicized
expected synergies and benefits from the Acquisition.
(ii) The Auhll letter (Exh. C at 1) unequivocally states that
Circon's "strategic plan . . . will reward stockholders with greater
value than they can obtain through tendering their shares in this
offer," without disclosing the facts set forth in (i) above, and the
numerous uncertainties inherent in the strategic plan.
(iii) Circon failed to disclose that the Compensation Plan
unlawfully discriminates against, and limits the ability of, duly
elected future directors of Circon to exercise their fiduciary duties,
by providing that only the current Board or its hand-picked successors
can amend, modify or eliminate the Compensation Plans. The Circon Board
also falsely stated that the "Plan is designed to help Circon retain its
employees . . ." (Exh. C at 2) without disclosing that incumbent
management unilaterally can terminate the plan or any designated
employee's right to participate therein at any time.
DELAWARE BUSINESS COMBINATION STATUTE, SECTION 203
45. Section 203 of the Delaware General Corporation Law, entitled
"Business Combinations With Interested Stockholders," applies to any Delaware
corporation that has not opted out of the statutes coverage. Circon has not
opted out of the statute's coverage.
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46. Section 203 was designed to impede coercive and inadequate tender
offers. Section 203 provides that if a person acquires 15% or more of a
corporation's voting stock (thereby becoming an "interested stockholder"),
such interested stockholder may not engage in a "business combination" with
the corporation (defined to include a merger or consolidation) for three
years after the interested stockholder becomes such, unless: (i) prior to the
15% acquisition, the corporation's board of directors has approved either the
acquisition or the business combination, (ii) the interested stockholder
acquires 85% of the corporation's voting stock (excluding stock owned by (a)
persons who are directors and also officers and (b) certain employee stock
plans) in the same transaction in which it crosses the 15% threshold, or
(iii) on or subsequent to such time of the 15% acquisition, the business
combination is approved by the corporation's board of directors and
authorized at an annual or special meeting of the corporation's stockholders,
and not by written consent, by the affirmative vote of at least 66-2/3% of
the outstanding voting stock which is not owned by the interested
stockholder.
47. The Offer in this case is a fully financed, all cash
offer, available to all Circon stockholders for all outstanding shares. The
Offer is not "front-end loaded" or otherwise coercive in nature, is at a
substantial premium, and represents a full and fair value to Circon
stockholders.
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Furthermore, the Offer poses no threat to the interests of Circon's
stockholders or to Circon's corporate policy and effectiveness. Accordingly,
a proper exercise of the Circon Board's fiduciary duties requires it to take
the requisite steps to render Section 203 inapplicable to the Offer.
IRREPARABLE INJURY
48. Plaintiffs do not have an adequate remedy at law. Only through the
exercise of the Court's equitable powers will plaintiffs and Circon's other
stockholders be protected from immediate and irreparable injury. Unless the
Court enjoins the application of Circon's anti-takeover devices, Circon's
stockholders will be deprived of the opportunity to decide for themselves
whether or not to accept the Offer. Furthermore, U.S. Surgical will be
precluded from consummating the Offer, which is conditioned on removal or
inapplicability of the Rights Plan and Section 203, and will be deprived of
realizing the benefits of a unique business opportunity.
COUNT ONE
[For Breach of Fiduciary Duty with
Respect to the Rights Plan]
49. Plaintiffs repeat each of the foregoing allegation as if fully set
forth in this paragraph.
50. The Director Defendants were and are obligated to consider the
Offer, and all reasonable acquisition proposals, in a timely fashion and on an
informed basis, and must be guided by the single principle of the best
interests
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of the corporation, its stockholders and other relevant constituencies. They
may not place management's own self-interests and personal considerations
ahead of the interests of Circon stockholders.
51. The Director Defendants rejected the Offer, adopted the Rights Plan,
and have failed to redeem the Rights Plan, for the sole or primary purpose of
perpetuating Auhll's and incumbent management's control of Circon and their
continued enjoyment of the perquisites of such continuing control, all to the
detriment of Circon and its stockholders.
52. In addition, the Director Defendants have already decided, in
advance, to defeat any future unfriendly offer, regardless of price or any
other factor, and regardless of the adverse consequences such decision will
have upon Circon's stockholders. The Director Defendants made this decision
without undertaking the careful review and analysis of the particular offer,
which review is mandated of directors under Delaware law.
53. As a result of the foregoing, the Director Defendants have breached
their fiduciary duties of loyalty and care to Circon's stockholders.
54. Unless enjoined by this Court, defendants will continue to breach
the fiduciary duties owed to Circon stockholders and entrench themselves in
their corporate
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offices, causing irreparable harm to Circon's stockholders and U.S. Surgical.
55. Plaintiffs have no adequate remedy at law.
COUNT TWO
[For Breach of Fiduciary Duty with
Respect to the Rights Plan]
56. Plaintiffs repeat each of the foregoing allegations as if fully set
forth in this paragraph.
57. The Rights Plan is unreasonable in relation to any purported threat
posed by the Offer, and is preclusive and coercive. The Offer poses no threat
to any legitimate corporate policy, because (i) the Acquisition has already
occurred and cannot, and will not be undone; and (ii) U.S. Surgical is a
strategic buyer in the same industry as Circon, and, accordingly, there is no
basis to believe that the synergies and benefits ostensibly achievable from
the Acquisition cannot be obtained for the corporation by U.S. Surgical.
Furthermore, the Rights Plan is coercive in that it forces shareholders to
accept management's strategic plan, even though the the vast majority of
unaffiliated stockholders have indicated their preference for the Offer.
58. Under the foregoing circumstances, the Director Defendants' adoption
of the Rights Plan in response to the Offer, and their refusal to redeem the
rights, was and is a breach of their fiduciary duties of loyalty and care
under Delaware law.
59. Plaintiffs have no adequate remedy at law.
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COUNT THREE
[For Breach of Fiduciary Duty with
Respect to the Adoption
of the Compensation Plan]
60. Plaintiffs repeat each of the foregoing allegations as if fully set
forth in this paragraph.
61. The Compensation Plan was adopted for the sole or primary purpose of
entrenching current Circon management, regardless of the effect on Circon
stockholders, and serves no legitimate justification. Furthermore, the
Compensation Plan is unreasonable in relation to any purported threat posed,
and was not adopted in good faith and after reasonable investigation.
62. In addition, the Compensation Plan impermissibly interferes with the
stockholders' right to elect directors capable of fully exercising their
fiduciary duties and directorial powers, in that it prevents any duly-elected
Board, other than the incumbent Board or its hand-picked successors, from
terminating the Compensation Plan -- even if such Board concludes that
termination would serve the best interests of Circon and its shareholders.
63. The Director Defendants also were grossly negligent in adopting the
Compensation Plan in that, among other things, they failed to ascertain the
cost to the company of adopting the Plan, and therefore did not, and could
not, undertake a responsible cost-benefits analysis before hastily adopting
this unique compensation package.
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64. As a result of the foregoing, the Director Defendants have breached
their fiduciary duties of care and loyalty under Delaware law.
65. Plaintiffs have no adequate remedy at law.
COUNT FOUR
[For Breach of the Duty of Candor]
66. Plaintiffs repeat each of the foregoing allegations as if fully set
forth in this paragraph.
67. The Board of Directors of Circon owes to all Circon stockholders a
duty of candor to disclose fully and truthfully all material facts relating to
the Board's opposition to the Offer. The duty of candor is intended to ensure
that fiduciaries not deny their CESTUI QUE TRUST information necessary for them
to make informed decisions as to the trust, including investment decisions.
68. The Circon Schedule 14D-9 and the amendments thereto contain
materially false and misleading statements and omit material information, as
alleged above. The failure to provide the requisite material information in a
truthful manner disables stockholders from accurately assessing Circon
management's bias and from making informed decisions with respect to their
investment in Circon. As a result, the Director Defendants have breached their
duty of candor to Circon stockholders.
69. Plaintiffs and Circon's stockholders have no adequate remedy at law.
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COUNT FIVE
[Injunctive Relief]
70. Plaintiffs repeat and reallege each and every foregoing allegation as
if fully set forth herein.
71. The Offer is not "front-end loaded" or coercive in any other way. It
represents a substantial premium over the market price of Circon shares, and
offers full and fair value to all Circon stockholders. The Offer complies with
all applicable laws and other obligations -- including, without limitation, the
securities laws, the antitrust laws, and all other legal obligations to which
plaintiffs are subject -- and poses no threat to the interests of Circon's
stockholders or to Circon's corporate policy or effectiveness.
72. Under these circumstances, the sole purpose and effect of Circon's
anti-takeover devices is to force management's strategic plan upon Circon's
stockholders, and to prevent stockholders from deciding for themselves whether
or not to accept the Offer. Accordingly, these anti-takeover devices are
coercive and preclusive, and are not proportionate, nor within the range of
reasonable responses, to the Offer or any alleged threat posed by the Offer.
73. The Director Defendants' actions in adopting these anti-takeover
responses to the Offer constituted a breach of their fiduciary duties of care
and loyalty to
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Circon's stockholders. Accordingly, Circon's use of such measures should be
enjoined by this Court.
74. Plaintiffs do not have an adequate remedy at law.
COUNT SIX
[Injunctive Relief]
75. Plaintiffs repeat and reallege each of the foregoing allegations as if
fully set forth herein.
76. Under Section 203 of the Delaware General Corporation Law, the
Director Defendants can render this section inapplicable to the Offer by
approving the Offer. As a result of the facts alleged herein, the Director
Defendants' failure to approve the Offer, and to take any other steps necessary
to render Section 203 inapplicable, constitutes a breach of fiduciary duty to
Circon's stockholders.
77. Plaintiffs do not have an adequate remedy at law.
WHEREFORE, plaintiffs respectfully request that this Court enter an order:
(a) preliminarily and permanently enjoining Circon's directors,
officers, successors, agents, servants, subsidiaries, employees and
attorneys, and all persons acting in concert or participating with them,
from taking any steps to impede or frustrate the ability of Circon's
stockholders to consider and make their own determination as
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to whether to accept the terms of the Offer, or taking any other action to
thwart or interfere with the Offer;
(b) preliminarily and permanently enjoining Circon's Board of
Directors from triggering the distribution of the Rights associated with
the Rights Plan;
(c) compelling Circon's Board of Directors to redeem the Rights
associated with the Rights Plan or to amend the Rights Plan so as to make
the Rights inapplicable to the Offer and preliminarily and permanently
enjoining Circon, its directors, officers, successors, agents, servants,
subsidiaries, employees and attorneys, and all persons acting in concert or
participating with them, from taking any action to implement, distribute or
recognize any rights or powers with respect to said Rights (other than to
redeem the Rights), and from taking any actions pursuant to the Rights Plan
that would dilute or interfere with U.S. Surgical's voting rights or in any
other way discriminate against U.S. Surgical in the exercise of its rights
with respect to its Circon stock;
(d) compelling Circon's Board of Directors to approve the Offer for
the purposes of Section 203, and preliminarily and permanently enjoining
Circon, its directors, officers, successors, agents, servants,
subsidiaries, employees and attorneys, and all persons acting in concert or
participating with them, from taking any actions to enforce or apply
Section 203 that would interfere with the
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commencement, continuation or consummation of Circon's Offer;
(e) compelling Circon's Board of Directors to terminate the
Compensation Plan, and preliminarily and permanently enjoining defendants,
and their agents, servants, attorneys, assigns, successors, and all persons
in active concert or participation with them from modifying the
compensation structure in place before the Offer was commenced;
(f) requiring that appropriate corrective disclosure be made in order
to cure all of the materially false and misleading statements and omissions
made by Circon and the Director Defendants in connection with the purchase
or sale of Circon stock;
(g) awarding plaintiffs their costs and disbursements, including
attorneys' fees, incurred in this action; and
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(h) granting plaintiffs such other and further relief as the Court
shall deem just and proper.
SKADDEN, ARPS, SLATE
MEAGHER & FLOM
By /s/ Edward P. Welch
-----------------------------------
Edward P. Welch
Andrew J. Turezyn
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899
(302) 651-3000
Attorneys for Plaintiffs
United States Surgical Corporation
and USS Acquisition Corp.
Of Counsel:
Barry H. Garfinkel
George A. Zimmerman
Michael H. Gruenglas
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
919 Third Avenue
New York, NY 10022
(212) 735-3000
Thomas R. Bremer
Donald F. Crane
UNITED STATES
SURGICAL CORPORATION
150 Glover Avenue
Norwalk, CT 06850
(203) 845-1000
Dated: September 17, 1996
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FOR IMMEDIATE RELEASE:
CIRCON RESPONDS TO U.S. SURGICAL'S FILING
SANTA BARBARA, CALIFORNIA (SEPTEMBER 18, 1996) - Circon Corporation
(NASDAQ-NMS:CCON) responded today to U.S. Surgical's announcement of a
lawsuit.
Richard A. Auhll, chairman of the board, president, and chief executive
officer of Circon said, "We believe this suit is without merit and we will
vigorously defend ourselves. Our shareholder rights plan was adopted by our
board in the course of exercising its fiduciary duty to shareholders."
Mr. Auhll continued, "With respect to U.S. Surgical's tender offer, the
position of the Circon board is unchanged. We continue to believe that the
implementation of our strategic plan will provide our shareholders with
greater value than they can obtain through tendering into this offer."
Circon is the leading U.S. supplier of products for minimally invasive
urological and gynecological surgery, including such hardware products as
endoscopes and video systems, and such disposable products as urological
stents, laparoscopic suction-irrigation devices, and a wide variety of
gynecological products.
###
CONTACT:
Judith Wilkinson
Abernathy MacGregor Group
212 / 371-5999