UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported): February 1, 1995
United States Surgical Corporation
(Exact name of registrant as specified in its charter)
Delaware 1-9776 13-2518270
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification Number)
150 Glover Avenue, Norwalk, CT 06856
(Address of principal executive offices)
(203) 845-1000
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events
In November 1994 the Company signed a letter of intent to purchase certain
assets of Century Medical, Inc. (a wholly-owned subsidiary of Itochu
Corporation and its independent distributor in Japan). The Company signed
an Asset Purchase Agreement on February 1, 1995 pursuant to which it would
acquire certain assets for a net price of approximately 6.1 billion yen
payable over seven years at no interest (present value of the purchase
price as of June 30, 1995 is estimated to be approximately 4.5 billion
yen).
The Company has received the required governmental approvals for the
purchase transaction to close, but the parties to the transaction agreed
to voluntarily postpone the official closing of the transaction as a
result of an investigation by the Japanese Ministry of Health and Welfare
of the distributor's operations unrelated to the assets to be acquired.
The transaction is expected by the Company to officially close before the
end of 1995.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
The Company will acquire from Century Medical, Inc. ("CMI") certain assets
related to CMI's distribution network for the Company's products in Japan.
It is not possible to develop an audited balance sheet that relates solely
to the USSC products distribution network of CMI. Since there are no other
assets and liabilities being acquired by the Company, no audited balance
sheet will be prepared and filed. However, an audited income statement
related to the sales of the Company's products by CMI for CMI's fiscal
year ended March 31, 1995 is being filed herewith.
Page
(1) Income statement for the year ended March 31, 1995 3
and independent Auditors' Report
(b) Pro Forma Financial Information 11
(1) Description of Unaudited Pro Forma 11
Consolidated Condensed Financial Statements
(2) Unaudited Pro Forma Consolidated Condensed 12
Statement of Income for the year ended December 31, 1994
(3) Unaudited Pro Forma Consolidated Condensed 13
Statement of Income for the quarter ended March 31, 1995
(4) Unaudited Pro Forma Consolidated Condensed 14
Balance Sheet as of March 31, 1995
<PAGE>
Century Medical, Inc.
Surgical Division
Income Statement for the
Year Ended March 31, 1995, and
Independent Auditors' Report
<PAGE>
Deloitte Touche
Tohmatsu
MS Shibaura Building Telephone: (03)3457-7321
13-23, Shibaura 4-chome Facsimile: (03)3769-8508
Minato-ku, Tokyo 108
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
United States Surgical Corporation:
We have audited the accompanying income statement of the Surgical Division
("SDV") of Century Medical, Inc. (the "Company"), a wholly-owned subsidiary of
ITOCHU Corporation, for the year ended March 31, 1995. The income statement of
SDV is the responsibility of the Company's and United States Surgical
Corporation's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the income
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the income
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
income statement presentation. We believe that our audit of the income statement
provides a reasonable basis for our opinion.
In our opinion, such income statement presents fairly, in all material respects,
the results of operations of SDV of the Company for the year ended March 31,
1995 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying income statement has been prepared from the separate records
maintained by SDV and may not necessarily be indicative of the conditions that
would have existed or the results of operations if SDV had been operated as an
unaffiliated company. Portions of certain expenses represented allocations made
from head-office items applicable to the Company as a whole as disclosed in Note
5 of Notes to Income Statement. The provision for income taxes of SDV was
calculated based on the normal effective statutory tax rate in Japan and the
effect of non-tax-deductible items as disclosed in Note 3 of Notes to Income
Statement.
Deloitte Touche
Tohmatsu
May 25, 1995
<PAGE>
Century Medical, Inc. Surgical Division
Income Statement
Year Ended March 31, 1995
<TABLE>
<CAPTION>
Thousands of
U.S. Dollars
Millions of Yen (Note 2)
<S> <C> <C>
NET SALES Yen10,552 $106,588
COST OF SALES, including commission
expense to ITOCHU of Yen527 million
($5,324 thousand) 5,323 53,773
-------- --------
Gross profit 5,229 52,815
SELLING, GENERAL and
ADMINISTRATIVE EXPENSES 3,487 35,220
-------- --------
Operating income 1,742 17,595
-------- --------
OTHER EXPENSES:
Interest expense 144 1,451
Other - net 10 102
-------- -------
Other expenses 154 1,553
-------- -------
INCOME BEFORE INCOME TAXES 1,588 16,042
PROVISION FOR INCOME TAXES 840 8,482
-------- -------
NET INCOME Yen748 $ 7,560
======== ========
</TABLE>
See notes to income statement.
<PAGE>
Century Medical, Inc. Surgical Division
Notes to Income Statement
Year Ended March 31, 1995
1. SALE OF SURGICAL DIVISION ("SDV")
On February l, 1995, United States Surgical Corporation ("USSC") and Century
Medical, Inc. (the "Company") signed an asset purchase agreement which provided
for the sale of the assets and operations of SDV to USSC. The parties to the
transaction have voluntarily agreed to postpone the closing of the transaction
until Japan's Ministry of Health and Welfare has completed its investigation
into the Company's operations unrelated to SDV.
2. BASIS OF PRESENTING INCOME STATEMENT
The accompanying income statement is stated in Japanese yen and U.S. dollars
translated from Japanese yen at the approximate average exchange rate of Yen99
for the year ended March 31, 1995.
The accompanying income statement has been prepared on the basis of accounting
principles generally accepted in the United States of America ("U.S. GAAP"). In
certain respects, effect has been given in the income statement to adjustments
that have not been entered in the Company's general books of account, which are
maintained in accordance with accounting practices prevailing in Japan. The
major adjustments include those relating to accounting for leases, pension costs
and severance indemnities and income taxes.
The income statement of SDV prior to the U.S. GAAP adjustments is the
responsibility of the Company. The aforementioned U.S. GAAP adjustments are the
responsibility of USSC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies applied by the
Company. This statement has been prepared from the separate records maintained
by SDV. The recording of expenses in each division was partly based on
allocation methods established by the Company as described in Note 5.
a. Revenue Recognition - Revenues from sales were recognized when products
were shipped to consumers, primarily hospitals, or to authorized distributors.
b. Inventories - Inventories were stated at the lower of cost,
determined on the monthly moving-average method, or market.
<PAGE>
c. Property and Equipment - Property and equipment were stated at cost.
Significant renewals and additions were capitalized at cost, while minor
improvements or additions (less than Yen200 thousand) were directly charged to
operations.
Depreciation was computed by the declining-balance method at rates based
on the estimated useful lives of the individual assets. Capital leases were
amortized over lease terms. Depreciation and amortization expenses in SDV
amounted to approximately Yen196 million ($1,981 thousand) for the year ended
March 31, 1995.
The useful lives of property and equipment were as follows:
Buildings 45 - 60 years
Leasehold improvement 3 - 15 years
Vehicles 4 years
Furniture and fixtures 3 - 20 years
Equipment 5 or 8 years
d. Retirement and Pension Plans - The Company follows Statement of
Financial Accounting Standards No. 87 for determining the expense for the
employees retirement plan.
Retirement benefits to directors and statutory auditors were provided at
the amount which would be required if they retired at the income statement date.
e. Income Taxes - The provision for income taxes of SDV was calculated
based on the normal effective statutory tax rate of 51% in Japan and the effect
of non-tax-deductible items.
4. ORGANIZATION, PRINCIPAL BUSINESS AND TRANSACTIONS WITH PARENT COMPANY
The Company was incorporated in 1974, under the laws of Japan and is wholly
owned by ITOCHU Corporation ("ITOCHU"), a Japanese corporation.
The principal business in SDV is to import surgical products from USSC (a U.S.
corporation) under a distributorship agreement, and to act as the sole agency in
Japan for the sale of the surgical products.
The Company has a commission agreement with ITOCHU, under which the Company pays
5% of sales price of imported products and 1% of sales price of domestic
products as commissions to ITOCHU.
<PAGE>
Transactions of SDV with ITOCHU for the year ended March 31, 1995 were as
follows:
Thousands of
Millions of Yen U.S. Dollars
Sales Yen 27 $277
The sales of Yen27 million ($277 thousand) represent sales
made by SDV to Itochu during the twelve months ended
March 31, 1995.
Commission expense Yen 527 $5,324
The commission expense of Yen527 million ($5,324 thousand)
relates to SDV's commission to Itochu on total sales of SDV of
Yen10,552 million ($106,588 thousand) for the year ended
March 31, 1995.
5. ALLOCATION METHOD OF MAJOR EXPENSES
Personnel Expenses
The actual payroll and provision for bonuses for each sales division were
accumulated and directly charged to the corresponding sales division. The actual
payroll and provision for bonuses for the administrative departments (personnel,
general affairs, accounting and finance, etc.), the employer's portion of social
insurances, fringe benefits and expense portion of endowment insurance (Yoro
Hoken) were allocated to sales divisions in proportion to the ratio of personnel
expenses recorded in each sales division against the total personnel expenses of
all sales divisions.
Office Rent Expenses
The yearly total office rent expense was allocated based on the usage of each
sales division compared to the usage of all sales divisions.
Rent expenses for the administrative departments were allocated to sales
divisions through the use of the Head Office Allocation Account, as discussed
later in this note.
Office Equipment and Certain Communication Expenses
The yearly amount was allocated to each sales division based on a formula
whereby the Company weights each employee based on individual responsibility.
Depreciation of Demonstration Equipment
Demonstration equipment was classified by each sales division and equipment was
amortized over five years.
Warehouse Expenses
Warehouse rent was allocated based on the use of warehouse space by each
division. Warehouse overhead expenses were allocated based on the Head Office
Allocation Ratios.
<PAGE>
Head Office Allocation Account
Overhead expenses of the administrative departments were allocated based on the
Head Office Allocation Ratios, which were determined by among other things, the
number of employees, quantity of office work, sales volume, etc. The percentage
of such expenses allocated to SDV was 59% for the year ended March 31, 1995.
Interest Expenses
Interest expense for each sales division was charged based on the deemed funding
required for each division. The deemed funding was calculated based on the
following formula:
[(Receivable balance + Inventory balance + Demonstration equipment
balance) - (Payable balance + Ordinary profit)] x Internal interest rate
Interest expense for the training center of SDV was calculated and was charged
based on the internal interest rate times the cost of the property and equipment
controlled by the training center.
6. RETIREMENT AND PENSION PLANS
Under most circumstances, terminating employees are entitled to severance
payments based on their pay at the time of termination, years of service and
certain other factors. If the termination is involuntary, caused by retirement
at the mandatory retirement age or in certain other cases, the employee is
entitled to greater payment than in the case of voluntary termination.
The majority of the expense is funded through a pension fund.
The following table sets forth components of the funded plan's estimated net
periodic charges to operations In SDV for the year ended March 31, 1995.
Thousands of
Millions of Yen U.S. Dollars
Service cost Yen29 $288
Interest cost 7 75
Actual return on plan assets (5) (49)
Net amortization of
unrecognized obligation 1 7
---------------- ---------
Total Yen32 $321
========= ======
<PAGE>
Severance and pension cost for the year ended March 31, 1995 was determined
using the following assumptions:
Discount rate 5.5%
Expected long-term rate of return on plan assets 4.16%
Rate of increase in future compensation levels 4.78%
7. RENT EXPENSES
Rent expenses under operating leases in SDV amounted to approximately Yen231
million ($2,329 thousand) for the year ended March 31, 1995.
The future minimum lease payments under noncancellable leases are Yen58
million ($587 thousand) in 1996, Yen44 million ($445 thousand) in 1997,
Yen37 million ($369 thousand) in 1998, Yen37 million ($369 thousand) in 1999
and Yen8 million ($80 thousand) in 2000.
8. INCOME TAXES
The effective rate of income taxes reflected in the income statement was 53% and
differed from a normal effective statutory rate of 51% due to the
non-tax-deductible expenses of Yen58 million ($590 thousand) which was
incurred by SDV.
<PAGE>
Description of Unaudited Pro Forma Consolidated
Condensed Financial Information
The following Unaudited Pro Forma Consolidated Condensed Balance Sheet as
of March 31, 1995, and the Unaudited Pro Forma Consolidated Condensed
Statements of Income for the year ended December 31, 1994 and the quarter
ended March 31, 1995 give effect to the acquisition accounted for under
the purchase method of accounting. The Unaudited Pro Forma Consolidated
Condensed Financial Information is based upon the historical Consolidated
Financial Statements of United States Surgical Corporation and
Subsidiaries and the Century Medical, Inc. Surgical Division under the
assumptions and adjustments set forth in the accompanying financial
information.
The Company is filing a pro forma balance sheet for the Company which
consists of the historical assets and liabilities of the Company as of
March 31, 1995 combined with the assets expected to be acquired at
closing, a pro forma income statement for the Company for the year ended
December 31, 1994 and the quarter ended March 31, 1995 which combines the
income statements of the Company for the applicable periods with the
income statements of the acquired business for the year and quarter ended
March 31, 1995.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The allocations of
the purchase price assigned to the assets acquired, including their
related depreciation and amortization, are based upon preliminary
estimates and will be revised when the final fair value allocations are
determined, as will the related income tax effects of the pro forma
adjustments.
For purposes of developing the Unaudited Pro Forma Consolidated Condensed
Balance Sheet, the value allocated to the training center was based upon a
real estate appraisal and the value allocated to inventory was based upon
inventory expected to be on hand at the closing date as indicated in the
Asset Purchase Agreement. Should the actual value of inventories at the
closing date be more or less than 1.6 billion yen (at transfer price to
CMI), an adjustment will be made where the Company will make an additional
payment or receive cash from CMI as appropriate.
The Pro Forma Consolidated Condensed Income Statements exclude any
nonrecurring costs associated with the acquisition, the amounts of which
cannot be determined until the transaction has closed. However, such
amounts are expected by management to be minor.
The Pro Forma Consolidated Condensed Financial Information may not be
indicative of the results that actually would have occurred if the
transactions had been in effect on the dates indicated or that may be
obtained in the future, due to the hypothetical nature of the pro forma
information.
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
($000's, except per share data)
<TABLE>
<CAPTION>
Operations
To Be Pro Forma
Registrant Acquired Adjustments'
Year Ended Year Ended debit(credit) Pro Forma
12/31/94 12/31/94
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $918,700 $106,600 $49,900 (1) $992,500
------- ------- -------
(17,100)(2)
-------
Costs and Expenses
Cost of products sold 463,600 53,800 (47,300)(1) 473,900
9,100 (2)
(5,300)(3)
Research and development 37,500 37,500
SG&A expenses 366,700 35,300 1,100(4) 403,100
Interest 18,200 1,500 3,400(5) 23,100
-------- ------- ------ --------
Total costs and expenses 886,000 90,600 (39,000) 937,600
------- ------ -------- -------
Income before income taxes 32,700 16,000 (6,200) 54,900
Income taxes 13,500 8,500 400(6) 22,400
-------- ------- ------ --------
Net income 19,200 7,500 (5,800) 32,500
Preferred stock dividends 14,900 14,900
-------- ----------- ----------- -------
Net income applicable to common stock $ 4,300 $ 7,500 $ (5,800) $ 17,600
========= ======= ======= ========
Average number of common shares outstanding 56,600 56,600
======== ========
Net income per common share $0.08 $0.31
==== ====
</TABLE>
Pro Forma Adjustments
1. To eliminate intercompany sales of products and fair value adjustments for
inventory acquired.
2. To reverse reserve for product returns related to inventory reacquired which
had a negative impact of $8,000 on the Registrant's 1994 income before income
taxes as reported.
3. To eliminate commissions paid by Century Medical to Itochu Corporation based
on sales/purchases of USSC products.
4. To recognize amortization expense over a 10-30 year life related to
approximately $26 million of intangible assets.
5. To recognize imputed interest expense related to 5.1 billion yen note payable
to Century Medical, Inc., discounted at 8%.
6. Income tax provision related to additional income in Japan.
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
($000's, except per share data)
<TABLE>
<CAPTION>
Operations
Registrant To Be Acquired Pro Forma Pro Forma
Quarter Ended Quarter Ended Adjustments' Quarter Ended
3/31/95 3/31/95 debit(credit) 3/31/95
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $240,600 $30,200 $11,700(1) $259,100
------- ------ ------- -------
Costs and Expenses
Cost of products sold 112,900 16,200 (11,700)(1) 115,900
(1,500)(2)
Research and development 10,100 10,100
SG&A expenses 94,000 9,900 300(3) 104,200
Interest 4,900 800(4) 5,700
--------- ----------- -------- ---------
Total costs and expenses 221,900 26,100 (12,100) 235,900
------- ------ ------- -------
Income before income taxes 18,700 4,100 (400) 23,200
Income taxes 4,300 2,200 200(5) 6,700
--------- ------- -------- ---------
Net income 14,400 1,900 (200) 16,500
Preferred stock dividends 4,900 4,900
--------- ----------- ----------- --------
Net income applicable to common stock $ 9,500 $ 1,900 $ (200) $ 11,600
========= ======= ===== ========
Average number of common shares outstanding 56,900 56,900
======== ========
Net income per common share $0.17 $0.20
==== ====
</TABLE>
Pro Forma Adjustments
1. To eliminate intercompany sales of products.
2. To eliminate commissions paid by Century Medical to Itochu Corporation based
on sales/purchases of USSC products.
3. To recognize amortization expense over a 10 - 30 year life related to
approximately $26 million of intangible assets.
4. To recognize imputed interest expense related to 5.1 billion yen note payable
to Century Medical, Inc., discounted at 8%.
5. Income tax provision related to additional income in Japan.
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
($000's)
<TABLE>
<CAPTION>
Estimated
USSC Assets
Period Ended Acquired Pro Forma Pro Forma
3/31/95 Liab. Assumed Adjustments Balance Sheet
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Current Assets:
Accounts receivable $ 204,900 $ 204,900
Inventories 156,400 $13,200 $ (4,000)(1) 165,600
Other 72,200 (6,700)(2) 65,500
----------- -------- -------- -----------
433,500 13,200 (10,700) 436,000
---------- -------- ------- ----------
Property, plant and equipment (net) 531,600 12,900 544,500
Other assets (net) 123,900 26,300 (3,400)(1) 146,800
---------- -------- ------- ----------
Total Assets $1,089,000 $ 52,400 $(14,100) $1,127,300
========= ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued liabilities $ 115,100 $115,100
Other 67,100 $ 12,100 $ (7,400)(1) 65,100
(6,700)(2)
---------- -------- -------- --------
182,200 12,100 (14,100) 180,200
---------- -------- -------- --------
Long-term debt 223,100 40,300 263,400
Deferred income taxes 6,300 6,300
Common stock 388,300 388,300
Preferred stock 191,500 191,500
Retained earnings 186,500 186,500
Treasury stock (86,700) (86,700)
Other
(2,200) (2,200)
----------- --------
677,400 677,400
---------- ---------- ---------
Total Liabilities and Stockholders' Equity $1,089,000 $ 52,400 $(14,100) $1,127,300
========= ======== ======== ==========
</TABLE>
Pro Forma Adjustments
1. To reverse reserve for product returns related to inventory reacquired.
2. To reverse downpayment of purchase price accounted for as a deposit in
Other Current Assets.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNITED STATES SURGICAL CORPORATION
Date: July 10, 1995 By: /s/ Howard M. Rosenkrantz
Howard M. Rosenkrantz
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
