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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR
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)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.10 par value New York Stock Exchange
Depositary Shares, representing
one-fiftieth interests in Series A
Convertible Preferred Stock,
$5 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
The aggregate market value of the voting stock held by non-affiliates of
the registrant (based on the closing sales price for Common Stock of $19 and
for Depositary Shares of $23 on December 31, 1994 and, for purposes of this
computation only, the assumption that all directors and officers of the
registrant are affiliates) was approximately $1.2 billion.
The number of outstanding shares of Common Stock, $.10 par value, of the
registrant was 56,836,139 shares on December 31, 1994.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Definitive Proxy Statement
for the 1995 Annual Meeting of Stockholders of the Registrant
Incorporated By Reference Into Part III, Items 10, 11, 12 and 13
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UNITED STATES SURGICAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
INDEX
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PART I
ITEM PAGE
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1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II
5. Market for Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 26
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Index to Consolidated Financial Statements
and Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
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PART I
ITEM 1. BUSINESS.
NATURE OF BUSINESS
United States Surgical Corporation (the Company) is a Delaware
corporation primarily engaged in developing, manufacturing and marketing a
proprietary line of technologically advanced surgical wound management products
to hospitals throughout the world. The Company currently operates domestically
and internationally through subsidiaries, divisions and distributors. Except
where the context otherwise requires, the term Company includes the Company's
divisions and subsidiaries.
The market that the Company services continues to be adversely affected
by cost consciousness on the part of health care providers and payors and to
experience slower growth rates created by efforts to reduce costs and by
uncertainties connected with industry-led and government sponsored health care
reform proposals. The Company believes, however, that in any scenario that
results from evolution of the domestic health care system, its products offer a
significant opportunity for reducing costs for the total health care system
while providing considerable advantages for the patient. The Company has also
been impacted negatively by aggressive pricing by competition. The Company
continues to innovate and develop new products that provide better patient care
and an effective means of reducing hospital costs.
To respond to these business conditions, the Company has expanded its
marketing efforts to meet the needs of hospital management through cost
effective pricing programs, by assisting hospitals in implementing more
efficient surgical practices, and by demonstrating the favorable economics
associated with the use of the Company's products. In addition, the Company
took steps during 1993 and 1994 to significantly reduce its own cost of doing
business in order to strengthen its competitive position.
The Company is the leading manufacturer and marketer of innovative
mechanical products for the wound closure market. In this category, principal
products consist of a series of surgical stapling instruments (both disposable
and reusable), disposable surgical clip appliers and disposable loading units
(DLUs) for use with stapling instruments. The instruments are an alternative
to manual suturing techniques utilizing needle/suture combinations and enable
surgeons to reduce blood loss, tissue trauma and operating time while joining
internal tissue, reconstructing or sealing off organs, removing diseased
tissue, occluding blood vessels and closing skin, either with titanium,
stainless steel, or absorbable POLYSORB copolymer staples or with titanium,
stainless steel, or absorbable POLYSURGICLIP copolymer clips. Surgical
stapling also makes possible several surgical procedures which cannot be
achieved with surgical needles and suturing materials. The disposable
instruments and DLUs are expended after a single use or, in the case of
reloadable disposable instruments, after a single surgical procedure.
The Company is the leading manufacturer and marketer of specialized wound
management products designed for use in the rapidly growing field of minimally
invasive surgery. This surgical technique (also referred to as minimally
invasive or laparoscopic surgery) requires incisions of up to one half inch
through which various procedures are performed using laparoscopic instruments
and optical devices, known as laparoscopes, for viewing inside the body cavity.
Laparoscopy generally
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Trademarks of United States Surgical Corporation are in italicized capital
letters.
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provides patients with significant reductions in post-operative hospital stay,
pain, recuperative time and hospital costs, improved cosmetic results, and the
ability to return to work and normal life in a shorter time frame. The Company
has developed and markets disposable surgical clip appliers and stapling
instruments designed for laparoscopic uses in a variety of sizes and
configurations. The Company's products in this area also include trocars,
which provide entry ports to the body in laparoscopic surgery, and a line of
instruments which allows the surgeon to see, cut, clamp, retract or otherwise
manipulate tissue during a laparoscopic procedure. The Company also designs
and markets laparoscopes. Applications for minimally invasive surgery
currently include cholecystectomy (gall bladder removal), hysterectomy, hernia
repair, anti-reflux procedures for correction of heartburn, and various forms
of bowel, stomach, gynecologic, urologic, and thoracic (chest) surgery.
Disposable instruments reduce the user's capital investment, eliminate
the risks and costs associated with maintenance, sterilizing and repair of
reusable instruments, and provide the surgeon with a new sterile instrument for
each procedure, offering more efficacious and safer practice for both patients
and operating room personnel.
In 1994, the Company continued to expand manufacturing and marketing of
its line of suture products, which was introduced in 1991. The Company
believes that sutures, which represent a major portion of the wound closure
market, are a natural complement to its other wound management products. This
market is currently dominated by other manufacturers, however, the Company
expects continuing growth in its market share as a result of offering
technologically advanced suture products.
PRODUCT CONTRIBUTION
The Company's current products constitute a single business segment.
Surgical wound management products accounted for substantially all of the
Company's net sales and profits in each of the years ended December 31, 1994,
1993 and 1992.
AUTO SUTURE Stapling Products and Clip Appliers
AUTO SUTURE stapling products consist of disposable single-use, and
disposable instruments and reusable stainless steel instruments that utilize
and can be reloaded with disposable loading units (DLUs) containing surgical
staples. The staples are made of titanium, stainless steel, or a proprietary
absorbable copolymer. The Company markets both disposable instruments and
reusable stainless steel instruments in a variety of sizes and configurations
for use in various surgical applications. Although the Company predominately
markets disposable staplers, the availability of both reusable and disposable
staplers gives surgeons the opportunity of using either in accordance with
their preference. The Company's stapling instruments have application in
abdominal, thoracic, gynecologic, obstetric, urologic and other fields of
surgery. Common uses of AUTO SUTURE staplers include closure and resection
(the removal of tissue or organs), anastomosis (the surgical joining of hollow
structures, as in organ reanastomosis), vessel occlusion, biopsies, skin and
fascia closure and Cesarean section deliveries.
The Company's MULTIFIRE and PREMIUM MULTIFIRE disposable staplers can be
reloaded with DLUs for multiple use within the same surgical procedure. The
MULTIFIRE and PREMIUM MULTIFIRE TA line of staplers are used for resection and
creation of anastomosis; the MULTIFIRE GIA line of staplers staples and
simultaneously transects tissue. These instruments are useful in a variety of
procedures.
The Company also markets a specialized line of advanced skin stapling
instruments, including the MULTIFIRE VERSATACK stapler, the only stapler
designed for open hernia repair, and which is also usable in a wide variety of
other open procedures.
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The Company continued to enhance other existing products during 1994,
including announcement of the PREMIUM PLUS CEEA, an improved version of its
instrument designed for circular anastomoses. The PREMIUM PLUS CEEA instrument,
expected to reach the market in early 1995, is easy to insert and remove from
the lumen in bowel resections, while retaining the advantage of superior
anastomotic security. The Company also offered a greater variety of sizes and
features in many of its existing instruments.
AUTO SUTURE clip applier instruments individually apply a sequence of
titanium, stainless steel, or absorbable clips for ligation of blood vessels
and other tubular body structures. They are offered in a variety of clip sizes
for use in a broad range of surgical procedures. All clip appliers marketed by
the Company are disposable instruments which provide the surgeon with a new,
sterilized instrument for each procedure. The Company's LDS disposable
staplers simultaneously ligate and divide tubular body structures.
The materials used in the Company's POLYSORB absorbable staples and
POLYSURGICLIP clips are proprietary copolymers developed and manufactured by
the Company. The copolymers are radio transparent, facilitate postoperative
diagnosis without X-ray or CAT scan interference, maintain significant strength
during the critical postoperative period, and are totally absorbed during
subsequent months. Among other applications, these absorbable staples are used
in the Company's POLY GIA 75 stapler, which places four rows of absorbable
staples and immediately cuts the tissue between the innermost staple lines. It
is used in gynecologic and urologic surgical procedures.
The Company believes that, where applicable, AUTO SUTURE staplers and
clip appliers provide benefits to surgeons, patients and hospitals that are
superior to manual suturing methods. Depending on the type of operation and
instruments used, these benefits may include: shorter operating time resulting
in less time under anesthesia; reduction in blood loss; reduction in tissue
handling, which can result in reduced tissue trauma and edema; lowering of the
incidence of postoperative infection; enhanced cosmetic results; and faster
healing. These benefits reduce the overall medical cost of the operation by
significantly reducing operating room time, postoperative care and
anesthesiology services. The Company believes these benefits are advantageous
to the total health care system.
AUTO SUTURE Products for Minimally Invasive Surgery
The Company provides a full line of products to serve the needs of the
surgical community in performing minimally invasive surgery, including a number
of proprietary products not offered by any other company.
The Company markets a line of disposable trocars. The initial
application of a trocar results in a sharp obturator tip or a cutting
instrument within the trocar making a small opening in the abdominal wall or
chest cavity. The obturator or cutting instrument is then removed, leaving the
trocar sleeve in place to serve as an access tube through which a laparoscope
and other surgical instruments may be inserted. Each disposable trocar is used
in a single surgical procedure, assuring a sharp obturator point or cutting
instrument for each application and eliminating the expense and risks of
resharpening and resterilizing associated with reusable trocars. The Company's
trocars are available in a wide range of sizes, some of which are offered with
radiolucent sleeves to permit unobstructed X-rays.
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The SURGIPORT trocar, introduced in February 1987, was the first
disposable trocar incorporating a safety shield, which enhances patient safety
by reducing the chance of injuring organs during trocar insertion. The
Company's PREMIUM SURGIPORT version of its disposable trocar, introduced in
1993, offers alternative safety features including a retractable obturator tip
and a seal system incorporating an adaptor to accommodate a variety of
instrument sizes. In 1994, the Company introduced the VERSAPORT trocar. This
trocar features the unique VERSASEAL system, the first self-adjusting trocar
seal accommodates 5mm to 12mm instrument sizes without the need for a
converter. The VERSAPORT trocar reduces the costs, additional inventory, and
operating room time associated with the use of converters, and provides
surgeons with a better seal and reduced friction on instruments in laparoscopic
procedures.
In the latter part of 1994, the Company introduced the VISIPORT optical
trocar, which allows a surgeon to visualize entry into the patient's body
cavity. The VISIPORT trocar consists of a transparent blunt-domed obturator,
housing a crescent shaped blade which, by means of a trigger, is extended and
retracted. A laparoscope is incorporated into the shaft of the instrument for
viewing through the obturator dome. This method of controlled blunt and sharp
dissection with direct visualization of each tissue layer during penetration
enhances surgeon control and maximizes safe entry into the patient cavity. The
VISIPORT trocar can be used in additional PREMIUM SURGIPORT sleeves for
secondary ports of entry to provide additional cost effectiveness.
The Company introduced in 1994 the SURGISPIKE trocar (a lower priced
trocar for secondary punctures), a cost effective device which provides the
quality of the same seal system utilized in the Company's PREMIUM SURGIPORT
trocar. The Company also markets its THORACOPORT line of trocars for use in
thoracic surgery, including an electrically conductive version, and the
BLUNTPORT II blunt tip trocar designed for open laparoscopic techniques.
The Company offers various instruments for use in conjunction with its
line of trocars. The PREMIUM SURGIPATCH and SURGIGRIP devices provide a method
for anchoring the SURGIPORT, PREMIUM SURGIPORT or VERSAPORT trocars and
facilitates adjustment of the trocar within the body cavity, the SEAL-UP II
converter, which allows surgeons to convert SURGIPORT trocars to a smaller seal
to accommodate 5mm instruments, improving the versatility of the instrument,
and the SURGINEEDLE disposable pneumoperitoneum needle, which is used to
provide insufflation prior to trocar insertion.
The Company also introduced in 1994 the SURGIVIEW 0 degree 10 mm
single-use laparoscope for visualization of the patient cavity. This device
offers the increased safety and convenience of a single use device, as well as a
convenient BLINK feature which allows the surgeon to cleanse the lens without
removal from the patient's cavity, providing significant time savings in the
operating room. The SURGIVIEW device offers a cost effective alternative to
the considerable expense of purchasing and maintaining reusable laparoscopes.
Since 1990, the Company has marketed the ENDO CLIP applier, the world's
first disposable multiple clip applier designed for minimally invasive surgery.
The Company introduced the second generation ENDO CLIP II instrument in 1993.
Both automatic clip appliers are available with titanium clips in a range of
sizes and can be used to ligate a variety of tissue structures and to perform
dissection. Designed to be applied through the SURGIPORT, PREMIUM SURGIPORT,
VERSAPORT, or VISIPORT trocars, the ENDO CLIP and ENDO CLIP II appliers have
application in a variety of surgical procedures and have gained great
acceptance for use in laparoscopic cholecystectomy, a procedure which has
become the standard technique for removal of the gallbladder. The advent of
these instruments revolutionized the way surgeons perform gallbladder surgery.
As the result of numerous surgeon education and training programs presented
under the Company's sponsorship or with its assistance, the Company believes
that hundreds of thousands of patients have benefited from this technology.
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The Company markets a variety of instruments under the MULTIFIRE name
designed for endoscopic application, including the MULTIFIRE ENDO GIA 30
instrument, the world's first stapler for endoscopic procedures, and the gas
powered MULTIFIRE ENDO GIA 60 instrument. These instruments have expanded the
scope of procedures which can be performed by a minimally invasive approach.
Each of these devices, which are inserted through a SURGIPORT, PREMIUM
SURGIPORT, VERSAPORT or VISIPORT trocar, places six rows of titanium staples
and immediately cuts the tissue between the two centermost staple lines. Each
may be reloaded with new DLUs several times during a single surgery. The
Company offers DLUs for the instrument in different staple sizes to
accommodate varying tissue thicknesses. The MULTIFIRE ENDO GIA 30 stapler is
used in a variety of procedures, including appendectomies, laparoscopically
assisted vaginal hysterectomies, and general, gynecologic and thoracic
procedures. The MULTIFIRE ENDO GIA 60 stapler is designed for use in bowel
procedures such as colectomies and interior resections and a variety of
thoracic procedures.
The Company also markets the MULTIFIRE ENDO TA 60, a non-cutting gas
powered instrument with the same features as the MULTIFIRE ENDO GIA 60
instrument. This instrument places three rows of titanium staples and is
designed for use in bowel procedures such as anastomotic closure and various
stomach and thoracic procedures. The Company's MULTIFIRE ENDO TA 30 stapler,
introduced in 1993, permits stapling in minimal access areas in a variety of
gynecological, thoracic and colorectal procedures.
The Company's SURGIWAND instrument is a high flow suction and irrigation
device, incorporating an electrocautery tip, which is useful in many surgical
applications. In 1994, the line was expanded with the introduction of the
second generation version, the SURGIWAND II series, which is available without
electrocautery capability. These instruments also offer laser capability.
The Company markets a variety of fully disposable hand instruments
designed especially for use in minimally invasive surgery which fit through the
SURGIPORT, PREMIUM SURGIPORT, VERSAPORT or VISIPORT trocars, including its ENDO
CLINCH clamp, ENDO SHEARS rotating scissors, ENDO GRASP graspers, ENDO DISSECT
dissectors, ENDO BABCOCK clamps, and the ENDO VERSASHEAR scissors, designed
for cutting through a diverse range of tissue thicknesses. The Company's
advanced line of laparoscopic hand instruments includes the ENDO MINI SHEARS
and the ENDO SCIZ instruments, which are designed for dissecting and cutting,
the ENDO MINI RETRACT and the ENDO MAXI RETRACT 10 MM retractors, which are
designed for retracting tissues and structures, such as liver, lung, stomach
and bowel, the ENDO LUNG device, a specialized clamp with a ratchet mechanism
designed for reduced tissue trauma for use in lung surgery, and the ENDO BOWEL
clamp, an atraumatic clamp designed for use in bowel surgery. Longer and
shorter versions of many of these instruments are offered for use in specialty
applications (such as thoracic and pediatric surgery). The Company also
markets the ROTICULATOR line of instruments which are versions of certain of
its instruments with an articulating and rotating head that may be guided
around curves of up to 80 degrees. In 1993, the Company introduced an enhanced
version of its ENDO RETRACT instrument, the ENDO RETRACT II instrument, which
permits enhanced maneuverability and precision in retraction of tissue by the
inclusion of five fingers articulating from 0 degree to 45 degrees.
The Company also introduced in 1993 the disposable ENDO CATCH pouch for
insertion into the body cavity through the SURGIPORT, PREMIUM SURGIPORT,
VERSAPORT or VISIPORT trocars for laparoscopic tissue removal through the
trocar site. The ENDO CATCH II device, introduced in 1994, allows for removal
of larger volumes of tissue.
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In 1994 the Company introduced the revolutionary ENDO STITCH instrument
and associated DLUs. This device allows the surgeon to suture and tie knots
laparoscopically by passing a proprietary needle with different types of the
Company's proprietary suture material (POLYSORB, SURGIDAC, SOFSILK, and BRALON
suture materials) attached between two jaws located at the end of an endoscopic
shaft, quickly, accurately and easily in comparison with manual endoscopic
suturing techniques. Manual techniques are time consuming and difficult to
learn, and have inhibited conversion of certain procedures which require
endoscopic suturing to the laparoscopic method.
The Company markets a line of products for use in endoscopic suturing,
including the SURGITIE ligating loop and the SURGIWIP ligature, which utilize a
variety of suturing materials including SURGIGUT plain and chromic gut,
POLYSORB synthetic absorbable, and SURGIDAC polyester. The ENDO CLOSE device,
offered in 1994, facilitates the suture closure of trocar incision sites.
Since 1991, the Company has marketed the ENDO HERNIA disposable surgical
stapler, the world's first fully automated endoscopic instrument designed
specifically for hernia repair, which features an articulating and rotating
head. A reloadable version of this stapler was introduced in 1992, marketed
as the MULTIFIRE ENDO HERNIA stapler. In 1993, the Company introduced the
MULTIFIRE ENDO HERNIA 0 degree stapler, a non-articulating version of this
product designed for procedures in which a surgeon desires to use greater
force in applying staples, and the ENDO UNIVERSAL 65 degrees stapler which
rotates and expands the range of articulation. The latter instrument is ideal
for hernia repair and a variety of other procedures.
During 1994, the Company entered a three year agreement with General
Surgical Innovation, Inc. ("GSI") to sell the GSI Spacemaker (tm) balloon
dissector for laparoscopic hernia procedures, combining the advantages of
laparoscopy with the accepted technique of extraperitoneal procedures. This
device may also be used in performing Burch bladder suspensions for relieving
urinary incontinence.
Endoscopic products are offered individually, in pre-assembled kits and
in custom kits designed for specific surgical procedures such as
cholecystectomy, hernia repair, laparoscopically assisted vaginal hysterectomy,
bowel and other procedures. Kits are intended to offer the surgeon and
operating room staff convenience and ease of accessibility to instruments, and
provide a cost efficient means of purchasing the Company's products for
hospital materials management departments.
SUTURE PRODUCTS
Sutures comprise a major portion of the wound closure market. Since most
surgical procedures which use staples also require manual suturing, the Company
considers sutures to be a natural complement to its stapling instrumentation.
The Company is continuing its planned expansion into this mature but very large
market. The Company's product line includes both non-absorbable products
(SURGIPRO polypropylene, MONOSOF and BRALON nylon, SOFSILK silk, SURGIDAC
polyester and stainless steel sutures) and absorbable products (SURGIGUT plain
and chromic gut and the Company's proprietary POLYSORB synthetic absorbable
sutures).
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The Company believes that its sutures have significant technological
advantages over competitors' products. The Company's POLYSORB sutures are
designed for removal from the package without kinking, are smoother (which
helps to reduce trauma) and pull through tissue more easily, and provide
greater holding power during the critical wound healing period than other
absorbable sutures. In late 1994, the Company introduced an improved coating
on its POLYSORB sutures which, in combination with the patented braid
structure, facilitates the surgeon's ability to place and secure knots. Some of
these suturing materials are utilized in the Company's endoscopic suturing
devices, discussed above. The Company also markets SURGIPRO mesh, a mesh
fabric designed for applications in both open and endoscopic surgery such as
hernia repair. In the second half of 1993, the Company introduced SURGALLOY
needles for the important cardiovascular segment of the market. The SURGALLOY
needles are significantly stronger and sharper than existing technologies.
During 1994, the Company expanded the use of SURGALLOY needles into the plastic
surgery and ophthalmic surgery specialties. The Company believes that the
SURGALLOY needles will enhance the competitive position of its sutures by
offering these three key surgical specialties a superior product. The Company
offers other suture-needle combinations for general and specialty applications.
The suture program also allows the Company to compete more effectively
for contracts with customers that prefer to purchase all of the hospital's
wound closure needs from a single vendor, particularly as individual hospitals,
buying groups and hospital alliances continue to consolidate their purchasing.
OTHER PRODUCTS
In 1991, the Company entered into a cooperative effort with Biomet, Inc.
to develop and market a line of bioresorbable orthopedic products utilizing the
Company's proprietary polymer technology. The Company has contributed its
existing research developments to the venture and will continue with pertinent
research and development work, while Biomet, a leader in the development and
marketing of orthopedic products, is responsible for sales, distribution and
marketing of the newly developed products. The profits and expenses of the
venture are being shared.
MARKETING AND SALES
Domestically, the Company markets its products to surgeons and materials
managers of hospitals primarily through the sales employees of its Auto Suture
Company division. Outside the United States, the Company markets its products
in 22 countries and in the Commonwealth of Puerto Rico by direct sales
employees of 15 sales and marketing subsidiaries, and through its authorized
distributors in 61 other countries. In 5 additional countries the Company
sells its products directly to the user through the distributor sales
department at its headquarters.
The Company maintains its own direct sales force employed by subsidiaries
operating in Algeria, Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Italy, Luxembourg, Morocco, the Netherlands, New Zealand,
Norway, Poland, Puerto Rico, Russia, Spain, Sweden, Switzerland, Tunisia and
the United Kingdom. The Company has entered an agreement to acquire assets of
its Japanese distributor in order to begin marketing directly in Japan.
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All sales employees of the Auto Suture Company, of the Company's
subsidiaries, and of the Company's authorized international distributors
receive identical training with respect to the Company's products, consisting
of an extensive training course that prepares them to provide surgeons and
hospital personnel with technical assistance, including scrubbing in surgery as
technical advisors in connection with the use of the Company's products. The
training courses are developed and conducted by the Company at its expense.
The training course includes an introduction to anatomy and physiology, the
study of surgical terminology, aseptic surgical techniques such as scrubbing,
gowning, gloving and operating room protocol and the use of the Company's
instruments on artificial foam organs for sales demonstrations and on
anesthetized animals in the laboratory for teaching purposes. During 1994, the
Company broadened its training curriculum to prepare sales personnel to assist
hospital administrators in implementing efficient surgical practices and in
realizing the economic benefits afforded by the Company's products.
The Company demonstrates its products on artificial foam organs and
through the use of films, video cassettes, technical manuals and surgical
atlases.
Since 1993, the Company has also sold to domestic distributors under a
program known as Just-in-Time (JIT) distribution. Under the Just-in-Time
program, the Company sells its products to a distributor selected by a
participating hospital and the distributor sells the products to the hospital
on an as needed basis. The Company compensates the distributor for handling
and other services. Distributor sales are common in the medical product
industry. The Company's JIT program responds to customer needs, many of which
desire distributorship arrangements in order to avoid costs associated with
inventory management. Distribution arrangements also negate distributor
incentives to promote competing brands, allow the Company's technical sales
force more time to support user surgeons and hospital management, and provide
the Company with opportunities to enhance or protect its competitive position
through an additional channel of sales. Sales through the JIT program
currently comprise approximately 44% of the Company's domestic business.
The Company is committed to the continuing education of the surgical
community by assisting a substantial number of medical schools, hospitals and
educational organizations in training residents, nurses, surgeons and
administrators in the techniques of wound management using AUTO SUTURE
instrumentation. With the increasing number of advanced surgical procedures
being performed using the minimally invasive approach, the Company also
supports proctorships and preceptorships where an experienced surgeon
clinically assists and teaches a surgeon in the operating room. Initially, the
primary focus of the training programs was on laparoscopic cholycestectomy.
Widespread training has been accomplished for that procedure, and the emphasis
in future training will be on more advanced applications of laparoscopy,
including hernia, bowel, and thoracic procedures, laparoscopically assisted
vaginal hysterectomies, laparoscopic bladder suspension, and procedures for the
correction of esophageal reflux. The Company believes that acceptance of
laparoscopic techniques as the preferred method in a broad range of procedures
will be an important element of the Company's future growth.
Numerous studies have shown that, in addition to reduced patient recovery
time, laparoscopy is a safe and efficacious technique. However, and
particularly in more complex procedures, surgeons must receive adequate
training before achieving competency to perform laparoscopy. The Company
supports certification of surgeons in this technique to ensure that the
Company's products are used properly. The costs of training for newer, more
complicated procedures and concerns as to reimbursement for newer procedures in
view of changes in the health care system have affected the rate at which the
surgical community is learning the more advanced laparoscopic procedures.
During 1994, the Company also expanded its marketing efforts to
administrators of hospitals and hospital purchasing groups, demonstrating the
economic efficiencies of the Company's' products and assisting hospital
management in implementing efficient surgical practices. The Company's BEST
PRACTICES program assists hospitals in a continuous effort to perform surgery
more efficiently, enabling hospitals to reduce costs, enhance their
competitiveness, and realize the benefits of laparoscopy.
-8-
<PAGE> 11
International sales represented approximately 46% of the Company's net
sales in 1994, 40% of the Company's net sales in 1993, and 33% in 1992.
International sales included sales through international subsidiaries, which
were approximately 37% in 1994, 33% in 1993, and 28% in 1992, and sales to
international distributors and to end users in countries not otherwise serviced
by the Company, which were approximately 9% in 1994, 7% in 1993, and 5% in
1992, of the Company's net sales. (See Note J of Notes to Consolidated
Financial Statements for additional information by geographical area.)
Orders for the Company's products are generally filled on a current
basis, and order backlog is not material to the Company's business.
MANUFACTURING AND QUALITY ASSURANCE
Manufacturing is conducted principally at two facilities: North Haven,
Connecticut, and Ponce, Puerto Rico. Manufacturing includes major assembly,
packaging and sterilization of products. The Company produces all material for
its synthetic absorbable staples, clips and sutures internally. Needles
contained in certain of the Company's suture products are produced either at
its facilities in North Haven, Connecticut, Germany or Switzerland. Other
needles and suture materials are supplied by several manufacturers. The
Company's reusable steel surgical staplers, components for the products the
Company manufactures, and a minor portion of the Company's DLUs are supplied by
several independent non-affiliated vendors using the Company's proprietary
designs.
Raw materials necessary for the manufacture of parts and components and
packaging supplies for all of the Company's products that are manufactured by
it are readily available from numerous third-party suppliers.
The Company considers quality assurance to be a significant aspect of its
business. It has a staff of professionals and technical employees who develop
and implement standards and procedures for quality control and quality
assurance. These standards and procedures cover detailed quality
specifications for parts, components, materials, products, packaging and
labeling, testing of all raw materials, in-process subassemblies and finished
products, and inspection of vendors' facilities and performance to assure
compliance with the Company's standards. Recently, the Company applied for and
received International Standards Organization ("ISO") certification for its
plants in Connecticut and Puerto Rico.
RESEARCH AND DEVELOPMENT
The Company believes that research and development is an important factor
in its future growth. The Company engages in a continuing product research,
development and improvement program at its Norwalk and North Haven, Connecticut
facilities and through funding of research and development activities at major
universities and other third parties. It employs a staff of engineers,
designers, toolmakers and machinists that performs research and development as
well as manufacturing support functions. During 1994, 1993, and 1992, the
Company's research and development expenses, including suture-related research
and development expenses, were approximately $37,500,000, $50,800,000, and
$43,800,000, respectively. In addition to its suture line, within the past
three years the Company has introduced 30 new products and size variations in
61 categories, that are the result of research and development conducted by the
Company. Approximately 74% of 1994 sales revenues were received from the sale
of products introduced within the preceding five years.
-9-
<PAGE> 12
During 1994, the Company reduced its research and development costs
through enhancement of design technology which streamlined the development
process, and by focusing resources on products and redesign of existing
products which are best suited to customer needs in the current cost conscious
health care environment. The Company's restructuring program during 1993 and
1994 also contributed significantly to the reduction of research and
development expense, while allowing the Company to continue its aggressive
program of exploring new opportunities for advancement in the surgical field.
PATENTS AND TRADEMARKS
Patents are significant to the conduct of the Company's business. The
Company owns 117 new U.S. patents issued in 1994, 58 such patents issued in
1993, and 50 patents issued in 1992. Overall, the Company currently owns over
400 unexpired U.S. utility and design patents covering products it has
developed or acquired and having expiration dates ranging from less than one
year to 17 years. No patents will expire in the near future which are material
to the Company's financial position. Moreover, the Company has many additional
U.S. patent applications pending. The Company's practice and experience is to
develop or acquire rights or licenses to new patented products and continuously
update its technology. The Company also has a significant number of foreign
patents and pending applications.
The Company has registered various trademarks in the U.S. Patent and
Trademark Office and has other trademarks which have acquired both national and
international recognition. The Company also has trademark registrations or
pending applications in a number of foreign countries.
See Item 3, "Legal Proceedings", for details of certain patent
infringement actions to which the Company is a party.
COMPETITION
There is intense competition in the markets in which the Company engages
in business. Products competitive with the Company's staplers and clip appliers
include various absorbable and non-absorbable sutures, clips and tape, as well
as disposable and steel stapling instruments, DLUs and some hand loaded
staplers. Many major companies that compete with the Company, such as Johnson
& Johnson, Minnesota Mining and Manufacturing Company ("3M") and Davis & Geck
which has been a division of American Cyanamid Company (the Company understands
the sale of Davis & Geck may be pending), have a wider range of other medical
products and dominate much of the markets for these other products. Ethicon,
Inc. ("Ethicon"), a Johnson & Johnson subsidiary, markets, in addition to
sutures and other wound closure products, disposable skin staplers, clip
appliers, and internal staplers. 3M markets disposable skin staplers and
internal stapling instruments. Davis & Geck markets disposable skin staplers,
clip appliers and suture materials. The Company believes that these major
companies will continue their efforts to develop and market competitive
devices.
The market for products for minimally invasive surgery is highly
competitive. The Company believes it is the leader in this field as the result
of its successful innovative efforts and superior products. Ethicon, through a
division known as Ethicon Endo- Surgery, markets a line of endoscopic
instruments directly competitive with the Company's products and is its
principal competitor. The Company believes that Ethicon devotes considerable
resources to research and development and sales efforts in this field.
Numerous other companies manufacture and distribute disposable endoscopic
instruments. In addition, manufacturers of reusable trocars and other reusable
endoscopic instruments, including Richard Wolf Medical Instruments Corp. (a
subsidiary of Richard Wolf, GmbH) and Karl Storz Endoscopy-America Inc. (a
subsidiary of Karl Storz, GmbH), compete directly with the Company.
-10-
<PAGE> 13
Industry studies show Ethicon currently has approximately 80% of the
suture market, while Davis & Geck has about 13% of this market. The Company
expects that, because the size of the total sutures market is relatively
stable, any increase in the Company's market share in this area will have to be
earned at the expense of the other current market participants. The Company
believes that the technological advantages of its sutures will enable it to
compete effectively with these companies and that its market share in sutures
will continue to grow.
The Company's principal methods of competing are the development of
innovative products, the performance and breadth of its products, its
technically trained sales force, educational services, including sponsorship of
training programs in advanced laparoscopic techniques, and more recently,
assisting hospital management with cost containment and marketing programs.
The Company's major competitors have greater financial resources than the
Company. Some of its competitors, particularly Ethicon, have engaged in
substantial price discounting and other significant efforts to gain market
share, including bundled contracts for a wide variety of healthcare products
with group purchasing organizations. In the current health care environment,
cost containment has become the predominant factor in purchasing decisions by
hospitals. As a result, the Company's traditional advantage of product
superiority has been impacted. The Company has responded to this aspect of
competition by competitive pricing and by offering products which meet hospital
cost containment needs, while maintaining the technical superiority of its
products and the support of its sales organization.
The Company believes that the advantages of its various products will
continue to provide the best value to its customers. However, there is
considerable competition in the industry and no assurance can be given as to
the Company's competitive position. The impact of competition will likely have
a continuing effect on sales volumes and on prices charged by the Company. In
addition, increased cost consciousness has revived competition from reusable
instruments to some extent. The Company believes that disposable instruments
are safer and more cost efficient for hospitals and the healthcare system than
are reusable instruments, but it can not predict the extent to which reusable
instruments will competitively impact the Company. The Company also offers
reusable instruments to respond to the preferences of its customers.
GOVERNMENT REGULATION
The Company's business is subject to varying degrees of governmental
regulation in the countries in which it operates. In the United States, the
Company's products are subject to regulation as medical devices by the United
States Food and Drug Administration (the "FDA"), as well as by other federal
and state agencies. These regulations pertain to the manufacturing, labeling,
development and testing of the Company's devices as well as to the maintenance
of required records. An FDA regulation requires prompt reporting by all
medical device manufacturers of an event or malfunction involving a medical
device where such device caused or contributed to death or serious injury or is
likely to do so.
Federal law provides for several routes by which the FDA reviews medical
devices prior to their entry into the marketplace. To date, all of the
Company's new products have been cleared by the FDA under the most expedited
form of pre-market review since the initiation of the program. The Company,
along with the rest of the industry, continues to experience lengthy delays in
the FDA approval process. Timely product approval is important to the
Company's maintaining its technological competitive advantages. Other than
increased FDA product approval periods, the Company has not encountered any
other unusual regulatory impediments to the introduction of new products.
-11-
<PAGE> 14
Overseas, the degree of government regulation affecting the Company
varies considerably among countries, ranging from stringent testing and
approval procedures in certain locations to simple registration procedures in
others, while in some countries there is virtually no regulation of the sale of
the Company's products. In general, the Company has not encountered material
delays or unusual regulatory impediments in marketing its products
internationally. Establishment of uniform regulations for European Community
nations has taken place beginning January 1, 1995. The Company believes it will
be subject to a single regulatory scheme for all of the participating
countries, and has taken the necessary steps to assure ongoing compliance with
these new, more rigorous regulations, including obtaining ISO certification for
its manufacturing operations which will allow the Company to market products in
Europe with a single registration applicable to all participating countries.
HEALTH CARE MARKET
The health care industry continues to undergo change, led primarily by
market forces which are demanding greater efficiencies and reduced costs.
Government proposed health care mandates in the United States have not
occurred, and it is unclear whether, and to what extent, any government mandate
will affect the domestic health care market. Industry led changes are expected
to continue irrespective of any governmental efforts toward health care reform.
The scope and timing of any further government sponsored proposals for health
care reform are presently unclear.
The primary trend in the industry is toward cost containment. Payors
have been able to exercise greater influence through managed treatment and
hospitalization patterns, including a shift from reimbursement on a cost basis
to per capita limits for patient treatment. Hospitals have been severely
impacted by the resulting cost restraints. The increasing use of managed care,
centralized purchasing decisions, consolidations among hospitals and hospital
groups, and integration of health care providers, are continuing to affect
purchasing patterns in the health care system. Purchasing decisions are often
shared by a coalition of surgeons, nursing staff, and hospital administrators,
with purchasing decisions taking into account whether a product reduces the
cost of treatment and/or attracts additional patients to a hospital. All of
these factors have contributed to reductions in prices for the Company's
products and, in the near term, to slower acceptance of more advanced surgical
procedures in which the Company's products are used, given hospital and surgeon
concerns as to the costs of training and reimbursement by payors.
The Company could potentially benefit from this focus on cost
containment. Stapling and laparoscopy decrease operating room time including
anesthesia, patient recovery time and in many cases are highly cost effective.
Doctors, patients, employers and payors all value decreased patient recovery
time. This could lead to potential increases in volume as surgical stapling
and laparoscopic procedures are selected over alternative techniques. However,
an undue focus on discrete costs or similar limits which fail to consider the
overall value of laparoscopy could adversely impact the Company. Some
hospitals may also lose per night revenues through reduced post-operative care
requirements as to procedures performed by laparoscopy, which could influence
their analysis of acceptance of newer procedures. The Company is adapting
itself to this new environment by promoting the cost effectiveness of its
products, by striving to efficiently produce the highest quality products at
the lowest cost, and by assisting hospitals and payors in achieving meaningful
cost reductions for the health care system while retaining the quality of care
permitted by the Company's products.
-12-
<PAGE> 15
RESTRUCTURING
During the several years prior to 1993, the Company's sales and earnings
increased substantially each year. In anticipation of continued comparable
business growth, the Company expanded its workforce and constructed additional
administrative and manufacturing facilities. Following the first quarter of
1993, sales volumes declined due to various factors impacting the health care
industry and the Company. By the fourth quarter of 1993 it became apparent that
the downtrend in the Company's business would be longer term than originally
anticipated and the Company determined that significant efforts to reduce costs
and fixed expenses through a restructuring were desirable. The Company reduced
its workforce during 1993 and the first quarter of 1994 through voluntary and
involuntary terminations of approximately 2,400 employees and through normal
attrition, by approximately 29% from levels preceding the restructuring.
Included in the reduction were approximately 14% of the management group, and
44% of the Company's corporate officers. Many of these positions, including
executive positions, were eliminated or consolidated with other positions in
the restructuring.
Concurrent with the workforce reduction, the Company consolidated its
operations as a means of reducing expenses and is in the process of leasing,
sub-leasing, selling or consolidating facilities which are underutilized. The
restructuring and other cost saving measures resulted in annualized cost
savings of approximately $150 million, compared to what operating expenses
would have been had such measures not been taken. The Company's operations
effectively absorbed the impact of the workforce reduction and other aspects of
the restructuring program, and it continues to evaluate opportunities for
decreasing its selling, general and administrative expenses.
EMPLOYEES
At December 31, 1994, the Company employed 5,922 persons, 5,124
domestically and 798 in foreign countries. None of the Company's domestic
employees is represented by a labor union for purposes of collective
bargaining. The Company considers its relations with its employees to be
excellent.
ITEM 2. PROPERTIES.
The Company owns its corporate headquarters, which is located at 150
Glover Avenue, Norwalk, Connecticut, and owns or leases other facilities in
Norwalk, North Haven and Wilton, Connecticut, in Ponce, Puerto Rico, and in
seventeen foreign countries. The Norwalk corporate headquarters includes
executive and administrative facilities and research laboratories. The other
facilities in the United States and the facilities in Puerto Rico and in
foreign countries consist variously of administrative offices, manufacturing,
research, warehouse, distribution, sterilizer operation and assembly space.
The North Haven, Connecticut and Puerto Rico facilities are the primary
manufacturing facilities of the Company. The facilities at each of these
locations are leased by the Company under longer term operating leases. The
Company also maintains needle manufacturing facilities in Switzerland and
Germany.
During 1992 and 1993, the Company expanded its facilities in North Haven,
Connecticut, Ponce, Puerto Rico, and various locations in Europe to accommodate
current and anticipated increased demand for its products, and constructed a
European headquarters and training facility in Elancourt, a suburb of Paris,
France. The Elancourt properties are leased under a 15 year financing lease
and a portion of the facility constructed is being used by the Company as a
surgeon training facility and for administrative offices. The Company is
presently attempting to sublease the unutilized portion of the Elancourt
facility (refer to Note B in Notes to Consolidated Financial Statements).
-13-
<PAGE> 16
The Company's facilities and equipment are in good operating condition,
are suitable for their respective uses and are adequate for current needs.
ITEM 3. LEGAL PROCEEDINGS.
A. On July 12, 1989, Ethicon, Inc. filed a complaint against the
Company in the United States District Court for the District of Connecticut
alleging infringement of a single United States patent relating to trocars. In
counterclaims, the Company has alleged, among other grounds, that Ethicon's
actions tortiously interfered with the Company's business dealings and that
Ethicon is infringing three of the Company's patents. The parties'
cross-motions for preliminary injunctions were denied by the District Court in
April 1991. The Company's motion to dismiss Ethicon's pending patent
infringement action is pending. Ethicon has responded to this motion, but a
hearing date has not yet been set. No trial date has been set. In the opinion
of management, based upon the advice of counsel, the Company has valid claims
against Ethicon and meritorious defenses against the claims by Ethicon. The
Company believes that the ultimate outcome of this action should not have a
materially adverse effect on the Company's consolidated financial statements.
B. On March 10, 1992, the Company filed a complaint in the United
States District Court for the District of Connecticut against Johnson & Johnson
subsidiaries Johnson & Johnson Hospital Supplies, Inc. and Ethicon, Inc.,
alleging infringement of United States patents issued to the Company on January
28, 1992 covering the Company's endoscopic multiple clip applier. On February
16, 1994, a jury returned a verdict in favor of the defendants, holding that
the Company's patent claims were invalid. The Company has appealed the verdict
to the United States Court of Appeals for the Federal Circuit and argued the
appeal on February 6, 1995. No decision has yet been rendered on the appeal.
C. On April 16, 1992, a complaint in a shareholder's derivative action
was filed in the Delaware Chancery Court, naming as defendants the Company and
the members of its Board of Directors. The complaint, as amended, alleges the
payment of excessive compensation in certain years to four executive officers
of the Company. On April 20, 1993, another complaint was filed in the same
court in a separate putative shareholder's derivative action, naming as
defendants the Company and the members of its Board of Directors. The
allegations in the additional complaint are comparable to those in the earlier
filed action. On January 12, 1994, notwithstanding defenses believed to be
meritorious, the defendants agreed to settle the claims asserted in these
actions, subject to Court approval. Under the settlement, the defendants deny
the allegations but have agreed to adjustments to the vesting and exercise
terms of stock option grants for certain executives within three years of the
court's approval of the settlement. On June 1, 1994, the Delaware Chancery
Court issued an opinion that it was satisfied that the claims of excessive
compensation were adequately investigated and reasonably settled, but that it
was unable to evaluate the overall reasonableness of the proposed settlement
pending further investigation by the plaintiff in connection with allegations
of insider trading. Discovery on this issue is continuing following which the
Court is expected to reconsider the proposed settlement.
-14-
<PAGE> 17
D. On May 27, 1992, the Company filed a complaint in the United States
District Court for the Northern District of California against Origin
Medsystems, Inc. ("Origin"), a subsidiary of Eli Lilly & Co., and Frederic
Moll, an officer of Origin and a former employee and director of
EndoTherapeutics. The Company acquired EndoTherapeutics in July 1992. On
January 12, 1993, the District Court granted the Company's motion for a
preliminary injunction. The infringing trocars were ordered removed from the
market. The United States Court of Appeals for the Federal Circuit on December
13, 1993 denied Origin's appeal and affirmed the lower court's order for a
preliminary injunction. A date for trial has not been set. The United States
Patent Office, on the defendant Origin's request, is reexamining one of the
Company's patents on its PREMIUM SURGIPORT retracting tip trocar. The
reexamination does 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 and VERSAPORT trocars.
In the opinion of management, based upon the advice of counsel, the Company has
valid claims against the defendants.
E. In August and September 1992, four complaints brought by
shareholders as class actions were filed in the United States District Court
for the District of Connecticut, naming the Company and two executives as
defendants. The complaints allege wrongful conduct in violation of federal
securities law and related state law which resulted in damages in connection
with the plaintiff shareholders' purchases of the Company's common stock.
During the second quarter 1993, the Company and certain executive officers were
named as defendants in additional complaints styled as shareholder class
actions, making comparable allegations to those in the earlier filed
complaints. On June 23, 1993, the Court entered orders consolidating these
cases. On October 8, 1993, the defendants moved to dismiss and/or strike the
consolidated complaint. No answers have yet been filed. In February and March
1994, three additional complaints brought by shareholders as class actions were
filed in the United States District Court for the District of Connecticut,
naming the Company and certain executives as defendants. The complaints allege
wrongful conduct in violation of federal securities laws in connection with the
plaintiff shareholders' purchases of the Company's common stock. In the
opinion of management, based upon the advice of counsel, the defendants have
meritorious defenses against the claims asserted in the actions. The Company
believes that the ultimate outcome of these actions should not have a
materially adverse effect on the Company's consolidated financial statements.
F. On September 17, 1993, Ethicon, Inc. filed a Complaint against the
Company in the United States District Court for the District of Delaware
alleging that the Company's manufacture, use and sale of surgical staples used
in a variety of the Company's staplers infringes certain patents. Ethicon,
Inc. subsequently amended its complaint to add Ethicon Endo-Surgery and Design
Standards Corporation, a Connecticut corporation and a supplier to the Company,
as co-plaintiffs. The Company successfully moved to transfer the case to the
United States District Court for the District of Connecticut. On December 13,
1993, the Company asserted counterclaims against Ethicon, Inc. and Ethicon
Endo-Surgery for, among other things, infringing the Company's patents relating
to surgical staples. In addition, the Company has asserted counterclaims
against Design Standards Corporation for breach of its contractual obligations
to the Company and for statutory unfair trade practices by purporting to assign
rights to Ethicon which belong to the Company. In the opinion of management,
based upon the advice of counsel, the Company has meritorious defenses against
the claims asserted in this action and valid claims against the plaintiffs and
Ethicon. The Company believes that the ultimate outcome of this action should
not have a materially adverse effect on the Company's consolidated financial
statements.
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<PAGE> 18
G. In February 1994, Ethicon Endo-Surgery filed suit against the
Company in the United States District Court for the Southern District of Ohio,
alleging infringement by the Company's instruments of a single patent for a
safety lockout mechanism on a linear cutter/stapler. On June 7, 1994, the
court denied the plaintiffs' motion for a preliminary injunction against the
Company. The Company has asserted counterclaims under two patents owned by the
Company. Ethicon has contested one of such patents in an interference
proceeding before the Patent Office. In the opinion of management, based upon
the advice of counsel, the Company has meritorious defenses against the claims
asserted in the complaint and valid counterclaims against the plaintiffs. The
Company believes that the ultimate outcome of this action should not have a
materially adverse effect on the Company's consolidated financial statements.
H. The Company is engaged in other litigation, primarily as a defendant
in cases involving product liability claims. The Company is also involved in
various other cases. The Company believes it is adequately insured in material
respects against the product liability claims and, based upon advice of
counsel, that the Company has meritorious defenses and/or valid cross claims in
these actions.
In the opinion of management, based upon the advice of counsel, the
ultimate outcome of the above actions, individually or in the aggregate, should
not have a materially adverse effect on the Company's consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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<PAGE> 19
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information pertaining to the
executive officers of the Company as of January 31, 1995:
<TABLE>
<CAPTION>
Acting as
Name Age Position Such Since
- ---- --- -------- ----------
<S> <C> <C> <C>
Leon C. Hirsch 67 Chairman of the Board, President 1987
and Chief Executive Officer
Turi Josefsen 58 Executive Vice President, and 1994
President, International Operations (President and Chief
Executive Officer of
Auto Suture Companies
1992 - 1994)
Thomas R. Bremer 41 Senior Vice President and 1994
General Counsel (Officer since 1989)
Thomas D. Guy 51 Senior Vice President, Operations 1994
(Officer since 1981)
Robert A. Knarr 46 Senior Vice President and 1994
General Manager, U.S. and Canada (Officer since 1985)
Howard M. Rosenkrantz 51 Senior Vice President, Finance and 1992
Chief Financial Officer (Officer since 1982)
Peter Burtscher 54 Group Vice President 1993
(Officer since 1982)
Richard A. Douville 39 Vice President and 1993
Treasurer
Richard N. Granger 38 Vice President, Research 1993
and Development (Officer since 1992)
Charles E. Johnson 46 Vice President, Education 1994
(Officer since 1993)
Louis J. Mazzarese 49 Vice President, Quality 1992
and Regulatory Affairs (Officer since 1991)
Pier Paolo Partiseti 74 Group Vice President 1993
Joseph C. Scherpf 51 Vice President and 1984
Controller
Marianne Scipione 48 Vice President, Corporate 1981
Communications
Verne Sharma 44 Vice President, Marketing and 1994
Strategic Planning
Wilson F. Smith, Jr. 49 Group Vice President 1993
</TABLE>
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<PAGE> 20
<TABLE>
<S> <C> <C> <C>
Judith M. Stant 48 Vice President, USSC; and 1993
General Manager, Auto Suture (Officer since 1985)
Company, Australia
Pamela Komenda 41 Corporate Secretary 1989
</TABLE>
Various of the above-named persons are also officers of one or more of the
Company's subsidiaries. Leon C. Hirsch and Turi Josefsen are husband and wife.
No other family relationship exists between any of the above-named persons.
Officers are elected for annual terms to hold office until their successors are
elected, or until their earlier resignation or removal by the Board of
Directors. All of the executive officers have for at least the past five years
held high level management or executive positions with the Company or its
subsidiaries, except for Mr. Douville, who joined the Company in 1993, Mr.
Mazzarese, who joined the Company in 1991, and Mr. Sharma, who joined the
Company in 1994. Mr. Douville was previously employed from 1977 to 1992 by
the accounting firm of Deloitte & Touche, where he was a partner, and was Vice
President and Controller with PepsiCo. Foods International from 1992 until
joining the Company. Mr. Mazzarese was previously Vice President, Regulatory
Affairs/Clinical Affairs, Product Assurance, at the Shiley division of Pfizer
Corporation's Hospital Products Group from 1987 until October, 1991. Mr.
Sharma was previously with General Electric Medical Systems, where he was
General Manager of the Global Nuclear Medicine and Positron Emission Tomography
business, and from 1987 through 1991, in various management positions at Rohm
and Haas Company, a specialty chemicals manufacturer.
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<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol USS. The following table sets forth for the periods indicated the
high and low of the daily sales prices, which represent actual transactions, as
reported by the New York Stock Exchange. In addition, the table sets forth the
amounts of quarterly cash dividends per share that were declared and paid by
the Company.
<TABLE>
<CAPTION>
CASH DAILY SALES PRICES
DIVIDENDS -----------------------------------
PAID HIGH LOW
------------ ---------- ------------
<S> <C> <C> <C>
1994
1st Quarter $.020 $32.50 $15.88
2nd Quarter .020 24.63 16.00
3rd Quarter .020 28.38 21.25
4th Quarter .020 27.50 18.25
1993
1st Quarter $.075 $79.13 $51.38
2nd Quarter .075 58.75 26.13
3rd Quarter .075 28.75 20.25
4th Quarter .020 26.50 19.88
</TABLE>
At December 31, 1994, the number of record holders of the Company's
Common Stock was 12,715. See discussion below in Management's Discussion and
Analysis of Financial Condition and Results of Operations as to restrictions
imposed by a credit agreement on registrant's level of dividend payments.
- 19 -
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
In thousands, except per share data 1994(1) 1993(2) 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . $ 918,700 $1,037,200 $1,197,200 $843,600 $514,100
Income (loss) before income taxes . . . $ 32,700 $ (137,400) $ 192,900 $130,300 $ 66,200
Net income (loss) . . . . . . . . . . . $ 19,200 $ (138,700) $ 138,900 $ 91,200 $ 46,000
Net income (loss) per common share and
common share equivalent (primary
and fully diluted) . . . . . . . . . . $.08 $(2.48) $2.32 $1.58 $.89
Average number of common shares
and common share equivalents
outstanding . . . . . . . . . . . . . 56,600 56,000 59,900 57,800 51,900
Dividends declared
per common share . . . . . . . . . . . $.08 $.245 $.30 $.2875 $.2375
At December 31,
Total assets . . . . . . . . . . . . . . $1,103,500 $1,170,500 $1,168,100 $741,600 $460,900
Long-term debt . . . . . . . . . . . . . $ 248,500 $ 505,300 $ 394,500 $251,600 $131,000
Stockholders' equity . . . . . . . . . . $ 662,000 $ 443,900 $ 590,000 $329,900 $225,000
</TABLE>
(1) In the fourth quarter of 1994 the Company signed a letter of intent to
purchase the assets of its independent distributor in Japan, which
includes inventory of the Company's products purchased by the independent
distributor but not yet sold to third parties at December 31, 1994.
Sales and Net income were reduced by $17 million and $8 million ($.14 per
common share), respectively, in anticipation of the pending reacquisition
of these products and valuing these products at the Company's production
cost.
(2) Income (loss) before income taxes and net income (loss) for 1993 include
restructuring charges of $137.6 million and $129.6 million ($2.31 per
share), respectively.
- 20 -
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
In 1994, the Company attained sales of $919 million compared with sales
of $1.04 billion in 1993 and sales of $1.2 billion in 1992. Sales decreased by
$119 million or 11% in 1994, and decreased by $160 million or 13% in 1993 and
increased by $354 million or 42% in 1992. In 1994, the Company reported net
income of $19 million or $.08 per common share (after preferred stock dividends
of $15 million), compared with a net loss of $139 million or $2.48 per common
share in 1993 and net income of $139 million or $2.32 per common share in 1992.
Net income and net income per common share increased $158 million and $2.56,
respectively, in 1994 compared to 1993 and decreased $278 million and $4.80,
respectively, in 1993 compared to 1992 and increased $48 million and $.74,
respectively, in 1992 over 1991. The effects of foreign currency exchange rate
changes on net income in 1994, 1993 and 1992 were immaterial.
In the second half of 1993 the Company adopted restructuring plans
designed to reduce its cost structure and improve its competitive position
through property divestitures and consolidations and a reduction in its
management, administrative and direct labor workforce. These plans were
adopted when it became apparent that projected worldwide sales growth and the
pace of reduction in trade barriers and other related considerations among
European countries did not meet Company expectations. Increased price
competition in the Company's domestic markets also prompted the Company to
reduce its cost structure. At the end of the 1993 third quarter the Company
announced a layoff of approximately 700 administrative staff personnel, closure
of its manufacturing plants for thirteen days in the fourth quarter of 1993 and
the adoption of a four day work week for certain manufacturing employees during
the early part of 1994. In the fourth quarter of 1993 the Company expanded its
restructuring plan to include real estate divestitures and consolidations and
employee voluntary and involuntary severance programs. The monthly payments
under such severance programs will be substantially completed by March 31,
1995.
In 1993 the Company recorded restructuring charges of $138 million ($130
million or $2.31 per share net of taxes). These charges consisted primarily of
write downs of certain real estate to estimated net realizable value ($79
million, of which $58 million related to the Company's new European office
building complex and distribution center in Elancourt, France), provisions for
lease buyout expenses ($24 million), accruals for severance costs ($30 million)
and write down of other assets ($5 million). Approximately $38 million of the
restructuring charges resulted in cash outflows related to severance and
accrued lease obligations, the majority of which was funded through operating
cash flows and credit facilities in 1994. The Company has several companies
interested in subleasing the unutilized space in its office building complex
and distribution center in Elancourt, France and is hopeful that a subleasing
arrangement will be consummated in 1995 at a lease rental which approximates
the written down carrying value of the facility. The Company has either
terminated or bought out the leases on the majority of those leased properties
which were part of the 1993 restructuring charges. All of the employees whose
severance was included in the 1993 restructuring charges have been terminated
and the vast majority of the Company's severance obligations have been paid as
of December 31, 1994. Accrued restructuring charges at December 31, 1994 are
approximately $18 million and relate primarily to accrued lease buyout expenses
($15 million) and unpaid severance costs ($3 million). The majority of accrued
restructuring charges are expected to be liquidated by December 31, 1995.
-21-
<PAGE> 24
Other cost savings measures taken by the Company in 1994 included the
reduction of salaries of all corporate officers by 10% and the salary of the
Chief Executive Officer by 20%, freezing the salaries of substantially all
other employees worldwide, and requiring higher co-payments and deductibles in
connection with employee health benefits programs. The Company estimates that
the future annual operating cost savings associated with the restructuring
plans will approximate $110 million of which more than $80 million represents
cash flow savings from reduced salaries expense and the remainder of which
represents reduced rent and depreciation expense. Cost saving measures beyond
such restructuring plans should result in additional annual operating cost
savings of approximately $40 million. As a result of the restructuring plans
and other cost saving measures, 1994 compensation expenses were approximately
$67 million lower than 1993 compensation expenses.
The reduction in sales in 1994 to $919 million compared to 1993 was
significantly affected by initial distributor stocking programs in early 1993,
which were not repeated in 1994 and by competition and pricing pressures due to
proposed health care reform. 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 1994 are down
significantly, because distributor sales to hospitals during the year
significantly exceeded distributor purchases from the Company. The Company
believes that distributor inventories are reaching optimum levels and that its
sales to distributors for hospitals currently in a JIT program will approximate
distributor sales to hospitals during 1995.
Sales in the fourth quarter of 1994 were reduced by $17 million and net
income was reduced by $8 million ($.14 per common share) in anticipation of the
Company's acquisition of the assets of its independent distributor in Japan,
which includes inventory of the Company's products purchased by the independent
distributor but not yet sold to third parties at December 31, 1994 (see Note C
in Notes to Consolidated Financial Statements). Sales and gross profit were
reduced in anticipation of the pending reacquisition of these products and
valuing the reacquired products at the Company's production cost.
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.
The following table analyzes the change in sales in 1994, 1993 and 1992
compared with the prior years.
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
COMPOSITION OF SALES INCREASE (DECREASE):
Unit increases (decreases) $ (96) $(114) $307
Net price changes (21) (6) 37
Effects of changes in foreign
currency exchange rates (2) (40) 10
--- ----- ----
Sales increase (decrease) $(119) $(160) $354
==== ==== ===
</TABLE>
-22-
<PAGE> 25
Sales unit decreases and the effects of foreign currency exchange rate
fluctuations accounted for 80% and 2%, respectively, of the total 1994 sales
decrease compared with 1993 and 71% and 25%, respectively, of the total 1993
sales decrease compared with 1992. The net price change component of the 1994
and 1993 sales decreases, accounting for 18% and 4% of the total sales
decreases in these years, respectively, reflect the net effect of selling price
discounts granted to hospitals and JIT distributors, partially offset by price
list increases. Increased sales of the Company's minimally invasive surgery
products was the primary factor in the strong sales gains in 1992, when sales
unit increases accounted for 87% of the total sales increases.
Sales in 1994 were reduced by approximately $6 million representing the
effect of establishing a sales reserve in connection with a new returned goods
policy which was effective July 1, 1994. Under the previous policy, the
Company did not grant credits for product returns. The new policy grants full
credit to direct hospital 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,
and other sales reserves in the fourth quarter of 1994 were also reduced by $2
million.
Gross margin from operations (sales less cost of products sold divided by
sales) was 50% in 1994, 50% in 1993 and 60% in 1992. Although the Company
implemented the majority of its restructuring plans during the last quarter of
1993 and the first quarter of 1994, the major benefits of the cost reduction
measures adopted by the Company did not start being realized until the last
nine months of 1994, which resulted in improved quarterly gross margins the
last three quarters in 1994 compared to the corresponding periods in 1993.
Gross margins in 1993 compared to 1992 were negatively impacted by higher costs
associated with the increase in productive capacity, the introduction of new
products and increases in related inventory and fixed asset reserves from the
consequent obsolescence of production tooling and inventories and additional
selling price discounts granted to JIT distributors with the implementation of
the JIT distribution program. The reserve for obsolescence of production
tooling and inventories, which are an ongoing cost of business, amounted to $61
million, $62 million and $34 million, respectively, in the years ended December
31, 1994, 1993 and 1992. Changes in foreign currency exchange rates from those
existing in 1992 had the effect of reducing cost of products sold by $18
million in 1993. The effects of foreign currency exchange rate changes on cost
of products sold in 1994 and 1992 were immaterial.
The Company's investment in research and development during the past
three years (1994 - $38 million; 1993 - $51 million; 1992 - $44 million) has
yielded numerous product improvements as well as the development of numerous
new products. The decrease in research and development expense in 1994
compared to 1993 reflects the impact of a program initiated in the second half
of 1993 to increase efficiency and reduce the cost connected with the pilot
development of new products which are classified as research and development.
In 1993 and 1992 the primary focus of the Company's research and development
program had been directed at minimally invasive surgery products. 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
continue its investment in research and development at levels approximating 3%
- - 5% of annual sales in the future.
-23-
<PAGE> 26
Selling, administrative and general expenses expressed as a percentage of
sales were 40% in 1994, 43% in 1993, and 39% in 1992. 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. The percentage increase in 1993 resulted
primarily from higher depreciation and amortization charges related to the
Company's facilities expansion. Expressed in total dollars, the reduction in
these expenses in 1993 compared to 1992 reflects lower salespersons commission
and related expenses which were influenced by decreased sales. In 1992 these
expenses increased primarily as a result of the continued expansion of the
Company's domestic and international sales organizations, growth in sales
expenses relating to the Company's increased sales and an increase in expenses
relating to training of surgeons in the use of the Company's products. Changes
in foreign currency exchange rates in 1993 from those existing in 1992 had the
effect of reducing selling, administrative and general expenses by $21 million
in 1993. The effects of foreign currency exchange rate changes on selling,
administrative and general expenses in 1994 and 1992 were immaterial.
The tax provisions for 1994 and 1993 relate primarily to foreign taxes
including taxes in Puerto Rico. The 1993 tax provision is 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 has examined 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 consolidated financial statements of the Company but may reduce the
availability of fully reserved net operating loss and tax credit carryforwards.
FINANCIAL CONDITION
The Company's current cash and cash equivalents, 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 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 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 bank and leasing agreements.
The Company's building programs have been essentially completed, which
enabled the Company to reduce its capital spending by more than 78% in 1994
compared to 1993 levels. Additions to property, plant, and equipment on the
accrual method totaled $49 million ($47 million on a cash basis) in 1994,
compared with $187 million in 1993, and $272 million in 1992, and consist of
additions to machinery and equipment ($32 million), leasehold improvements ($2
million), molds and dies ($13 million) and land and buildings ($2 million).
During 1994 the Company removed from its Balance Sheet property, plant, and
equipment which was fully depreciated and out of service with a cost of $19
million.
-24-
<PAGE> 27
The increase in cash and cash equivalents and the reduction of long-term
debt at December 31, 1994 in comparison to the prior year-end is primarily
attributable to the receipt of the net proceeds ($191 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 ($45 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 ($12 million) from
the prior year-end level was primarily attributable to 1994 payments of accrued
severance obligations which were expensed in 1993 as a component of the
restructuring charges partially offset by an accrual ($17 million) for the
pending acquisition of the assets of its independent distributor in Japan,
which includes inventory of the Company's products purchased by the independent
distributor but not yet sold to third parties at December 31, 1994 (see Note C
in Notes to Consolidated Financial Statements). Severance payments are
generally 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 December 31, 1994 the Company
had approximately $16 million of such contracts outstanding that will mature at
various dates through February 1995. Realized and unrealized foreign currency
gains and losses are recognized when incurred. As a result of the Company's
hedging program the changes in foreign currency exchange rates had an
immaterial effect on its results of operations. The weakening of the dollar
relative to most foreign currencies caused the $12 million movement in the
Company's Accumulated Translation Adjustments component of Stockholders' Equity
at December 31, 1994 compared to the prior year end.
-25-
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
A. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED).
The following is a summary of the quarterly results of operations for the
years ended December 31, 1994 and 1993.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(1) QUARTER(2) QUARTER(1,2,3) YEAR(2)
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
1994
Net sales . . . . . . . . . . . . . . $226,000 $232,000 $234,200 $226,500 $918,700
Cost of products sold . . . . . . . . 117,600 117,200 115,200 113,600 463,600
Income (loss) before income taxes . . (5,400) 11,800 17,400 8,900 32,700
Net income (loss) . . . . . . . . . . (7,900) 8,000 13,200 5,900 19,200
Net income (loss) per common
share (primary and fully diluted) . $(.14) $.05 $.15 $.02 $.08
1993
Net sales . . . . . . . . . . . . . . $326,300 $228,800 $237,700 $244,400 $1,037,200
Cost of products sold . . . . . . . . 138,800 119,800 120,900 138,900 518,400
Income (loss) before income taxes . . 49,300 (30,100) (13,200) (143,400) (137,400)
Net income (loss) . . . . . . . . . . 36,000 (22,000) (14,300) (138,400) (138,700)
Net income (loss) per common
share and common share
equivalent (primary and fully diluted) $.61 $(.39) $(.26) $(2.46) $(2.48)
</TABLE>
(1) In the second quarter of 1993 in anticipation of the pending purchase
by the Company of an international distributor, the Company accrued
for the reacquisition of inventory from this distributor and reduced
Net sales by $10 million and Cost of products sold by $4 million. In
the fourth quarter of 1993 the negotiations for the purchase of the
distributor were suspended and the Company reversed the second
quarter entries and increased Net sales by $9 million and Cost of
products sold by $3 million. In the fourth quarter of 1994 the
Company reached an agreement to purchase the assets of this
distributor and accrued for the reacquisition of inventory from this
distributor and reduced Net sales by $17 million and Net income by $8
million ($.14 per common share).
(2) Income (loss) before income taxes for 1993 includes restructuring
charges of $138 million (third quarter - $8 million; fourth quarter -
$130 million). Net income (loss) for 1993 includes restructuring
charges of $130 million or $2.31 per share (third quarter - $ 6
million or $.11 per share; fourth quarter - $124 million or $2.20 per
share).
(3) Cost of products sold in the fourth quarter includes $16 million of
inventory and fixed asset reserves ($19 million in the corresponding
period in 1993) resulting from the continued introduction of new
products and the consequent obsolescence of production tooling and
inventories.
B. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
See Index to Consolidated Financial Statements and Financial Statement
Schedules on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
-26-
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
A. DIRECTORS
The section entitled "Election of Directors" in the Definitive Proxy
Statement for the 1995 Annual Meeting of Stockholders of the registrant (the
1995 Proxy Statement) is hereby incorporated by reference.
B. OFFICERS
See Part I.
C. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The section entitled "Executive Compensation and Transactions -
Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
1995 Proxy Statement is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section entitled "Executive Compensation and Transactions" in the
1995 Proxy Statement is hereby incorporated by reference, except for those
portions entitled "Performance Graph" and "Report of Compensation Committee".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The sections entitled "Outstanding Shares, Voting Rights and Principal
Stockholders" and "Share Ownership of Management" in the 1995 Proxy Statement
are hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled "Executive Compensation and Transactions - Certain
Transactions" in the 1995 Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
A. AND D. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE.
See Index to Consolidated Financial Statements and Financial
Statement Schedule on Page F-1 herein.
B. REPORTS ON FORM 8-K.
None.
C. EXHIBITS.
(The Company will furnish a copy of any exhibit upon payment of 15 cents
per page plus postage.)
-27-
<PAGE> 30
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
(a) Certificate of Incorporation filed March 14, 1990
- Exhibit 3(a) to registrant's Form 8-B declared
effective August 3, 1990.*
(b) Certificate of Merger filed May 1, 1990 - Exhibit
3(b) to registrant's Form 8- B declared effective
August 3, 1990.*
(c) Certificate of Amendment filed May 15, 1991 -
Exhibit 3(c) to registrant's Form 10-K for 1991.*
(d) By-laws adopted March 14, 1990 - Exhibit 3(c) to
registrant's Form 8-B declared effective August 3,
1990.*
(e) Certificate of Designations relating to the
issuance of the Company's Series A Convertible
Preferred Stock, filed March 28, 1994. Exhibit
3(e) to registrant's Form 10-K for 1993.*
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
(a) Credit Agreement as of June 27, 1994 among
registrant, signatory banks, Morgan Guaranty Trust
Company of New York as Documentation Agent and
Nations Bank of North Carolina, N.A., as
Administration Agent - Exhibit 4(a) to
registrant's Form 10-Q for the quarter ended June
30, 1994.*
(10) MATERIAL CONTRACTS.
(a) 1981 Employee Stock Option Plan, as amended
through May 5, 1987 - Exhibit 10(a)(1) to
registrant's Form 10-K for 1987.* +
(b) Amendment to 1981 Employee Stock Option Plan
adopted May 2, 1989 - Exhibit 10(b) to
registrant's Form 10-K for 1989.* +
(c) Amendment to 1981 Employee Stock Option Plan
adopted May 1, 1990 - Exhibit 10(c) to
registrant's Form 10-K for 1990.* +
(d) 1990 Employee Stock Option Plan - Exhibit B to
registrant's Proxy Statement dated March 19, 1990,
for its May 1, 1990, Annual Meeting of
Stockholders.* +
(e) Amendment to 1990 Employee Stock Option Plan
adopted July 30, 1990 - Exhibit 10(e) to
registrant's Form 10-K for 1990.* +
(f) Amendment to 1990 Employee Stock Option Plan
adopted May 15, 1991 - Exhibit 10(f) to
registrant's Form 10-K for 1991.* +
-28-
<PAGE> 31
(g) Amendment to 1981, 1990 and 1993 Employee Stock
Option Plans adopted March 9, 1993. Exhibit 10(h)
to registrant's Form 10-K for 1993.* +
(h) Restricted Stock Incentive Plan, as amended
through May 5, 1987 - Exhibit 10(a)(2) to
registrant's Form 10-K for 1987.* +
(i) Amendment to Restricted Stock Incentive Plan
adopted May 15, 1991 - Exhibit 10(h) to
registrant's Form 10-K for 1991.* +
(j) Installment Option Purchase Agreement with Leon C.
Hirsch dated September 10, 1984, as amended
through May 18, 1994. Filed herewith.+
(k) Outside Directors Stock Plan - Exhibit 10(a)(4) to
registrant's Form 10-K for 1988.* +
(l) Amendment to Outside Directors Stock Plan adopted
May 1, 1990 - Exhibit 10(j) to registrant's Form
10-K for 1990.* +
(m) Long-Term Incentive Plan - Exhibit 10(a)(5) to
registrant's Form 10-K for 1988.* +
(n) Lease Agreement dated as of January 14, 1993
between State Street Bank and Trust Company of
Connecticut, National Association, as Lessor and
the registrant, as Lessee - Exhibit 10(o) to
registrant's Form 10-K for 1992.*
(o) Participation Agreement dated as of January 14,
1993 among registrant, Lessee, Baker Properties
Limited Partnership, Owner Participant, The Note
Purchasers listed in Schedule 1 thereto, State
Street Bank and Trust Company of Connecticut,
National Association, Owner Trustee, and Shawmut
Bank Connecticut, N.A., Indenture Trustee -
Exhibit 10(p) to registrant's Form 10-K for 1992.*
(p) Letter Agreement between the registrant and Bruce
S. Lustman dated March 11, 1994 - Exhibit 10(q) to
registrant's Form 10-K for 1993.* +
(q) Lease and financing agreements dated January 4,
1994 between registrant's French subsidiary,
A.S.E. Partners, and (i) the Corporation for the
Financing of Commercial Buildings ("FINABAIL") and
(ii) the Association for the Financing of
Commercial Buildings ("U.I.S.") - Exhibit 10(r) to
registrant's Form 10-K for 1993.*
(r) Lease and financing agreement dated December 26,
1991 between registrant's subsidiary, U.S.S.C.
Puerto Rico, Inc., and The Puerto Rico Industrial
Development Company ("PRIDCO") - Exhibit 10(s) to
registrant's Form 10-K for 1993.*
(11) Statement regarding computation of per share earnings.
Filed herewith.
(12) Statement of Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock
Dividends. Filed herewith.
-29-
<PAGE> 32
(21) Subsidiaries of the registrant. Filed herewith.
(27) Financial Data Schedule. Filed herewith
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC File No. 1-9776.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of this report.
-30-
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 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 on the 7th day of February, 1995.
UNITED STATES SURGICAL CORPORATION
(REGISTRANT)
By: /s/ HOWARD M. ROSENKRANTZ
--------------------------------
(HOWARD M. ROSENKRANTZ
SENIOR VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LEON C. HIRSCH Chairman of the Board, President February 7, 1995
- ------------------------------------ and Chief Executive Officer
(Leon C. Hirsch) (Principal Executive Officer)
and Director
/s/ JULIE K. BLAKE Director February 7, 1995
- ------------------------------------
(Julie K. Blake)
/s/ JOHN A. BOGARDUS, JR. Director February 7, 1995
- ------------------------------------
(John A. Bogardus, Jr.)
/s/ THOMAS R. BREMER Director February 7, 1995
- ------------------------------------
(Thomas R. Bremer)
/s/ TURI JOSEFSEN Director February 7, 1995
- ------------------------------------
(Turi Josefsen)
Director February 7, 1995
- ------------------------------------
(Douglas L. King)
Director February 7, 1995
- ------------------------------------
(Zanvyl Krieger)
Director February 7, 1995
- ------------------------------------
(Bruce S. Lustman)
/s/ WILLIAM F. MAY Director February 7, 1995
- ------------------------------------
(William F. May)
/s/ MARIANNE SCIPIONE Director February 7, 1995
- ------------------------------------
(Marianne Scipione)
Director February 7, 1995
- ------------------------------------
(John R. Silber)
Director February 7, 1995
- ------------------------------------
(Douglas T. Tansill)
/s/ JOSEPH C. SCHERPF Vice President and Controller February 7, 1995
- ------------------------------------ (Principal Accounting Officer)
(Joseph C. Scherpf)
</TABLE>
-31-
<PAGE> 34
UNITED STATES SURGICAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report and Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Management Report on Responsibility for Financial Reporting . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets - December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations - Years Ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows - Years Ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
F-1
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
UNITED STATES SURGICAL CORPORATION
We have audited the accompanying consolidated financial statements and
financial statement schedule of United States Surgical Corporation and
subsidiaries listed in the Index to Consolidated Financial Statements and
Financial Statement Schedule of the Annual Report on Form 10-K of United States
Surgical Corporation for the year ended December 31, 1994. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of United States Surgical
Corporation and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- ---------------------
Deloitte & Touche LLP
Stamford, Connecticut
January 24, 1995, except
for Note C, as to which the
date is February 1, 1995
INDEPENDENT AUDITORS' CONSENT
TO INCORPORATION BY REFERENCE IN REGISTRATION STATEMENTS
ON FORM S-3 AND FORM S-8
We consent to the incorporation by reference in United States Surgical
Corporation's Registration Statement No. 2-96790 on Form S-3 and Registration
Statements Nos. 2-64804, 2-78663, 33-3419, 33-13997, 33-37328, 33-38710,
33-40171, 33-59278 and 33-61912 on Form S-8 of our report dated January 24,
1995 (except for Note C, as to which the date is February 1, 1995) and
appearing on page F-2 of the Annual Report on Form 10-K for the year ended
December 31, 1994. We also consent to the reference to us, under the heading
"Financial Statements" in the Registration Statement on Form S-3.
/s/ DELOITTE & TOUCHE LLP
- ---------------------
Deloitte & Touche LLP
Stamford, Connecticut
February 1, 1995
F-2
<PAGE> 36
MANAGEMENT REPORT ON RESPONSIBILITY
FOR FINANCIAL REPORTING
The management of United States Surgical Corporation and its subsidiaries (the
"Company") has the responsibility for preparing the accompanying consolidated
financial statements and related notes. The consolidated financial statements
were prepared in accordance with generally accepted accounting principles and
necessarily include amounts based upon judgments and estimates by management.
Management also prepared the other information in the annual report and is
responsible for its accuracy and consistency with the consolidated financial
statements.
Management of the Company has established and maintains a system of internal
controls that provide reasonable assurance that the accounting records may be
relied upon for the preparation of the consolidated financial statements.
Management continually monitors the system of internal controls for compliance.
Also, the Company maintains an internal auditing function that independently
assesses the effectiveness of the internal controls and recommends possible
improvements thereto. The Company's consolidated financial statements have
been audited by Deloitte & Touche LLP, independent auditors. Management has
made available to Deloitte & Touche LLP all the Company's financial records and
related data. In addition, in order to express an opinion on the Company's
consolidated financial statements, Deloitte & Touche LLP considered the
internal accounting control structure in order to determine the extent of their
auditing procedures for the purpose of expressing such opinion but not to
provide assurance on the internal control structure. Management believes that
the Company's system of internal controls is adequate to accomplish the
objectives discussed herein.
The Board of Directors monitors the internal control system through its Audit
Committee which consists solely of outside directors. The Audit Committee
meets periodically with the independent auditors, internal auditors and senior
financial management to determine that they are properly discharging their
responsibilities.
Leon C. Hirsch
Chief Executive Officer
Howard M. Rosenkrantz
Chief Financial Officer
F-3
<PAGE> 37
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------
In thousands except share data 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 11,300 $ 900
Receivables, less allowance of $7,300 (1994); $5,000 (1993) . . . . . 211,500 197,900
Inventories:
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . 95,500 113,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . 27,100 36,900
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,600 62,300
--------- ---------
167,200 212,200
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 49,500 53,800
--------- ---------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . 439,500 464,800
--------- ---------
Property, plant, and equipment (net) . . . . . . . . . . . . . . . . . . 540,000 592,200
Other assets (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,000 113,500
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $1,103,500 $1,170,500
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,500 $ 50,200
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 125,200 137,500
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 29,400 28,800
--------- ---------
Total Current Liabilities . . . . . . . . . . . . . . . . . . 184,100 216,500
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248,500 505,300
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 8,900 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 . . . . . . . . . . . . . 190,600
Common stock $.10 par value, authorized 250,000,000 shares;
issued, 64,973,192 at December 31, 1994 and 64,402,144 at
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 6,500 6,400
Additional paid-in capital - common stock . . . . . . . . . . . . . . 380,700 371,700
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 178,100 178,300
Installment receivables from sale of common stock . . . . . . . . . . (5,400)
Treasury stock at cost; 8,137,053 shares at
December 31, 1994 and 8,144,386 shares at
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . (86,700) (86,700)
Accumulated translation adjustments . . . . . . . . . . . . . . . . . (8,100) (20,400)
--------- ---------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . 662,000 443,900
--------- ---------
Commitments and contingencies
Total Liabilities and Stockholders' Equity . . . . . . . . . . . $1,103,500 $1,170,500
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 38
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
In thousands, except per share data 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . $918,700 $1,037,200 $1,197,200
------- --------- ---------
Costs and expenses:
Cost of products sold . . . . . . . . . . 463,600 518,400 483,100
Research and development . . . . . . . . . 37,500 50,800 43,800
Selling, administrative and general . . . 366,700 449,300 462,700
Interest . . . . . . . . . . . . . . . . . 18,200 18,500 14,700
Restructuring charges . . . . . . . . . . 137,600
------- --------- ---------
Total costs and expenses . . . . . . 886,000 1,174,600 1,004,300
------- --------- ---------
Income (loss) before income taxes . . . . . . 32,700 (137,400) 192,900
Income taxes . . . . . . . . . . . . . . . . 13,500 1,300 54,000
------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . 19,200 (138,700) 138,900
Preferred stock dividends . . . . . . . . . . 14,900
------- --------- --------
Net income (loss) applicable to
common stock . . . . . . . . . . . . . . . $ 4,300 $ (138,700) $ 138,900
========= ========== =========
Average number of common shares and
and common share equivalents
outstanding . . . . . . . . . . . . . . 56,600 56,000 59,900
========= ========== =========
Net income (loss) per common share
and common share equivalents
(primary and fully diluted) . . . . . . . $ .08 $ (2.48) $ 2.32
=== ===== ====
Dividends paid per common share . . . . . . . $ .08 $.245 $ .30
=== ==== ===
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 39
United States Surgical Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Additional Additional
Paid-in Paid-in
Preferred Capital - Common Capital - Retained
Years ended December 31, 1994, 1993 and 1992 Stock Preferred Stock Common Earnings
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in thousands except share data
--------------------------------------
BALANCE AT JANUARY 1, 1992 . . . . . . . . . . . . . . $6,100 $192,800 $208,200
Common stock issued to employees-net
(3,110,529 shares) . . . . . . . . . . . . . . . . 300 48,000
Amortization and adjustment of deferred
compensation . . . . . . . . . . . . . . . . . . . (1,500)
Income tax benefit from stock options exercised . . 50,000
Acquisition of common stock for treasury
(269,204 shares) . . . . . . . . . . . . . . . . .
Reissuance of common stock from treasury for
acquisition (580,020 shares) . . . . . . . . . . . 55,900
Aggregate adjustment resulting from the
translation of foreign financial statements . . .
Dividends paid ($ .30 per share) . . . . . . . . . . (16,400)
Net income . . . . . . . . . . . . . . . . . . . . . 138,900
------ -------- --------
Balance at December 31, 1992 . . . . . . . . . . . . . 6,400 345,200 330,700
Common stock issued to employees-net
(626,079 shares) . . . . . . . . . . . . . . . . . 12,100
Income tax benefit from stock options exercised
recognized upon adoption of FAS 109 . . . . . . . 14,400
Payment received from officer on installment
receivables . . . . . . . . . . . . . . . . . . .
Aggregate adjustment resulting from the
translation of foreign financial statements . . .
Dividends paid ($.245 per share) . . . . . . . . . . (13,700)
Net loss . . . . . . . . . . . . . . . . . . . . . . (138,700)
---- -------- ------ -------- --------
BALANCE AT DECEMBER 31, 1993 . . . . . . . . . . . . . 6,400 371,700 178,300
Issuance of preferred stock (177,400) shares . . . . $900 $190,600
Common stock issued to employees-net
(577,991 shares) . . . . . . . . . . . . . . . . . 100 7,900
Income tax benefit from stock
options exercised . . . . . . . . . . . . . . . . 1,100
Payment received from officer on installment
receivables . . . . . . . . . . . . . . . . . . .
Aggregate adjustment resulting from the
translation of foreign financial statements . . .
Preferred stock dividends . . . . . . . . . . . . . (14,900)
Common stock dividends paid
($ .08 per share) . . . . . . . . . . . . . . . . (4,500)
Net income . . . . . . . . . . . . . . . . . . . . . 19,200
--- -------- ------ -------- --------
Balance at December 31, 1994 . . . . . . . . . . . . . $900 $190,600 $6,500 $380,700 $178,100
=== ======= ===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Deferred Installment
Accumulated Compensation Receivables
Translation Arising from from Sale of Treasury
Years ended December 31, 1994, 1993 and 1992 Adjustments Restricted Stock Common Stock Stock Total
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in thousands except share data
--------------------------------------
BALANCE AT JANUARY 1, 1992 . . . . . . . . . . . . $6,200 $(4,200) $(8,100) $(71,100) $329,900
Common stock issued to employees-net
(3,110,529 shares) . . . . . . . . . . . . . . 48,300
Amortization and adjustment of deferred
compensation . . . . . . . . . . . . . . . . . 4,200 2,700
Income tax benefit from stock options exercised . 50,000
Acquisition of common stock for treasury
(269,204 shares) . . . . . . . . . . . . . . . 2,100 (18,200) (16,100)
Reissuance of common stock from treasury for
acquisition (580,020 shares) . . . . . . . . . 2,600 58,500
Aggregate adjustment resulting from the
translation of foreign financial statements . . (5,800) (5,800)
Dividends paid ($ .30 per share) . . . . . . . . (16,400)
Net income . . . . . . . . . . . . . . . . . . . 138,900
------ ------- ------- -------- -------
Balance at December 31, 1992 . . . . . . . . . . . 400 0 (6,000) (86,700) 590,000
Common stock issued to employees-net
(626,079 shares) . . . . . . . . . . . . . . . 12,100
Income tax benefit from stock options exercised
recognized upon adoption of FAS 109 . . . . . 14,400
Payment received from officer on installment
receivables . . . . . . . . . . . . . . . . . 600 600
Aggregate adjustment resulting from the
translation of foreign financial statements . (20,800) (20,800)
Dividends paid ($.245 per share) . . . . . . . . (13,700)
Net loss . . . . . . . . . . . . . . . . . . . . (138,700)
------ ------- ------- -------- -------
BALANCE AT DECEMBER 31, 1993 . . . . . . . . . . . (20,400) 0 (5,400) (86,700) 443,900
Issuance of preferred stock (177,400) shares . . 191,500
Common stock issued to employees-net
(577,991 shares) . . . . . . . . . . . . . . . 8,000
Income tax benefit from stock
options exercised . . . . . . . . . . . . . . 1,100
Payment received from officer on installment
receivables . . . . . . . . . . . . . . . . . 5,400 5,400
Aggregate adjustment resulting from the
translation of foreign financial statements . 12,300 12,300
Preferred stock dividends . . . . . . . . . . . (14,900)
Common stock dividends paid
($ .08 per share) . . . . . . . . . . . . . . (4,500)
Net income . . . . . . . . . . . . . . . . . . . 19,200
------ ------- ------- -------- -------
Balance at December 31, 1994 . . . . . . . . . . . $ (8,100) $ 0 $ 0 $(86,700) $662,000
====== ======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 40
United States Surgical Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
In thousands 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . $ 913,100 $1,103,300 $1,087,700
Cash paid to vendors, suppliers, and employees . . . . . . . . . . . . . (749,300) (941,200) (905,900)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,800) (18,300) (15,600)
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,900) (12,800) (18,400)
-------- ----------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . 124,100 131,000 147,800
-------- ----------- ----------
Cash flows from investing activities:
Additions to property, plant, and equipment . . . . . . . . . . . . . . (47,000) (216,400) (270,700)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,600 (31,100) (31,100)
-------- ----------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . (36,400) (247,500) (301,800)
-------- ---------- ----------
Cash flows from financing activities:
Long-term debt borrowings under credit agreements . . . . . . . . . . . 3,483,900 2,614,400 1,840,800
Long-term debt repayments under credit agreements . . . . . . . . . . . (3,753,800) (2,495,900) (1,696,000)
Issuance of preferred stock, net . . . . . . . . . . . . . . . . . . . . 191,500
Common stock issued from stock plans . . . . . . . . . . . . . . . . . . 13,400 12,100 48,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,500) (13,700) (16,400)
Acquisition of common stock for treasury . . . . . . . . . . . . . . . . (16,100)
--------- ---------- ----------
Net cash (used in) provided by financing activities . . . . . . . . . (79,500) 116,900 160,300
--------- ---------- ----------
Effect of exchange rate changes . . . . . . . . . . . . . . . . . . . . . . 2,200 (2,000) (6,400)
--------- ---------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . 10,400 (1,600) (100)
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . 900 2,500 2,600
--------- ---------- -----------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . $ 11,300 $ 900 $ 2,500
========= ========= =========
Reconciliation of net income (loss) to net cash provided by
operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,200 $ (138,700) $ 138,900
-------- --------- ---------
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 89,400 83,200 59,400
Amortization of deferred compensation . . . . . . . . . . . . . . . . 4,200
Asset writedowns - restructuring . . . . . . . . . . . . . . . . . . . 73,800
Adjustment of property, plant, and equipment reserves . . . . . . . . 22,300 17,400 3,900
Receivables -- (increase) decrease . . . . . . . . . . . . . . . . . . (3,300) 67,800 (108,200)
Inventories -- decrease (increase) . . . . . . . . . . . . . . . . . . 7,400 (48,400) (75,800)
Adjustment of inventory reserves . . . . . . . . . . . . . . . . . . . 39,200 44,200 29,900
Accounts payable and accrued liabilities -- (decrease) increase . . . (42,500) 34,300 51,400
Income taxes payable and deferred -- (decrease) . . . . . . . . . . . (2,900) (24,300) (14,100)
Income tax benefit from stock options exercised . . . . . . . . . . . 1,100 14,400 50,000
Other assets -- net . . . . . . . . . . . . . . . . . . . . . . . . . (5,800) 7,300 8,200
--------- --------- ---------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . 104,900 269,700 8,900
--------- --------- ---------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . $ 124,100 $ 131,000 $ 147,800
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 41
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include
the accounts and transactions of United States Surgical
Corporation and Subsidiaries (the "Company"), excluding
intercompany accounts and transactions. Certain subsidiaries
(including branches), primarily operating outside the United
States, are included in the consolidated financial statements on a
fiscal-year basis ending November 30.
PROPERTY, PLANT, AND EQUIPMENT. Depreciation and amortization
is provided using the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
Years
---------------------------------------------------------------------
<S> <C>
Buildings . . . . . . . . . . . . . . . . . . . . . . . 40
Molds and dies . . . . . . . . . . . . . . . . . . . . 5 to 7
Machinery and equipment . . . . . . . . . . . . . . . . 3 to 10
Leasehold improvements . . . . . . . . . . . . . . . . 5 to 30
</TABLE>
The Company capitalizes interest incurred on funds used to
construct property, plant, and equipment. Interest capitalized
during 1994, 1993 and 1992 was immaterial.
INVENTORIES. Inventories are stated at the lower of cost
(first-in, first-out method) or market.
OTHER ASSETS. The Company capitalizes and includes in Other
Assets the costs of acquiring patents on its products, the costs
of computer software developed and used in its information
processing systems, goodwill arising from the excess of cost over
the fair value of net assets of purchased businesses and deferred
start-up costs incurred prior to 1991 relating to the Company's
entrance in 1991 into the suture portion of the wound management
market. These costs are amortized on the straight-line basis over
the following estimated useful lives:
<TABLE>
<CAPTION>
Years
--------------------------------------------------------------------
<S> <C>
Patents . . . . . . . . . . . . . . . . . . . . . . . . 10
Computer software costs . . . . . . . . . . . . . . . . 3 to 4
Deferred start-up costs . . . . . . . . . . . . . . . . 5
Goodwill . . . . . . . . . . . . . . . . . . . . . . . 10 to 40
</TABLE>
REVENUE RECOGNITION. Revenues from sales are recognized when
products are sold directly by the Company to ultimate consumers,
primarily hospitals, or to authorized distributors.
F-8
<PAGE> 42
FOREIGN CURRENCY TRANSLATION. For translation of the financial
statements of its international operations the Company has
determined that the local currencies of its international
subsidiaries are the functional currencies. Assets and
liabilities of foreign operations are translated at year end
exchange rates, and income statement accounts are translated at
average exchange rates for the year. The resulting translation
adjustments are made directly to the Accumulated Translation
Adjustments component of Stockholders' Equity. Foreign currency
transactions are recorded at the exchange rate prevailing at the
transaction date.
NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT.
Net income (loss) per common share and common share equivalent is
based on the weighted average number of common shares and, where
material, common share equivalents (stock options) outstanding.
Common share equivalents are not included in the computation of
net income (loss) per share in 1994 and 1993 since the effect of
their inclusion would be antidilutive.
NOTE B - RESTRUCTURING CHARGES
In the second half of 1993 the Company adopted a restructuring
plan designed to reduce its cost structure and improve its
competitive position through property divestitures and
consolidations and a reduction in its management, administrative
and direct labor workforce. During 1993 the Company recorded
restructuring charges of $138 million ($130 million after taxes).
These charges consisted primarily of write downs of certain real
estate to estimated net realizable value ($79 million), provisions
for lease buyout expenses ($24 million), severance costs ($30
million) and write down of other assets ($5 million).
The majority of the restructuring charges were non-cash in
nature. Accrued Liabilities at December 31, 1993 included $56
million related primarily to severance costs and accrued lease
obligations, the majority of which was paid in 1994. Included in
restructuring charges was a $58 million charge related to the
Company's new European building complex and distribution center at
Elancourt, France. The Company decided to sublease unutilized
space rather than occupy the entire Elancourt facility when it
became apparent that projected worldwide sales growth and the pace
of reduction in trade barriers and related considerations among
European countries did not meet Company expectations. The
estimated net realizable value of these facilities was based upon
the present value of rental income expected to be received,
assuming the facilities were subleased after one year.
F-9
<PAGE> 43
The Company has several companies interested in
subleasing the unutilized space in its building complex and
distribution center in Elancourt, France and is hopeful that a
subleasing arrangement will be consummated in 1995 at a lease
rental which approximates the written down carrying value of the
facility. The Company has either terminated or bought out the
leases on the majority of those other leased properties which were
part of the 1993 restructuring charges. All of the employees
whose severance was included in the 1993 restructuring charges
have been terminated and the vast majority of the Company's
severance obligations have been paid as of December 31, 1994.
Approximately $38 million of the restructuring charges resulted in
cash outflows related to severance and accrued lease obligations,
the majority of which was funded through operating cash flows and
credit facilities in 1994. Accrued restructuring charges at
December 31, 1994 are approximately $18 million and relate
primarily to accrued lease buyout expenses ($15 million) and
unpaid severance costs ($3 million). The majority of accrued
restructuring charges are expected to be liquidated by December
31, 1995.
NOTE C - ACQUISITIONS
In November 1994 the Company signed a letter of intent to
purchase the assets of its independent distributor in Japan, which
consist of real property with a book value of approximately $10
million, inventories of products purchased by the distributor from
the Company at the distributor's cost of approximately $17 million
and intangible assets (primarily goodwill). The Company
substantially completed its due diligence investigations in
December 1994 and it signed the Asset Purchase Agreement on
February 1, 1995 for a purchase price of approximately $61 million
payable over seven years at no interest (present value of the
purchase price approximately $46 million). Before the closing of
the transaction can occur the transaction must receive the
approval of two governmental authorities in Japan, which the
Company expects to receive in March 1995. In anticipation of the
reacquisition of the distributor's inventory of products
previously purchased by the distributor from the Company, the
Company reduced 1994 sales revenue and gross profit by
approximately $17 million and $8 million ($.14 per common share),
respectively, based upon the inventory quantities on-hand at the
distributor's warehouse as of December 31, 1994.
In July 1992, the Company purchased all of the
outstanding common stock of EndoTherapeutics for approximately
$60 million of the Company's common stock (approximately 580,000
shares). Under the purchase agreement the Company acquired
EndoTherapeutics' laparoscopic surgical technology, including the
trocar and pneumoperitoneum needle patents which the Company
previously licensed from EndoTherapeutics, technical know-how and
other assets. The acquisition has been accounted for by the
purchase method. The purchase price has been primarily allocated
to the acquired patents which are included in Other Assets.
F-10
<PAGE> 44
NOTE D - PROPERTY, PLANT, AND EQUIPMENT
At December 31, 1994 and 1993, Property, plant, and equipment
(at cost) were comprised of the following items:
<TABLE>
<CAPTION>
In thousands 1994 1993
-------------------------------------------------------------------------------------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,800 $ 20,700
Buildings . . . . . . . . . . . . . . . . . . . . . . . 149,600 163,400
Molds and dies . . . . . . . . . . . . . . . . . . . . 100,500 114,300
Machinery and equipment . . . . . . . . . . . . . . . . 321,700 306,600
Leasehold improvements . . . . . . . . . . . . . . . . 155,500 147,100
------- -------
751,100 752,100
Less allowance for depreciation and amortization . . . (211,100) (159,900)
------- -------
$540,000 $592,200
======= =======
</TABLE>
Property, plant, and equipment at December 31, 1994 includes
land and building in Elancourt, France with a net book value of
$70 million. During 1994 the Company removed from its Balance
Sheet Property, plant and equipment which was fully depreciated
with a cost of $19 million.
NOTE E - OTHER ASSETS
At December 31, 1994 and 1993 Other Assets (net of accumulated
amortization of $57 million and $61 million in 1994 and 1993,
respectively) were comprised of the following items:
<TABLE>
<CAPTION>
In thousands 1994 1993
-------------------------------------------------------------------------------------
<S> <C> <C>
Patents . . . . . . . . . . . . . . . . . . . . . . . . $ 57,200 $ 59,200
Computer software costs . . . . . . . . . . . . . . . . 8,300 12,500
Deferred start-up costs . . . . . . . . . . . . . . . . 4,200 8,300
Goodwill . . . . . . . . . . . . . . . . . . . . . . . 5,200 5,600
Prepaid rent . . . . . . . . . . . . . . . . . . . . . 19,700 10,400
Other . . . . . . . . . . . . . . . . . . . . . . . . . 29,400 17,500
-------- --------
$124,000 $113,500
======= =======
</TABLE>
During 1994 the Company removed from its Balance Sheet
fully amortized Other Assets with a cost of $23 million.
NOTE F - INCOME TAXES
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109 - "Accounting for Income
Taxes" (FAS 109) in February 1992, and the Company was required to
adopt FAS 109 by January 1, 1993. This statement requires that
deferred income taxes reflect the tax consequences on future years
of differences between the tax return bases of assets and
liabilities and their financial statement amounts.
F-11
<PAGE> 45
Prior to 1993, provisions were made by the Company for
deferred income taxes where differences existed between the time
that transactions affected taxable income and the time that these
transactions entered into the determination of income for
financial reporting purposes. The effect of the adoption of FAS
109 on a prospective basis from January 1, 1993 was not material.
A summary of the source of income (loss) before income taxes
follows:
<TABLE>
<CAPTION>
In thousands 1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (a) . . . . . . . . . $35,600 $ (61,800) $171,800
Foreign . . . . . . . . . . . . (2,900) (75,600) 21,100
------ -------- -------
$32,700 $(137,400) $192,900
====== ======== =======
</TABLE>
(a) Includes Puerto Rico and U.S. branches in foreign locations.
A summary of the provision for income taxes follows:
<TABLE>
<CAPTION>
In thousands 1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . $ 1,700
Foreign . . . . . . . . . . 1,000 $ 4,800 $13,900
State and local (a) . . . . 6,500 4,700 4,000
Deferred:
Federal . . . . . . . . . . (900) 23,400
Foreign . . . . . . . . . . 500 (8,800) (300)
State and local (a) . . . . 4,700 600 13,000
------- ------ ------
$13,500 $ 1,300 $54,000
====== ===== ======
</TABLE>
(a) Includes Puerto Rico.
A reconciliation between income taxes based on the
application of the statutory federal income tax rate (1994 and
1993 - 35%; 1992 - 34%) to income before income taxes and the
provision for income taxes as set forth in the Consolidated
Statements of Operations follows:
<TABLE>
<CAPTION>
In thousands 1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision (benefit) for taxes
at statutory rates $11,400 $(48,100) $65,600
Benefit of operating loss not
recognized for U.S. federal
or foreign taxes 6,500 65,700
State and local income taxes,
net of federal income tax
benefit 900 800 5,000
Foreign income taxed at rates
different than U.S.
statutory rate 1,600 1,600 6,400
Tax savings from operations
in Puerto Rico (7,500) (18,700) (25,000)
Other 600 2,000
------ ------- ------
$13,500 $ 1,300 $54,000
====== ======= ======
</TABLE>
F-12
<PAGE> 46
The Company has provided for taxes on the income of its
manufacturing subsidiary's operations in Puerto Rico at an
effective rate that is lower than the U.S. federal income tax
statutory rate. This rate reflects the fact that approximately 90%
of income is exempt from local taxes in Puerto Rico as well as the
availability of a tax credit under Section 936 of the Internal
Revenue Code. Withholding taxes at a negotiated rate of 7% (6% in
1993 and 5% in 1992) have been provided on the expected
repatriation of the income of this subsidiary.
At December 31, 1994 deferred tax liabilities and assets
under FAS 109 were comprised of the following:
<TABLE>
<S> <C>
Patent amortization $ 21,700
Depreciation 30,900
Operating leases 8,500
Other 10,900
--------
Gross deferred tax liabilities 72,000
--------
Restructuring reserves 28,700
Inventory reserves 32,800
Fixed asset reserves 25,300
Accrued expenses 9,500
Other 15,700
Tax net operating loss carryforwards 142,800
Tax credit carryforwards 29,500
--------
Gross deferred tax assets 284,300
Less: Valuation allowance (204,600)
--------
79,700
--------
Net deferred tax assets $ 7,700
========
</TABLE>
Deferred taxes resulted from temporary differences in the
recognition of revenue and expense for tax and financial statement
purposes. The source of the temporary differences, none of which
are individually material, are: the use of accelerated methods of
computing depreciation for income tax purposes and the
straight-line method for financial reporting purposes; expensing
certain patent costs as incurred for income tax purposes and
capitalizing and amortizing them over their estimated useful lives
for financial reporting purposes; accruals and provisions not
currently deductible for tax purposes; expensing certain deferred
start-up costs incurred for income tax purposes and deferring and
amortizing such costs over a five year period for financial
reporting purposes; and other temporary differences applicable to
current assets and liabilities.
At December 31, 1994 current deferred tax assets of $6
million and non-current deferred tax assets of $12 million were
included in the Consolidated Balance Sheet captions Other
Current Assets and Other Assets, respectively. Current deferred
tax liabilities of $1 million and non-current deferred tax
liabilities of $9 million were included in the Consolidated
Balance Sheet captions Income Taxes Payable and Deferred Income
Taxes, respectively.
F-13
<PAGE> 47
The Company's loss carryforwards prior to 1993 are primarily
attributable to compensation expense deductions on its income tax
return which were not recognized for financial accounting
purposes. A valuation allowance in the amount of $205 million has
been recorded as of December 31, 1994 ($198 million at December
31, 1993) because of the uncertainty over the future utilization
of the tax benefit of its gross deferred tax assets.
At December 31, 1994 the Company's consolidated subsidiaries
have unremitted earnings of $110 million on which the Company has
not accrued a provision for U.S. federal income taxes since these
earnings are considered to be permanently invested. The amount of
the unrecognized deferred tax liability relating to unremitted
earnings was approximately $28 million at December 31, 1994.
The Internal Revenue Service completed its examination of the
Company's tax returns through December 31, 1983 resulting in no
material impact on the Company's consolidated financial
statements. The Internal Revenue Service has examined the
Company's tax returns for the period 1984 through 1990 and it has
proposed adjustments to increase the Company's tax liability for
certain of these years. Based upon the 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 effect on the consolidated financial
statements of the Company but may reduce the availability of fully
reserved net operating loss and tax credit carryforwards.
The Company has available for U.S. Federal income tax return
purposes the following net operating loss and tax credit
carryforwards:
<TABLE>
<CAPTION>
NET INVESTMENT RESEARCH
OPERATING TAX AND OTHER
IN THOUSANDS LOSSES CREDITS CREDITS
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
YEAR SCHEDULED TO EXPIRE:
1995 . . . . . . . . . . . . . . $ 800
1996 . . . . . . . . . . . . . . 1,400
1997 . . . . . . . . . . . . . . 1,400
1998 . . . . . . . . . . . . . . 1,300 $ 200
1999 . . . . . . . . . . . . . . 900 100
2000 . . . . . . . . . . . . . . $ 7,200 900 300
2001 . . . . . . . . . . . . . . 500 500
2002 . . . . . . . . . . . . . . 700
2003 . . . . . . . . . . . . . . 800
2004 . . . . . . . . . . . . . . 500
2005 . . . . . . . . . . . . . . 23,500(a) 1,800
2006 . . . . . . . . . . . . . . 52,400(a) 3,000
2007 . . . . . . . . . . . . . . 133,600(a) 6,500
2008 . . . . . . . . . . . . . . 39,800(a) 2,800
2009 . . . . . . . . . . . . . . 300(a)
------- ------ ------
$256,800 $7,200 $17,200
======= ===== ======
</TABLE>
In addition, the Company has available for state and foreign
income tax return purposes net operating loss carryforwards of
$141 million and $93 million, respectively, and tax credits of $5
million which expire at various dates.
F-14
<PAGE> 48
(a) The exercise of stock options which have been granted
under the Company's various stock option plans and the vesting
of restricted stock give rise to compensation which is includable
in the taxable income of the applicable employees and deductible
by the Company for federal and state income tax purposes. Such
compensation results from increases in the fair market value of
the Company's Common Stock subsequent to the date of grant of the
applicable exercised stock options and restricted stock and,
accordingly, in accordance with Accounting Principles Board
Opinion No. 25, such compensation is not recognized as an expense
for financial accounting purposes and the related tax benefits are
taken directly to Additional Paid-in Capital - Common Stock. In
the years ended December 31, 1990 - 1992 such deductions resulted
in significant federal and state deductions which may be carried
forward. Utilization of such deductions will increase Additional
Paid-in Capital. The compensation deductions arising from the
exercise of stock options were not material in 1993 and 1994.
NOTE G - ACCRUED LIABILITIES
Included in Accrued Liabilities at December 31, 1994 are accrued
restructuring charges $18 million (1993 - $56 million), accrued
inventory repurchase $17 million (1993 - $0), accrued payroll,
property and sales taxes $15 million (1993 - $15 million) and
accrued commissions $12 million (1993 - $14 million).
NOTE H - LONG-TERM DEBT
At December 31, 1994 the Company had $161 million in bank
borrowings and $88 million in financing lease obligations
outstanding relating to its European headquarters office building
and distribution center complex in Elancourt, France.
During 1994, the Company entered into a new $400 million
syndicated credit agreement which replaced its previous $675
million revolving credit and term loan agreement with various
banks and which matures in January 1997. The syndicated credit
facility provides the Company with a choice of borrowings with
interest rates based upon the banks' CD rate, the Euro-dollar rate
or the London Interbank Offered Rate (LIBOR). The actual interest
charges paid by the Company are determined by a pricing schedule
which considers the ratio of consolidated debt at each calendar
quarter end to consolidated earnings before interest, taxes,
depreciation and amortization for the trailing twelve months. The
effective interest rate on long-term bank debt outstanding as of
December 31, 1994 and 1993 was 7.7% and 5.3%, respectively.
The new credit agreement and the Company's operating lease
for its primary domestic manufacturing, distribution and
warehousing complex in North Haven, Connecticut, provide for
certain restrictions including sales of assets, capital
expenditures, dividends and subsidiary debt. The most
restrictive covenants of the Company's financing agreements
require the maintenance of certain minimum levels of tangible
net worth ($476 million), fixed charges coverage and a maximum
ratio of total debt to total capitalization (60%), as defined.
The Company is prohibited from declaring dividends on its common
stock in excess of $1.25 million per quarter, subject to changes
in the number of common shares outstanding, until it achieves
investment grade status, as defined. The Company is in full
compliance with all of the covenants associated with its various
financing agreements.
F-15
<PAGE> 49
At December 31, 1994, the scheduled principal repayments
under loan agreements and future minimum payments under a
financing lease were as follows:
<TABLE>
<CAPTION>
Bank
Credit Financing
In thousands Facility Lease Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 . . . . . . . . . . . . . . $ 8,700 $ 8,700
1996 . . . . . . . . . . . . . . 8,700 8,700
1997 . . . . . . . . . . . . . . $161,000 8,700 169,700
1998 . . . . . . . . . . . . . . 8,800 8,800
1999 . . . . . . . . . . . . . . 10,100 10,100
After 1999 . . . . . . . . . . . 121,600 121,600
-------- ------- -------
161,000 166,600 327,600
Current portion long-term debt. . (1,300) (1,300)
Amount representing interest. . . (77,800) (77,800)
-------- -------- --------
Long-term debt . . . . . . . . . $161,000 $ 87,500 $248,500
======= ======== ========
</TABLE>
NOTE I - STOCKHOLDERS' EQUITY
On March 28, 1994 the Company issued approximately $200 million
of 9.76% Series A Convertible Preferred Stock (convertible into a
maximum of approximately 8.9 million shares or a minimum of
approximately 8.5 million shares of the Company's Common Stock),
par value $5 per share, in an offering exempt from the
registration requirements of the Securities Act of 1933, as
amended. Dividends on the Convertible Preferred Stock are
cumulative at the annual rate of $110 per share, payable quarterly
in arrears commencing July 1, 1994. On April 1, 1998 each share
of Convertible Preferred Stock outstanding will automatically
convert into 50 shares of Common Stock of the Company, and prior
to this date it may be converted into 47.65 shares of Common Stock
at any time at the option of the holder. The Company may redeem
the Convertible Preferred Stock at any time after April 1, 1997
for 50 shares of Common Stock together with an additional cash
dividend of up to $27.50 per share, declining ratably after April
1, 1997 to $0 by March 1, 1998. The Preferred Stock trades
principally as depositary receipts, each representing a
one-fiftieth interest in a share of Preferred Stock. The proceeds
from the sale of Preferred Stock were used to reduce bank
indebtedness.
The Company had 56,836,139 and 56,257,758 shares of its $.10 par
value Common Stock outstanding as of December 31, 1994 and 1993,
respectively. In the past, the Company announced programs to
repurchase up to a total of 9,200,000 shares of its outstanding
Common Stock. As of December 31, 1994, a total of 8,712,537
shares (0 in 1994 and 1,010 in 1993) had been acquired at a total
cost of $89.3 million. Acquired shares are being held as treasury
shares, the majority of which are reserved for issuance upon
conversion of the Company's Preferred Stock.
Shares of Common Stock reserved for future issuance in
connection with restricted stock awards, stock option plans and
employee stock purchase plans, etc. amounted to 17,631,774 and
16,057,440 at December 31, 1994 and 1993, respectively. The
Compensation/Option Committee (the "Committee") of the Board of
Directors is responsible for administering the Company's stock
compensation plans.
F-16
<PAGE> 50
The Restricted Stock Incentive Plan (the "Incentive Plan")
provides for grants to key employees of the Company's Common Stock
in the maximum aggregate amount of 5,000,000 shares. As of
December 31, 1994, 3,839,740 shares were issued and vested under
the Incentive Plan and 142,160 shares were cancelled. There were
no restricted stock grants during the three-year period ended
December 31, 1994.
The 1990 Employee Stock Option Plan (the "1990 Option Plan")
provides for grants to key employees and certain key consultants
of options and stock appreciation rights for up to 11,000,000
shares of the Company's Common Stock at the per share market price
at the date of grant unless the Committee determines otherwise.
As of December 31, 1994, no stock appreciation rights have been
granted. Subject to a maximum exercise period of fifteen years,
the exercise period of awards under the 1990 Option Plan will be
as determined by the Committee.
The 1993 Employee Stock Option Plan (the "1993 Option Plan")
provides for grants to key employees (excluding executive
officers) of options and stock appreciation rights for up to
3,500,000 shares of the Company's Common Stock at the per share
market price at the date of grant unless the Committee deems
otherwise. As of December 31, 1994 no stock appreciation rights
have been granted. Subject to a maximum exercise period of fifteen
years, the exercise period of awards under the 1993 Option Plan
will be as determined by the Committee.
The Service-Based Stock Option Plan (the "Service Option
Plan") provides for grants of options for up to 1,144,132 shares
of the Company's Common Stock at the per share market price at
the date of grant to individuals employed by the Company who are
within an eligible category. Options under the Service Option
Plan are awarded for a fixed number of shares of Common Stock
based solely upon the eligible recipient's years of service
within the eligible category, and are exercisable for a period
of up to ten years.
The Outside Directors Stock Plan provides for an aggregate
maximum of up to 160,000 shares of Common Stock to be issued under
restricted stock awards and option grants to certain non-employee
members of the Board of Directors. At December 31, 1994 and 1993,
restricted stock awards and option grants for 112,000 shares and
96,000 shares, respectively, had been granted under the Outside
Directors Stock Plan. As of December 31, 1994 and 1993, 48,000
and 64,000 shares, respectively, are reserved for future issuance
under the Outside Directors Stock Plan.
A summary of stock option transactions under the employee
Option Plans and the Outside Directors Stock Plan for each of
the three years in the period ended December 31, 1994 follows:
F-17
<PAGE> 51
<TABLE>
<CAPTION>
NUMBER OPTION
OF SHARES PRICE RANGE
-------------------------------------------------------------------------------
<S> <C> <C>
OUTSTANDING JANUARY 1, 1992 . . . . . 13,747,429 $ 3.28 - 98.69
Granted . . . . . . . . . . . . . . 601,358 56.25 - 114.13
Exercised . . . . . . . . . . . . . (2,913,827) 3.28 - 103.69
Canceled or lapsed . . . . . . . . (581,354) 19.75 - 103.69
---------
OUTSTANDING DECEMBER 31, 1992 . . . . 10,853,606 3.28 - 114.13
Granted . . . . . . . . . . . . . . 1,977,081 23.06 - 69.75
Exercised . . . . . . . . . . . . . (245,055) 3.28 - 58.19
Canceled or lapsed . . . . . . . . (1,080,079) 19.75 - 114.13
----------
OUTSTANDING DECEMBER 31, 1993 . . . . 11,505,553 3.58 - 114.13
Granted . . . . . . . . . . . . . . 2,287,869 20.50 - 22.55
Exercised . . . . . . . . . . . . . (347,487) 3.58 - 22.69
Canceled or lapsed . . . . . . . . (713,319) 7.50 - 114.13
----------
OUTSTANDING DECEMBER 31, 1994 . . . . 12,732,616 4.97 - 111.94
==========
At December 31, 1994:
Exercisable . . . . . . . . . . . . 7,328,162 4.97 - 111.94
==========
</TABLE>
Under the USSC Employees 1979 Stock Purchase Plan (the "1979
Purchase Plan") and the 1994 Employees Stock Purchase Plan (the
"1994 Purchase Plan"), all eligible employees may authorize
payroll deductions of up to 10% of their base earnings, as
defined, to purchase shares of the Company's Common Stock at 85%
of the market price when such deductions are made. There are no
charges or credits to income in connection with the Purchase Plan
The plans will continue in effect as long as shares authorized
under the Purchase Plan remain available for issuance thereunder.
The Company has reserved 2,400,000 shares of its Common Stock for
issuance under the 1979 Purchase Plan, of which 140,375 shares are
available for future issuance, and it has reserved 650,000 shares
of its Common Stock for issuance under the 1994 Purchase Plan, of
which 546,391 are available for future issuance, at December 31,
1994.
F-18
<PAGE> 52
NOTE J - SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company develops, manufactures and markets wound management
products which constitute a single business segment. The
following information sets forth geographic information with
respect to the Company's net sales, operating profits and
identifiable assets.
<TABLE>
<CAPTION>
In thousands 1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES:
United States . . . . . . . . $ 775,000 $ 895,500 $1,058,500
International (1)(2) . . . . 342,100 341,000 341,200
Inter-area transfers eliminated (198,400) (199,300) (202,500)
-------- ---------- ----------
$ 918,700 $1,037,200 $1,197,200
========== ========= =========
OPERATING PROFIT (LOSS):
United States . . . . . . . . $ 71,200 $ 30,500 $ 259,900
International (1) . . . . . . . 70,800 (65,600) 43,600
Profit on inter-area transfers
eliminated . . . . . . . . . . (91,100) (83,800) (95,900)
----------- ----------- ----------
$ 50,900 $ (118,900) $ 207,600
=========== ========== =========
IDENTIFIABLE ASSETS AT
DECEMBER 31:
United States . . . . . . . . . $ 807,500 $ 877,100 $ 889,200
International (1) . . . . . . . 308,600 304,900 291,600
Inter-area assets eliminated. . (12,600) (11,500) (12,700)
----------- ----------- -----------
$1,103,500 $1,170,500 $1,168,100
========= ========= =========
</TABLE>
(1) Principally Europe.
(2) Does not include sales made primarily to international
distributors (1994 - $84,800, 1993 - $69,600 and 1992 - $54,500)
from a location in the United States. The combination of
sales to international distributors and international sales
above approximate 46% in 1994, 40% in 1993 and 33% in 1992 of
consolidated sales, respectively.
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company is engaged in litigation as a defendant in cases
involving alleged patent infringement, product liability claims
and shareholders' derivative and class action suits (see Item
3). In the opinion of management, based upon advice of
counsel, the ultimate outcome of these lawsuits should not
have a material adverse effect on the Company's consolidated
financial statements.
As part of the ongoing expansion of its Puerto Rico
operations, the Company is committed to certain undertakings,
including the maintenance of specified levels of employment and
capitalization for the Puerto Rican subsidiary.
F-19
<PAGE> 53
The future minimum rental commitments for building space,
leasehold improvements, data processing and automotive equipment
for all operating leases as of December 31, 1994, were as follows:
1995 - $27 million; 1996 - $54 million; 1997 - $68 million; 1998 -
$86 million; 1999 - $66 million; after 1999 - $251 million. Rent
expense was $31 million, $34 million and $24 million in 1994, 1993
and 1992, respectively. The Company's North Haven lease agreement
includes contingent rent provisions based on formulas utilizing
the consumer price index. The amount of the contingent rent over
the life of the lease is estimated to be $18 million.
NOTE L - FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
DERIVATIVES
The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes.
They are used to manage well-defined interest rate and foreign
exchange rate risks.
The Company enters into contracts to reduce its exposure to
and risk from foreign currency exchange rate changes and
interest rate fluctuations in the regular course of the
Company's global business. As of December 31, 1994, the Company
had approximately $16 million of foreign currency exchange
contracts outstanding that will mature at various dates through
February 1995. Realized and unrealized foreign currency gains
and losses with respect to such contracts are recognized when
incurred and amounted to losses of $4 million, $1 million and
$4 million in 1994, 1993 and 1992, respectively.
The Company has swapped with certain banks its exposure to
floating interest rates on $50 million of its variable rate U.S.
dollar debt and $37 million (200 million French francs) of
variable rate French franc debt. These swap agreements expire in
August 1996 and December 1997 for the U.S. dollar debt and French
franc debt, respectively. The Company makes fixed interest
payments at rates of approximately 7.8% for the U.S. dollar swap
and 8.1% for the French franc swap and receives payments based on
the floating six-month LIBOR and three-month LIBOR, respectively.
The net gain or loss from the exchange of interest rate payments,
which is immaterial, is included in interest expense. Based upon
the fair value of the Company's interest rate swap agreements at
December 31, 1994, termination of such agreements would require a
payment by the Company of approximately five hundred thousand
dollars. The Company does not currently intend to terminate its
interest rate swap agreements prior to their expiration dates.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in both deposits with major
banks throughout the world and other high quality short-term
liquid money market instruments (commercial paper, government and
government agency notes and bills, etc.). The Company has a
policy of making investments only with institutions that have at
least an "A" (or equivalent) credit rating from a national rating
agency. The investments generally mature within six months but
certain investments in bank CDs mature within five years. The
Company has not incurred losses related to these investments.
F-20
<PAGE> 54
The Company sells products in the surgical wound management
field in most countries of the world. Concentrations of credit
risk with respect to trade receivables are limited due to the
large number of customers comprising the Company's customer base.
Ongoing credit evaluations of customers' financial condition are
performed and, generally, no collateral is required. In certain
European countries the Company's receivables are not paid until
the customers receive governmental reimbursement for their
purchases. The Company has not encountered difficulty in
ultimately collecting accounts receivable in these countries. The
Company maintains reserves for potential credit losses and such
losses, in the aggregate, have not significantly exceeded
management's estimates.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair
value due to the short-term maturities of these instruments. The
fair value of certificates of deposit, long-term debt and foreign
interest rate swap agreements were estimated based on quotes
obtained from brokers for those or similar instruments. The fair
value of interest rate swap contracts were estimated based on
quoted market prices at year-end.
The estimated fair value of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1994 1993
------------------- -----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------- ----- -------- -----
<S> <C> <C> <C> <C>
Cash, cash equivalents and
certificates of deposit . . . . $ 20,600 $ 20,400 $ 2,700 $ 2,700
Long-term debt and related
interest rate swap payable 249,900 250,400 506,700 511,450
Interest rate swap receivable . . 1,000 1,000 600 600
</TABLE>
F-21
<PAGE> 55
SCHEDULE VIII
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- --------- -------- ---------- ------
<S> <C> <C> <C> <C>
In thousands
- ------------
Year ended December 31, 1994:
- ----------------------------
Allowance for doubtful accounts $ 5,000 $ 2,400 $ 100(A) $ 7,300
Reserve for inventory valuation 48,700 39,200 27,000(B) 60,900
Reserve for fixed assets valuation 40,100 22,300 3,100(C) 59,300
Year ended December 31, 1993:
- ----------------------------
Allowance for doubtful accounts $ 3,500 $ 1,700 $ 200(A) $ 5,000
Reserve for inventory valuation 25,900 44,200 21,400(B) 48,700
Reserve for fixed assets valuation 24,400 17,400 1,700(C) 40,100
Year ended December 31, 1992:
- ----------------------------
Allowance for doubtful accounts $ 2,400 $ 1,200 $ 100(A) $ 3,500
Reserve for inventory valuation 18,400 29,900 22,400(B) 25,900
Reserve for fixed assets valuation 24,800 3,900 4,300(C) 24,400
</TABLE>
(A) Represents amounts written off. Normal recurring credits and returns are
charged against sales.
(B) Represents disposition of inventory which has been superseded by a new
generation of products.
(C) Represents disposition of fixed assets.
S-1
<PAGE> 56
EXHIBIT INDEX
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
(a) Certificate of Incorporation filed March 14, 1990
- Exhibit 3(a) to registrant's Form 8-B declared
effective August 3, 1990.*
(b) Certificate of Merger filed May 1, 1990 - Exhibit
3(b) to registrant's Form 8- B declared effective
August 3, 1990.*
(c) Certificate of Amendment filed May 15, 1991 -
Exhibit 3(c) to registrant's Form 10-K for 1991.*
(d) By-laws adopted March 14, 1990 - Exhibit 3(c) to
registrant's Form 8-B declared effective August 3,
1990.*
(e) Certificate of Designations relating to the
issuance of the Company's Series A Convertible
Preferred Stock, filed March 28, 1994. Exhibit
3(e) to registrant's Form 10-K for 1993.*
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
(a) Credit Agreement as of June 27, 1994 among
registrant, signatory banks, Morgan Guaranty Trust
Company of New York as Documentation Agent and
Nations Bank of North Carolina, N.A., as
Administration Agent - Exhibit 4(a) to
registrant's Form 10-Q for the quarter ended June
30, 1994.*
(10) MATERIAL CONTRACTS.
(a) 1981 Employee Stock Option Plan, as amended
through May 5, 1987 - Exhibit 10(a)(1) to
registrant's Form 10-K for 1987.* +
(b) Amendment to 1981 Employee Stock Option Plan
adopted May 2, 1989 - Exhibit 10(b) to
registrant's Form 10-K for 1989.* +
(c) Amendment to 1981 Employee Stock Option Plan
adopted May 1, 1990 - Exhibit 10(c) to
registrant's Form 10-K for 1990.* +
(d) 1990 Employee Stock Option Plan - Exhibit B to
registrant's Proxy Statement dated March 19, 1990,
for its May 1, 1990, Annual Meeting of
Stockholders.* +
(e) Amendment to 1990 Employee Stock Option Plan
adopted July 30, 1990 - Exhibit 10(e) to
registrant's Form 10-K for 1990.* +
(f) Amendment to 1990 Employee Stock Option Plan
adopted May 15, 1991 - Exhibit 10(f) to
registrant's Form 10-K for 1991.* +
<PAGE> 57
(g) Amendment to 1981, 1990 and 1993 Employee Stock
Option Plans adopted March 9, 1993. Exhibit 10(h)
to registrant's Form 10-K for 1993.* +
(h) Restricted Stock Incentive Plan, as amended
through May 5, 1987 - Exhibit 10(a)(2) to
registrant's Form 10-K for 1987.* +
(i) Amendment to Restricted Stock Incentive Plan
adopted May 15, 1991 - Exhibit 10(h) to
registrant's Form 10-K for 1991.* +
(j) Installment Option Purchase Agreement with Leon C.
Hirsch dated September 10, 1984, as amended
through May 18, 1994. Filed herewith.+
(k) Outside Directors Stock Plan - Exhibit 10(a)(4) to
registrant's Form 10-K for 1988.* +
(l) Amendment to Outside Directors Stock Plan adopted
May 1, 1990 - Exhibit 10(j) to registrant's Form
10-K for 1990.* +
(m) Long-Term Incentive Plan - Exhibit 10(a)(5) to
registrant's Form 10-K for 1988.* +
(n) Lease Agreement dated as of January 14, 1993
between State Street Bank and Trust Company of
Connecticut, National Association, as Lessor and
the registrant, as Lessee - Exhibit 10(o) to
registrant's Form 10-K for 1992.*
(o) Participation Agreement dated as of January 14,
1993 among registrant, Lessee, Baker Properties
Limited Partnership, Owner Participant, The Note
Purchasers listed in Schedule 1 thereto, State
Street Bank and Trust Company of Connecticut,
National Association, Owner Trustee, and Shawmut
Bank Connecticut, N.A., Indenture Trustee -
Exhibit 10(p) to registrant's Form 10-K for 1992.*
(p) Letter Agreement between the registrant and Bruce
S. Lustman dated March 11, 1994 - Exhibit 10(q) to
registrant's Form 10-K for 1993.* +
(q) Lease and financing agreements dated January 4,
1994 between registrant's French subsidiary,
A.S.E. Partners, and (i) the Corporation for the
Financing of Commercial Buildings ("FINABAIL") and
(ii) the Association for the Financing of
Commercial Buildings ("U.I.S.") - Exhibit 10(r) to
registrant's Form 10-K for 1993.*
(r) Lease and financing agreement dated December 26,
1991 between registrant's subsidiary, U.S.S.C.
Puerto Rico, Inc., and The Puerto Rico Industrial
Development Company ("PRIDCO") - Exhibit 10(s) to
registrant's Form 10-K for 1993.*
(11) Statement regarding computation of per share earnings.
Filed herewith.
(12) Statement of Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock
Dividends. Filed herewith.
<PAGE> 58
(21) Subsidiaries of the registrant. Filed herewith.
(27) Financial Data Schedule. Filed herewith
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC File No. 1-9776.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of this report.
<PAGE> 1
EXHIBIT 10(j)
May 18, 1994
Mr. Leon C. Hirsch
83 Red Coat Road
Westport, CT 06880
Re: Amendment No. 3 to Installment
Option Purchase Agreement
Dear Mr. Hirsch:
The Compensation/Option Committee of the Board of Directors of United
States Surgical Corporation has approved, and requests that you consider,
amendments to your present Installment Option Purchase Agreement dated
September 10, 1984, as amended pursuant to letter agreements dated May 30, 1986
and June 16, 1989 (as amended, the "Agreement"). Should you agree with the
terms hereof, and so indicate by affixing your signature below, the Agreement
will be further modified, effective as of May 18, 1994 (the "Effective Date")
as follows:
1. Sections 1 and 5 of the Agreement are amended to provide that the
option price shall be paid in full on or before July 5, 1994. The Common Stock
to which the Agreement relates will, on payment, be fully paid in accordance
with Section 3 of the Agreement.
2. Section 6 of the Agreement is amended to provide that the
outstanding interest accrued through the date on which the option price is paid
(the "Original Interest") shall be payable as follows: the Original Interest
attributable to the remaining portion of the first installment of the original
option price on or before May 10, 1995, one-half of the remaining (after the
May 10, 1995 payment) portion of the Original Interest on or before May 10,
1997, and the final balance of the Original Interest on or before May 10, 1999.
Section 6 of the Agreement is further amended to provide for payment of
interest on the Original Interest outstanding, with respect to payments made
more than three (3) years, but not more than nine (9) years, after the date on
which the option price is paid, at an interest rate of 6.33 percent compounded
semiannually (the mid-term applicable federal rate as of the Effective Date),
and, with respect to payments made within three (3) years after the payment
date, at an interest rate of 4.88 percent compounded semiannually (the
short-term applicable federal rate as of the Effective Date), in accordance
with Internal Revenue Service regulations. As provided in Section 6 of the
Agreement, at the time such interest becomes due, the Company will pay to you
as a bonus while you are an employee of the Company or one of its affiliates an
amount equal to 100 percent of the interest. Each such bonus will be reflected
on your Form W-2 for the year in which the bonus is paid and would be subject
to applicable withholding.
3. The amendments to the Agreement as set forth herein are requested
by the Company in order to secure early payment of the option price. In order
to place you in substantially the same position had the Agreement remained
unmodified, the Company will reimburse you, as an annual bonus, for the
interest charges and out of pocket expenses on a third party loan to you of
funds borrowed to pay the option price, to the extent of interest attributable
to amounts equal to the principal as scheduled to be repaid under the Agreement
prior to these amendments; and provided that the initial interest rate shall be
less than 9.47 percent per annum. Each such bonus will be reflected on your
Form W-2 for the year in which the bonus is paid and would be subject to
applicable withholding.
<PAGE> 2
Mr. Leon C. Hirsh Page Two
May 18, 1994
4. Except as otherwise provided herein, all terms and conditions of
the Agreement will remain in full force and effect.
Very truly yours,
Accepted and Agreed UNITED STATES SURGICAL CORPORATION
By: By:
Leon C. Hirsch Senior Vice President and General Counsel
<PAGE> 1
EXHIBIT 11
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
EXHIBIT TO FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1994
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
-------------------------------------------------
In thousands, except per share data 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $19,200 $(138,700) $138,900
Preferred stock dividends 14,900
------ ------- -------
Net income (loss) applicable to common stock $ 4,300 $(138,700) $138,900
======= ======== =======
Average number of common shares and
common share equivalents outstanding:
Average number of common shares
outstanding 56,600 56,000 54,300
Add common share equivalents - options
to purchase common shares - net 5,600
------- --------- -------
Average number of common shares and
common share equivalents outstanding 56,600 56,000 59,900
====== ====== ======
Net income (loss) per common share and
common share equivalent (primary and
fully diluted) $ .08 $ (2.48) $ 2.32
==== ===== ====
</TABLE>
The computation does not assume conversion of the Company's preferred stock
into common since the result would be antidilutive. Net income (loss)
applicable to common stock in 1994 and 1993 was computed solely on the weighted
average number of common shares outstanding during the period, since the
inclusion of common share equivalents would be antidilutive.
<PAGE> 1
EXHIBIT 12
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Determination of earnings:
Income (loss) before provision for
income taxes . . . . . . . . . . . . . $32,700 $(137,400) $192,900 $130,300 $66,200
Fixed charges . . . . . . . . . . . . . 28,400 29,900 22,600 16,900 12,800
------ ------- ------- ------- -------
Total earnings as defined . . . . 61,100 (107,500) 215,500 147,200 79,000
------ ------- ------- ------- -------
Fixed charges and other:
Interest expense . . . . . . . . . . . . 18,200 18,500 14,700 12,000 9,800
Interest portion of rent expense . . . . 10,200 11,400 7,900 4,900 3,000
------ -------- ------- ------- -------
Fixed charges . . . . . . . . . . 28,400 29,900 22,600 16,900 12,800
Capitalized interest . . . . . . . . . . 300 9,500 6,400 2,700 1,400
------ -------- ------- ------- -------
Total fixed charges and capitalized
interest . . . . . . . . . . . . . . . $28,700 $ 39,400 $ 29,000 $ 19,600 $14,200
====== ======== ======== ======== ======
Preferred stock dividends (1) . . . . . 22,900
------
Combined fixed charges, capitalized
interest and preferred stock
dividends . . . . . . . . . . . . . . . $51,600
======
Ratio of Earnings to Fixed Charges
and Capitalized Interest . . . . . . . . 2.1 N.M.(2) 7.4 7.5 5.6
====== ======= ======== ======== =======
Ratio of Earnings to Combined
Fixed Charges, Capitalized Interest
and Preferred Stock Dividends . . . . . 1.2
======
</TABLE>
The ratio of earnings to fixed charges and capitalized interest and to combined
fixed charges, capitalized interest and preferred stock dividends is computed
by dividing the sum of earnings before provision for income taxes and fixed
charges (excluding capitalized interest) by total fixed charges and capitalized
interest, or by the sum of total fixed charges and capitalized interest and
preferred stock dividends. Total fixed charges and capitalized interest
includes all interest (including capitalized interest) and the interest factor
of all rentals, assumed to be one-third of consolidated rent expense.
(1) Preferred stock dividends have been increased to an amount representing
the pretax earnings which would be required to cover such dividend
requirements, assuming a statutory tax rate of 35%.
(2) Earnings are inadequate to cover fixed charges. The dollar amount of the
deficiency at 12/31/93 is $147 million. If the restructuring charges of $138
million were excluded from the calculation, the dollar amount of the deficiency
would have been $9 million.
<PAGE> 1
EXHIBIT 21
UNITED STATES SURGICAL CORPORATION
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1994
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION
NAME OF INCORPORATION
- ----------------------------------------------------------------------------------------------------------
<S> <C>
ASE Continuing Education Center S.A...................................................... France
ASE Partners SNC ........................................................................ France
Auto Suture Austria GmbH ................................................................ Austria
Auto Suture Belgium B.V. ................................................................ Holland
Auto Suture Company, Australia........................................................... Connecticut
Auto Suture Company, Canada ............................................................. Connecticut
Auto Suture Company, Netherlands ........................................................ Connecticut
Auto Suture Company, U.K. .............................................................. Connecticut
Auto Suture Deutschland GmbH ............................................................ Germany
Auto Suture Eastern Europe, Inc. ........................................................ Delaware
Auto Suture Espana, S.A. ................................................................ Spain
Auto Suture Europe Holdings, Inc. ....................................................... Connecticut
Auto Suture FSC Ltd. .................................................................... U.S. Virgin Islands
Auto Suture International, Inc. ......................................................... Connecticut
Auto Suture Italia, S.p.A. .............................................................. Italy
Auto Suture Norden Co. .................................................................. Connecticut
Auto Suture Poland, Limited Liability Company .......................................... Poland
Auto Suture Puerto Rico, Inc. ........................................................... Connecticut
Auto Suture Russia, Inc. ............................................................... Delaware
Auto Suture (Schweiz) AG ............................................................... Switzerland
Auto Suture Surgical Instruments ....................................................... Russia
Merlin Medical S.A. .................................................................... France
USSC AG ................................................................................ Switzerland
USSC (Deutschland) GmbH ................................................................ Germany
USSC Financial Services, Inc. ........................................................... Connecticut
U.S.S.C. Puerto Rico, Inc. .............................................................. New York
</TABLE>
None of the registrant's subsidiaries does business under any name
other than its corporate name.
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 11,300
<SECURITIES> 0
<RECEIVABLES> 218,800
<ALLOWANCES> 7,300
<INVENTORY> 167,200
<CURRENT-ASSETS> 439,500
<PP&E> 751,100
<DEPRECIATION> 211,100
<TOTAL-ASSETS> 1,103,500
<CURRENT-LIABILITIES> 184,100
<BONDS> 0
<COMMON> 6,500
0
900
<OTHER-SE> 654,600
<TOTAL-LIABILITY-AND-EQUITY> 1,103,500
<SALES> 918,700
<TOTAL-REVENUES> 918,700
<CGS> 463,600
<TOTAL-COSTS> 463,600
<OTHER-EXPENSES> 401,800
<LOSS-PROVISION> 2,400
<INTEREST-EXPENSE> 18,200
<INCOME-PRETAX> 32,700
<INCOME-TAX> 13,500
<INCOME-CONTINUING> 19,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,200
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
