<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------- ---------------
COMMISSION FILE NO. 1-9776
UNITED STATES SURGICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2518270
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 GLOVER AVENUE, NORWALK, CONNECTICUT 06856
(Address of principal executive offices) (Zip Code)
(203) 845-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
Number of shares of Common Stock,
par value $.10 per share,
outstanding at September 30, 1994 56,769,623 Shares
<PAGE> 2
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I--FINANCIAL INFORMATION Page
----
<S> <C>
Financial Statements:
Consolidated Balance Sheets at September 30, 1994 (Unaudited) and
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations (Unaudited) for the Nine Months
and Three Months Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Nine Months Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . 7
Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management's Discussion and Analysis of Interim Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II--OTHER INFORMATION
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
-2-
<PAGE> 3
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
In thousands, except share data 1994 1993
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 10,500 $ 900
Receivables, less allowance
($6,400 -September 30, 1994; $5,000-December 31, 1993) 204,200 197,900
Inventories:
Finished goods 102,200 113,000
Work in process 30,800 36,900
Raw materials 43,500 62,300
--------- ---------
176,500 212,200
Other current assets 49,900 53,800
--------- ---------
Total Current Assets 441,100 464,800
--------- ---------
Property, Plant, and Equipment at cost: 757,200 752,100
Less: Allowance for depreciation and amortization (198,300) (159,900)
--------- ---------
558,900 592,200
--------- ---------
Other assets (net) 121,500 113,500
--------- ---------
Total Assets $1,121,500 $1,170,500
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 36,200 $ 50,200
Accrued liabilities 117,500 137,500
Income taxes payable 34,200 28,800
--------- ---------
Total Current Liabilities 187,900 216,500
Long-Term Debt 260,900 505,300
Deferred Income Taxes 11,000 4,800
Stockholders' Equity:
Preferred Stock $5.00 par value, authorized 2,000,000 shares;
9.76% Series A cumulative convertible, 177,400 shares
issued and outstanding (liquidation value - $200 million) 900
Additional paid-in capital - preferred stock 190,700
Common stock $.10 par value, authorized 250,000,000 shares;
issued, 64,906,676 at September 30, 1994 and 64,402,144 at
December 31, 1993 6,500 6,400
Additional paid-in capital - common stock 378,600 371,700
Retained earnings 178,200 178,300
Treasury stock at cost; 8,137,053 shares at
September 30, 1994 and 8,144,386 shares
at December 31, 1993 (86,700) (86,700)
Other (6,500) (25,800)
--------- ---------
661,700 443,900
--------- ---------
Total Liabilities and Stockholders' Equity $1,121,500 $1,170,500
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
-3-
<PAGE> 4
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- -------------------
In thousands, except per share data 1994 1993 1994 1993
- - - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $692,200 $792,800 $234,200 $237,700
------- ------- ------- -------
Costs and expenses:
Cost of products sold 350,000 379,500 115,200 120,900
Research and development 28,000 41,900 8,000 12,900
Selling, administrative and general 275,800 344,900 89,300 104,300
Interest 14,600 12,500 4,300 4,800
Restructuring charges 8,000 8,000
------- ------- ------- -------
Total costs and expenses 668,400 786,800 216,800 250,900
------- ------- ------- -------
Income (loss) before income taxes 23,800 6,000 17,400 (13,200)
Income taxes 10,500 6,300 4,200 1,100
------- ------- ------- -------
Net income (loss) 13,300 (300) 13,200 (14,300)
Preferred stock dividends 10,000 4,900
------- ------- ------- -------
Net income (loss) applicable to
common stock $ 3,300 $ (300) $ 8,300 $(14,300)
======= ======= ======= =======
Average number of common shares
outstanding 56,500 55,900 56,700 56,000
======= ======= ======= =======
Net income (loss) per common share
(primary and fully diluted) $.06 $(.01) $.15 $(.26)
=== ==== === ====
Dividends declared per common share $.06 $.225 $.02 $.075
=== ==== === ====
</TABLE>
See Notes to Consolidated Financial Statements.
-4-
<PAGE> 5
United States Surgical Corporation and Subsidiaries Form 10-Q
Consolidated Statements of Changes in (September 30, 1994
Stockholders' Equity (Unaudited)
For the nine months ended September 30, 1994 and 1993
<TABLE>
<CAPTION>
Additional Additional
Paid-in Paid-in
Dollars in thousands, Preferred Capital - Common Capital - Retained
except share data Stock Preferred Stock Common Earnings
- - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 . . . . . . . . . . . . $6,400 $345,200 $330,700
Common stock issued to
employees-net (502,433 shares) . . . . . . . . . 10,000
Income tax benefit from stock
options exercised, recognized upon
adoption of FAS 109 . . . . . . . . . . . . . . . 14,400
Payment received on installment receivables . . . .
Aggregate adjustment resulting
from the translation of foreign
financial statements . . . . . . . . . . . . . .
Common stock dividends declared ($.225 per share) . (12,600)
Net loss . . . . . . . . . . . . . . . . . . . . . (300)
----- ------- -------
BALANCE AT SEPTEMBER 30, 1993 . . . . . . . . . . . $6,400 $369,600 $317,800
===== ======= =======
BALANCE AT JANUARY 1, 1994 . . . . . . . . . . . . $6,400 $371,700 $178,300
Issuance of preferred stock (177,400 shares) . . . $900 $190,700
Common stock issued to
employees-net (511,475 shares) . . . . . . . . . 100 6,900
Payment received on installment receivables . . . .
Aggregate adjustment resulting
from the translation of foreign
financial statements . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . (10,000)
Common stock dividends declared ($.06 per share) . (3,400)
Net income . . . . . . . . . . . . . . . . . . . . 13,300
--- ------- ----- ------- -------
BALANCE AT SEPTEMBER 30, 1994 . . . . . . . . . . $900 $190,700 $6,500 $378,600 $178,200
=== ======= ===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Installment
Accumulated Receivables
Dollars in thousands, Translation from Sale of Treasury
except share data Adjustments Common Stock Stock Total
- - - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 . . . . . . . . . . . . $ 400 $(6,000) $(86,700) $590,000
Common stock issued to
employees-net (502,433 shares) . . . . . . . . . 10,000
Income tax benefit from stock
options exercised, recognized upon
adoption of FAS 109 . . . . . . . . . . . . . . . 14,400
Payment received on installment receivables . . . . 600 600
Aggregate adjustment resulting
from the translation of foreign
financial statements . . . . . . . . . . . . . . (18,000) (18,000)
Common stock dividends declared ($.225 per share) (12,600)
Net loss . . . . . . . . . . . . . . . . . . . . . (300)
------- ------ ------- -------
BALANCE AT SEPTEMBER 30, 1993 . . . . . . . . . . . $(17,600) $(5,400) $(86,700) $584,100
======= ====== ======= =======
BALANCE AT JANUARY 1, 1994 . . . . . . . . . . . . $(20,400) $(5,400) $(86,700) $443,900
Issuance of preferred stock (177,400 shares) . . . 191,600
Common stock issued to
employees-net (511,475 shares) . . . . . . . . . 7,000
Payment received on installment receivables . . . . 5,400 5,400
Aggregate adjustment resulting
from the translation of foreign
financial statements . . . . . . . . . . . . . . 13,900 13,900
Preferred stock dividends . . . . . . . . . . . . . (10,000)
Common stock dividends declared ($.06 per share) (3,400)
Net income . . . . . . . . . . . . . . . . . . . . 13,300
------- ------- ------- -------
BALANCE AT SEPTEMBER 30, 1994 . . . . . . . . . . $ (6,500) $ $(86,700) $661,700
======= ======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
-5-
<PAGE> 6
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
In thousands 1994 1993
- - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 694,900 $ 872,200
Cash paid to vendors, suppliers and employees (571,500) (727,800)
Interest paid (20,100) (12,400)
Income taxes paid (10,300) (10,400)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 93,000 121,600
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (40,800) (183,700)
Other assets 15,100 (20,000)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (25,700) (203,700)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings 3,030,700 1,909,500
Long-term debt repayments (3,286,200) (1,820,700)
Issuance of preferred stock, net 191,600
Common stock issued from stock plans 12,400 10,600
Dividends paid (8,500) (12,600)
----------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (60,000) 86,800
----------- ----------
Effect of exchange rate changes 2,300 (2,100)
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,600 2,600
Cash and cash equivalents, beginning of period 900 2,500
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,500 $ 5,100
=========== ==========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 13,300 $ (300)
----------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 66,900 57,500
Adjustment of property, plant, and equipment reserves 15,200 16,000
Receivables -- decrease 4,100 80,500
Inventories -- decrease/(increase) 6,400 (65,600)
Adjustment of inventory reserves 30,800 26,100
Accounts payable and accrued liabilities--(decrease)/increase (43,100) 13,600
Income taxes payable and deferred -- (decrease) (2,000) (18,400)
Income tax benefit from stock options exercised 14,400
Other adjustments -- net 1,400 (2,200)
----------- ----------
Total adjustments 79,700 121,900
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 93,000 $ 121,600
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-6-
<PAGE> 7
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements for the
nine-month and three-month periods ended September 30, 1994 and 1993 have
been prepared in accordance with the instructions to Form 10-Q. All
adjustments which, in the opinion of management, are necessary for a fair
presentation of the consolidated financial statements for the nine-month
and three-month periods ended September 30, 1994 and 1993 have been
reflected. All such adjustments are of a normal recurring nature except
for amounts identified as "Restructuring Charges". It is suggested that
the September 30, 1994 consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
2. INCOME TAXES
The 1994 and 1993 tax provisions relate primarily to foreign taxes
including taxes related to the Company's operations in Puerto Rico. The
1993 tax provisions were a result of the Company incurring net operating
losses in certain tax jurisdictions for which it was not able to
recognize corresponding tax benefits. The 1994 tax provisions reflect
the tax benefit of operations in Puerto Rico and the utilization of the
tax benefit of certain net operating loss carryforwards which were not
previously usable.
The Internal Revenue Service is presently examining the Company's income
tax returns for the period 1984 to 1990, and it has proposed adjustments
to increase the Company's tax liability for certain of these years.
Based upon advice of tax counsel, the Company believes that it has
substantial support for its filing positions and does not believe that
the results of the tax audit will have a material adverse effect on the
financial statements of the Company but may reduce the availability of
fully reserved carryforward tax losses and tax credits.
-7-
<PAGE> 8
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
REVIEW BY INDEPENDENT ACCOUNTANTS
The September 30, 1994 and 1993 consolidated financial statements included in
this Quarterly Report on Form 10-Q have been reviewed by Deloitte & Touche LLP,
in accordance with established professional standards and procedures for such a
review. In addition, the December 31, 1993 consolidated balance sheet was
audited by Deloitte & Touche LLP in accordance with generally accepted auditing
standards.
-8-
<PAGE> 9
Form 10-Q
September 30, 1994
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
UNITED STATES SURGICAL CORPORATION
We have reviewed the accompanying consolidated balance sheet of United States
Surgical Corporation and subsidiaries as of September 30, 1994, and the related
consolidated statements of operations for the nine-month and three-month
periods ended September 30, 1994 and 1993 and the consolidated statements of
changes in stockholders' equity and of cash flows for the nine-month periods
ended September 30, 1994 and 1993. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United States Surgical Corporation
and subsidiaries as of December 31, 1993, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated February 1,
1994 (except for Notes H, K and L as to which the date was March 28, 1994), we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1993 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
STAMFORD, CONNECTICUT
OCTOBER 25, 1994
-9-
<PAGE> 10
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In the third quarter of 1994, the Company attained sales of $234 million
compared with sales of $238 million in the third quarter of 1993. In the first
nine months of 1994, the Company achieved sales of $692 million compared with
sales of $793 million in the first nine months of 1993. Sales decreased 1% in
the third quarter and 13% in the first nine months of 1994 in comparison to the
corresponding 1993 periods.
In the third quarter of 1994, the Company reported net income of $13 million or
$.15 per common share (after preferred stock dividends of $5 million) compared
with a net loss of $14 million or $.26 per common share in the third quarter of
1993. In the first nine months of 1994, the Company reported net income of $13
million or $.06 per common share (after preferred stock dividends of $10
million) compared with a net loss of $.3 million or $.01 per common share in
the first nine months of 1993. The effects of changes in foreign currency
exchange rates on net income were immaterial to the results of operations of
the three and nine month periods in 1994 compared with the corresponding
periods in 1993.
The Company's restructuring plans and other cost saving measures are expected
to reduce its operating and fixed manufacturing costs by approximately $150
million on an annualized basis. The cost cutting programs implemented in 1993
and 1994 included the reduction of the Company's workforce by approximately
2,400 employees or 29% since September 1993 and a consolidation and an
anticipated divestiture of certain owned and leased real estate. As a result
of the restructuring and cost savings measures adopted, compensation related
expenses were approximately $17 million and $51 million lower in the three and
nine month periods ended September 30, 1994, respectively, in comparison to the
corresponding periods in 1993.
The reduction in sales in the first nine months of 1994 to $692 million
compared to the corresponding period in 1993 was significantly affected by
initial distributor stocking programs in early 1993, which were not repeated in
1994. These distributor inventory purchases were made in connection with the
implementation of the Company's Just-In-Time (JIT) domestic hospital
distribution program during the first quarter of 1993. The initial stocking of
JIT distributors precipitated an inventory reduction period during which the
hospitals formerly supplied directly by the Company worked their inventories
down and distributors adjusted their own inventories. The Company believes
that inventories at JIT distributors at the end of the 1994 third quarter are
down significantly, because distributor sales to hospitals during the preceding
nine months significantly exceeded distributor purchases from the Company. The
Company believes that distributor inventories will reach optimum levels during
the fourth quarter of 1994, and its sales to distributors for hospitals
currently in a JIT program will approximate distributor sales to hospitals
during 1995. Company sales were also affected by competition during the period
and by uncertainties related to health care reform and other trends toward cost
containment in the health care industry.
The Company continues to be affected by intense competition, and by ongoing
changes in the health care industry which impact hospital purchasing decisions.
The rate of acceptance of newer procedures utilizing the Company's products
also continues to be affected by uncertainty surrounding health care reform and
by the increased educational requirements for more complex procedures.
-10-
<PAGE> 11
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Sales in the first nine months of 1994 were reduced by approximately $6 million
representing the effect of adopting a new returned goods policy which was
effective July 1, 1994. Previously, the Company did not grant credits for
product returns; the new policy grants full credit to direct customers for
certain products returned up to one year after initial shipment and a partial
credit for certain products returned up to four years after initial shipment.
The initial establishment of this reserve reduced second quarter sales by
approximately $8 million, partially offset by a $4 million adjustment of other
sales reserves in the second quarter of 1994. The returned goods reserve was
reduced from $8 million to $6 million in the third quarter of 1994 based upon
lower than estimated product returns. The adjustment of the other sales
reserves in the first and third quarters of 1994 was immaterial.
The following table analyzes the decrease in sales in the third quarter and
first nine months of 1994 compared with the corresponding periods in 1993:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
In thousands September 30, 1994 September 30, 1994
------------ ---------------------- --------------------------
<S> <C> <C>
Composition of Sales Decrease:
Sales volume increases (decreases) $ 4,200 $(73,600)
Net price changes (10,900) (18,900)
Effects of changes in foreign
currency exchange rates 3,200 (8,100)
-------- --------
Sales Decrease $ (3,500) $(100,600)
======== =======
</TABLE>
Sales volume decreases in the first nine months of 1994 accounted for 73% of
the total sales decrease compared with the corresponding period in 1993. The
net price change component of the sales decrease, which accounted for
approximately 19% of the total sales decrease for the nine months of 1994 in
comparison to the corresponding 1993 period, reflects the net effect of selling
price discounts granted to hospitals and just-in-time distributors, partially
offset by price list increases effective January 1, 1994. The effects of
changes in foreign currency exchange rates during the first nine months of 1994
contributed to 8% of the total sales decrease compared with the corresponding
period in 1993.
Gross margin from operations (sales less cost of products sold divided by
sales) was 51% in the third quarter and 49% in the first nine months of 1994,
compared with 49% and 52% in the corresponding periods in 1993. Although the
Company implemented the majority of its restructuring plans during the fourth
quarter of 1993 and in the first quarter of 1994, the major benefits of the
cost reduction measures adopted by the Company did not start being realized
until the second quarter of 1994, which resulted in improved gross margins in
the second and third quarters of 1994. Changes in foreign currency exchange
rates from those existing in 1993 did not have a material effect on the cost of
products sold in 1994.
-11-
<PAGE> 12
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company's expenditures for research and development in the third quarter
and first nine months of 1994 decreased by 38% and 33%, respectively, compared
to the corresponding periods in 1993, reflecting the impact of a program
initiated in the second half of 1993 to increase efficiency and reduce the
costs connected with pilot development of new products which are classified as
research and development. The Company is continuing its commitment to develop
unique new products for use in new surgical procedures and specialty areas.
The Company presently plans to maintain its investment in research and
development activities at levels approximating 3% - 5% of annual sales.
Selling, administrative and general expenses expressed as a percentage of sales
decreased to 38% in the third quarter and 40% in the first nine months of 1994,
compared with 44% in the corresponding 1993 periods. The Company began to
realize the major cost saving benefits from its restructuring program in the
form of reduced selling, administrative and general expenses as a percentage of
sales in the second quarter of 1994. Changes in foreign currency exchange
rates from those existing in 1993 did not have a material effect on reported
selling, administrative and general expenses in 1994.
The tax provisions for the third quarter and first nine months of 1994 and 1993
relate primarily to foreign taxes including taxes in Puerto Rico. The 1993 tax
provisions are a result of the Company incurring net operating losses in
certain tax jurisdictions for which it is not able to recognize the
corresponding tax benefits. The Company's tax provisions in 1994 reflect the
lower effective tax rates on a subsidiary's operations in Puerto Rico and the
availability of a tax credit under Section 936 of the Internal Revenue Code and
the tax benefit of certain net operating loss carryforwards which were not
previously usable. The Internal Revenue Service is presently examining the
Company's income tax returns for the period 1984 to 1990 and it has proposed
adjustments to increase the Company's tax liability for certain of these years.
Based upon advice of tax counsel, the Company believes that it has substantial
support for its filing positions and does not believe that the results of the
tax audit will have a material adverse effect on the financial statements of
the Company but may reduce the availability of fully reserved carryforward tax
losses and tax credits.
FINANCIAL CONDITION
The Company's current cash and cash equivalent balances, existing borrowing
capacity and projected operating cash flows are currently well in excess of its
foreseeable requirements. Following the successful issuance of $200 million of
convertible preferred stock in March 1994, the proceeds from which were
utilized to reduce bank debt, the Company entered into a new syndicated credit
agreement in June 1994 which replaced its revolving credit and term loan
agreements with various banks and reduced the size of the credit facility from
$675 million to $400 million. The new credit agreement matures in January 1997
and provides for certain restrictions including sales of assets, capital
expenditures, dividends and subsidiary debt and requires the maintenance of
certain minimum levels of tangible net worth and fixed charge coverage ratio
and a maximum ratio of total debt to total capitalization, as defined. Under
the most restrictive covenants, the Company must maintain certain levels of
tangible net worth and fixed charge coverage ratios and its debt to total
capitalization ratio may not exceed a certain stipulated level. The Company is
in full compliance with all of the covenants associated with its various
financing agreements.
-12-
<PAGE> 13
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company's building programs have been essentially completed, which should
enable the Company to reduce its capital spending by more than 75% in 1994
compared to 1993 levels. Additions to property, plant, and equipment on the
accrual basis totaled $53 million ($41 million on a cash basis) in the first
nine months of 1994, compared with $161 million on the accrual basis ($184
million on a cash basis) in the corresponding period in 1993, and consist
primarily of additions to machinery and equipment ($31 million), molds and dies
($11 million), land and buildings ($9 million) and leasehold improvements ($2
million).
The increase in cash and cash equivalents and the reduction of long-term debt
at September 30, 1994 in comparison to the prior year- end is primarily
attributable to the receipt of the net proceeds ($192 million) from the
issuance of the Company's preferred stock (liquidation value $200 million) and
the generation of positive cash flow from operations. The reduction in
inventories ($36 million) from the prior year-end level resulted primarily from
improved utilization and management of raw materials in the Company's
production process. The reduction in accrued liabilities ($20 million) from
the prior year-end level was primarily attributable to 1994 severance payments
accrued for in 1993 as a component of the restructuring charges. Such payments
are being made over a period of up to twelve months.
The Company routinely enters into foreign currency exchange contracts to reduce
its exposure to foreign currency exchange rate changes on the results of
operations of its foreign subsidiaries. As of September 30, 1994 the Company
had approximately $36 million of such contracts outstanding that will mature at
various dates through November 30, 1994. Realized and unrealized foreign
currency gains and losses are recognized when incurred. As a result of the
Company's economic hedging program the changes in foreign currency exchange
rates had an immaterial effect on its results of operations.
-13-
<PAGE> 14
Form 10-Q
September 30, 1994
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
A. Referring to the Company's action against Origin Medsystems, Inc.
("Origin") (see Item 1 of Part II of the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1994), the United States Patent Office,
upon Origin's request, agreed to reexamine one of the Company's patents on
its PREMIUM SURGIPORT* retracting tip trocar. The reexamination will not
apply to other patents held by the Company on the PREMIUM SURGIPORT*
trocar, or to patents on other trocars sold by the Company, including the
SURGIPORT* trocar and the newer VISIPORT* trocar. The preliminary
injunction issued by the United States District Court for the Northern
District of California in favor of the Company, removing Origin's trocars
from the market was based on patent infringement and on interference with
the Company's business relationships, and remains in effect and no trial
date has been set. In the opinion of management, based upon the advice of
counsel, the Company has valid claims against the defendants.
B. The Company is engaged in other litigation, primarily as the defendant, in
cases involving product liability claims. The Company believes it is
adequately insured in all material respects against the product liability
claims. The Company is also involved in various other cases. In the
opinion of management, based on advice of counsel, the Company has
meritorious defenses and valid cross-claims in these actions.
* * *
In the opinion of management, based on the advice of counsel, the ultimate
outcomes of all of the aforementioned lawsuits should not have a materially
adverse effect on the Company's consolidated financial statements.
-14-
<PAGE> 15
Form 10-Q
September 30, 1994
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit
(11) Statement Regarding Computation of Per Share Earnings.
b. Reports on Form 8-K - The Company did not file any reports
on Form 8-K during the three-month period ended
September 30, 1994.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATES SURGICAL CORPORATION
----------------------------------
Registrant
By:
-----------------------------------
Howard M. Rosenkrantz
Senior Vice President, Finance and
Chief Financial Officer
Dated: October 25, 1994
-15-
<PAGE> 16
EXHIBIT INDEX
Exhibit No. Description
- - - ----------- ------------
11 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule
<PAGE> 1
Form 10-Q
September 30, 1994
EXHIBIT 11
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- --------------------------
In thousands, except per share data 1994 1993 1994 1993
- - - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 13,300 $ (300) $13,200 $(14,300)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . 10,000 4,900
-------- --------- ------- --------
Net income (loss) applicable to common stock . . . . . . . . . $ 3,300 $ (300) $ 8,300 $(14,300)
======== ========= ======= ========
Average number of common shares and
common share equivalents outstanding:
Average number of common shares
outstanding . . . . . . . . . . . . . . . . . . . . . 56,500 55,900 56,700 56,000
Add common share equivalents - options
to purchase common shares - net . . . . . . . . . . .
-------- --------- ------- --------
Average number of common shares and
common share equivalents outstanding . . . . . . . . . . . . 56,500 55,900 56,700 56,000
======== ========= ======= ========
Net income (loss) per common share and
common share equivalent (primary and
fully diluted) . . . . . . . . . . . . . . . . . . . . . . . $.06 $(.01) $.15 $(.26)
======== ========= ======= ========
</TABLE>
The computation does not assume conversion of the Company's preferred stock
into common stock since the result would be antidilutive. In 1994 and 1993,
common stock equivalents were excluded from the computation since the result
would be antidilutive.
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNITED STATES SURGICAL CORPORATION
Financial Data Schedule
Article 5 of Regulation S-X
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 10,500
<SECURITIES> 0
<RECEIVABLES> 210,600
<ALLOWANCES> 6,400
<INVENTORY> 176,500
<CURRENT-ASSETS> 441,100
<PP&E> 757,200
<DEPRECIATION> 198,300
<TOTAL-ASSETS> 1,121,500
<CURRENT-LIABILITIES> 187,900
<BONDS> 0
<COMMON> 6,500
0
900
<OTHER-SE> 654,300
<TOTAL-LIABILITY-AND-EQUITY> 1,121,500
<SALES> 692,200
<TOTAL-REVENUES> 692,200
<CGS> 350,000
<TOTAL-COSTS> 350,000
<OTHER-EXPENSES> 302,400
<LOSS-PROVISION> 1,400
<INTEREST-EXPENSE> 14,600
<INCOME-PRETAX> 23,800
<INCOME-TAX> 10,500
<INCOME-CONTINUING> 13,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,300
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
