9-801-403 REV: DECEMBER 11, 2003 BRIAN J. HALL CHRISTOPHER ROSE GUHAN SUBRAMANIAN Circon (A) Capitalism is not only about Wall Street’s focus on short-term shareholder value. It is also about the factories, the customers, the employees, the government, and the innovation and hard work of the people who i make the products and build the companies. — Richard Auhll, Chairman and CEO, Circon Corporation The night of Friday, August 2, 1996, like most summer nights in Santa Barbara, California, was a beautiful one. Richard Auhll (pronounced “all”), founder, chairman, and CEO of medical device maker Circon Corporation, was holding his annual Fiesta party at his house overlooking the Santa Barbara harbor. In attendance, along with approximately five hundred other “mostly single” guests, was George Cloutier, a longtime friend and Harvard Business School Class of 1969 sectionmate. To an outside observer the party would seem like any other thrown on Fiesta night in Santa Barbara, if perhaps more extravagant and better-attended. Yet a cloud hung over the festivities, unmentioned by Auhll or his guests. The previous day Auhll had received a call from Leon Hirsch, Chairman and CEO of U.S. Surgical Corporation, informing him that Surgical was launching a hostile takeover bid for Circon. The call had come as a shock to Auhll, particularly since Hirsch owned a vacation home in Aspen a few doors down from Auhll’s, and had been an occasional skiing ii companion of the Circon leader. “I thought about putting up a sign at the party, saying ‘Please don’t ask!’” mused Auhll in retrospect, “but I didn’t, and nobody did ask.” Auhll retired early that night, since he had to leave early the next morning for Palo Alto to meet with his takeover defense advisors. Cloutier stayed on, hounded by guests who wanted to know whether to buy or sell the Circon stock. As an outsider to the company, Cloutier was perhaps ideally situated to advise his old HBS sectionmate on how to respond to the bid. Originally his advice was combative: “I told Richard to [forget] ’em. We’re not giving up here. We’re staying until the last gun is fired.” Over the following two years, Cloutier would become increasingly enmeshed in the longest-running takeover battle in U.S. corporate history. With the benefit of hindsight, one wonders whether he would have given the same advice on that warm night in Santa Barbara, had he known how events would eventually unfold. Background Richard Auhll graduated from the University of Michigan with a bachelor’s degree in aerospace engineering in 1963. He began his professional career as a rocket engineer at United Technology ________________________________________________________________________________________________________________ Professor Brian J. Hall, Christopher Rose, J.D. (MBA ’01), and Professor Guhan Subramanian prepared this case with the assistance of Research Associate Jonathan P. Lim. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) Corporation’s Rocket Division Advanced Decision Group in Sunnyvale, California. Auhll spent five years at United Technology, eventually moving up to Program Development Manager. While working full-time, he also earned a Master’s Degree in Aerospace Engineering from Stanford University. After working his way into management, Auhll became concerned about a possible glass ceiling for engineers. All of his managers had MBAs, and Auhll became convinced that in order to advance to the top management levels, he would need one too. He applied to Stanford and Harvard business schools, and decided to attend Harvard, where he had been awarded a fellowship. When he arrived at HBS he realized quickly that he was different from most of the other students: I was married at the time and was over at married student housing at Peabody Terrace. I had a child and a wife and I had quit a very good paying job. At that time it was fairly unusual to have an MBA student with five years experience. I was actually one of the older students there and I was interested in pursuing a career very directly. George was a single guy, just out of Harvard College. So he was a bon vivant and at the time he was interested in exploring various options in his social life, etc., more important probably than school. Myself, I was at the other end of the spectrum. George Cloutier graduated magna cum laude from Harvard College in 1967 and went straight to HBS. He recalled their HBS experiences: When I was in college, I founded Operation Match, which was the first computer dating company. I was going to go to law school, but I thought, gee, this business thing was fun—you can have a very aggressive, active social life. Richard and I were in the same class and in the same section and actually were friendly. We were among three or four guys who were a bit, as I would like to call it now, a bit eccentric, a bit roguish, who didn’t take the business school quite as seriously as arguably we should have. While I was studious in college and did well academically, the undergraduate experience was more loosely structured than the business school. And since I was fresh out of college, I just kept up my less structured existence. Cloutier became one of only four students in his graduating class who immediately started his own business. Based on Cloutier’s HBS thesis, Innovative Management provided implementationbased consulting services for small and midsize companies. After six years at Innovative Management, Cloutier spent the next ten years (1976-1986) as an independent “hired gun” to struggling businesses. He eventually founded American Management Services (AMS), a management consulting firm in Waltham, Massachusetts. Auhll, meanwhile, was looking for options outside of aerospace, because he saw the window opened by the Apollo project as rapidly closing. He wanted to find a company, preferably on the west coast, where he could run his own technology enterprise. He interviewed for a position as assistant to the Chairman of the Board of Applied Magnetics, a high-tech company on the west coast. At the interview Auhll was given a tour of Applied Magnetics’ businesses, and took notice of a small eight-person division called Circon. Auhll declined the offer to be Assistant to the Chairman, but told the Chairman, Harold Frank, that he would be interested in running the small Circon subsidiary. Frank accepted the offer and Auhll joined Applied Magnetics in the fall of 1969. He rapidly changed the product mix from miniature tools for industrial use to high-tech surgical products: We transformed Circon from having an industrial base, to primarily being a medical company, by taking miniature tools and converting them to surgical instruments. We started making television microscope systems for industrial inspection, and we converted that over to television systems for surgery. In fact, we were credited with inventing the use of color video 2 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 systems in surgery at the beginning of 1972. It was written up in the New York Times, the L.A. Times, and other papers. From there we took off, though by today’s standards it sounds small. In 1976, Auhll took the momentous step of making an offer for Circon. Using $55,000 of his own money, a Small Business Administration guaranteed loan, additional funding from private investors and family members, and leveraged buyout money, he bought Circon from Applied Magnetics for $1.1 million. Circon was chartered as a California corporation in January 1977. Auhll owned 55% of the equity; a private investor named Rudi Schulte owned 15%; Auhll’s former boss at United Technology Corporation owned another 10%; an uncle owned 5%; and miscellaneous small investors owned the remaining 15%. The next six years were demanding but heady times for Richard Auhll and Circon. “At the time we had extraordinary margins,” recalled Auhll. “We commanded the major share, almost a monopoly, on this new market of video systems for surgery—all the things that were used in knee surgery and arthroscopy. We were on the ground floor of all that.” Sales grew from $1 million to $9 million from 1977 to 1984. All of this growth was funded internally, with the exception of a $7.0 million private placement in 1982 that reduced Auhll’s stake from 55% to approximately 40%. On July 7, 1983, Circon went public, opening at $21.00 per share and going up to $26.75 on the first day, yielding a price/earnings ratio of 83 to 1. Suddenly, Auhll’s net worth was $50 million, an astronomical sum in the days before the Internet. Exhibits 1A, 1B, and 1C show Circon’s stock price performance from 1983 to 1998. Exhibit 2 shows Circon’s income statement and balance sheet from 1988 to 1997. On the other coast, Cloutier continued to build AMS as its President and CEO. Since graduation Auhll and Cloutier had lost touch, occasionally running into each other “like ships passing in the night” at airports. Cloutier rekindled his friendship with Auhll at their HBS ten-year reunion in June 1979. Cloutier recalled: I remember at the reunion, he was really running around having a good time meeting with people. We all had our moments of exuberance, and he had his fairly regularly. In the mid1980s, he was out here a lot for business, and I used to have him over. I saw how hard he would work. A couple weekends I had him come out to Nantucket where he slept for two days straight because he was so tired. And that’s when we became more friendly. We traveled two or three times to Greece and a couple of times to Venice. We even chartered a yacht for a few of these trips. So we picked up our friendship in the mid to late 1980s. In 1986 Auhll made the bet-the-company decision to acquire ACMI Corporation, the leading maker of urological endoscopes, which was four times as large as Circon at the time. Auhll lent Circon $2 million of his own money and Circon borrowed another $13 million in order to finance the $28.5 million deal. Auhll then worked harder than he ever had before to re-engineer ACMI’s aging product line. After three years of losses, Forbes declared in January 1992 that Auhll’s “shrewd gamble” had “paid off.” In the same year Auhll was named “Entrepreneur of the Year” by the Institute of American Entrepreneurs. Despite their growing friendship during this time, Auhll and Cloutier rarely discussed business. In the early 1990s, however, Cloutier got to learn more about Circon when AMS was hired by Circon to create a penetration strategy for Circon’s salesforce. The Initial Attack In April 1995, Auhll made another bold gamble by bidding for Cabot Corporation: “Cabot was kind of a parallel company to Circon, with Circon focused on urology and Cabot focused on gynecology,” said Auhll. “We thought Cabot’s products were a bit obsolete and needed upgrading, 3 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) and they did not have a clear strategy within their own company. We thought that Cabot fit beautifully within Circon and that the Circon/Cabot strategy was very coherent and an outstanding program.” Circon won the bidding contest for Cabot and, though the identity of the other bidders was unknown at the time, Auhll later learned that he had beaten out Leon Hirsch of U.S. Surgical. As with ACMI, Cabot proved to be a net drain on the company at the outset. Exhibit 2 shows that Circon experienced net losses as a result of the Cabot acquisition, and Exhibit 1A shows that Circon’s stock price fell dramatically in the aftermath of the acquisition, from a high of $22 to approximately $15 per share. In February 1996, Circon stock plunged further, to $11.25, following a negative earnings announcement for the fourth quarter of 1995 that was largely related to Cabot. Despite this performance, Auhll believed that, with time, he would be able to turn around Cabot in the same way that he had turned around ACMI: “We had done it once, we felt that we could do it again. We had confidence that we could repeat that performance.” But Auhll would never get that chance. On August 1, 1996, around 6:00 p.m., Auhll took a call from his acquaintance and occasional ski partner Leon Hirsch, Chairman and CEO of U.S. Surgical. Hirsch had a “terrifying reputation in the business” according to Auhll. “He was the 800 pound gorilla. Well, he was at least a 600 pound gorilla, and Johnson & Johnson was an 800 pound gorilla, and we were a 100 pound gorilla.” Hirsch informed Auhll that U.S. Surgical would be announcing a tender offer for 100% of Circon’s shares at $18.00 cash per share, or approximately $230 million in total value, the next morning. Hirsch also informed Auhll that Surgical had already purchased an 8% stake in Circon through open-market transactions. Auhll owned 11.5% of Circon, and company iii insiders (employees and directors) held roughly another 13%. “I was rather stunned,” said Auhll. “I guess it became clear that it was going to be a hostile attempt. He didn’t make any friendly overtures at all.” Though the bid was not announced publicly until after the close of the market, Circon’s shares jumped 16%, to $12.125 on the Nasdaq that day. At $18.00, the bid represented almost a 70% premium over the pre-announcement price of Circon. U.S. Surgical’s shared closed at $34.375, up $0.125 on the New York Stock Exchange. After detailing the terms of the offer, Hirsch asked Auhll what he thought about the bid. Auhll deadpanned: “Well, it certainly was not in our strategic plan.” The siege had begun. Raising the Drawbridge The day after receiving the U.S. Surgical offer, Auhll flew to Palo Alto to meet with Larry Sonsini. Sonsini was a law professor at the Boalt Hall School of Law at the University of California (Berkeley). He was also a name partner with the large and rapidly growing law firm of Wilson, Sonsini, Goodrich & Rosati. Sonsini and his firm had gained fame and wealth over the previous decade by representing the many venture capital firms and start-up companies founded in Silicon Valley. According to some observers, Sonsini hoped to use his representation of Circon to help his firm gain prominence as a merger advisor. In his meeting with Auhll, Sonsini urged Auhll to bring before his board a resolution authorizing a shareholder rights plan, also known as a “poison pill.” The pill would make it prohibitively expensive for Surgical to acquire more than a 15% stake in Circon without the approval of Circon’s board.1 In addition, just two weeks before the bid was launched, Circon’s general counsel had filed a 1 A poison pill works by distributing to all shareholders warrants to buy more common stock from the company at substantially less than the market price. These warrants only become exercisable in the event that a shareholder (“the acquiring person”) buys more than a certain percentage of the company. These warrants are explicitly not exercisable by the acquiring person, so the resulting dilution in his voting power and economic stake may make the acquisition of the target through market purchases too expensive to pursue. In the roughly fifteen years since the pill was invented, no bidder has 4 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 shareholder resolution (approved a year earlier) that prohibited shareholder action by written consent and shareholder action through special meeting. Auhll speculated that Surgical’s advisors might have perceived this as a weak link in Circon’s defensive armor: We suspect that when their lawyers checked out the bylaws and things in the Delaware records, they found out that the shareholder resolution had not been filed, and therefore was not in effect. I believe that they thought they could launch a hostile takeover, have a tender offer out for 27 days, and they could get the proxies and hold a shareholders’ meeting and own Circon in 27 days. I am suspecting that this was their strategy. The poison pill did not require a shareholder vote and was therefore adopted in a matter of hours by the Circon board. Filing the amendment to the bylaws was equally quick since the shareholders had already approved it. In addition to these defenses, Circon had adopted a staggered board (or classified board), whereby only one-third of the directors stood for re-election at each annual meeting. Gaining control of the board, therefore, would require two proxy contests over two years (to get two-thirds and therefore majority control), rather than just a single contest. 2 Circon also announced an Employee Retention Plan (“silver parachutes” ) that would be triggered by a change in control of the company. A Circon spokeswoman said the plan covered approximately 300 employees (25% of the total Circon workforce), from sales people to “key professionals.” Circon officials declined to elaborate publicly on its retention plan, which had both single trigger and double trigger pay-outs in place for its top management.3 A spokesman for Surgical, commenting on the employee-retention plan, said U.S. Surgical was committed to its takeover attempt and accused Circon management of “doing everything it can to entrench itself and preclude shareholders from iv making their own decision.” All of these defenses were facilitated by Delaware court decisions in cases such as Time v. v vi Paramount and Moore v. Wallace Computer. These cases held that a board is not required to accept an all cash bid for a company, regardless of support by stockholders in the form of shares tendered, as long as the board determines that its “strategic plan” will deliver more value to stockholders over the long run. In Time, the Delaware Supreme Court held that “[d]irectors are not obligated to abandon a deliberately conceived plan for a short-term shareholder profit unless there is clearly no basis to vii sustain the corporate strategy” (emphasis added). Circon management received the benefit of these rulings because Circon had changed its state of incorporation from California to Delaware when it went public in 1983. Siege Resistance Within days of the bid announcement, Auhll chose New York investment bank Bear Stearns & Company as Circon’s financial advisor. Brian McCarthy, a managing director with Bear Stearns, led the engagement. Auhll described the decision: “broken through” (triggered) a poison pill. In Circon’s case, the poison pill was triggered at 15% and allowed all shareholders (other than the acquiring shareholder) to pay in $70 cash and receive in return $140 worth of Circon common stock for each share owned (valued before the takeover attempt). 2 “A silver or tin parachute functions like a golden parachute, but covers more employees.” Bruce Wasserstein, Big Deal : 2000 and Beyond (New York: Warner Books, 1998), 711. 3 A "Single Trigger" pay-out is one that is paid automatically on the closing of a change of control transaction. A "Double Trigger" pay-out is one that is paid only when an employee is terminated within a specified period (usually one year) after a change of control has occurred. 5 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) We interviewed six investment banking firms to represent and guide Circon during the hostile takeover attempt. Of these, two seemed interested only in packaging Circon for sale and making a quick commission. Three indicated that Circon had only a 20% chance of remaining independent for even a few months. Two or three firms seemed willing to be aggressive in resisting the attempt by U.S. Surgical. We selected the Bear Stearns & Co. team led by Brian McCarthy for two reasons. First, Brian was relatively young and ambitious, and obtaining a high price for Circon and especially a defeat of the hostile takeover attempt would be a major coup for him and would substantially advance his career. Because of the personal stakes involved we believed we would get his full attention and effort. Moreover, he had done a good job for us during the Cabot Medical acquisition. Second, while Bear Stearns was a very prominent firm, it was not in the “highest rank” and some success with the Circon defense would likely advance its reputation on Wall Street, so we thought we would obtain solid institutional support. In retrospect I believe our judgment was correct and that we made the best possible choice. On August 13, Bear Stearns issued its opinion to Circon that the $18 per share bid was inadequate (see Exhibit 3 for the text of this letter). On the basis of this inadequacy opinion, Circon’s board quickly recommended that Circon shareholders reject the $18 per share offer. Auhll articulated his reasoning for rejecting the offer: After discussions with my lawyers and bankers, my assessment of our situation was as follows. First, there was a high probability that within three to five months Circon would be acquired by some company. Second, if we could resist and delay U.S. Surgical’s takeover there was strong probability that competitors of either U.S. Surgical or Circon would launch defensive competitive bids for Circon leading to a “bidding war” which might raise our price 50 to 100 percent over U.S. Surgical’s price. At a minimum, we believed that any effective resistance would cause U.S. Surgical to raise its offer. And third, there was a very high probability that I would no longer be employed by Circon’s new owners. One of the basic questions is: “Is short-term shareholder interest the only consideration?” And is it unethical to do anything other than what the shareholders say in the short term? I’m not an expert in this area, but my understanding is that short-term shareholder interests are an important factor, but they are not paramount, and they are certainly not the only factor that has to be considered. Delaware has systematically stated in numerous of their case law pronouncements that the judgment of the board of directors is paramount. The speculators and takeover artists and arbitrageurs are not the primary interest; the primary interest, in the state of Delaware, is either the medium or the long-term shareholder benefit. Circon’s board at this time was composed of four members in addition to Auhll, all of whom were friends and business relations of the Circon leader. Though they were all ostensibly outsiders (meaning that they were not Circon employees), all except one had been nominated by Auhll himself. Harold R. Frank was Auhll’s former boss at Applied Magnetics. Paul W. Hartloff, Jr. was a former attorney to Circon, and Rudolf R. Schulte was a local investor and one of Auhll’s major backers in his initial LBO. Exhibit 4 contains a more detailed description of each director’s background and their respective stockholdings, including information on George Cloutier, Charles Elson, Victor Krulak, and Bruce Thompson, who would subsequently join the board. Auhll was instructed by legal counsel not to communicate with Hirsch or other Surgical representatives, despite several attempts by Surgical to do so. Instead, Auhll and Hirsch traded blows in the press. In elaborating on why U.S. Surgical’s offer was inadequate Auhll was quoted as viii Hirsch countered with: saying “Execution of our strategic plan will generate superior value.” “Despite Circon’s poor performance, missed forecasts and deteriorating shareholder value before our 6 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 tender, their directors offer shareholders no alternative and no firm value other than a continuation of ix a ‘strategic plan’ that has not produced results.” On August 20, Circon announced that three of its stockholders had filed separate lawsuits against the company, its board, and top executives over their response to Surgical’s takeover offer. The suits sought class-action status and alleged that the board and Auhll in particular had violated duties to shareholders by rejecting the hostile bid. A Circon spokesman said the allegations lacked merit and x that the company would defend against them. On August 30, Surgical announced that 6.99 million Circon shares had been tendered into its initial tender offer. The tendered shares, when combined with the Circon shares that Surgical already owned, represented 63% of Circon’s common stock. In view of this initial success, Surgical extended its $18 tender offer for another month, through September 30, 1996. On September 30, Surgical again extended the $18 per share offer until December 13. The Enemy Falters? While shares continued to flow to Surgical, employee morale began to falter almost immediately after the hostile bid was launched, and turnover in the sales force began to increase sharply. Auhll recalled the internal struggle: We were terrified that we would lose our employees and that would destroy our ability to operate the company. That was a major, major issue, trying to hold our team together. We were very worried that we would lose a lot of our employees. So I was a major cheerleader out there for the employees, trying to keep up morale and keep the esprit de corps up. Despite best efforts, sales force attrition increased dramatically, which led to missed revenue targets. Exhibit 5 shows the quarterly performance of the company during this period. In view of these operational difficulties, when Surgical’s $18 bid expired on December 16, it announced that it was lowering its tender offer to $17 per share and extending it until February 13, 1997. Auhll was “utterly stunned” by the reduction in offer price: In November, I thought, “My God, Leon is a genius. He’s going to raise the price on December 14, and it’s going to require my lawyers, my management team, my board, my investment bankers, all working over Christmas and New Year’s to submit an answer in ten working days.” My chief financial officer [Bruce Thompson] believes to this day that had Surgical raised its price to $19.00, the Circon board would have accepted it. Instead, Leon tried to flex his muscles. He not only wanted to acquire Circon, I think he wanted to rub our nose in it and I think he just got very greedy. I expected him to raise the price a dollar or two, at least, and then stress everybody out and we would capitulate. But he lowered the price, which was a total shocker. What that meant was that we didn’t even have to go back to Bear Stearns for an adequacy opinion. We already had one, which was still fresh. Indeed, a day after Surgical’s new offer, Circon announced that its board of directors had recommended that stockholders reject the bid as inadequate. In a Wall Street Journal article Auhll stated that his strategic plan was “on track,” and noted that Circon expected to see savings early in the next year from the closure of a Pennsylvania facility. He also noted to the press that products introduced in the prior few months had been well received. In response, a Surgical spokeswoman said: “We’re very disappointed that they won’t come to the table to discuss the offer’s benefits and xi synergies for stockholders.” 7 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) On June 16, Surgical made a move to increase its position in Circon stock. Surgical announced an amended tender offer to purchase only 973,174 shares at $14.50 per share. This amended offer was for just enough shares to give Surgical 14.9% of Circon’s outstanding shares, an amount just below that which would trigger Circon’s poison pill. Surgical’s initial offer had been for all of Circon’s shares. Under U.S. securities laws, Surgical had to make a new offer to buy a smaller number of shares. In addition, this lower offer was not for control of Circon, but only for a minority position. This lack of a control premium allowed Surgical to succeed in closing the smaller offer at the much lower price of $14.50 per share. In order to provide adequate disclosure on this smaller offer, Surgical made clear its intention to renew its tender offer, this time at $16.50, for all Circon shares, after the smaller tender offer expired on July 14. As expected, on July 15, Surgical announced that its $14.50 per share amended tender offer had been completed. On August 5, U.S. Surgical renewed its cash tender offer for all outstanding Circon shares at $16.50 per share. At the August 15, 1997, board meeting Brian McCarthy presented financial analysis which had led Bear Stearns & Co. to renew its written opinion that the U.S. Surgical tender was “inadequate from a financial point of view to the company’s stockholders.” Without this “inadequacy opinion” the hostile takeover defense could not have continued. Some board members were not expecting this renewal. In September 1997, Surgical filed suit against Circon in the Delaware Court of Chancery, seeking an injunction against Circon’s poison pill and employee retention plan. In the lawsuit, Surgical claimed Circon’s board adopted the pill for the “improper sole purpose” of allowing Auhll to retain control over the company. The lawsuit also alleged that the employee retention plan adopted by xii Circon was a ruse intended to discourage a hostile takeover. A Flanking Maneuver While the direct battle for Circon’s shares continued, Hirsch announced that Surgical would initiate a proxy battle to oust the one-third of Circon’s directors who would be up for re-election in October 1997. One of the directors who would be standing for election was Auhll himself. Surgical filed proxy materials with the SEC and announced its intention to elect two directors to the Circon board: stockholder activist Charles Elson, a Stetson University law professor, and Victor Krulak, a retired U.S. Marine Corps lieutenant general. If elected, they would be the first directors without friendship ties to Auhll. Elson had gained recognition for his writings on corporate governance and his selection by “Chainsaw” Al Dunlap to be a director of Sunbeam Corporation. General Krulak, known to his friends as “Brute,” became famous for serving on the Joint Chiefs of Staff during the Vietnam War as head of counterinsurgency operations and training. Elson described his initial involvement: In March 1997, Leon Hirsch called me. So I went to New York and spent a couple of hours talking to him and the Surgical people about Circon and the bid. To me, the issue was, can a board turn down an all-cash offer to which at that point 73% or 74% of its shareholders said that they should go forward with it? I was very clear with them, though, that I was not representing their interests. I was simply a candidate for the board to represent all the shareholders. I had no obligations to them following the nomination. Once I was elected to the board, I would have no contact or relationship with them. In return for their willingness to stand for election, Elson and Krulak each received $100,000 in Circon stock from Surgical, as well as “back-up” indemnification in the event that they won board seats but did not receive the same indemnification as the other Circon directors. “We consulted with counsel and they agreed that would not compromise independence,” recalled Elson. Exhibit 6 8 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 contains copies of the proxy materials filed by Surgical and Circon that were sent to Circon stockholders. In April 1997, Circon announced that George Cloutier had been appointed to fill a “longstanding” vacancy on the Circon board. “George was a friend of mine, and I knew he was a fighter,” recalled Auhll. “He was an independent person, so I knew he was somebody I could sell to the board and they would be comfortable with him.” Cloutier recalled the situation as well: He was looking around for a new director because he had to replace some people on the board. It looked like a couple directors would be leaving and I think he was getting the feeling that they were getting squirrelly on him because the offer had been lowered and he wasn’t meeting his business plan. So he was getting into a place where he needed someone to buck him up, and he probably perceived me as that, and I perceived me as that. I knew that by coming onto the board, I was stepping into automatic lawsuits. Richard had to have someone willing to step in and not care, and that was me. “Hey Richard, we’ll take these guys and slap them around and get them straightened out here.” That was my position: we fight until the last minute, last day, last hour, and something will happen. At that point I was probably more aggressive because for me it was riding into an unknown battle. It was just an emotional friendship move—charge in to defeat the Hun. Even though we didn’t know then who the Hun was. In July 1997, the Circon board increased the number of Class II directors from one to two and named Circon’s CFO, Bruce Thompson to the new position. Thompson’s appointment brought the total number of directors on the Circon board to seven, with two in Class I (up for re-election in October 1997), three in Class II (up in 1998), and two in Class III (up in 1999). In September 1997, Surgical increased the pressure on Circon by asking the Delaware Court of Chancery to bar reinstatement of Auhll to the board if he were not re-elected by stockholders at Circon’s October 6 annual meeting. The Delaware court refused to issue an injunction before the meeting, but agreed to hear the case if Auhll were voted out by shareholders but reappointed by the board. Showdown at the Fess Parker Hotel Circon held its annual stockholders meeting on Monday, October 6, 1997, at Fess Parker's Double Tree Resort in Santa Barbara, California. Anticipating victory, members of Surgical’s deal team had flown to the hotel and set up a “war room” in a small dining room at the hotel. Elson was there as well: “I felt that if I was going to stand in the election, I should be at the shareholder’s meeting, be available, and then if elected, maybe something at that point would happen.” Specifically, the Surgical team hoped that after a convincing defeat Circon management would finally come to the bargaining table. At the meeting stockholders expressed their fury at Auhll for not pursuing a sale. “You appear to run the company like you own the company,” George D’Angel, a shareholder from Tampa, Florida, said to Auhll. “You’re treating the shareholders like we’re a bunch of children.” Auhll countered by xiii saying only that, “You should vote your conscience.” Despite the dramatic speeches, in fact only about 100 shareholders were in attendance. Moreover, major stockholders and directors such as Frank and Schulte were absent. Elson recalled: “Here was this critical meeting. The biggest moment of all. The one time in the world when directors, I think, have an obligation to face their shareholders. If more of the outside directors had been there, they would have been horrified. They would have held a board meeting and said, look, the story is over. But they didn’t come.” 9 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) Circon delayed releasing the election results due to problems with the proxies.4 On October 17, xiv Surgical announced that Elson and Krulak had replaced Auhll and Hartloff on the Circon board. In addition, Surgical claimed that shareholders had supported by a margin of nearly 4 to 1 a non5 binding resolution to seek a prompt sale of Circon. Shortly after the results were finalized, Auhll sent Elson a letter saying he wanted to meet “anytime, any place and anywhere” that Elson wanted. They met on a Sunday afternoon at Elson’s home in Tampa, Florida. Auhll arrived by himself, carrying a slide projector, and proceeded to go through the same presentation that he had made at the shareholders’ meeting just a few weeks earlier. Afterwards, Elson and Auhll went to dinner on the condition that no business would be discussed. Both reported that the dinner was a pleasant one, with Auhll and Elson learning that they had a mutual interest in good wine. “Maybe we had differences,” said Elson, “but in my role as a director of his company, we had to work together, and I wanted to work with him.” The Enemy Gains a Beachhead Unfortunately, the goodwill between Elson and Auhll would disappear quickly under the weight of ideological and business differences in the months to come. Some issues were relatively trivial, but carried symbolic weight. For example, the first board meeting was originally set for October 31, a date that Elson had long been scheduled to speak at the National Association of Corporate Directors conference in Washington, D.C. When Elson asked if the meeting could take place on a different date, Circon’s General Counsel refused. It was only after Elson threatened to charter a plane (because no commercial flight was available) so that he could attend was the meeting time changed. Other confrontations were more substantive. Elson and Krulak were each asked to sign a Directors’ Confidentiality Agreement that had been adopted by Circon only after the election of the insurgents. Exhibit 7 gives the text of this agreement. Though Krulak signed this agreement without protest, Elson felt that signing the agreement would compromise his duties as a director: I said, look, I know I’ve never seen something like this. As a law professor, I know the law of Delaware and I know this thing basically emasculates me as a director. I can’t sign this. I think it would subject me to legal liability to shareholders, if I’ve effectively signed away my right to information. After extended wrangling between Elson’s attorney and Circon’s attorney, Auhll abandoned the issue. On November 21, 1997, the Circon board met for the first time after the election of Elson and Krulak. Elson flew out the night before: “They said there was no room at Fess Parker’s, so they put me up in a place that was pretty long in the tooth, complete with a paper sanitary band over the commode. They were ‘sorry,’ but all of a sudden, there was nothing else available—everything else was supposedly full. At that point, I didn’t care, though it was clear I wasn’t exactly being welcomed with open arms.” The scene at this first meeting was described by several as tense, but professional. General Krulak introduced himself to Elson as “Brute.” Upon meeting Auhll, the General responded “this is General Krulak” and from then on all other directors addressed him only as General Krulak. In the board 4 Some parties remember that a major shareholder was so angry that he almost forgot to cast his votes and this led to a ballot dispute, but the precise reasons for the delay are not known. 5 Under Delaware law certain actions, (e.g., amending of the Certificate of Incorporation or the approval of a merger) require both stockholder approval and board approval. Therefore a resolution by stockholders alone to sell a company is not sufficient to bind the corporation. Yet, proposal of non-binding resolutions for the sale of a company or the removal of anti-takeover devices such as staggered boards and pills do sometimes have strong persuasive power and have become quite popular with both dissident groups seeking to become bidders as well as with shareholder activists in recent years. 10 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 room Krulak took his place in the middle on one side of the table, and Elson sat opposite him. “We were surrounded,” Elson said. “Brute and I were on opposite sides, and the rest of them were all around us.” Circon’s lawyers at Wilson Sonsini had been instructed to find a way to get Auhll back on the board. They issued a memo which made five arguments: having the CEO on the board is a sound management practice; not putting the CEO back on the board would send a powerful and adverse signal to employees; the election of the Surgical nominees should not be viewed as a vote to remove the CEO; Auhll’s appointment would not alter the voting strength on the board of the two factions; and Delaware law supported the authority of the board to elect a CEO who has lost his seat in a proxy contest. The first order of business at the meeting was to accept the resignation of Rudi Schulte, a 65-yearold retired investor and board member since the company’s inception in 1977, who left for “personal reasons.” As the next order of business, Cloutier nominated Auhll to fill the vacancy on the board created by Schulte’s resignation. “Schulte had resigned earlier, and it was not a set-up,” remembered Cloutier. “It was not engineered, but we did take advantage of it.” By a vote of 5 to 2, with both the Surgical nominees dissenting, Auhll was re-appointed to the board and re-named Chairman of the Board. Exhibit 8A contains a copy of the minutes from this meeting. Recalled Elson: I wondered how they were going to do it—how they were going to manage to reappoint Richard. And at the meeting they show up and they said, “Oh, it was really sad. Rudi Schulte is very ill, and he just can’t do this any more. Rudi has just resigned because of illness.” And Krulak was very funny. He said, “How convenient.” He felt that it all had been pre-arranged. They had clearly met before. They knew exactly how they were going to handle the reappointment situation. “They,” in Elson’s view were primarily Auhll and Cloutier: “I knew they had been roommates at HBS. They would always go off together. It was clear that they were old friends.” Harold Frank was also part of Auhll’s inner-circle, as his former boss at Applied Magnetics: “Always to the very, very end, Harold was totally and completely supportive of Richard,” said Elson. With Auhll back on the board, Elson recognized that any potential opportunities to make headway within the boardroom had disappeared. In a statement issued the same day as the board meeting, the board majority said they believed “it is essential” for a CEO to be a board member too (see Exhibit 8B). A chief executive with the board’s confidence also “has the board’s confidence to be a director, taking part in our deliberations and sharing the responsibility for our decisions,” the statement went on. Auhll said after the meeting that he “appreciated the vote of confidence by the board” and emphasized that the board’s action was “well within the legal bounds.” In a separate statement, Elson said that he had opposed Auhll’s reinstatement because “of legal liability and shareholder suffrage concerns. I thought it was xv inappropriate to take this action at this point in time.” Surgical indicated that it would renew its legal battle against Auhll’s reinstatement. In September, the Delaware Court of Chancery had indicated that it would rule on Surgical’s complaint if Auhll were placed back on the board. For reasons that are now unclear, however, Surgical did not pursue this claim, despite the fact that the condition imposed by the Court had become a reality. Operating Under Siege As time passed, the hostilities from the initial board meeting seemed to subside a bit, as both sides focused on trying to understand and improve Circon’s business. “It was more camaraderie,” recalled Cloutier. “Let’s meet the plan, let’s work on meeting the plan.” Tensions did not completely 11 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) disappear—for example, Elson’s Confidentiality Agreement was raised again, and eventually an acceptable form was negotiated between the parties. In addition, though the minutes do not reflect it, some parties remember each meeting beginning with a motion by General Krulak for Auhll’s termination as CEO. Elson recalled the frustration he experienced as a dissident director at the board meetings during this period: The numbers were not adding up. They were missing their own projections, and by missing their own projections there was no way they could justify rejecting $16.50 [the current offer by Surgical]. Even their projections would have just barely gotten us to $16.50, but they weren’t even meeting on the revenue side the numbers that would get us close to $16.50. At each meeting, I would just push and push and push on those numbers. The goal was to hit a dollar EPS. Because if we agree that it’s a 15x multiple, then at around a dollar we’re at $15. But it was becoming clear to me that we weren’t going to hit a dollar, ever. Auhll blamed the poor performance during this period on the high sales force turnover, which in turn he blamed on the hostile bid itself: We spent a lot of money on incentives for the sales force to stay in place, because the sales force was vital to the whole issue. And it turns out, those efforts were not successful. No matter how much money we threw at it, it was not enough to keep the sales force in place. Over the full 26-month period [of the hostile bid], our sales remained basically level. In the late spring of 1997, we decided that we were not going to be able to raise sales significantly by any means, because we were losing too many salesmen and it was not worthwhile throwing a lot of money into retention programs for the sales force. So we actually terminated that activity and moved aggressively into a cost-cutting program. And the cost-cutting program was more under our control, and with that we could raise our earnings very dramatically. So that became a major activity. Despite the turn-around story painted by Auhll, even those closest to him on the board gradually began to lose faith over the next few months. Circon’s financial reporting to its directors was sparse and difficult to interpret, a fact that made it difficult for them to contribute to long-term strategy. In addition, what little financial analysis that was distributed was often sent too late to be meaningfully reviewed by directors. Cloutier recalled the stark contrast between the HBS sectionmate and diligent entrepreneur, versus the Circon CEO that he now had to work with: Richard didn’t really manage the business. For instance, he didn’t have budgets, because he felt that budgets were not good. And I said “Richard, please.” The response was, “Well, I don’t use budgets. I just compare to last year.” So the place spun out of control. The decisionmaking process was terrible. He wasn’t functioning on a management level. Why, I’m not sure. I think he got the stuffing knocked out of him when the takeover offer came. It was the really intense, hard-working Richard up until say the late 1980s, early 1990s, then he made lots of money and went to a lower level of intensity. I don’t think anyone else would see that because you would need to see him through that whole time. But that would be my view. Auhll held a different view: The workload during this hostile takeover attempt was the highest of my professional career. Of course, we had all the normal tasks of running a corporation, but on top of this we had three additional major jobs. The first was the integration into Circon of Cabot, which was fully two-thirds of our size. To obtain the planned synergies and profit growth we had to completely merge the two companies and not let them exist as two stand alone entities. The second additional major job was negotiating joint venture agreements with Johnson & Johnson and B. Braun, which 12 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 unfortunately fell through in the end. The third additional major job was, of course, managing the hostile takeover defense: managing outside consultants (legal counsel, bankers, public relations consultants, etc.); building morale among employees who thought they were going to lose their jobs; giving white knight and white squire presentations; and beginning a major costcutting program in May 1997, which in retrospect I wish we had initiated nine months earlier. Circon board activities were also more intense and comprehensive than normal—for example, we had 33 board meetings during the takeover attempt instead of the usual nine. The Search for Reinforcements Between December 1997 and March 1998, Circon continued to miss its projections. As a result it became clear that Circon would likely lose another proxy fight—and this time, it would mean losing control of the board. In its meeting on April 27, 1998, the board directed Bear Stearns to begin searching for potential “white knight” buyers or “white squire” strategic partners. Auhll decided to lead this search himself. Elson felt that Auhll might actually work against finding a buyer. “I said I think it’s a big mistake to have Richard run this process, “Elson recalled telling the other board members. “I thought Richard was going to stall. I said we should just have an auction, but I was shot down.” Even Cloutier agreed that Auhll was leading the sale process in order to keep control of Circon. Cloutier had spoken with Bear Stearns, Wilson Sonsini and Auhll himself, all of which had convinced him that Auhll did not want to sell the company. Even outsiders did not believe that the search was a legitimate one. A director from a competitor medical products manufacturer told Cloutier squarely that “you’ll never sell that company with Richard leading the process.” Karen Finerman, an arbitrageur whose fund Metropolitan Capital held a 1% stake in Circon at the time (purchased in the market for prices ranging from $14.00 to $16.63), also believed that Bear Stearns, controlled by Auhll, “would not run a bona fide process.” Elson speculated about Auhll’s mindset during this period: Richard liked being a CEO. It was who he was. He was in charge of a large organization in this small community. The company had a beautiful headquarters—clay tile roof, dark wood paneling, thick carpeting, beautiful woodwork, leaded glass. His office was gorgeous, on the corner of the building, with a private eating terrace. I think being CEO of Circon was prestigious from both a financial and social perspective. I think he had more than enough money already because he was single, he made a good salary as CEO, his house was already paid for and he even had his own airplane. He was living very happily. I’m only speculating, but it would seem to me that the value of being CEO was greater than the value of the cash that Richard could have received on a sale. Karen Finerman agreed: “[Auhll] was a bit of a wild card. I think this company was his baby. That’s not an ideal situation, because sometimes people do stupid things to protect their baby.” In the end, Auhll’s search resulted in some moderate interest from a few strategic buyers, but no one who was willing to offer as much as the $16.50 that Surgical had put on the table. Auhll supported a joint venture proposal that would have sold part of Circon to Thermo Electron, a Bostonbased medical manufacturer. “I didn’t come up with it; they came up with it,” said Auhll. “It was a brilliant program—take care of the short-term shareholders now, and the people who had confidence in the company could stay in.” Despite Auhll’s enthusiasm, the board quickly rejected the joint venture proposal. The rejection of the Thermo Electron deal was the first explicit challenge to Auhll’s authority on the board. Elson remembered, “Suddenly, it was clear that we had gotten in the majority. Now that 13 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) Blokker and Cloutier were on our side, I thought that they were going to nicely tell Auhll, ‘Look, it’s time to start moving this.’” In fact, during this time Cloutier had been spending hours reading the cases given to him by Wilson Sonsini on his duties as a director. Cloutier’s voluminous files were full of cases, law review articles and other materials on the subject. In addition, at the beginning of each board meeting Larry Sonsini would update the board on its defense strategy, reminding them of their duty of care to the company’s shareholders. Cloutier recalled: I was very stressed out—issues of personal loyalty, old school ties, friendship, all come into play. Should friendship be more important? Boy, you sit there for two years in a mess and you read the law. You read the law and the law is very clear that even with friends as directors, loyalty is out the window. I’ve got to do the job required of me. I am a director. I work for shareholders. The CEO is not meeting his projections. He hasn’t met them for a couple years. He’s not killing himself to run the business. At some point, you’ve got this duty of care. Cloutier realized he could not escape the difficult decision looming before him. He remembered a conversation he and Auhll had a year earlier, before Cloutier agreed to join the Circon board: “You know there may come a time,” I had said to Auhll, “when I might have to vote against you.” “Yes, I know,” he had responded. “I would do the same thing if I was in your shoes and the circumstances called for that.” I think he meant it at the time, but we both never thought it would come to that. It had come to that, and now Cloutier found himself torn as he agonized over the decision for several days: Should he fight Auhll? Should he resign from the board in protest? Or should he wait out the proxy fight and let shareholders decide his fate? The Hunter Becomes Prey Cloutier’s decision was preempted by other events. In late May 1998, Surgical agreed to be acquired by Tyco International, a $55 billion conglomerate. In a statement to analysts after the announcement of the merger pact, Tyco Chairman L. Dennis Kozlowski said that while he would review the U.S. Surgical offer for Circon, “we’re not big on hostile deals. In fact, we don’t do them.” Circon’s shares tumbled $2 on the news, to $15.88. Many in the financial community remained hopeful that with the change in control at Surgical, a friendly acquisition of Circon by Tyco would occur shortly. Circon’s board authorized Bear Stearns to begin a dialog with Tyco. In addition, the board began to feel more pressure from arbitrageurs, who by now owned almost 50% of Circon and were interested in a quick sale for cash. Karen Finerman from Metropolitan Capital left messages for Auhll which weren’t returned. “To be fair,” said Finerman, “he probably had 150 of those messages.” Exhibit 9 shows one of many letters that Auhll received during this time from arbitrageurs. On September 15, 1998, Surgical’s tender offer expired and was not renewed. Surgical announced that it was terminating its offer due to the acquisition by Tyco, as well as Circon’s recent announcement that it was offering itself to be acquired by other bidders. Circon shares fell $3 3/8 to $9 7/8 on the news. Auhll issued a press release in response to the news: “I welcome U.S. Surgical’s termination of its hostile takeover attempt of Circon. For two years Circon executives have devoted substantial time and energy to the negative effect of the takeover attempt on our business. In particular, the company’s sales growth was negatively affected by employee turnover and in other ways. Now that our defense has been victorious, we can give full attention to benefiting our customers and shareholders.” (Exhibit 10 shows Blokker’s reaction to this public statement.) 14 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 Circon continued to have discussions with Tyco until October 13, at which point Tyco amended its Schedule 13D with the SEC to disclose that its offer to Circon had been rejected. “Our basic strategy at this point was to dust ourselves off and to not go after anyone,” Cloutier said. With the stock now down to $7.94, the mood within Circon was at its darkest. “We were going to get nothing for this thing,” Elson recalled. “All the things that were materializing were terrible. The bankers were embarrassed and panicky, as I recall. The sale process was a flop.” On Friday, October 16, arbitrageurs sent a letter to Circon stating that they had formed a group to nominate an alternative slate of directors that would be committed to a quick sale of Circon. A board meeting was then scheduled for Monday, October 19, but before that meeting, Cloutier decided that an unofficial meeting with the other directors was necessary. Cloutier recalled the situation: I flew to Santa Barbara in my plane the night before. I had to hide it at the other end of the airport so Richard wouldn’t know I was in town. We met at the Fess Parker’s Resort Hotel, all the directors except Richard and Bruce Thompson. Brian McCarthy from Bear Stearns was there. He came and just listened, as did the corporate attorney, Drew Simon. Despite their differences, the members of the board had developed bonds that only the extreme circumstances of the past two years could forge. From all accounts they had operated with professionalism and respect toward each other. Now, with arbitrageurs launching a dissident slate and Circon’s stock in freefall, the assembled group knew that something had to be done. They crowded in to the living area of the hotel room as Cloutier began the meeting. 15 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) Exhibit 1A Circon Share Price July 1983 to October 1998 50 45 Price per Share ($) 40 35 Cabot acquisition 30 25 ACMI acquisition 20 15 10 5 Surgical bid Jul-98 Jul-97 Jul-96 Jul-95 Jul-94 Jul-93 Jul-92 Jul-91 Jul-90 Jul-89 Jul-88 Jul-87 Jul-86 Jul-85 Jul-84 Jul-83 0 Circon Share Price July 1996 to October 1998 Exhibit 1B 21 19 Price per Share ($) 17 15 13 Tyco buys Surgical 11 Surgical bid 9 Surgical withdraws tender offer 7 Sep-98 Jul-98 May-98 Mar-98 Jan-98 Nov-97 Sep-97 Jul-97 May-97 Mar-97 Jan-97 Nov-96 Sep-96 Jul-96 5 Source: Datastream. 16 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 Exhibit 1C Circon Price Performance Relative to the S&P 500 Composite Index and the Health Care Medical Products Price Index Circon S&P Index HCMP Index 900 $843 800 $756 Indexed Price per Share (July 1983 = $100) 700 600 500 400 300 200 100 $66 Jul-98 Jul-97 Jul-96 Jul-95 Jul-94 Jul-93 Jul-92 Jul-91 Jul-90 Jul-89 Jul-88 Jul-87 Jul-86 Jul-85 Jul-84 Jul-83 0 Source: Datastream. The Heath Care Medical Products Index includes the following companies: Applera Applied Biosystems, Bard, Bausch & Lomb, Baxter International, Becton Dickinson, Biomet, Boston Scientific, Guidant Corp., Medtronic, St. Jude Med., and Stryker. 17 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Exhibit 2 Circon (A) Circon Income Statement and Balance Sheet, 1988-1997 $ Thousands INCOME STATEMENT Net Sales Cost of Goods Sold Gross Profit R&D SG&A Non-Operating Income (Expense) Interest Expense Income Before Taxes Provision for Income Taxes Net Income Before Extraordinary Items Extraordinary Items and Discontinued Operations Net Income Shares Outstanding BALANCE SHEET Cash Marketable Securities Receivables Inventories Other Current Assets Total Current Assets PP&E (Net of Depreciation) Other Assets Total Assets Notes Payable Accounts Payable Current Portion of Long-Term Debt Accrued Expenses Income Taxes Other Current Liabilities Total Current Liabilities Deferred Charges Convertible Debt Long-Term Debt Non-Current Capital Leases Other Long-Term Liabilities Total Liabilities Common Stock Capital Surplus Retained Earnings Treasury Stock Other Equities Shareholders Equity Total Liabilities and Equity FY90 FY91 FY92 41,415 22,439 18,976 4,204 15,999 289 1,563 -2,501 -63 49,483 25,394 24,089 4,320 17,535 -145 1,718 371 522 54,706 27,472 27,234 5,214 19,353 226 1,744 1,149 821 68,926 32,448 36,478 6,025 24,779 8 810 4,872 1,858 83,483 37,522 45,961 7,022 30,399 792 -2,438 -151 328 3,014 6,345 4,828 6,509 -5,393 2,071 5,099 -2,438 469 318 1,463 1,791 501 3,515 234 6,579 -2,396 2,432 6,509 -5,393 2,071 5,099 5,289 5,306 5,343 7,659 7,729 7,788 12,181 12,564 13,240 13,294 90 101 281 7,755 12,746 580 21,171 12,622 4,680 38,473 8,825 13,280 649 22,855 12,698 4,231 39,784 10,200 13,737 539 24,757 13,395 3,778 41,930 14,736 10,750 13,768 16,428 505 56,187 15,305 3,527 75,019 559 23,448 14,896 20,942 1,555 61,400 18,976 3,082 83,458 3,444 2,771 3,256 3,606 1,200 2,936 3,954 3,493 2,822 2,996 69 123 9,403 3,373 35 559 10,829 3,275 109 309 7,829 4,564 239 300 9,057 735 4,692 12,228 11,746 14,829 FY95 FY96 FY97 87,301 157,041 1 6 0 , 4 4 7 153,779 159,954 41,000 68,472 72,595 67,901 71,962 46,301 88,569 87,852 85,878 87,992 8,003 12,676 11,393 11,896 10,941 33,075 62,140 64,206 64,644 66,330 559 672 -12,274 -5,141 -134 5,970 5,946 4,199 4,062 5,782 8,455 -5,967 -2 6,525 954 1,946 -574 -2,073 1,426 495 2,475 17,586 6,234 3,660 21,810 21,301 6,496 1,074 1,115 14,803 27,017 26,539 28,497 33,535 17,632 29,353 31,645 35,123 38,489 3,634 9,087 8,559 9,985 8,137 58,374 89,233 90,825 80,913 84,936 25,580 52,201 53,750 54,672 53,786 3,591 41,909 36,824 33,533 30,635 87,545 184,129 181,399 169,118 169,357 5,313 5,019 701 12,229 7,728 15,857 10,796 6,344 429 12,000 4,629 390 10,892 392 8,527 3,827 473 18,422 5,633 1,079 35,460 2,251 879 19,652 688 16,599 72,782 327 56,516 50,565 48,799 627 97,164 122 89,749 -1,982 94,227 70,217 65,398 126 132 133 94,928 104,426 105,079 -7,226 -5,155 -56 87 437 8,709 2,259 7 91 21,722 15,050 27 22,602 15,102 17 22,675 15,224 9,799 57,738 284 11,252 58,426 12,981 58,799 1,497 1,815 3,606 7,121 13,700 15,958 204 16,751 265 17,182 39,784 425 19,255 41,930 361 65,220 75,019 72,206 38,473 FY94 a FY89 9,332 2,987 FY93 a FY88 80 83,458 -193 -924 -656 -502 -1,197 74,564 86,965 87,172 98,901 103,959 87,545 184,129 181,399 169,118 169,357 a Circon acquired Cabot in August of 1995. The figures for these two years (1994 and 1995) reflect the pooling of Circon and Cabot’s financial statements on a pro forma basis. 18 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 Exhibit 3 Bear Stearns Fairness Opinion (Exhibit 7 from 14D-9 filing, filed with the SEC on August 15, 1996) Circon Corporation 6500 Holister Avenue Santa Barbara, CA 93117-3019 Attention: Mr. Richard A. Auhll Chairman, President and Chief Executive Officer Ladies and Gentlemen: We understand that USS Acquisition Corp., a wholly owned subsidiary of United States Surgical Corporation (together, “U.S. Surgical”), has commenced a tender offer (the “U.S. Surgical Tender Offer”) to acquire all of the outstanding shares of common stock (the “Shares”) of Circon Corporation (“Circon” or the “Company”) for $18.00 net per share in cash, as more fully described in U.S. Surgical’s Schedule 14D-1 and related Offer to Purchase dated August 2, 1996 (collectively, the “U.S. Surgical Tender Offer Documents”). We understand that Circon plans to file its Schedule 14D-9 in response to the U.S. Surgical Tender Offer on or about August 15, 1996 in substantially the form which has been furnished to us. You have asked for our opinion as to whether the consideration to be offered for the Shares pursuant to the U.S. Surgical Tender Offer is adequate, from a financial point of view, to the shareholders of Circon (excluding U.S. Surgical and its affiliates). In the course of performing our review and analyses for rendering this opinion, we have: 1. reviewed the U.S. Surgical Tender Offer Documents and Circon’s Schedule 14D-9 in substantially the form expected to be filed on or about August 15, 1996; 2. reviewed Circon’s Annual Reports to Shareholders and Annual Reports on Form 10-K for the years ended December 31, 1993 through 1995, and its Quarterly Reports on Form 10-Q for the periods ended March 31, 1996 and ended June 30, 1996; 3. reviewed certain operating and financial information, including projections, provided to us by management relating to Circon’s businesses and prospects; 4. met with certain members of Circon’s senior management to discuss the Company’s operations, historical financial performance (including, among other things, the factors underlying the Company’s financial performance during the past three quarters), financial condition and future prospects; 5. reviewed the historical prices, valuation multiples and trading volume of the Shares; 6. reviewed the terms of selected precedent mergers and acquisitions of companies which we deemed generally comparable to Circon; 7. performed discounted cash flow analyses on the projections furnished to us by Circon; 8. reviewed publicly available financial data, stock market performance data and valuation multiples of companies which we deemed generally comparable to Circon; and 9. conducted such other studies, analyses, inquiries and investigations as we deemed appropriate. 19 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) In the course of our review, we have relied upon and assumed 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 Company’s expected future performance. We have not assumed any responsibility for the information or 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 arriving at our opinion, we have not performed, nor have we been furnished with, any independent appraisal of the assets or liabilities of Circon. Our opinion is necessarily based on economic, market and other conditions, and the information made available to us, as of the date hereof. It is understood that this letter is for the information of the Board of Directors of the Company and does not constitute a recommendation to any holder of Shares as to whether to tender shares pursuant to the U.S. Surgical Tender Offer. This letter may not be used for any other purpose, or be reproduced, disseminated, quoted or referred to at any time, in whole or part, without our prior written consent; provided, however, that this letter may be included in its entirety in the Schedule 14D-9 to be distributed to the holders of the Shares in connection with the U.S. Surgical Tender Offer. Based on the foregoing, it is our opinion that the consideration to be offered for the Shares pursuant to the U.S. Surgical Tender Offer is inadequate, from a financial point of view, to the shareholders of Circon (excluding U.S. Surgical and its affiliates). Very truly yours, BEAR, STEARNS & CO. INC. By:__________________________________ Senior Managing Director 20 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) Exhibit 4 801-403 Biographies and Circon Stock Ownership of Circon Board Members Name and Background Richard Auhll: Chairman & CEO since 1969. Prior position at United Technologies Corporation. Member, Board of Trustees, University of California at Santa Barbara Foundation. Past Chairman, Board of Directors, Seton School for Developmentally Disabled Children. Director of Circon since 1969. John Blokker: Chairman & CEO, Luxcom. General Partner, Hambrecht & Quist Venture Partners, 1985 to 1988. Prior positions at Hewlett-Packard. Member, Boards of Directors of Mid-Peninsula Bank of Palo Alto and Whittier Trust Company. Director of Circon since 1991. Paul Hartloff: Senior partner, Schramm & Raddue. Member, Board of Directors of Selvac Corporation. Secretary, Circon Corporation, 1977 to 1988. Director of Circon since 1991. Harold Frank: Founder and Chairman until 1996 of Applied Magnetics, a manufacturer of magnetic recording heads. Member, Board of Directors of Trust Company of the West and Key Technology, Inc. Past Chairman, American Electronics Association. Director of Circon since 1984. Rudolf Schulte: Founder and President & CEO until 1974 of Heyer-Schulte Corporation. Chairman of the Board of Directors of Pudenz-Schulte Medical Research Corporation, 1978 to 1995. Independent investor since 1974. Director of Circon since 1977. George Cloutier: Founder, Chairman, President and CEO, American Management Services, Inc.. Director of Circon since 1997. Bruce Thompson: Executive Vice President and CFO of Circon since 1985. Prior positions at Heyer-Schulte. Member, Board of Directors, MEDMARC Insurance Company. Past board member, R.N. Linquist and Associates (Qupe), a winery in the California Central Coast region. Director of Circon since 1997. Charles Elson: Professor of Law at Stetson University College of Law in St. Petersburg, Florida. Of Counsel, Holland & Knight. Director, Sunbeam Corporation and Nuevo Energy Company. Director of Circon since 1997. Lt. Gen. Victor Krulak: President, Words Limited. Lieutenant General, U.S. Marine Corps, until retirement in 1968. Prior positions at Copley News Service. Director of Circon since 1997. Circon Shares Owned (Options a Owned) b 1,418,142 (140,000) 0 (47,225) 1,000 (26,513) 34,419 (18,858) 406,412 (2,858) 0 (16,000) 33,346 (8,571) c 6,963 (11,000) 4,463 (11,000) aAt end of fiscal year 1997. Does not include unvested options. bRichard Auhll received salary and bonus as follows: 1997: $265,860 ($45,316); 1996: $316,500 ($39,274); 1995: $298,000 ($136,739); 1994: $237,930 ($107,475). Auhll did not receive any stock or stock option grants as part of his compensation during this period. Auhll was a member of his own compensation committee. cBruce Thompson received salary and bonus as follows: 1997: $166,320 ($11,343); 1996: $176,000 ($26,860); 1995: $166,000 ($64,840); 1994: $140,080 ($52,202). Thompson also received 10,000 at-the-money options in 1997 (exercise price $16.25) as part of his compensation, which vested in January 1999. 21 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Exhibit 5 -22- Quarterly Financials $ Thousands 97Q4 Forecast 96Q3 96Q4 97Q1 97Q2 97Q3 97Q4 INCOME STATEMENT Net Sales Cost of Sales 39,362 17,764 37,062 16,466 38,369 17,030 38,386 16,641 38,393 16,927 40,455 18,673 41,034 18,777 40,072 17,585 Gross Profit R&D SG&A Facilities shutdown expense Reorganization Total Operating Expenses Income from Operations 22,198 2,975 15,645 --18,645 3,578 20,596 3,060 16,573 2,129 -21,762 -1,166 21,339 3,174 15,808 500 -19,482 1,857 21,745 2,687 16,618 --19,280 2,440 21,466 2,784 16,679 --19,463 2,003 21,782 2,743 17,517 --20,260 1,522 22,257 2,658 16,552 -150 19,360 2,897 22,487 2,756 15,582 -362 18,700 3,787 Interest income Interest expense 95 -1,128 166 -1,002 86 -1,121 0 -948 141 -919 40 -1,000 36 -1,065 30 -1,078 10 -874 5 -793 4 -686 Other (expense) income, net Income before Income Taxes -62 2,483 -53 -2,055 32 -2,346 224 1920 -9 1,216 115 1,522 35 1,903 -10 1,884 10 1,904 141 2,625 26 3,836 Provision for income taxes Non-recurring tax benefit Net Income 824 -1,659 -760 -2,000 705 -821 --1,525 684 -1,232 425 -791 237 -440 667 -1,236 947 -850 2,632 685 -1,219 900 -1,725 1,343 -2,493 5,000 3,400 36,279 15,871 20,408 2,758 14,882 --17,650 2,758 43,000 5,100 2,800 98Q2 98Q2 Forecast 96Q2 43,200 98Q1 98Q1 Forecast 96Q1 37,251 16,434 20,817 2,700 14,845 --17,545 3,272 46,700 6,500 3,600 98Q3 38,400 17,227 21,173 2,628 14,053 --16,681 4,492 Circon (A) Exhibit 6 801-403 Proxy Materials Sent by Circon and U.S. Surgical to Shareholders circon September 23, 1997 Dear Fellow Circon Shareholders: Circon’s sales and profits are growing strongly as shown in the attached news release. As the Company’s strategic plan continues to unfold, the value of the Company will grow. United States Surgical Corporation (“USSC”) wants this value for themselves and they want to pay as little as possible. They have spent millions of dollars to further their cause sending our shareholders multiple mailings, publishing full page newspaper ads, and calling nearly every shareholder. Why? Because they expect to make enormous profits by acquiring Circon at a bargain price. As part of their strategy, USSC has nominated two Directors to our Board and proposed a resolution calling for a prompt sale of the Company. Our Board has carefully considered the USSC Director Nominees, the USSC resolution and the USSC tender offer. The Board’s overwhelming conclusion: NOW IS THE WRONG TIME TO SELL CIRCON, AND DON’T VOTE FOR THE USSC NOMINEES We think you will reach the same conclusion if you consider these facts: 1. Current results show that the Circon strategic plan is working—sales and profits are accelerating. Selling the Company now deprives shareholders of the real value of an investment in Circon. 2. Circon’s Director Nominees want to maximize the value of the Circon investment for you, our shareholders. 3. The hand-picked and paid USSC Nominees are NOT INDEPENDENT. They have a stated intention of forcing a quick sale of the Company, which is not in the best interests of the Circon shareholders. 4. Bear, Stearns & Co. Inc., investment bankers, after extensive study have concluded that the “U.S. Surgical tender offer is inadequate from a financial point of view, to the shareholders of Circon (excluding U.S. Surgical and its affiliates).” 5. Circon’s unique strategic position in the market place warrants a premium well above any of the offers made by USSC. Take the action that is in YOUR best interest, NOT the best interest of USSC. VOTE THE WHITE CARD FOR CIRCON. Even if you have already voted the blue card, you can revoke your vote now by executing the WHITE card today or by simply calling our proxy solicitor D.F. King. They can also answer any questions you may have regarding voting your proxy. 23 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) For more information about the five points mentioned above, please call D.F. King or read the more detailed information that follows. 1. Circon’s Recent Results Show Solid Growth In Revenues and Profitability The enclosed financial data for the most recent three-month period (June, July and August) shows both revenues and profits increasing and accelerating significantly compared to the same period last year. We view this solid upward movement as very positive and we are striving to make further gains. The Circon Board believes it is an inappropriate time to sell the Company now because our strategic business plan has potential to significantly increase Circon’s profitability and stock price. USSC knows Circon is in the middle of carrying out its strategic plan and that Circon is cheaper now than it will be as the plan continues to be achieved. However, the result for you, the Circon shareholder, is that you potentially get less now from a sale of the Company than you would later, as the plan is realized. Circon’s strategic plan is highlighted in the Annual Report which was sent to you in our last mailing (for additional copies please call 805-685-5100). The central themes of this plan include: ! Sales increases resulting from the introduction of numerous new products in each of the next four quarters. ! Introduction of a major new gynecological procedure by Circon and its medical consultants next quarter. ! The implementation of a comprehensive cost reduction program designed to lower expenses, including salary cuts for top management if results are not achieved each quarter. 2. Circon Shareholders Will Be Best Served by the Circon Nominees As substantial owners of Circon Common Stock, the Board members of Circon have one primary objective: to maximize the value of an investment in Circon for all shareholders. Our Directors are not highly paid or entitled to abundant perks for serving on our Board. There is no motive for them to prolong their directorships. Instead, they are interested in what is in the best interests of the Circon shareholders. In other words, our interests and your interests are the same. USSC, however, wants to acquire Circon for the lowest possible price. ! In voting your shares, ask yourself who is in a better position to represent your interests: The two Circon Directors who collectively own 1.6 million shares of Circon stock; OR The two hand-picked USSC Nominees, each given 6,963 shares by USSC presumably to further USSC’s objectives of acquiring Circon for the lowest possible price? ! The Board is closely monitoring the Company’s performance under the strategic plan and will consider alternative strategies including a merger or sale if it becomes appropriate to do so. 24 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 3. The USSC Nominees Have the Same Agenda as USSC USSC is not interested in maximizing value for Circon shareholders. On the contrary, their sole objective is to acquire Circon for the lowest possible price. What better way to accomplish this objective than to elect two hand-picked, highly paid members to our Board with an agenda to force a prompt sale of the Company? Consider the facts about USSC and their Nominees. ! The two USSC Nominees are being paid $100,000 in Circon stock by USSC, and USSC has agreed to pay all of their expenses presumably to further USSC’s objectives. ! USSC Nominees would have a conflict of interest during deliberations of Circon’s Board on matters relating to USSC and would be caught between their loyalty to USSC and their fiduciary duty to Circon shareholders. Are these the individuals you want negotiating with USSC on your behalf? ! USSC is also indemnifying their Nominees against certain liabilities. In other words, the USSC Nominees potentially do not have any personal exposure if they breach their fiduciary duty to the shareholders of Circon by taking actions which are in the best interests of USSC rather than the other Circon shareholders. ! USSC’s proxy materials state “If elected, U.S. Surgical’s Nominees will seek to convince other members of Circon’s Board to vote with them to pursue the prompt sale of Circon. . . .” If these Nominees are truly independent and not simply agents for USSC how can USSC be so sure of what position they will take on this critical issue? The Nominees appear to have already made up their minds to sell the Company without even talking to the Company’s management about the alternatives. ! Appointing two USSC members to the Circon Board will disrupt meetings and distract the Board and Management from pursuing their strategic plan. 4. Circon’s Investment Advisors Analyzed the Tender Offer In considering these issues, the Board sought the assistance of Bear, Stearns & Co. Inc. who have served as financial advisors to the Company. Bear, Stearns & Co. Inc., after extensive study, concluded that the “U.S. Surgical tender offer is inadequate from a financial point of view, to the shareholders of Circon (excluding U.S. Surgical and its affiliates).” 5. Circon’s Strategic Market Position Makes It Worth Much More Than USSC’s Offer Circon’s strategic market position enables the Company to capitalize on positive industry trends. Given the growth projected for the minimally invasive surgery markets, Circon is now poised for further expansion and profit growth. The anticipated result is increased wealth for our shareholders. ! According to an independent research report, Circon is the “clear leader” in the urological endoscopy market and has a leading position in the gynecology market. ! Circon has the largest sales force and the largest installed base for urology and gynecology in the United States. ! Circon has the most advanced technology for endoscopes and related equipment in the world. Endoscope systems are the core product for all minimally invasive surgical procedures, a major growth market, and would substantially enhance USSC’s market position. 25 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 ! Circon (A) Other companies have tried to duplicate our products and failed. The only other manufacturers of this equipment are two private German companies and one Japanese conglomerate. CONCLUSION Make the Right Choice—Vote the White Proxy Card Circon’s objective is to maximize value for Circon shareholders by capitalizing on our strengths. USSC’s objective is to cash out all of Circon’s shareholders and capture the current and potential value of Circon for themselves and their shareholders. They have attempted to discredit management and persuade shareholders to vote against Circon to further their goal. Voting with USSC helps them, not you. Make the right choice. Vote for Circon and give your investment a chance to grow. We urge you to re-elect the Circon slate and vote AGAINST the USSC non-binding resolution by executing the enclosed WHITE proxy card and returning it in the pre-paid envelope. Thank you for your support. On Behalf of Your Board of Directors Sincerely, RICHARD A. AUHLL President and Chairman of the Board 26 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 Exhibit 6 (continued) United States Surgical Corporation 150 Glover Avenue, Norwalk, Connecticut 06856 (203) 845-1000, http://www.ussurg.com BULLETIN August 26, 1997 WHERE’S YOUR MONEY? It is unconscionable that more then 12 months have passed since U S. Surgical made its first cash offer for all of the outstanding shares of Circon Corporation. U.S. Surgical’s tender offers have received overwhelming support from Circon’s shareholders. Our last partial offer was oversubscribed by 400 percent and understandably so; shareholders want their money. THE VAST MAJORITY OF SHAREHOLDERS HAVE YET TO RECEIVE ONE SINGLE PENNY HOW IS THIS POSSIBLE? We believe it is because of greed. We think it is clear that Circon’s management and Board of Directors don’t want to sell the Company for fear of losing their jobs and all the executive perks. Instead they adopted a “poison pill” which made it prohibitively expensive for any bidder to acquire Circon without their approval, even if supported by the vast maturity of shareholders. TAKE THE FIRST STEP TO ELIMINATE THE OBSTACLE THAT PREVENTS YOU FROM MAXIMIZING THE VALUE OF YOUR CIRCON SHARES You now have an opportunity to take an important first step in controlling your destiny by removing the obstacle separating you from the cash being offered for your shares by U.S. Surgical. VOTE THE BLUE PROXY CARD The long awaited Circon Annual Shareholders Fleeting is scheduled for October 6, 1997. Take action against Circon’s entrenched Board that has ignored the will of the shareholders who elected them. Now you can replace two current directors with two new directors who are committed to your wishes to sell Circon. Exercise your rights by voting on the enclosed BLUE proxy card FOR U.S. Surgical’s director nominees and FOR the Maximize Value Resolution. On behalf of the Board, Leon C. Hirsch Chairman United States Surgical Corporation 27 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) Exhibit 6 (continued) It’s Time for a Change United States Surgical Corporation 150 Glover Avenue, Norwalk, Connecticut 06856 Dear Fellow Circon Shareholders: When the Board of Directors you selected at Circon to manage your Company: ! blatantly defies the desire of the overwhelming majority of Circon’s shareholders to sell the Company—it’s time for a change. ! places their interests above yours—it’s time for a change. ! denies you of the opportunity to more than double the value of your Circon investment—it’s time for a change. ONLY YOU CAN EFFECT CHANGE VOTE THE BLUE PROXY CARD As Circon’s shareholders, we are faced with an important decision. We are strapped with a Board of Directors led by Richard Auhll, Chairman and President, which, in our opinion, has failed in its fiduciary responsibility to act in the best interest of all Circon’s shareholders. We believe Mr. Auhll and his Board are letting greed cloud their judgment. Mr. Auhll and his Board have repeatedly resisted U.S. Surgical’s cash offers for Circon during the last 13 months in spite of the overwhelming support of Circon’s shareholders. The Board’s negative actions since our original $18 cash offer has cost Circon’s shareholders dearly in lost opportunities. Shareholders could have more than doubled the value of their Circon investment had the Board not resisted our original cash offer. Enough is enough! It is time to take matters into our own hands by replacing Board members who are not responsive to shareholder wishes with new Directors who will be. At Circon’s Annual Meeting of Shareholders on October 6, 1997, send a message to Mr. Auhll and the Board that you will no longer tolerate their nonsense and delay. Show the Circon Board that you demand that they comply with their industry responsibilities and the will of a majority of Circon’s shareholders to sell the Company to the highest bidder. Return your BLUE proxy card today. We urge you to vote FOR U.S. Surgical’s two Director nominees and FOR the Maximize Value Resolution on the BLUE card. Thank you for your consideration and continued support. On behalf of the Board, Leon C. Hirsch, Chairman United States Surgical Corporation 28 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) Exhibit 7 801-403 Director’s Confidentiality Agreement I understand that, during the term of my service as a director of Circon Corporation (“Directorship”), I may acquire information which is confidential in nature and of great value to Circon Corporation, including by way of illustration and not limitation, matters or subjects concerning corporate assets, strategic plans, strategic initiatives, acquisition or merger proposals, performance targets and goals, financial results and reports, cost and pricing data, customer listings, formulae, inventions, know-how, marketing strategies, manufacturing processes, new product information and evaluations, personnel files, products or devices, compensation plans or arrangements, research and development projects and findings, suppliers and trade secrets, whether in the form of records, files, correspondence, notes, data, drawings, product prototypes or in some other form, including copies or excerpts thereof and oral or visual presentations (collectively “Confidential Information”). Confidential Information shall not include information which is or becomes a matter of public record through no fault of mine. I understand and acknowledge that said Confidential Information is the sole and exclusive property of Circon Corporation. I hereby agree to keep the Confidential Information strictly confidential and to not disclose the Confidential Information to, or otherwise discuss the information with, any person who is not then a current member of the Circon Board of Directors, an executive officer of Circon, legal counsel to Circon, legal counsel to me (provided such counsel is obligated to keep the information confidential and is not also representing United States Surgical Corporation), a partner of Circon’s independent auditors or any individual designated in writing by the Circon Chief Executive Officer or by resolution of the Circon Board as authorized to receive the Confidential Information. I further agree that under no circumstances will I use the Confidential Information for any purpose other than to fulfill my duties as a director of the Corporation. Upon termination of my Directorship, for whatever reason, I agree that I will promptly return any such information in my possession to the Chief Executive Officer of Circon. Finally, I acknowledge that the obligations contained herein shall remain in effect following the termination of my Directorship. Dated: ________________________ __________________________________ Name __________________________________ 29 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Exhibit 8A Circon (A) Minutes from November 21, 1997 Board Meeting Pursuant to applicable provisions of Delaware law, on Friday, November 21, 1997, a Meeting of the Board of Directors (the “Board”) of Circon Corporation, a Delaware corporation (the “Company”), was held. Present were the following of the Company’s directors: Richard A. Auhll John Blokker George Cloutier Charles Elson Harold Frank Victor Krulak R. Bruce Thompson Also present for various portions of the meeting were the following of the Company’s officers: Winton Berci Vice President, Sales Frank D’Amelio Chief Manufacturing Officer David Piggin Vice President, International Sales Andrew D. Simons Vice President, Secretary and General Counsel Mr. Simons recorded the minutes. Mr. Cloutier, Vice Chairman, opened the meeting by stating that he had requested Richard Auhll’s attendance at the meeting and asked if any directors objected to Mr. Auhll’s presence. No objections were expressed. As this was the first meeting for the two new directors, Mr. Cloutier asked that each person in attendance introduce themselves for the rest of the group. Both Charles Elson and Victor Krulak also made statements to the entire Board regarding their independence. They indicated that no arrangement between them and U.S. Surgical existed whatsoever other than what had been previously publicly disclosed. They further indicated that they were entirely free to exercise their own independent judgment on all matters before the Board and intended to do so. Mr. Cloutier then announced that the Company had received a formal resignation from Rudi Schulte. In a written statement directed to the Board, Mr. Schulte expressed his support for the decisions of the Circon Board but regretted that he had to resign due to personal reasons. Mr. Cloutier then proposed a three-part resolution to (i) reduce the authorized number of Class II directors from three to two and increase the authorized number of Class III directors from two to three, (ii) elect Mr. Auhll as a Class III director, and (iii) elect Mr. Auhll as Chairman of the Board. A copy of the resolution along with a memorandum prepared by counsel analyzing the issues implicated by the resolution was distributed to all members. Mr. Cloutier addressed the Board in 30 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 Circon (A) 801-403 support of the resolution by emphasizing several points, including that the Company was not likely to achieve its near-term goals without Mr. Auhll on the Board. The directors discussed the resolution extensively and asked counsel a number of detailed questions about the proposed action. Mr. Elson in particular asked a number of questions regarding counsel’s view of the likelihood that Circon would prevail if this action was subsequently legally challenged by U.S. Surgical. Counsel responded to the director’s questions. David Berger stated that Circon has an excellent chance of withstanding any challenge on this issue brought by U.S. Surgical. Both Mr. Krulak and Mr. Elson expressed concerns about frustrating the will of the shareholders by reselecting Richard Auhll to the Board. Mr. Cloutier and others debated this point. The Board further discussed the consequences of not taking the action including the potential detrimental impact on the Company’s employees. After further discussion on the issue, upon motion duly made and seconded, the Board voted on the resolution. The results are as follows: John Blokker George Cloutier Harold Frank Charles Elson Victor Krulak Bruce Thompson Aye Aye Aye Nay Nay Aye Andrew Simons announced that the resolution passed with four votes being counted in favor and two votes counted against. Mr. Elson and Mr. Krulak asked that the record reflect that they voted against the proposal for two primary reasons: (i) the concern over the legal implications of the reappointment, particularly if U.S. Surgical challenges the action in court, and (ii) the concern that reappointing Mr. Auhll to the Board is contrary to the sentiment of the shareholders at this time. Mr. Cloutier then turned the meeting over to Mr. Auhll. As the next order of business, Mr. Auhll asked for approval of the minutes of the Annual Meeting of October 6, 1997 and the Board Meeting of September 26, 1997. Upon motion duly made and seconded, the minutes were approved as drafted with certain minor corrections. Mr. Auhll then reviewed with the Board the Director stock option compensation program previously adopted by the Board. Mr. Auhll then distributed options to purchase 11,000 shares of the Company’s common stock to the new directors and options to purchase 5,000 shares to all other continuing non-employee Directors, all of which were automatically granted under the Director compensation program. The Board then discussed the need to fill the seat on the Audit Committee that was previously held by Paul Hartloff. After discussion, upon motion duly made and seconded, Charles Elson was unanimously elected to serve on the Board’s Audit Committee. Mr. Auhll then asked the Board to consider the non-binding, advisory resolution to seek a prompt sale of the Company passed by the shareholders at the Annual Meeting. The Directors discussed the resolution and the option of putting the Company up for sale. After further discussion, the Board determined that it had fully considered the proposal but did not want to take any further action at this time. 31 Downloaded by XanEdu User MA897 on 1/25/2017. Cornell University-Johnson Graduate School of Management, Yaniv Grinstein, Spring 2017 801-403 Circon (A) Frank D’Amelio, Winton Berci and David Piggin then joined the meeting and Mr. Auhll presented the Board with a detailed review of the financial results for the third quarter. Mr. Auhll also presented October 1997 year-to-date financial information. The presentation included a thorough discussion with the Board of the Company’s performance versus the Company’s strategic plan. Mr. Auhll responded to questions from the Board about the financial results including questions about variances between projected and actual results. Mr. Auhll then reviewed with the Board the Company’s P&L cost structure, sales history and certain trends. Bruce Thompson and Mr. Auhll also reviewed the Company’s balance sheet and cash flow. The Board discussed these issues with management including the Company’s inventory levels and accounts receivable. Management addressed the progress being made in both these particular areas. Mr. Thompson described the cost-cutting measures that were part of the second half 1997 operating rebound. The discussion included a detailed summary of the cost reductions implemented to date as well as expenses which increased over the same period. The Board questioned management about these issues including the impact cuts may have upon operations. Mr. Auhll then discussed management projections for the fourth quarter. He presented the Board with management’s projected targets and a worst case scenario. The Board vigorously questioned Mr. Auhll and management about the anticipated fourth quarter results. The Board further questioned management about its new and improved products, its strategic plan and its ability to meet its targeted goals. As part of this discussion Winton Berci and Frank D’Amelio demonstrated several new products and product improvements to the Board. Management also reviewed with the Board the status of the introduction of the new Vaginal Hydrolaparoscopy (VHL) procedure. David Piggin then provided a review of the results of international sales and responded to questions from the Board about the ability to meet the targeted numbers for the fourth quarter and beyond. Management was then asked to leave the room and the Board meeting continued in confidential session. The Board...
Purchase answer to see full attachment