SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential for use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
UNITED STATES SURGICAL CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant).
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
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14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11:
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Set forth the amount on which the filing fee is calculated and state how
it was determined.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number of the
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<PAGE>
(USSC LOGO)
UNITED STATES SURGICAL CORPORATION
150 Glover Avenue
Norwalk, Connecticut 06856
Notice of 1996 Annual Meeting
Proxy Statement
and
Annual Report To Stockholders
Date of Meeting:
May 2, 1996
<PAGE>
(USSC LOGO)
To Our Stockholders:
United States Surgical Corporation's management had three primary
objectives during 1995: to significantly improve the company's financial
condition, to improve sales and regain market share and to accelerate new
product development and acquisitions. These objectives were achieved.
By any measure, USSC's financial condition improved significantly.
(bullet) Sales increased 11% to over $1 billion from $919 million in 1994.
During the fourth quarter, sales were up 16% over the same
quarter in 1994.
(bullet) Net income grew to $79 million. EPS was $1.05 per common share,
up from $.08 in 1994. Operations contributed $.93 per common
share; $.12 was a result of a favorable tax settlement, offset by
non-recurring R&D- related costs.
(bullet) Cash flow generated from operations was approximately $154
million.
(bullet) Gross margins for the year expanded to 56%, a six percentage
point increase over the prior year.
(bullet) Long-term debt remained essentially flat despite the acquisition
of our Japanese distributor's wound closure business and the
purchase of two other businesses for cash--Surgical Dynamics,
Inc., and the internal stapling business of 3-M--plus a 9.5%
interest in Alexion Pharmaceuticals, Inc.
(bullet) Despite a sales increase of approximately $100 million, inventory
was reduced by $6 million year-to-year.
(bullet) In December, USSC obtained a five-year, $325 million long-term
credit line at favorable rates. This bank facility, combined with
ongoing positive cash flow, should provide ample resources for
further acquisitions and product development.
The health care industry is in its third year of major change. Although
President Clinton's formula for centralized control of medicine was soundly
rejected, hospitals and payers, recognizing the need to rein in rapidly
escalating costs, embarked on their own market-driven cost containment
initiative. The result has been a totally new approach by hospitals to
purchasing and financial management.
USSC has made significant changes in its strategies and marketing programs
to fill the needs of its customers in this new environment. During prior
years, responding to the surgeon's needs and enhancing clinical efficacy were
the company's principal objectives. These are still primary goals, but the
company has expanded its efforts to include a close working relationship with
the hospital's materials and financial management.
The objective is to save our customers money in managing their operating
rooms and purchasing surgical products. USSC is ideally positioned to do so.
All three of the company's major product lines facilitate better patient care
and provide a cost effective means of performing surgery. Today, the
company's sales organization works hand- in-hand, not only with the surgery
and nursing departments, but also with materials management and financial
administration. The results have been measurable and satisfying.
During 1995, USSC's sales increased, market share increased and the
company was particularly successful in expanding its business with some of
the largest hospital organizations in the world.
Effective January 1, 1995, we were awarded a primary source agreement to
supply both stapling and laparoscopic instruments to all of Kaiser
Permanente's 66 hospitals and surgicenters. In May, we received a sole source
suture agreement for Kaiser's entire Northern California region.
In addition, USSC increased its business with Columbia/HCA Health Care
Corporation, the nation's largest hospital system. Columbia owns and operates
more than 450 hospitals and surgicenters.
During the fourth quarter, the Tenet Hospital Group, the second largest
hospital chain in the United States, signed a sole source contract with USSC
for all of their hospitals' stapling and laparoscopic products.
<PAGE>
The company is currently discussing its new marketing programs and the
benefits they can provide with other integrated health networks and hospital
purchasing organizations.
Suture sales continue to grow dramatically, enjoying an increase of
approximately 50% during 1995 over the prior year. One of the year's bright
lights was the launching of the company's newest suture product, BIOSYN, in
October.
The BIOSYN suture is the world's first synthetic monofilament suture that
embodies most of the characteristics of a braided suture. Surgeons prefer
braided sutures because they are more supple, handle better, provide better
knot security and have higher tensile strength during the critical
postoperative healing period. However, braided sutures, because of their
braided structure, can provide a pathway for bacteria to migrate. Surgeons,
therefore, would very much like to have a monofilament suture with the
characteristics of a braid.
BIOSYN is the only monofilament suture available today that answers this
need. It is very close to a braided suture in tensile strength, knot security
and suppleness. Although BIOSYN has been on the market for only a few months,
it has already won many converts.
USSC was built on innovation and today, more than ever, we are committed
to innovation both in existing businesses and in areas of new opportunity. In
1996 our R&D budget will be increased by almost 20%.
At the American College of Surgeons Meeting in October, the company showed
some of the innovative products planned for introduction in 1996 and 1997.
One of these products, the ABBI system, introduced during the first quarter
of 1996, is an exciting new minimally invasive system for breast surgery, and
represents an entirely new market for USSC. ABBI's groundbreaking technology
can significantly improve women's health care while reducing costs. There are
nearly one million women in the United States who require breast biopsies
each year.
Currently the standard approach for diagnosis of breast lesions requires a
radiologist to place a wire marker into the breast to identify the position
of the lesion. The patient is then transferred to the operating room where
the surgeon removes a tissue specimen while the patient is under general
anesthesia.
The ABBI system reduces the procedure to one step, with the patient under
local anesthesia. It utilizes stereotactic x-ray, a three-dimensional
locating process accurate to within one millimeter. The placement of the wire
marker and removal of the tissue sample are performed using a minimally
invasive technique. The entire specimen is removed through an incision that
can be less than one inch in diameter. If the specimen proves to be
cancerous, but pathology reports the entire tissue margin is free of cancer
cells, it is up to the clinical judgment of the surgeon as to whether
additional tissue must be removed or the surgical procedure can be considered
complete.
ABBI's minimally invasive technique can minimize scarring and
disfigurement and facilitate postoperative healing. Most patients are back to
normal function in just a few hours. The ABBI system provides an optimal fit
with managed care by reducing the cost of breast surgery.
Cardiovascular and peripheral vascular surgery are rapidly expanding
surgical specialties where innovative technology is contributing
significantly to patient care and reduced cost.
USSC pioneered the use of mechanical clip appliers for vascular closure
and has recently introduced a series of state-of-the-art vascular sutures.
With these products as a beginning, the company plans to become a major
player in this important surgical arena.
There are approximately 400,000 coronary bypass operations performed
annually in the United States alone. These procedures require opening the
chest, placing the patient on a heart lung bypass machine and stopping the
heart. It is a highly invasive procedure requiring a lengthy postoperative
hospital stay and an extended recuperative period.
USSC, in collaboration with a multinational group of leaders in
cardiovascular surgery, is developing a minimally invasive approach to
coronary bypass surgery, and a system that can eliminate expensive heart lung
bypass equipment in both open and minimally invasive procedures. Heart lung
profusion is one of the principal causes of complications associated with
coronary bypass surgery.
Coronary bypass surgery also involves removing the saphenous vein in the
leg to graft to the coronary artery. This vein stripping procedure requires a
lengthy leg incision, often from the ankle to the groin, and in many patients
<PAGE>
creates even greater discomfort than the heart operation itself. The long
incision is slow to heal and can result in unsightly scarring.
The company has developed a new minimally invasive technique to remove the
saphenous vein that requires only four to five small incisions. The result is
much less tissue trauma, less postoperative pain and significantly improved
cosmetic results.
Another important technological breakthrough in vascular surgery is the
company's new VCS clip applier. This unique device enables surgeons to
reconnect arteries or veins without penetrating the inside of the vessel.
Suturing, the standard procedure today, requires a needle and thread to pass
through the inside of the vessel, resulting in a portion of the suture
remaining within the vessel. This foreign body can cause turbulence and blood
clotting.
The VCS clip application is rapid and precise and can reduce operative
time by up to 30%. Use of the VCS clip has the potential to provide patient
benefits and reduced costs in more than one million procedures, including
many non-vascular applications.
Back pain has brought misery to millions of people for years and years.
Current approaches provide only marginal relief. Late in 1995, the company
acquired Surgical Dynamics, Inc. (SDI), a manufacturer of spinal cages. The
spinal cage is a device used to facilitate fusion of injured or deteriorating
vertebrae.
Spinal cages are implants that hold the discs in correct approximation
while new bone grows into position, creating a permanent fusion. Four years
of clinical experience with SDI's spinal cages have resulted in a success
rate of more than 95%, a truly impressive record. Experts in orthopedics
believe spinal cages have the potential to revolutionize back surgery and
provide long-term relief to millions of patients who now suffer disorders of
the spine.
There are no spinal cages approved for use in the United States at the
present time; however, the FDA has informed the company that its Pre-market
Approval application will receive expedited review.
Modern medicine and surgery have reduced the pain and suffering of
millions and expanded our life expectancy considerably. Nevertheless, some
organ diseases reach a level where they no longer can be treated
successfully. The only hope for these patients is an organ transplant.
Unfortunately, the number of available donor organs falls far short of the
need. There are approximately 100,000 people in the United States alone
waiting to receive donor organs. For the majority, their only hope is new
technology that can provide a readily available source of organs. Today, this
technology is being transformed from a dream to potential reality.
Last August, USSC entered into an agreement with Alexion Pharmaceuticals,
a biopharmaceutical company that is developing genetically altered pig organs
for use in human transplant surgery. USSC purchased 9.5% of Alexion and has
the worldwide rights to manufacture, market, sell and distribute any products
that result from this research.
In the human-to-human transplant, the white blood cells of the host
patient recognize the transplanted organ as a foreign body and then attack
and destroy it. Human-to-human transplants have been successful because
immunosuppressant medicines such as cyclosporin are able to neutralize the
effect of the white blood cells on the transplanted organ.
When an animal organ is transplanted into a human body, the organ is
rejected through a different mechanism. The rejection begins as antibodies in
the human's system attach themselves to sugar molecules in the tissue of the
transplanted animal organ. Once attached, the antibodies attract and activate
human inflammatory proteins which quickly attack and destroy the transplanted
organ.
Pigs have been identified as the ideal animal for transgenic implants
because their anatomy is similar to humans; and pigs, unlike primates, are
unlikely to transmit viruses to humans.
We believe that a successful transgenic organ program requires animals
that are genetically altered to both eliminate the sugar molecules that
attract the human antibodies, in addition to providing a coating of human
protein on the animal's tissue to act as a defense mechanism against the
human inflammatory proteins.
Alexion is developing transgenic pigs whose genes will be genetically
engineered to (1) remove the foreign sugar molecules, and (2) provide a
coating of human proteins that will defend the tissues against human inflam-
<PAGE>
matory proteins. The engineered transgenic pig, therefore, will have organs
that when implanted into a human will be treated by the body similarly to a
human organ.
Alexion has successfully engineered a colony of mice that reproduce with
organs that do not have foreign sugar molecules and whose cells have
inflammatory protein inhibitors. They are currently developing pigs with
these same gene alterations, and hope to be implanting transgenic pig organs
into primates within 18 to 24 months.
New products and new surgical techniques require highly specialized
training. USSC has always been an innovative leader in surgical training.
Today, the company is partnering with leading academic and medical centers
throughout the world to provide research and training programs for minimally
invasive surgery and other advanced techniques. These "centers of excellence"
have been created to train physicians and residents, investigate new
applications and new surgical techniques and to conduct preclinical trials.
As the world becomes closer knit through improved communication and
transportation, surgical techniques and surgical instrumentation become
multinational. Recognizing the globalization of surgery, USSC has been
increasing the resources it commits to the international market. During 1995,
the company acquired its Japanese distributor's wound closure business,
providing a major base of operations in the Far East to complement its
significant European presence. USSC's international business has reached
approximate parity with domestic sales.
The company's objective for 1996 is to improve upon the success achieved
in 1995.
Sincerely,
/s/ Leon C. Hirsch
Leon C. Hirsch, Chairman
March 15, 1996
<PAGE>
UNITED STATES SURGICAL CORPORATION
150 Glover Avenue
Norwalk, Connecticut 06856
-------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 2, 1996
----------------------
To the Stockholders of
United States Surgical Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of UNITED
STATES SURGICAL CORPORATION (the "Company") will be held at The Equitable
building, 787 Seventh Avenue, New York, New York 10019, on May 2, 1996 at
2:00 P.M. (local time), for the following purposes:
1. To elect a board of eleven directors to serve until the next Annual
Meeting of Stockholders or until their successors are elected and qualified;
2. To consider and act upon a proposal to approve adoption of the
Company's 1996 Employee Stock Option Plan and to approve a stock option grant
under such Plan to the Chairman and Chief Executive Officer;
3. To consider and act upon a proposal to authorize the Company's
Executive Incentive Compensation Plan; and
4. To transact such other business, including two shareholder proposals,
as may properly be brought before the meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on March 4, 1996,
as the record date for determination of the stockholders entitled to notice
of and to vote at the Annual Meeting, and only holders of record of the
Company's Common Stock and the Company's Series A Convertible Preferred Stock
(or depositary shares representing interests therein) on said date will be
entitled to receive notice of and to vote at the meeting.
Stockholders are cordially invited to attend the meeting. Whether or not
you plan to attend the meeting, please mark, sign, date and return the
enclosed Proxy. The giving of your Proxy will not affect your right to vote
in person in the event you find it convenient to attend the meeting. You may
revoke the Proxy at any time before the closing of the polls at the meeting.
ATTENDANCE AT THE ANNUAL MEETING WILL BE LIMITED TO STOCKHOLDERS AND
INVITED GUESTS OF THE COMPANY. ADMITTANCE TICKETS WILL BE REQUIRED.
If you are a stockholder and plan to attend, you must request an
admittance ticket by writing to the Office of the Secretary at the address
shown above. If your shares are not registered in your own name, evidence of
your stock ownership, which you can obtain from your bank, stockbroker, etc.,
must accompany your letter. An admittance ticket will be sent to you.
By order of the Board of Directors
PAMELA KOMENDA
Corporate Secretary
March 15, 1996
PLEASE SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE.
<PAGE>
(USSC LOGO)
UNITED STATES SURGICAL CORPORATION
150 Glover Avenue
Norwalk, Connecticut 06856
----------------------------
PROXY STATEMENT
For
ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 2, 1996
March 15, 1996
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of United States Surgical Corporation, a Delaware
corporation (the "Company"), of proxies to be voted at the Annual Meeting of
Stockholders of the Company to be held at The Equitable building, 787 Seventh
Avenue, New York, New York 10019, on May 2, 1996, at 2:00 P.M. (local time),
and at any adjournments thereof, for the purposes set forth in the attached
Notice of Annual Meeting of Stockholders.
When proxies in the enclosed form are returned properly executed, the
shares represented thereby will be voted at the meeting and, where
instructions have been given by the stockholder, will be voted in accordance
therewith. If the stockholder does not otherwise specify, the stockholder's
shares will be voted for the election of the listed nominees and in
accordance with the directors' recommendations on the other subjects listed
on the proxy card. If any other matter is properly presented for action at
the meeting, the persons named in the enclosed form of proxy will vote on
such matter in their discretion. Any proxy may be revoked by the stockholder,
either by attending the meeting and voting in person or by submitting a
revocation in writing to the Company (including a subsequent signed proxy) at
any time prior to the closing of the polls at the meeting.
Stockholder Vote Required
To be elected a director, a nominee must receive the affirmative vote of a
plurality of shares present in person or represented by proxy at the meeting and
entitled to vote in the election of directors. A plurality vote means that the
eleven individuals who receive the largest number of votes cast will be elected
as directors. Withheld votes will not affect the outcome of the election of
directors. For each other matter specified in the Notice of Annual Meeting of
Stockholders, the affirmative vote of a majority of the shares present at the
annual meeting in person or by proxy and entitled to vote on such matter is
required for approval. Abstentions will be considered shares present in person
or by proxy and entitled to vote and will, therefore, have the effect of a vote
against the matter. In instances where brokers are prohibited by the rules of
the New York Stock Exchange from exercising discretionary authority for
beneficial owners who have not returned proxies to the brokers (referred to as
"broker non-votes"), those shares will not be included in the vote totals and
will have no effect on the vote. However, properly returned proxies which
withhold authority to vote for directors, abstain, or reflect a broker non-vote
will be counted for purposes of determining if a quorum is present for the
annual meeting.
The Company's auditors are Deloitte & Touche LLP, 333 Ludlow Street,
Stamford, Connecticut 06904. A representative of Deloitte & Touche LLP will
be present at the meeting, will have an opportunity to make a statement if
the representative desires to do so, and will be available to respond to
appropriate questions.
A copy of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1995 will be
provided, without charge, to any stockholder upon written request. Requests
should be directed to Investor Relations, United States Surgical Corporation,
150 Glover Avenue, Norwalk, CT 06856.
<PAGE>
OUTSTANDING SHARES, VOTING RIGHTS AND PRINCIPAL STOCKHOLDERS
Holders of record of outstanding shares of the Company's Common Stock,
$.10 par value ("Common Stock"), and of the Company's Series A Convertible
Preferred Stock, $5.00 par value ("Series A Preferred Stock"), represented by
1/50 interest Depositary Shares ("Depositary Shares"), at the close of
business on March 4, 1996, will be entitled to notice of and to vote at the
meeting. Voting rights are vested exclusively in the holders of the Common
Stock and the Series A Preferred Stock. Each share of Common Stock
outstanding on the record date will be entitled to one vote. Each share of
Series A Preferred Stock outstanding on the record date will be entitled to
47.50 votes, equivalent to .95 of a vote for each Depositary Share held.
Shares held as treasury shares by the Company are not entitled to be voted.
At the close of business on December 31, 1995, a total of 57,165,938 shares
of Common Stock (not including 8,127,219 shares held as treasury shares) and
8,870,000 Depositary Shares, representing 177,400 shares of Series A
Convertible Preferred Stock, were outstanding.
The following table sets forth the only persons known to the Company to be
beneficial owners as of December 31, 1995, of more than five percent of the
Company's Common Stock or Series A Preferred Stock.
<TABLE>
<CAPTION>
Voting Securities
-----------------------------
Number of
Shares Percent
Name and Address Title of Beneficially of
of Stockholder Class Owned Class
----------------------------- --------------------- --------------- -----------
<S> <C> <C> <C>
Leon C. Hirsch(1) Common 4,901,423 8.12%(2)
150 Glover Avenue
Norwalk, Connecticut 06856
FMR Corp.(3) Common 2,819,748 4.93%
82 Devonshire Street
Boston, Massachusetts 02109
Series A 3,846,900 43.37%
Preferred
(Depositary Shares)
Common, assuming 6,485,845 9.88%
conversion of
Depositary Shares
Putnam Investments, Inc.(4) Common 3,751,400 6.56%
One Post Office Square
Boston, Massachusetts 02109
The Prudential Insurance Series A 545,700 6.15%
Company of America(5) Preferred
751 Broad Street (Depositary Shares)
Newark, New Jersey 07102
</TABLE>
- ----------
(1) Mr. Hirsch has sole voting and investment powers with respect to the
shares listed as beneficially owned by him. Includes 3,177,834 shares
subject to options which are exercisable on or become exercisable within
60 days following December 31, 1995, and 4,310 shares held by a private
foundation of which Mr. Hirsch is the trustee. Excludes shares
beneficially owned, and options to purchase shares held, by his wife, an
officer and director of the Company, as to which shares Mr. Hirsch
disclaims beneficial ownership.
(2) Percent of class is based on 57,165,938 shares of Common Stock
outstanding on December 31, 1995, plus 3,177,834 shares subject to
options held by Mr. Hirsch which are exercisable on or become exercisable
within 60 days following such date.
(3) As reported in a Schedule 13G filed with the Securities and Exchange
Commission and based on additional information provided by FMR Corp.
Percent of class is based on 57,165,938 shares of Common Stock
outstanding on December 31, 1995, plus 8,453,110 shares based on the
assumed conversion of 8,870,000 Depositary Shares (.953 shares of Common
Stock for each Depositary Share). This number includes 6,381,715 shares
2
<PAGE>
beneficially owned by Fidelity Management & Research Company, a
subsidiary of FMR Corp., as a result of its serving as investment adviser
to various investment companies registered under Section 8 of the
Investment Company Act of 1940 and as investment adviser to certain other
funds which are generally offered to limited groups of investors; 102,224
shares beneficially owned by Fidelity Management Trust Company, a
subsidiary of FMR Corp., as a result of its serving as trustee or
managing agent for various private investment accounts (primarily
employee benefit plans) and also serving as investment adviser to certain
other funds which are generally offered to limited groups of investors;
1,906 shares beneficially owned by Fidelity International Limited, as a
result of its serving as investment advisor to various non-U.S.
investment companies.
The number of shares of United States Surgical Corporation beneficially
owned by Fidelity Management & Research Company on December 31, 1995
included 3,666,096 shares of Common Stock resulting from the assumed
conversion of 3,846,900 Depositary Shares (.953 shares of Common Stock
for each Depositary Share).
The number of shares of United States Surgical Corporation beneficially
owned by Fidelity Management Trust Company on December 31, 1995 included
88,534 shares of Common Stock resulting from the assumed conversion of
92,900 Depositary Shares (.953 shares of Common Stock for each Depositary
Share).
FMR Corp. has sole voting power with respect to 76,112 shares and sole
dispositive power with respect to 6,485,845 shares. The Company is
advised that voting power with respect to shares owned by various
Fidelity funds resides with such funds' board of trustees.
(4) As reported in a Schedule 13G filed with the Securities and Exchange
Commission, and on information provided by Putnam Investments, Inc.,
certain investment managers affiliated with Putnam Investments, Inc.
(together with its parent corporation, Marsh & McLennan Companies, Inc.)
are considered beneficial owners in the aggregate of 3,751,400 shares of
Common Stock held by mutual funds and other institutional investors which
they advise. Percent of class is based on 57,165,938 shares of Common
Stock outstanding on December 31, 1995. The Company is advised that such
shares were acquired for investment purposes by such investment funds for
certain of their advisory clients and that such funds may share voting
and/or investment power with such clients.
(5) As reported in a Schedule 13G filed with the Securities and Exchange
Commission, and on information provided by The Prudential Insurance
Company of North America. Percent of class is based on 8,870,000
Depositary Shares outstanding on such date. The Company is advised that
such holder shares voting and investment power with respect to 539,300
shares with various of its business units.
SHARE OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the shares of
the Company's Common Stock beneficially owned as of December 31, 1995, except
as otherwise indicated, by all directors, nominees, executive officers
identified in the Summary Compensation Table below, and all executive
officers and directors as a group. No director or officer owns any Series A
Preferred Stock. Except as noted, each person listed has sole voting and
investment powers as to shares beneficially owned by such person.
<TABLE>
<CAPTION>
Number of
Shares Percent
of Common Stock of
Beneficially Class(1)
Name Owned
- ------------------------------------------------ --------------- --------
<S> <C> <C>
Julie K. Blake 5,000(dagger) *
John A. Bogardus, Jr. 26,000(2) *
Thomas R. Bremer 177,084(2) *
Thomas D. Guy 131,666(2) *
Leon C. Hirsch 4,901,423(3) 8.12%
Turi Josefsen 1,125,642(2) 1.94%
Douglas L. King 17,000(2) *
William F. May 16,422(2) *
Barry D. Romeril+ 0 *
Howard M. Rosenkrantz 122,184(2) *
Marianne Scipione 147,696(2) *
John R. Silber 14,200 *
All executive officers and directors as a group
(24 persons) 7,725,251(4) 12.28%
</TABLE>
- ----------
* Ownership of less than one percent.
3
<PAGE>
+ Elected a director on February 29, 1996.
(dagger) Includes restricted stock award of 4,000 shares during January, 1996.
(1) Percent of class for each person and all executive officers and directors
as a group is based on shares of Common Stock outstanding on December 31,
1995, plus shares subject to options held by the individual or the group,
as applicable, which are exercisable on or become exercisable within 60
days following such date.
(2) Includes the following shares which may be acquired on or within 60 days
following December 31, 1995, through the exercise of stock options under
Company sponsored plans: Mr. Bogardus, 22,000; Mr. Bremer, 161,666; Mr.
Guy, 131,666; Ms. Josefsen, 1,000,000; Mr. King, 15,000; Mr. May, 12,000;
Mr. Rosenkrantz, 121,666; and Ms. Scipione, 130,666. No voting or
investment power exists with respect to such shares prior to acquisition.
(3) See Note (1) under "Outstanding Shares, Voting Rights and Principal
Stockholders".
(4) Includes options to purchase 5,736,810 shares exercisable on or within 60
days following December 31, 1995.
PROPOSAL 1: ELECTION OF DIRECTORS
(Item 1 on Proxy Card)
Nominees
The persons named in the accompanying form of proxy intend, except as
otherwise directed, to vote for the election as directors of the eleven
nominees listed below, each for a term expiring at the next Annual Meeting or
until his or her successor is duly elected and qualified. All nominees are
now serving as directors of the Company, and all have informed management
that they are willing to serve as directors of the Company. If any of the
nominees should decline or be unable to act as a director, the persons named
as proxies in the form of proxy will vote in accordance with their best
judgment and shall have discretionary authority to vote for a substitute
nominee. The Board of Directors has fixed its present size at, and for the
purposes of this meeting authorized the election of, eleven directors.
The following table sets forth certain information as to the nominees for
directors of the Company.
<TABLE>
<CAPTION>
Serving as
Business Experience During Last Director
Name Age Five Years and Other Directorships Since
---- --- ---------------------------------- -----
<S> <C> <C> <C>
Julie K. Blake (A)(D)(E) 48 1992-1994, Executive Vice President and Chief 1995
Operating Officer, Flavin, Blake & Co., Inc.;
Vice President, J.P. Morgan & Co. Incorporated,
1970-1992.
John A. Bogardus, Jr. (A)(B)(C)(D) 68 Director, Alexander & Alexander Services Inc., 1981
insurance brokerage and financial services firm,
New York, N.Y., from l988 to May 1995; prior
thereto, its Chairman of the Board and Director
since l987; prior thereto, its Chairman of the
Board, Chief Executive Officer and Director.
Thomas R. Bremer 42 Senior Vice President and General Counsel since 1993
January 1, 1994; Vice President and General
Counsel since 1989; prior thereto, General Counsel
since 1988.
Leon C. Hirsch (B)(E) 68 Chairman of the Board, President and Chief 1964
Executive Officer since 1987; prior thereto,
President and Chief Executive Officer.
4
<PAGE>
Serving as
Business Experience During Last Director
Name Age Five Years and Other Directorships Since
---- --- ------------------------------------ ------
Turi Josefsen (B)(E) 59 Executive Vice President and, since July, 1994 1977
President, International Operations; prior
thereto, Executive Vice President and President,
Auto Suture Companies.
Douglas L. King (A)(B)(C)(D) 54 President and Director, Smyth, Sanford & Gerard 1984
Reinsurance Intermediaries, Inc., insurance and
reinsurance brokers. Director, Healthplex, Inc., a
dental administration service company, New York,
N.Y.
William F. May (A)(B)(C)(D) 80 Chairman of the Board, Statue of Liberty-Ellis 1984
Island Foundation, Inc., New York, N.Y., since
1995, prior thereto, its Chairman and Chief
Executive Officer; Director, Salomon Inc, New
York, N.Y.; Trustee, University of Rochester;
Trustee, American Museum of Natural History;
Director, Lincoln Center; Trustee, Columbia
Presbyterian Hospital; Trustee, Committee for
Economic Development.
Barry D. Romeril (A)(C)(E) 52 Executive Vice President and Chief Financial 1996
Officer, Xerox Corporation.
Howard M. Rosenkrantz (E) 52 Senior Vice President, Finance and Chief Financial 1995
Officer since 1992; prior thereto, Vice President,
Finance; Trustee, Committee for Economic
Development.
Marianne Scipione 49 Vice President, Corporate Communications since 1992
1981; Member, Board of Trustees, Norwalk Hospital
Association, Director, The Norwalk
Community-Technical College Foundation, Inc.
John R. Silber (C)(E) 69 President, Boston University; Director, Seragen, 1994
Inc. and Mutual of America Institutional Funds
Inc.
</TABLE>
- ------------
(A) Member of Audit Committee. Mr. May is Chair.
(B) Member of Executive Committee. Mr. King is Chair.
(C) Member of Compensation/Option Committee. Mr. King is Chair.
(D) Member of Nominating Committee. Mr. Bogardus is Chair.
(E) Member of Transaction and Finance Committee. Ms. Blake is Chair.
Leon C. Hirsch and Turi Josefsen are husband and wife. No other family
relationship exists between any of the directors or between any director and
any officer of the Company. With respect to certain relationships between the
Company and certain of the business entities listed in the above table, see
"Executive Compensation and Transactions--Certain Transactions," below.
Meetings and Committees
In 1995, the Board of Directors held 11 meetings and committees of the Board
held the following number of meetings: Audit Committee, 4;
Compensation/Option Committee, 6; Nominating Committee, 3, and the
Transaction and Finance Committee, 3. The Executive Committee did not meet in
1995.
The Audit Committee's function is to assist the Board in fulfilling its
duties in connection with the internal control, accounting and reporting
practices of the Company and to maintain communication between the Board and
the Company's auditors, including review of the Company's financial
statements, press releases and indepen-
5
<PAGE>
dent auditors' reports. Its authority includes power to resolve certain
disputes, if any, concerning accounting policies, practices and changes and
internal controls and to retain attorneys, investigators and others as it
deems appropriate to assist it in carrying out its functions. The
Compensation/Option Committee's function is to establish officers' and key
employees' bonus objectives, compensation and bonuses, including performance
standards, and to administer Company sponsored stock and other benefit plans.
The function of the Nominating Committee is to nominate directors and
committee members, subject to Board approval. The Nominating Committee must
act unanimously and will not consider nominees recommended by stockholders.
The Executive Committee's function is to act on important matters occurring
during time periods between scheduled meetings of the Board of Directors. The
Transaction and Finance Committee reviews and makes recommendations to the
Board as to acquisitions, other transactions, and financial plans.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
FOR EACH OF THE NOMINEES LISTED ABOVE.
PROPOSAL 2: APPROVAL OF ADOPTION OF 1996
EMPLOYEE STOCK OPTION PLAN AND GRANT OF STOCK OPTIONS TO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(Item 2 on Proxy Card)
Option Plan and Grant of Options
The Board of Directors has unanimously approved, and recommends to the
stockholders for their approval, the adoption of the 1996 Employee Stock
Option Plan (the "1996 Option Plan") authorizing the issuance of up to 2.5
million shares of Common Stock thereunder, and a one time multi-year option
grant, included in such shares, to the Chairman and Chief Executive Officer
of the Company. An inadequate number of shares is currently available for
such grant under the Company's 1990 Employee Stock Option Plan (the "1990
Option Plan"). Had the Grant of Options been made under the 1990 Option Plan,
the terms of the grant would have been subject to the terms of a settlement
with respect to stockholders derivative litigation entered in 1995. Approval
of the 1996 Option Plan will make available sufficient shares for the grant
to the Chairman and Chief Executive Officer and permit grants, as deemed
advisable by the Compensation/Option Committee of the Board (the
"Committee"), to other eligible participants. Approval of the Option Plan
will also enable the Company to deduct profits realized thereunder, if any,
by holders of options, under new federal income tax rules, as discussed
below.
Purpose
The Board of Directors on January 30, 1996 granted options for the
purchase of an aggregate of 1,500,000 shares of the Common Stock of the
Company (the "Option Grant") by the Chairman and Chief Executive Officer,
subject to the approval of the stockholders of the Option Plan and of the
Option Grant. The Board of Directors believes that stock options have been
and continue to be of significant benefit to the Company in obtaining and
keeping valuable employees, and in promoting long-term growth and
profitability by aligning stockholder and employee interests. In most years,
grants of options are made to the Company's officers. The Chief Executive
Officer has not received a grant of options since 1991, and the Committee has
determined that another grant of options will not be awarded to the Chief
Executive Officer for five years from the date of the Option Grant. Mr.
Hirsch will not realize any benefits from the Option Grant unless the stock
appreciates in price. The Option Grant is also intended to afford the
opportunity for a source of retirement funds, since the Company does not
presently provide Mr. Hirsch (or any other employee) with retirement
benefits, other than the opportunity to participate in a Company sponsored
401(k) plan. In consideration for the Option Grant, Mr. Hirsch has agreed to
remain with the Company for at least an additional five years to execute the
strategic plan developed as part of the Company's recent restructuring, to
bring products currently in the development cycle to market, and to develop a
succession plan. The Compensation Committee was advised by an outside
compensation consultant in reaching its determination. In the belief that the
Option Grant will continue to provide an incentive for appreciation in the
price of the Company's Common Stock, the Board recommends that the
stockholders approve the 1996 Option Plan and the Option Grant.
The terms of the Option Grant to Mr. Hirsch are discussed below under the
caption "Terms of Option Grant". A summary of the principal features of the
1996 Option Plan is set forth below under the caption "Summary of the 1996
Option Plan", but is qualified in its entirety by reference to the full text
of the 1996 Option Plan, which was filed electronically with this Proxy
Statement with the Securities and Exchange Commission. Such text is not
included in the printed version of this Proxy Statement. All defined terms
used below have the meaning set forth in the 1996 Option Plan unless
otherwise indicated.
6
<PAGE>
Terms of The Option Grant
Assuming approval by the stockholders, the purchase price for Common Stock
acquired upon exercise of an option pursuant to the Option Grant to Mr.
Hirsch will be at the Fair Market Value on the date of stockholder approval.
Options under the Option Grant will vest in 20 percent increments per year
over the five year period from the date of grant. The exercise period of the
Option Grant will be for ten years from the date of grant. The terms of the
Option Grant are otherwise in accordance with the 1996 Option Plan, as
summarized herein.
Summary of the 1996 Option Plan
General. The 1996 Option Plan provides for the grant to eligible employees
of Incentive Awards, which may be Incentive Stock Options, Non-Qualified
Stock Options or Appreciation Rights (all as defined in the Plan) with
respect to up to an aggregate maximum of 2,500,000 shares of Common Stock
(including the 1,500,000 shares attributable to the Option Grant).
Appreciation Rights may be granted in tandem with options or alone. The 1996
Option Plan terminates when no more shares of Common Stock are available
thereunder. In addition, 373,800 shares remain available for Incentive Awards
under the 1990 Option Plan, and approximately 685,000 shares remain available
for issuance under other plans of Incentive Awards to employees other than
officers of the Company. To the extent options granted under the 1996 Option
Plan (and any other of the Company's Option Plans) are canceled or expire
prior to exercise, or are surrendered, the shares covered thereby again
become available for option grants.
Administration. The 1996 Option Plan is and will continue to be
administered by the Committee, or any successor committee, which must consist
of two or more directors who qualify as disinterested persons under Rule
16b-3 under the Securities Exchange Act of 1934 and as outside directors
under Section 162(m) of the Code. The present Committee consists of directors
John A. Bogardus, Jr., Douglas L. King, William F. May, Barry D. Romeril, and
John R. Silber. Mr. King will no longer serve on the Committee after the date
of the Annual Meeting. The Committee is responsible for interpreting the
Option Grant (as well as other grants), determining the terms and provisions
of award instruments and making all other determinations with respect to
administration of the 1996 Option Plan.
Participation. Awards may be granted under the 1996 Option Plan only to
executive officers of the Company, presently 18 persons. The Committee
administering the 1996 Option Plan is authorized in its discretion, after
receiving the recommendations of management, to designate officers who are to
be granted awards under the 1996 Option Plan. Non-employee directors are not
eligible to receive grants under the 1996 Option Plan.
Awards. The Committee determines the type of each Incentive Award granted
under the 1996 Option Plan. Options may be either Incentive Stock Options
("ISO's") or Non-Qualified Stock Options ("NQSO's"), as defined, provided
that no person may be granted an Incentive Stock Option if such person owns
stock with more than 10% of the voting power of all Company stock. Stock
appreciation rights ("SAR's"), which entitle the holder to be paid an amount
in cash or stock equal to the appreciation in the value of the stock covered
thereby between the grant price and the fair market value of the stock on the
date of exercise, may be granted by themselves or may be granted in tandem
with options. The Committee in its discretion may, with the consent of the
holder, cancel all or a portion of any outstanding award upon granting the
holder a new award bearing terms determined at the time of the new grant. No
participant in the 1996 Option Plan may be awarded Incentive Awards with
respect to more than 1,500,000 shares.
Price of Option Shares; Payment of Appreciation Rights. The purchase price
for Common Stock acquired upon exercise of an option will be the fair market
value, as defined ("Fair Market Value") of such Common Stock on the date of
grant of the option, unless the Committee determines otherwise, but in the
case of Incentive Stock Options may not be less than such Fair Market Value.
Upon exercise of an option, the purchase price will be paid, in the
discretion of the Committee, (i) in cash, or (ii) by installment payments of
cash or by a promissory note, in each case secured by Common Stock. Upon
exercise of an appreciation right, the holder will be paid, in cash or Common
Stock as the Committee determines, the difference between the then Fair
Market Value of the Common Stock as to which the appreciation right is
exercised and (i) in the case of an appreciation right granted in tandem with
an option, the purchase price of such Common Stock as specified in the
related option, or (ii) in the case of an appreciation right granted by
itself, the Fair Market Value of such Common Stock on the date of grant of
the appreciation right. Upon exercise of an appreciation right granted in
tandem with an option, the related option will be surrendered to the extent
the appreciation right is exercised and the shares subject to the portion of
the option so surrendered will no longer be available for awards. The
Committee is authorized to cancel, with the consent of the holder, all or a
portion of an outstanding award and discharge the Company's obligation with
respect thereto by the payment of cash or Common Stock equal in value to the
excess of the then Fair Market Value of the Common
7
<PAGE>
Stock subject to the canceled portion of the award over (i) its purchase
price under the option, or (ii) in the case of an appreciation right granted
by itself, the Fair Market Value of such Common Stock on the date of grant of
the appreciation right. Upon such cancellation, the shares subject to the
portion of the award so canceled will no longer be available for awards. The
Committee will provide for withholding of taxes arising with respect to
exercises of options and may permit any tax obligation to be satisfied by the
delivery of Common Stock.
Exercise. Subject to a maximum exercise period of fifteen years (ten years
for ISO's), the exercise period of awards under the 1996 Option Plan will be
as determined by the Committee.
Cancellation or Rescission for Cause. The Committee may in its discretion
cancel an award prior to exercise if a participant's employment terminates
and he or she were to engage in activities in conflict with the Company's
best interests, in breach of agreements with the Company, or to take actions
which otherwise harm the Company in any way. In addition, if any such actions
occur before or within two years after exercise of an award (whether such
exercise is during or after employment), and the participant's employment has
terminated, the exercise will be deemed rescinded, and the Company may
recover the financial benefit accruing to the terminated employee upon such
exercise. The Company's ability to cancel or rescind an award would no longer
be available in the event of a Change in Control of the Company, as defined.
Adjustments. The 1996 Option Plan provides for appropriate adjustments in
the number and kind of shares subject to outstanding awards, including the
Option Grant, and in the price or Fair Market Value of shares with respect to
which such awards have been granted, in the case of changes in the Company's
outstanding Common Stock by reason of stock dividends, stock splits,
recapitalizations and the like. However, in the event of circumstances which
result in a Change of Control (generally defined as an acquisition of twenty
percent or more of the voting power of the Company) of the Company, or in the
event of a filing under Section 14(d) of the Exchange Act with respect to the
Company, (i) all outstanding awards will become immediately exercisable and
(ii) the Committee in its discretion may grant appreciation rights to a
participant, pay cash to a participant in exchange for the cancellation of
outstanding options, and make appropriate amendments or adjustments to the
Plan or outstanding awards or take any other actions permitted under the 1996
Option Plan. The Board believes that the Change in Control provisions will
benefit the Company and its stockholders by retaining the incentives inherent
in an option grant without regard to the possibility of a change in control
of the Company.
Transferability During Lifetime. During the lifetime of a participant to
whom an option is granted, only the participant, or the participant's legal
representative, may exercise an Option or an SAR, except that the Committee
may permit transfers of NQSO's, SAR's and ISO's if and to the extent such
transfers do not cause a participant subject to Section 16 of the Exchange
Act to lose the benefit of the exemptions under Rule 16b-3 for such
transactions or violate or result in a loss of benefits under other rules or
regulations of the Securities and Exchange Commission or the Internal Revenue
Service.
Termination and Amendment. The Committee may in its discretion amend the
1996 Option Plan, subject to such stockholder approval as may be required for
compliance with certain regulations under Section 16 of the Exchange Act or
Section 162(m) of the Internal Revenue Code.
Federal Income Tax Consequences. The rules governing the tax treatment of
stock options and SAR's are complex, and the following discussion is
necessarily a general discussion of current Federal income tax consequences
and does not purport to be complete. Statutory provisions, and
interpretations thereof, are subject to change.
Incentive Stock Options. The participant recognizes no taxable gain or
loss when an ISO is granted or exercised, although upon exercise the spread
between the fair market value and the exercise price generally is an item of
tax preference for purposes of the participant's alternative minimum tax. If
the shares acquired upon the exercise of an ISO are held for at least one
year after exercise and two years after grant (the "Holding Periods"), the
participant recognizes any gain or loss realized upon such sale as long-term
capital gain or loss and the Company is not entitled to a deduction. If the
shares are not held for the Holding Periods, the gain is ordinary income to
the participant to the extent of the difference between the exercise price
and the fair market value of Common Stock on the date the option is
exercised. Any difference between the ultimate sale price of the acquired
Common Stock and the fair market value of such Common Stock on the date of
exercise will be treated as capital gain or capital loss, as the case may be.
Also, in such circumstances, the Company receives a deduction equal to the
amount of any ordinary income recognized by the participant, to the extent
qualified under Section 162(m) of the Internal Revenue Code, as applicable.
8
<PAGE>
Non-Qualified Stock Options. The participant recognizes no taxable income
and the Company receives no deduction when an NQSO is granted. Upon exercise
of an NQSO, the participant recognizes ordinary income and the Company
receives a deduction equal to the difference between the exercise price and
the fair market value of the shares on the date of exercise, to the extent
qualified under Section 162(m) of the Internal Revenue Code, as applicable.
The participant recognizes as a capital gain or loss any subsequent profit or
loss realized on the sale or exchange of any shares disposed of or sold.
Stock Appreciation Rights. Upon the grant of an SAR, the participant
recognizes no taxable income and the Company receives no deduction. The
participant recognizes ordinary income and the Company receives a deduction
at the time of exercise equal to the cash and fair market value of the shares
payable upon such exercise.
Parachute Payments. Under certain circumstances, an accelerated vesting or
the cash-out of stock options in connection with a change in control of the
Company might be deemed an "excess parachute payment" for purposes of the
golden parachute tax provisions of Section 280G of the Code. To the extent it
is so considered, the participant may be subject to a 20% excise tax and the
Company may be denied a tax deduction.
Section 162(m). Under Section 162(m) of the Internal Revenue Code and
regulations thereunder (referred to collectively as Section "162(m)" or the
"Code"), the amount of compensation paid by a publicly held corporation to
its chief executive officer and the four other most highly compensated
executive officers during any year which may be deductible for federal income
tax purposes is limited to $1,000,000 per person per year. Compensation which
qualifies as performance-based is excluded from this limit on the amount of
deductible compensation. The Board of Directors believes that the Company
should seek to maximize the deductibility of such compensation for federal
income tax purposes where it can do so consistent with its compensation
program objectives. In order for stock option grants to constitute "qualified
performance-based compensation" under Section 162(m) of the Internal Revenue
Code, the material terms of the plan pursuant to which options or other stock
based compensation are to be granted must be approved by the stockholders.
It is not possible either to predict the benefits or amounts that will be
received by the Chief Executive Officer or to determine the benefits or
amounts that would have been received for 1995 if the Option Grant had been
in effect. Other than the Option Grant to the Chief Executive Officer, the
Committee has not made any determinations with respect to grants to other
participants under the 1996 Option Plan. However, stock options were granted
under the 1990 Option Plan to the named executive officers as set forth in
the table captioned OPTION/SAR GRANTS IN 1995 on page 16. Also, in 1996,
stock options for 710,000 shares were granted to all executive officers as a
group (including the options granted to the named executive officers) and for
1,250,000 shares to other management employees as a group at an exercise
price of not less than $21.75 per share, the market price of the Company's
Common Stock on January 30, 1996, the date of grant.
As of March 8, 1996 the closing price for the Company's Common Stock on
the New York Stock Exchange was $26.75.
Stockholder Vote Required
Approval of the 1996 Option Plan and of the related Option Grant to the
Chief Executive Officer requires the affirmative vote of a majority of the
shares of Common Stock present at the annual meeting in person or by proxy
and entitled to vote on such matter. Abstentions have the effect of a vote
against the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
FOR APPROVAL OF THE ADOPTION OF THE 1996 OPTION PLAN AND
THE 1996 OPTION PLAN GRANT.
9
<PAGE>
PROPOSAL 3: APPROVAL OF EXECUTIVE
INCENTIVE COMPENSATION PLAN
(Item 3 on Proxy Card)
The Board of Directors adopted, on January 30, 1996, subject to
stockholder approval, the United States Surgical Corporation Executive
Incentive Compensation Plan (the "Incentive Plan"), which is designed to
qualify part or all of the amounts paid from time to time under the Company's
short term and long term bonus plans as "qualified performance-based
compensation" under Section 162(m). A significant portion of the current
compensation of the Company's executive officers is based on their
achievement of specific objectives established by the Compensation/ Option
Committee of the Board (the "Committee"); the Plan continues this existing
program, which offers corporate executives the opportunity to earn annual and
multi-year bonus awards. The Board of Directors believes that this
compensation program is important in attracting and retaining individuals of
superior ability and in holding executives personally accountable for the
achievement of important corporate objectives. See Report of Compensation/
Option Committee, beginning on page 17, for a discussion of the objectives of
this program.
Under Section 162(m), the amount of compensation paid by a publicly held
corporation to its chief executive officer and the four other most highly
compensated executive officers during any year which may be deductible for
federal income tax purposes is limited to $1,000,000 per person per year.
Compensation which qualifies as performance-based is excluded from this limit
on the amount of deductible compensation. The Board of Directors believes
that the Company should seek to maximize the deductibility of such
compensation for federal income tax purposes where it can do so consistent
with its compensation program objectives. In order for part or all of the
compensation payable pursuant to the existing short and long term bonus plans
to constitute "qualified performance- based compensation" under Section
162(m), the material terms of such a plan, including the performance
standards, must be approved by the stockholders. No award payouts will be
made pursuant to the Incentive Plan unless such approval is obtained.
A summary of the principal features of the Incentive Plan follows, but is
qualified in its entirety by reference to the full text, which was filed
electronically with this Proxy Statement with the Securities and Exchange
Commission. Such text is not included in the printed version of this Proxy
Statement. All defined terms used below have the meaning set forth in the
Incentive Plan, unless otherwise indicated.
Persons Covered. The persons covered by the Incentive Plan are the
executive officers of the Company, presently 18 persons. Other employees of
the Company will continue to be eligible to receive annual cash incentive
bonuses outside of and under terms substantially the same as in the Incentive
Plan. Long Term grants are presently limited to those senior officers who, in
the Committee's opinion, have a measurable impact on the performance of the
Company during a long term performance cycle. At present, 6 executives,
including the executives named in the Summary Compensation Table, have been
designated as participants by the Committee.
Administration. Grants of target awards under the Plan and all other
decisions regarding the administration of the Plan will be made by the
Committee, which consists solely of outside directors as such term is defined
in Section 162(m) and who are not eligible to participate or receive any
benefits pursuant to the Incentive Plan.
Performance Standards. Within 90 days of the beginning of each fiscal year
of the Company, the Committee will establish for each participating executive
officer the performance target or targets and related target awards payable
in cash upon meeting the performance targets for the annual and the
multi-year performance periods, as the case may be. Performance targets
(except for personal performance objectives) must be expressed as an
objectively determinable level of performance of the Company or any
subsidiary, division or other unit of the Company, based on one or more of
the following: net income, net income before taxes, operating income,
revenues or sales, earnings, earnings per share, operating cash flow,
expenses, or development of specific strategic assignments, as determined by
the Committee at the time of establishing the performance targets. The
Compensation Committee believes that specific information as to such
performance standards is confidential business information, the disclosure of
which would adversely affect the Company. The Committee may also provide, at
the time of establishing such performance targets, whether, and to what
extent, non-recurring or similar charges or income shall be taken into
account in determining whether such targets are met. Personal Performance
Objectives may be based on such objectively determinable criteria as
described above, or on such other criteria as the Committee may determine. To
the extent that personal performance objectives are not based on objectively
determinable criteria as contemplated by Section 162(m), payment of awards
attributable to such objectives will not be deductible for any of the
10
<PAGE>
Company's Chief Executive Officer or the four other most highly compensated
executives to the extent such person's aggregate compensation exceeds $1
million in that year.
Determination of Award Payouts. At the end of each fiscal year, in the
case of the annual bonus component, or at the end of a three year performance
period in the case of the long term bonus component, the Committee is
required to certify in writing the attainment of the performance targets and
the calculation of the payouts, if any, of the related target awards. No
award shall be paid if the related performance target is not met. The maximum
award for a covered executive in any year will be $2.0 million separately
with respect to each of the annual bonus component or the long term bonus
component. The awards related to a performance standard are adjusted at the
end of a performance period based on an increase in an individual
participant's salary, however, any such adjustments may not be made to the
extent that an award would exceed such maximum award levels.
1996 Short Term Opportunities. On January 30, 1996, the Committee
established performance targets and target awards under the Incentive Plan
for the Company's executive officers for 1996. As in prior years under the
previously existing annual incentive bonus program, target awards for 1996
are set in proportion to the participants' salary levels, and may be earned
based on the achievement of target levels of earnings per share, cash flow,
and personal performance objectives (including sales objectives) during the
one year performance period. Because the award levels are based upon
achievement of objectives during 1996, the amount of any awards that may be
payable to participating Executive Officers under the Incentive Plan
(including the Chief Executive Officer) cannot currently be determined.
However, the Incentive Plan is a continuation of the previously existing
annual incentive bonus program, and stockholders may assume that if the
Incentive Plan had been in effect for 1995, the annual bonus compensation
received by the named officers in the Summary Compensation Table on page 15
would have been awarded under the Incentive Plan, subject to upward
adjustments based on salary increases. For 1995, the Company paid all
executive officers (including the named executive officers) as a group
$2,412,790 and 131 other employees participating in a similar plan,
$2,574,258, in bonuses. In the discretion of the Committee, award levels (to
be earned based on performance) may be increased for award opportunities
established in the future, subject to the maximum award level described
above.
Long Term Grants. Target awards are established for three year performance
cycles, and are generally set at three levels, specifically, a threshold
level of performance to earn any award, a target level, and a maximum award
for exceeding targets. Long term grants were made by the Committee in 1995
for the 1995-1997 performance cycle, and in 1996 for the 1996-1998
performance cycle, each such grant being subject to stockholder approval.
Awards for each of these performance cycles are based on the achievement of
target levels of earnings and sales. Because the award levels are based upon
achievement of financial objectives during periods ending in 1997 and 1998,
as the case may be, the amount of any awards that may be payable to
participating Executive Officers under the Incentive Plan cannot currently be
determined. Information concerning potential future long term payouts under
the Long Term component of the Plan with respect to the grant for the
1995-1997 performance cycle is presented in tabular form in the section of
this Proxy Statement captioned "EXECUTIVE COMPENSATION AND TRANSACTIONS"
under the heading "Long Term Incentive Plan Awards in Last Fiscal Year."
Information concerning potential payouts with respect to the grant for the
1996-1998 performance cycle is set forth below. In the discretion of the
Committee, award levels (to be earned based on performance) may be increased
for future grants, subject to the maximum award level described above.
<TABLE>
<CAPTION>
Performance Estimated Future Payouts
or Other Under Non-Stock Price-Based
Number of Period Options
Shares, Units Until -------------------------------
or Other Maturation Threshold Target Maximum
Name Rights (#) or Payout ($) ($) ($)
------------------------ --------------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Leon C. Hirsch 195 Units 3 Years $194,569 $389,138 $778,276
Turi Josefsen 85 Units 3 Years 85,059 170,119 340,237
Howard M. Rosenkrantz 29 Units 3 Years 28,964 57,928 115,855
Thomas D. Guy 25 Units 3 Years 24,743 49,487 98,973
Thomas R. Bremer 24 Units 3 Years 23,998 47,997 95,994
</TABLE>
Amendment and Termination. The Incentive Plan may be amended by the Board
of Directors or Committee at any time, provided that such changes shall be
consistent with the provisions of Section 162(m) of the Code and the
Regulations, including the requirement that no amendment that requires
stockholder approval under Section 162(m) of the Code or the Regulations may
be made without such approval. The Plan will terminate at the first meeting
of stockholders of the Company in the year 2001 or may be sooner terminated
by the Board of Directors at any time.
11
<PAGE>
Proposal 3 must be approved by the affirmative vote of a majority of the
shares present at the annual meeting in person or by proxy and entitled to
vote on such matter. Abstentions have the effect of a vote against the
proposal. No award payouts may be made pursuant to the Incentive Plan unless
such approval is obtained.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR APPROVAL OF THE EXECUTIVE
INCENTIVE COMPENSATION PLAN.
SHAREHOLDER PROPOSALS
SHAREHOLDER PROPOSAL NO. 1
(ITEM 4 ON PROXY CARD)
Ms. Arlene Boryk, 66-36 Yellowstone Boulevard, Apt 12F, Forest Hills, New
York, beneficial owner of 1,000 shares of the Common Stock of the Company,
has submitted the following proposal:
Stock Compensation Proposal
"RESOLVED that the shareholders recommend that the board of directors take
the necessary steps to ensure that from here forward all non-employee
directors should receive a minimum of fifty percent of their total
compensation in the form of company stock which cannot be sold for three
years."
Supporting Statement
A significant equity ownership by outside directors is probably the best
motivator for facilitating identification with shareholders.
Traditionally, outside directors, sometimes selected by management, were
routinely compensated with a fixed fee, regardless of corporate performance.
In today's competitive global economy, outside directors must exercise a
critical oversight of management's performance in furthering corporate
profitability. All too often, outside director's oversight has been marked by
complacency, cronyism, and inertia.
Corporate America has too many examples of management squandering company
assets on an extended series of strategic errors. Meanwhile, boards of
directors stood by and passively allowed the ineptitude to continue, well
after disaster struck. They fiddled while Rome was burning.
When compensation is in company stock, there is a greater likelihood that
outside directors will be more vigilant in protecting their own, as well as
corporate, and shareholder interests.
What is being recommended in this proposal is neither novel or untried. A
number of corporations have already established versions of such practices,
namely, Scott Paper, The Travelers, Hartford Steam Boiler, and Alexander &
Alexander.
Harvard Business School did a series of studies comparing highly
successful to poorly performing companies. They found that outside directors
in the better performing companies had significantly larger holdings of
company stock than outside directors in the more mediocre and poorly
performing companies.
It can be argued that awarding stock options to outside directors
accomplishes the same purpose of insuring director's allegiance to a
company's profitability, as paying them exclusively in stock. However, it is
our contention that stock options are rewarding on the upside but offer no
penalties on the downside. There are few strategies that are more likely to
cement outside directors with shareholder interests and company profitability
than one which results in their sharing the same bottom line.
I URGE YOUR SUPPORT. VOTE FOR THIS RESOLUTION.
BOARD OF DIRECTORS RECOMMENDATION
The Board of Directors recommends that shareholders vote against this
proposal, which would result in a costlier and less effective compensation
structure for the members of the Board, making it more difficult to attract
and retain qualified directors. The Board agrees that outside directors
should have a personal economic interest in the Company's stock price but
believes its present arrangements, which include a combination of cash, stock
options and restricted stock, provide a more cost-effective means for
accomplishing this goal. Cash fees are an important component of director
compensation, and should be adequate payment for the independent directors'
valuable time and services. The Company believes that its cash compensation
to outside directors is reasonable when compared
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<PAGE>
to other similar corporations. If the Company adopted the proponent's
approach, it would either be required to reduce cash compensation
dramatically, risking loss of the ability to attract competent, experienced
outside directors, or raise the overall compensation to interest competent
outside directors by offering adequate cash compensation in addition to
restricted stock grants. Therefore, the proposal, if adopted, could be more
costly to the Company than the current plan. Impacting the Company's ability
to pay reasonable outside director fees would be counterproductive to the
very goal the proponent seeks--a competent and diligent board of directors.
The Company believes that its present non-employee director stock program,
which was approved overwhelmingly by the shareholders in 1988, is appropriate
and properly aligns the directors' interests with those of the stockholders.
This program includes an annual grant of stock options which, unlike
restricted stock, has no value unless the stock appreciates in price. Under
the current plan, the one time grant of 4,000 restricted shares, made to
directors on the first anniversary of their joining the Board, accomplishes
the same goal as sought by the proponent but without the level of charges to
earnings which would be the case with annual restricted stock awards to all
directors. Stock options, which do not require a charge to earnings as
reflected on the Company's income statement at the time of the grant, provide
a more effective and lower cost means of a stock incentive to the Company's
directors. Therefore, contrary to the proponent's suggestion, restricted
stock is disadvantageous to the Company. Moreover, the Company receives
payment for option stock, in cash, at the time of exercise.
It is important that the Board retain flexibility in compensating
directors in order to maintain an effective board. Although the Company
agrees with the proponent's goal of aligning the director's and shareholders
interests, it believes that this proposal is not effective and would
needlessly hamper the Board's ability to establish director compensation from
time to time.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE AGAINST THIS PROPOSAL.
SHAREHOLDER PROPOSAL NO. 2
(ITEM 5 ON PROXY CARD)
Mr. William Steiner, 4 Radcliff Drive, Great Neck, New York, beneficial
owner of 100 shares of the Common Stock of the Company, has submitted the
following proposal:
Independent Board
Whereas the board of directors is meant to be an independent body elected by
shareholders charged by law and shareholders with the duty, authority and
responsibility to formulate and direct corporate policies and is to be held
to the highest standards of fiduciary care, duty and loyalty.
Now therefore be it "resolved that the shareholders request that the
company's board of directors be comprised of a truly independent board,
meaning that the majority of the board will be non-family members and
individuals who do not currently work or consult with the company, have been
employed by the company or have consulted with the company in the past. This
is meant to be applied only to nominees for directors at meetings subsequent
to the 1995 annual meeting."
Supporting Statement
I believe that shareholders will be better served when the majority of the
board is truly independent. Such independent individuals hopefully will bring
true objectivity to serious issues facing our company.
As matters stand today the members of the board of directors are either
family members, individuals who either are employed by, do work for, or have
been employed by the Company in the past. There is an apparent conflict of
interest each time matters concerning executive compensation policies,
possible takeover offers and corporate governance issues arise. I am a
founding member of the Investors Rights Association of America and I believe
this is a matter that is urgent and must be presented to the shareholders for
action.
I URGE YOUR SUPPORT. VOTE FOR THIS RESOLUTION.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors agrees that it should be independent but opposes
this proposal, which the Board believes is misleading and inflexible. The
Company notes that the proposal is identical to a proposal submitted by the
pro-
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ponent to a different corporation in 1995, including, word for word, various
accusations made against that corporation, which are simply false in this
case. The Company believes that the proponent submits many proposals to many
different corporations and has made no effort to determine whether claims
made in support of this proposal are valid.
The Board believes that any referendum that proposes a rigid formula for
the Board make-up at all times is inadvisable and impractical. Three outside
directors were elected during the past eighteen months and the Board is
continually searching for additional qualified outside board members, as it
finds candidates who possess the necessary talents to contribute to the
Company, its stockholders and to the Board's activities. In fact, the slate
of directors to be voted on by the stockholders at this meeting includes six
outside and five inside directors. While the Board's goal is a majority of
independent directors, it does not believe that it is practical or
appropriate to constrict the Board rigidly, immediately and at all times to a
defined quota. There may be periods when, due to retirements or other
resignations of directors in the ordinary course of business, the balance of
inside and outside directors could change. Adequate time must be available to
locate suitable nominees as replacements, and the proposal would not allow
for such needs. Furthermore, the proposal is confusing in that it includes a
definition of independent director suggesting that a director would not be
"independent" in the event he or she "consulted" with the Company,
irrespective of whether fees were even paid.
Secondly, contrary to the implications contained in this shareholder
proposal, the Board does in fact act independently. Many of the Board's
actions are based on votes by only outside directors. Indeed, the
Compensation/ Option Committee, which administers the Company's executive
compensation program, and the Audit Committee, which oversees the Company's
financial reporting and the Company's internal control system, consist
exclusively of outside directors. Despite these facts, which are readily
ascertainable from the Company's public filings, the proposal falsely
suggests that the Company's directors all are family members, employees or
former employees, or do work for the Company. As discussed above, the
proponent merely repeated identical claims made against another corporation.
In fact, no current outside director has ever been an employee of the
Company. Moreover, the Company does not engage its directors to perform
services to the Company which would preclude their faithfully and
independently executing their responsibilities. Reference is made to the
discussion below under the caption Certain Transactions with respect to
services performed for the Company by one outside director. For all the
reasons cited herein, this stockholder proposal should be rejected in its
entirety.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE AGAINST THIS PROPOSAL.
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EXECUTIVE COMPENSATION AND TRANSACTIONS
Executive Officers' Compensation
The following table shows compensation paid by the Company and its
subsidiaries for services in all capacities during 1993, 1994 and 1995 to
each of the Chief Executive Officer and the other four most highly
compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
--------------------------- ---------------------------------
Restricted Securities LTIP
Stock Underlying Payouts All Other
Salary Bonus Awards Options/SARs ($) Compensation
Name and Principal Position Year ($) ($) ($) (1) (#) (2) (3) ($) (4)
- ------------------------------- --- --------- ------- ---------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Leon C. Hirsch ................ 1995 $1,026,016 $806,125 0 0 0 $ 745,578
Chairman and CEO 1994 824,485 322,450 0 0 0 1,021,596
1993 1,026,016 352,680 0 0 $209,218 1,169,839
Turi Josefsen ................. 1995 635,080 431,704 0 17,000 0 21,170
Executive Vice President and 1994 573,408 194,267 0 0 0 30,622
President, International 1993 635,080 215,852 0 0 90,185 2,129
Operations
Howard M. Rosenkrantz ......... 1995 368,360 175,000 0 12,000 0 15,008
Senior Vice President, Finance 1994 274,560 64,050 0 50,000 0 21,893
and Chief Financial Officer 1993 303,027 85,400 0 0 0 2,307
Thomas D. Guy ................. 1995 317,360 149,500 0 12,000 0 13,272
Senior Vice President, 1994 235,291 55,973 0 50,000 0 19,788
Operations 1993 260,168 74,630 0 0 0 2,086
Thomas R. Bremer .............. 1995 274,000 127,820 0 12,000 0 9,249
Senior Vice President and 1994 235,291 55,973 0 50,000 0 12,533
General Counsel 1993 260,168 74,630 0 0 0 1,034
</TABLE>
- -----------
(1) At December 31, 1995 no shares of restricted stock were held by any of
the named executive officers. The plan pursuant to which restricted stock
was available has been terminated by the Board of Directors of the
Company, effective February 1, 1996, and the 1,018,100 previously
reserved shares of Common Stock may no longer be issued pursuant to such
plan.
(2) Although Company sponsored stock plans permit the granting of SAR's, no
SAR's have been granted.
(3) Mr. Guy and Mr. Bremer were not eligible for LTIP awards for the
performance periods ended in 1993, 1994 or 1995. Mr. Rosenkrantz was not
eligible for an LTIP award for the performance periods ended in 1993 or
1994.
(4) Represents for Mr. Hirsch accrued bonuses payable pursuant to the terms
of installment option purchase agreements and for all of the named
executives the value of the benefit of premiums on life insurance paid by
the Company (for Mr. Hirsch, $25,152, 1995, $ 32,190, 1994; $ 2,171,
1993). The methodology for computing the value of such premiums was
revised in 1994; benefits were not increased. The computation reflects
the present value to the named executives of the premium payments rather
than the present value of the anticipated cash benefit to the executive,
resulting in a greater portion of benefits allocated earlier in the
policy term. Mr. Hirsch's installment option purchase agreement, the
principal balance of which was repaid by Mr. Hirsch in 1994, is described
on page 22 under the heading "Certain Transactions".
Perquisites and other personal benefits, securities or property did not
exceed the lesser of either $50,000 or 10% of the total of annual salary and
bonus reported for the named executive officers.
OPTIONS
Stock Options and Stock Appreciation Rights
Under the Company's stock incentive program, the Compensation/Option
Committee may grant stock options and related stock appreciation rights
("SAR's") to executive officers, to purchase shares of the Company's common
stock at prices not less than the fair market value of the stock on the date
of grant. SAR's entitle an option holder
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<PAGE>
to surrender unexercised stock options for cash or stock equal to the excess
of the fair market value of the surrendered shares over the option price of
such shares. No SAR's have been granted. See Report of Compensation/Option
Committee, beginning on page 17 below.
The following table contains information concerning the grant of stock
options to four named executive officers of the Company.
OPTION/SAR GRANTS IN 1995
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees Exercise or Grant Date
Granted in Fiscal Base Price Expiration Present Value
Name (#) Year ($/SH) Date (1)
- --------------------- ----------- ------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Turi Josefsen 17,000 1.2% $26.06 2/07/02 $158,270
Howard M. Rosenkrantz 12,000 .8% 23.69 2/07/05 120,240
Thomas D. Guy 12,000 .8% 23.69 2/07/05 120,240
Thomas R. Bremer 12,000 .8% 23.69 2/07/05 120,240
</TABLE>
- ---------------------
(1) The estimated fair value of stock options is measured at the date of
grant under the Black-Scholes option pricing model based on four
assumptions: expected volatility of .46 based on the average of the high
and low prices of the Company's Common Stock for the last four years;
expected term to exercise of approximately four years; interest rates
equal to the U.S. Treasury Note rates in effect at the date of the grant
(5.01%) for the expected term of the option; and a dividend yield of .33%
based on the current annual yield. The actual value, if any, an executive
may realize will depend on the excess of the stock price over the
exercise price on the date the option is exercised. Consequently, there
is no assurance the value realized by an executive will be at or near the
value estimated above.
The table below sets forth certain information about the exercise of stock
options during 1995 by each of the named executive officers and the value of
unexercised in- the-money options held by such officers at December 31, 1995.
Aggregated Option/SAR Exercises in Last Year and Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options/SARs at Year-End at Year-End (1) (2)
Acquired on Value ---------------------------- -----------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($) (#) (#) ($) ($)
- ---------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leon C. Hirsch 0 0 3,052,834 125,000 876,390 0
Turi Josefsen 0 0 933,333 83,667 0 0
Howard M. Rosenkrantz 0 0 90,666 95,334 0 0
Thomas D. Guy 0 0 100,666 95,334 0 0
Thomas R. Bremer 0 0 130,666 95,334 273,750 0
</TABLE>
- ----------------
(1) Although the Company's option plans permit the granting of SAR's, no
SAR's have been granted.
(2) Value is calculated by determining the difference between the fair market
value of the securities underlying the options at year-end and the
exercise price of the options.
Long Term Incentive Awards
Under the Company's Long Term Incentive Plan, described more fully in the
Compensation/Option Committee's Report beginning on page 17, senior
executives have the opportunity to earn a cash payment at the end of a
performance cycle (currently three years) based on achievement of sales and
earnings per share growth. The table below sets forth certain information
regarding each award made to the named executive officers during 1995 under
the Company's Long Term Incentive Plan.
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<PAGE>
Long-Term Incentive Plan Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Performance Estimated Future Payouts
Number of or Other Under Non-Stock Price-Based Options
Shares, Period -----------------------------------
Units Until
or Other Maturation Threshold Target Maximum
Name Rights (#) or Payout ($) ($) ($)
- --------------------- ----------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Leon C. Hirsch 185 Units 3 Years $185,304 $370,608 $741,215
Turi Josefsen 81 Units 3 Years 81,009 162,018 324,035
Howard M. Rosenkrantz 28 Units 3 Years 27,585 55,169 110,338
Thomas D. Guy 24 Units 3 Years 23,565 47,130 94,260
Thomas R. Bremer 22 Units 3 Years 21,997 43,993 87,986
</TABLE>
Set forth below is a graph comparing the cumulative total shareholder
return on the Company's Common Stock with the cumulative total return of the
S & P 500 Index and the S & P Medical Products & Supplies Index. Cumulative
total shareholder return assumes reinvestment of dividends.
The comparison is based upon the assumption that $100 was invested on
December 31, 1990 in United States Surgical Corporation's Common Stock, the S
& P 500 Index and the S & P Medical Products & Supplies Index.
The following depiction of shareholder return shall not be deemed
incorporated by reference into any filings by the Company under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended.
PERFORMANCE GRAPH
(INSERT PERFORMANCE GRAPH FROM MAC)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1995
USSC 100 312 194 64 54 61
S & P 500 100 130 140 155 157 215
S & P Medical Products 100 164 140 107 127 214
</TABLE>
Report of Compensation/Option Committee
The compensation of the Company's executive officers is reviewed and
approved at least on an annual basis by the Compensation/Option Committee
(the "Committee") of the Board of Directors, which consists exclusively of
independent, non- employee Directors who qualify as "outside directors" under
Section 162(m) of the Internal Revenue Code, discussed below.
17
<PAGE>
General Policy
The Company's compensation policy, which is endorsed by the Committee, is
to attract and retain the best management talent available, and to pay that
talent based on Company and individual performance. To this end, a
substantial portion of an executive officer's compensation opportunity is "at
risk" and is realized only for achievement of specific goals. For 1995, the
Company's goal was continuing to build the Company's financial health and
stability. Consequently, the Committee set achievement of specific objectives
for earnings per share and cash flow as the base for 1995 incentive
compensation. The Committee thinks that, while performance goals should
include corporate financial results, executives should also be held
accountable for individual performance objectives. The Committee established
personal performance objectives for each of the Company's executives. In
1995, the portion of the annual and long term cash compensation opportunities
of the named executive officers which was "at risk" (subject to attainment of
performance goals) ranged from 32% to 59%, with 59% of such compensation
opportunities of the Chief Executive Officer "at risk". Stock programs,
including primarily stock options, are also an important part of the
Company's compensation program, particularly since the Company does not
provide pensions.
In setting compensation, the Committee periodically reviews, with the
assistance of independent compensation consultants, available information as
to salaries and incentive opportunities for similar positions or levels at
comparable companies. The companies generally include a diverse sample of
manufacturing companies with sales within and above the range of those of the
Company. Medical device manufacturers are included in the sample but the
comparison has not been limited to such companies, or to companies included
in the index for the stock price performance graph on page 17. The Committee
uses this information as a benchmark for compensation opportunities offered
by competitors for talented executives, both in the industry, in a broader
manufacturing sector, and in the geographical area in which the Company's
headquarters is located. In some cases, private industry association surveys
are also considered when they provide useful information for certain
positions. For most executives, market based compensation was last set for
1992 compensation packages; more recently, compensation packages have been
adjusted from that base, as discussed below. Historically, the Company has
set annual salaries and incentive compensation opportunities at the higher
end of the range of the companies used for comparison because the Company
demands superior performance from its executives and typically assigns most
executive officers of the Company broader, more complex responsibilities than
corresponding positions in comparative companies. The Committee believes that
compensation opportunities have fallen below target levels more recently
since salaries have not been generally adjusted to the market since 1992, as
discussed below. The Company will continue to hire executives whose talent
and performance place them within the high end of the pool of available
executives, and the Committee intends to set compensation packages which are
adequate to meet this need while furthering Company objectives.
The total compensation program is designed to balance incentives between
short and long term performance, and consists of annual compensation, which
includes base salary and the opportunity to earn an annual bonus, and a long
term incentive program, which includes stock awards (primarily stock options)
and the opportunity to earn cash awards over a multi-year performance period.
Each element of the compensation program, including a specific discussion
as to the Chief Executive Officer's compensation, is set out below.
Annual Compensation.
Generally, annual compensation of executive officers under the Executive
Compensation Program for 1995 consisted of salary and bonus components.
1. Salary.
Under the Company's compensation program, executive officers are paid a
base salary based upon their level of responsibility and their contribution
to the Company, including informal assessments as to their compliance with
the Company's overall corporate policies. The 1995 salaries of executive
officers, including the Chief Executive Officer, were reviewed and approved
by the Compensation/Option Committee in November, 1994. Generally, the
Committee restored Mr. Hirsch's and the Company's other executives base
salary to 1993 levels, following reductions of 1994 base salaries (by 20% for
Mr. Hirsch, and by 10% for other officers) at the request of Mr. Hirsch and
the Company's other executives, as part of a cost reduction effort by the
Company. The Committee thinks that the substantial improvements in the
Company's financial strength during 1994 were due to the efforts of the
executives and that restoration of their salaries was amply earned. In
addition, the Committee adjusted the salary of Mr. Rosenkrantz, Senior Vice
President--Finance and Chief Financial Officer and of Mr. Bremer, Senior Vice
President and General Counsel, during 1995. Mr. Rosenkrantz's salary
adjustment was based on information obtained by the
18
<PAGE>
Committee as to salaries paid chief financial officers of other known, well
respected companies, and was set at approximately the mean of such companies.
Mr. Bremer's salary adjustment was based on surveys conducted by an
independent management consulting firm of comparable positions at various
companies considered appropriate for comparison. The companies included in
the comparative groups in both cases were not limited to the companies
included in the medical devices index used in the stock performance graph on
page 17, since the Company competes for the top tier of executive talent with
firms in other industries and which, in many cases, are much larger than the
Company.
2. Bonus.
A significant portion of 1995 executive officer annual compensation was
based on corporate performance. Annual bonuses under the Company's executive
compensation program were based on the Earnings Per Share ("EPS") bonus
component, the cash flow bonus component, for officers with marketing
responsibilities, sales objectives, and personal performance objectives.
Annual bonuses are based solely on performance. For 1995, 50% of the bonus
opportunities were weighted equally between the EPS and cash flow components,
and 50% for the personal performance objective component. Each bonus
performance element is evaluated independently, however, a failure to achieve
personal performance objectives ratably reduces the opportunity for awards
for achievement of EPS and cash flow components. Bonus opportunity levels are
set as a percentage of base salary. For 1995, bonus opportunities were
increased by 20% for the Chief Executive Officer and by 10% for the other
named executives, commensurate with restoring the base salaries to 1993
levels.
Performance goals are established by the Committee. Following year-end,
the Committee reviews the extent to which the goals have been achieved with
the assistance of the Company's independent auditors, assesses personal
performance objectives, and determines the amount of the bonus to be paid to
the executive officers, if any.
The EPS Bonus Component: The 1995 EPS bonus opportunity ranged from 12.5%
to 20% of the salary levels of the executives named in the Summary
Compensation Table, with 20% for the Chief Executive Officer. A percentage of
the bonus may be earned based on a particular year's EPS above a minimum base
(subject to attainment of personal performance objectives), up to a maximum
determined by the Committee. The EPS goals were exceeded for 1995 and the
maximum amounts were paid for the EPS Bonus Component to the Chief Executive
Officer and to the named (and other) officers of the Company.
The Cash Flow Bonus Component: The 1995 Cash Flow bonus opportunity ranged
from 12.5% to 20% of the salary levels of the executives named in the Summary
Compensation Table, with 20% for the Chief Executive Officer. A percentage of
the bonus may be earned based on the year's cash flow above a minimum base
(subject to attainment of personal performance objectives), up to a maximum
determined by the Committee. The cash flow goals were substantially exceeded
for 1995 and the maximum amount was paid for the Cash Flow Bonus Component to
the Chief Executive Officer and to the named (and other) executive officers
of the Company.
The PPO Bonus Component: Under the PPO Bonus component, individual
performance objectives are established for the Chief Executive Officer and
the other named (and other) executives by the Committee. Each PPO is weighted
and is related to the particular area for which an executive officer is
responsible. Examples of objectives include, but are not limited to, budget
control, achievement of sales objectives, product design, and manufacturing
practices. In 1995, the portion of cash compensation opportunity represented
by this component of compensation ranged from 25% to 40% of the salary levels
of the executives named in the Summary Compensation Table, with 40% for the
Chief Executive Officer.
Long Term Incentive Program
The Company's long term incentive program, developed with the advice of
outside compensation consultants, consists of stock incentives, which
directly link the interests of management with those of the stockholders, and
cash incentives based on financial performance over a three year performance
period.
19
<PAGE>
1. Restricted Stock Awards.
No awards of restricted stock were made in 1995 to any executive officers.
During February, 1996, the Board of Directors terminated the Company's
Restricted Stock Incentive Plan, based on the belief that stock options
provide a more effective and less costly incentive program.
2. Stock Options.
The Company seeks to have its executives think of themselves as having a
personal stake in the Company by awarding stock options which give such
officers the opportunity to participate in the growth in the value of the
Company's stock. This approach aligns the interest of the executive officers
with those of the stockholders because the value of the executive officers'
stock options will depend exclusively on how the Company's stock performs.
Stock options only have value to the recipient when the price of the
Company's Common Stock exceeds the exercise price of the option, which is at
least the fair market value at date of grant. Thus, options provide a
powerful incentive for employees to maximize the Company's sales and profits,
and build the value of the business, all of which should be reflected over
the long term in the price of the Company's Common Stock. In prior years,
executives of the Company realized substantial profits from the exercise of
stock options, in some cases placing them among the more highly compensated
executives in the nation. The Committee believes that stockholders benefited
proportionately and that the use of options facilitated the Company's
substantial growth during the period from 1989 through 1992. During 1995, an
option grant was made to the named executive officers other than the Chief
Executive Officer, and to other executive officers, as a reward for restoring
the Company's financial stability and as a retention incentive for the core
management group which is key to the continued improvement of the performance
of the Company. The exercise price was set at the market price on the date of
grant, with the exception of the grant to Ms. Josefsen which was set at a ten
percent premium to the market price on the date of grant in accordance with a
settlement of shareholder derivative litigation. No grants were made to
Company executives in 1992 or 1993, except in the case of newly elected
officers. For 1995 awards, the Committee took into account that many of the
outstanding option grants preceded the downturn in the health care industry,
were out of the money, and were not adequate to further the purpose of the
stock grant program. The number of options granted reflected the advice of an
independent compensation consultant that such grants were at levels
comparable to the market. The stock option grants are also intended to
provide participants with a potential source of retirement income since the
Company does not provide pensions. No grants have been made to Mr. Hirsch
since 1991 prior to the grant proposed for stockholder approval at the 1996
Annual Meeting, as discussed on page 6.
3. Long Term Incentive Plan.
Under the Executive Long Term Incentive Plan ("LTIP") (if approved by the
shareholders at the Annual Meeting, the plan will become the long term
component of the Executive Incentive Compensation Plan) cash payouts may be
earned by a limited number of senior executives based on achievement of a
weighted combination of measurable financial objectives set by the committee.
At present, the objectives are sales growth (34%) and EPS (66%) during a
three-year performance cycle. The long term cash incentive opportunity
encourages executives to take steps which build the business for the future,
avoiding a possible disincentive for prudent long term steps out of concern
as to the possible impact on short term results. Levels of performance are
graded on three tiers--minimum, target and maximum (corresponding to the
threshold, target, and maximum columns under the table describing Long Term
Incentive Awards on page 17)--with no compensation payable if the performance
is below the minimum tier and no additional compensation if the performance
is above the maximum tier. The amount of the payout is based on a percentage
of the recipient's average annual base salary during the cycle, ranging from
7.5% to 17.5% for achievement in the minimum tier, 15% to 35% for achievement
in the target tier and 30% to 70% for achievement in the maximum tier, the
exact percentage depending on the executive's tier. For the Chief Executive
Officer, the percentages for these tiers was 17.5%, 35% and 70%.
The Company did not achieve the minimum tiers for sales growth or EPS
components for the three year performance cycle ended in 1995. As a result,
neither the Chief Executive Officer nor the other named executives received
any payout under the LTIP for that period.
All Other Compensation.
Included with respect to the Chief Executive Officer in 1995 as "all other
compensation" reported in the Summary Compensation Table was interest accrued
and forgiven pursuant to the terms of an Installment Option Purchase
Agreement which was entered into in 1984 by the Chief Executive Officer and
the Company. The Installment Option Purchase Plan ("IOPA") was originally
entered to encourage Mr. Hirsch, and other executives, to exercise options in
the Company's stock. In 1994, at the Committee's request, Mr. Hirsch repaid
the outstanding principal option
20
<PAGE>
price of $5,370,000 in full to the Company in cash. To keep Mr. Hirsch in
substantially the same position on interest, the Committee agreed to continue
to pay the accrued interest as a bonus as it becomes due and to repay
interest expenses of a personal loan by Mr. Hirsch to obtain the funds to pay
the option price. In effect, the transaction substituted a third party for
the Company as the lender under the installment option purchase arrangement.
The Company obtained a significant net cash benefit and additional equity,
and Mr. Hirsch received no advantage.
Tax Considerations.
In 1994, federal tax laws imposed a limit on deductions for executive
compensation. Accordingly, deductions by the Company for compensation for
each of the five executives named in the summary compensation table are
limited to $1 million unless certain conditions are met, primarily, that the
compensation is based on objective performance criteria approved by the
stockholders. The compensation payments must also be made pursuant to a plan
approved by the stockholders and administered by a committee of outside
directors.
The Committee believes that its executive compensation program is
consistent with the intent of this legislation and has taken steps designed
to maximize the deductibility of executive compensation consistent with
corporate objectives. The Company's 1990 stock option plan under which
options may be granted to executive officers has been approved by the
stockholders and qualifies for the exclusion from the deduction limits for
grants through 1997. The 1996 Stock Option Plan, if approved by the
stockholders, is expected to maintain the Company's deduction for any
compensation realized by participants from options granted under such plan.
Long Term Incentive Plan grants which, depending on performance, may result
in payouts for performance periods through 1995 predated the new law, are not
subject to the limit and can be claimed as a deduction. The Company's long
term plan is based on objective performance criteria and will allow the
Company to make awards which qualify for the deduction if the Executive
Incentive Compensation Plan is approved by the stockholders at the Annual
Meeting. Long term grants for the performance periods 1995 through 1997 and
1996 through 1998 were conditioned on such stockholder approval. Part or all
of the annual bonus opportunity likewise qualifies for the deduction if the
Executive Annual Incentive Compensation Plan is approved by the stockholders.
Base salary and certain other compensation amounts disclosed in the summary
compensation table do not qualify for the exclusion from the $1 million
limit. The Committee intends to take steps in the future, including
stockholder approval, to maintain deductions for its incentive compensation
plans to the greatest extent practical while maintaining flexibility to take
actions which it deems in the best interests of the Company and its
stockholders but which may result in certain compensation not qualifying for
tax deductions.
COMPENSATION/OPTION COMMITTEE:
Douglas L. King, Chairman
John A. Bogardus, Jr.
William F. May
John R. Silber
Compensation Committee Interlocks and Insider Participation
Mr. King, a member of the Committee, is President and a director of Smyth,
Sanford & Gerard Reinsurance Intermediaries, Inc., which provided certain
insurance brokerage services to the Company. Smyth, Sanford and Gerard
Reinsurance Intermediaries Inc. received compensation of approximately
$229,500 from such services during 1995. Mr. King may have benefited
indirectly from these transactions as an officer and employee of that firm.
On advice of counsel, the Company believes that Mr. King qualifies through
the date of the annual meeting as an outside director for purposes of Section
162(m), but will not serve on the Committee after such date in order to
maintain the qualification of the Committee as administrators for purposes of
Section 162(m) of the Internal Revenue Code, as discussed above, relating to
deductions of executive compensation for federal income tax purposes.
Directors' Compensation
Directors who are also officers (currently, Messrs. Hirsch, Bremer and
Rosenkrantz and Mmes. Josefsen and Scipione) serve as such without additional
compensation. During 1995, outside directors were each paid the following
fees in each of the capacities served: directors, $31,200 plus $2,500 for
each Board meeting attended; Chairman of a Committee, $4,375; other members
of a Committee, $3,120 per Committee; all Committee members received $1,250
for each Committee meeting attended on a non-Board meeting day.
21
<PAGE>
Certain Eligible Directors (defined as directors who are not, and have not
been for the preceding l2 months, employees of the Company or its
subsidiaries, and who are not the beneficial owner of five percent or more of
the outstanding Common Stock) have received stock award and option grants
under the Outside Directors Stock Plan (the "Outside Directors Plan"). The
Outside Directors Plan provides for stock awards and option grants of up to
an aggregate maximum of 160,000 shares of Common Stock, of which 26,000
shares remained available for grant as of December 31, 1995. Upon the
forfeiture of shares prior to vesting, and upon expiration of an option, the
forfeited shares and any shares subject to the option which remain
unexercised generally become available again under the Outside Directors
Plan. The Outside Directors Plan is administered by the Compensation/Option
Committee of the Board of Directors. The selection and eligibility of
grantees and the dates and amounts of option grants are defined in the
Outside Directors Plan and are not subject to the discretion of any person.
Option grants of 4,000 shares are automatically made under the Outside
Directors Plan to Eligible Directors each year upon his or her reelection to
the Board by the stockholders. The option price is the fair market value of
the Common Stock on the date of grant. Each option becomes exercisable as to
one-half of the shares covered by it commencing one year after the date of
grant and as to the remaining one-half commencing two years after the date of
grant, provided the optionee has been in continuous service on the Board at
all times since the date of grant. However, each option becomes fully
exercisable in the event of the grantee's death or permanent disability, and
may be exercised to the extent otherwise exercisable if the grantee retires
with the consent of the Board or his or her service on the Board is
terminated after a Change in Control, as defined. The Eligible Directors each
received an option for 4,000 shares in 1995, with an option exercise price of
$22.63. Assuming an Eligible Director is reelected, such director will
receive an option for 4,000 shares effective May 2, 1996. Eligible Directors
also receive a one-time stock award of 4,000 shares of restricted stock
following the first anniversary of their election to the board. Dr. Silber
received such an award during 1995.
Certain Transactions
(a) In connection with the exercise of certain options granted under the
1981 Employee Stock Option Plan, the Company entered an installment option
purchase agreement (the "Agreement") with Leon C. Hirsch in 1984 where the
Agreement, as amended, permitted Mr. Hirsch to pay the option price in three
equal installments, with the last installment payable in 1999. Mr. Hirsch
agreed, at the request of the Company, to repay the outstanding principal
option price of $5,370,000 during 1994. In exchange, the Company agreed to
continue to award Mr. Hirsch a bonus equal to scheduled installments of
interest payments on the original option price and for the interest costs on
a personal loan taken to repay the option price. The interest rate on such
personal loan was at an annual rate of 7.25%; interest on the installment
payments of interest at the original option price ranges from 4.88% to 6.33%.
Bonuses accrued in 1995 under the Agreement aggregated $720,426. Total
accrued interest under the Agreement at December 31, 1995 was $6,620,272.
Under the Agreement, an amount equal to 100% of the interest for the term of
the Agreement is to be paid as a bonus to Mr. Hirsch while he remains an
employee of the Company as and when such interest is due. See footnote (4) to
the Summary Compensation Table above.
(b) In 1995, Smyth Sanford & Gerard Reinsurance Intermediaries, Inc., of
which Mr. King, also a director of the Company, is President and a director,
performed certain insurance brokerage services for the Company for which it
received compensation of approximately $229,500. Mr. King may have benefited
indirectly from these transactions as an officer and employee of that firm.
EMPLOYMENT AGREEMENT
On January 30, 1996, the Company entered an agreement with Howard M.
Rosenkrantz, Senior Vice President and Chief Financial Officer, providing for
certain separation benefits if Mr. Rosenkrantz elects to retire, provided
that he remains with the Company until March 31, 1997. Pursuant to the
Agreement, Mr. Rosenkrantz will receive a payment of one year's base salary
in effect on the date of separation, and certain stock option grants held at
that time will continue to be exercisable for a period of up to three years
from the date of separation. In addition, the Company has agreed to continue
providing medical and life insurance coverage and financial planning for a
period of one year from the date of separation.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and any persons who own more than
ten percent of the Company's Common Stock to file with the Securities and
Exchange Commission and the New York Stock Exchange various reports as to
ownership of such Common Stock.
22
<PAGE>
Such persons are required by Securities and Exchange Commission regulation to
furnish the Company with copies of all Section 16(a) forms they file. Mr.
Joseph C. Scherpf, Vice President and Controller, inadvertently filed a Form
4 Report with respect to the purchase of 600 shares one month late. To the
Company's knowledge, based solely on its review of the copies of such reports
furnished to the Company and written representations to the Company that no
other reports were required, all the aforesaid Section 16(a) filing
requirements were otherwise met on a timely basis during 1995.
STOCKHOLDERS' PROPOSALS
Proposals of stockholders intended to be presented at the 1997 Annual
Meeting must be received at the Company's principal executive offices, 150
Glover Avenue, Norwalk, Connecticut 06856, Attention: Corporate Secretary,
for inclusion in the Company's Proxy Statement and form of proxy relating to
that Annual Meeting, no later than November 8, 1996.
DIRECTOR NOMINEES OR OTHER BUSINESS FOR PRESENTATION
AT THE ANNUAL MEETING
Shareholders who wish to present director nominations or other business at
the Annual Meeting are required to notify the Corporate Secretary of their
intent at least 60 days but not more than 120 days before the meeting and the
notice must provide information as required in the By-laws. A copy of these
By-law requirements will be provided upon request in writing to the Corporate
Secretary of the Company, 150 Glover Avenue, Norwalk, Connecticut 06856. This
requirement does not affect the deadline for submitting shareholder proposals
for inclusion in the Proxy Statement, nor does it apply to questions a
shareholder may wish to ask at the meeting.
EXPENSES OF SOLICITATION
The solicitation of proxies in the form enclosed is made on behalf of the
Board of Directors of the Company. The expenses of the solicitation of
proxies, including preparing, handling, printing and mailing the proxy
soliciting material, will be borne by the Company. Solicitation will be made
by use of the mails and, if necessary, by advertising, electronic
telecommunications and personal interview. The Company has retained the
services of Kissel- Blake Inc. to assist in connection with the soliciting of
proxies by such methods for a fee estimated at $12,000 plus out-of-pocket
expenses. Management may use the services of its directors, officers and
employees in soliciting proxies, who will receive no compensation therefor in
addition to their regular compensation, but who will be reimbursed for their
out-of-pocket expenses incurred. The Company will reimburse banks, brokers,
nominees, custodians and fiduciaries for their expenses in forwarding copies
of the proxy soliciting material to the beneficial owners of the stock held
by such persons and in requesting authority for the execution of proxies.
OTHER MATTERS
The persons named in the enclosed form of proxy have no present intention
of bringing before the meeting for action any matters other than those
specifically referred to above, nor has management or the Board of Directors
any such intention, and none of such persons, management or the Board of
Directors is aware of any matters which may be presented by others. If any
such business should properly come before the meeting, the persons named in
the form of proxy intend to vote thereon in accordance with their best
judgment.
By Order of the Board of Directors
PAMELA KOMENDA
Corporate Secretary
Dated: March 15, 1996
23
<PAGE>
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
United States Surgical Corporation and Subsidiaries
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Consolidated Statements of Operations............................... 25
Consolidated Balance Sheets......................................... 26
Consolidated Statements of Changes in Stockholders' Equity.......... 27
Consolidated Statements of Cash Flows............................... 28
Notes to Consolidated Financial Statements.......................... 29
Management Report on Responsibility for Financial Reporting......... 41
Independent Auditors' Report........................................ 2
Quarterly Results of Operations (Unaudited)......................... 43
Common Stock Prices and Dividends................................... 44
Description of the Company's Business............................... 44
Five Year Selected Financial Data................................... 45
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 46
</TABLE>
24
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
---------- ------- ----------
In thousands, except per share data
<S> <C> <C> <C>
Net sales....................................................... $1,022,300 $918,700 $1,037,200
---------- -------- ----------
Costs and expenses:
Cost of products sold.......................................... 451,700 463,600 518,400
Research and development....................................... 43,100 37,500 50,800
Selling, general and administrative............................ 417,000 366,700 449,300
Interest....................................................... 20,700 18,200 18,500
Restructuring charges.......................................... 137,600
---------- -------- ----------
Total costs and expenses..................................... 932,500 886,000 1,174,600
---------- -------- ----------
Income (loss) before income taxes............................... 89,800 32,700 (137,400)
Income taxes.................................................... 10,600 13,500 1,300
---------- -------- ----------
Net income (loss)............................................... 79,200 19,200 (138,700)
Preferred stock dividends....................................... 19,500 14,900
---------- -------- ----------
Net income (loss) applicable to common stock.................... $ 59,700 $ 4,300 $ (138,700)
========== ======== ==========
Average number of common shares outstanding..................... 57,000 56,600 56,000
========== ======== ==========
Net income (loss) per common share (primary and fully diluted).. $ 1.05 $ .08 $ (2.48)
========== ======== ==========
Dividends paid per common share................................. $ .08 $ .08 $ .245
========== ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1993
--------- -----------
In thousands except
share data
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 10,500 $ 11,300
Receivables, less allowance of $8,200 (1995); $7,300 (1994) 247,300 211,500
Inventories:
Finished goods ........................................................... 92,700 95,500
Work in process .......................................................... 28,800 27,100
Raw materials ............................................................ 39,700 44,600
---------- ----------
161,200 167,200
Other current assets ...................................................... 87,900 49,500
---------- ----------
Total Current Assets .................................................... 506,900 439,500
---------- ----------
Property, plant, and equipment (net) ....................................... 504,900 540,000
Other assets (net) ......................................................... 253,700 124,000
---------- ----------
Total Assets ............................................................ $1,265,500 $1,103,500
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 28,600 $ 28,200
Accrued liabilities ....................................................... 148,900 125,200
Income taxes payable ...................................................... 78,600 29,400
Current portion of long-term debt ......................................... 4,200 1,300
---------- ----------
Total Current Liabilities 260,300 184,100
Long-term debt ............................................................. 256,500 248,500
Deferred income taxes ...................................................... 7,600 8,900
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) ..................................................... 900 900
Additional paid-in capital--preferred stock ................................ 190,600 190,600
Common stock $.10 par value, authorized 250,000,000 shares; issued,
65,293,157 at December 31, 1995 and 64,973,192 at December 31, 1994 ...... 6,500 6,500
Additional paid-in capital--common stock ................................... 394,200 380,700
Retained earnings .......................................................... 233,200 178,100
Treasury stock at cost; 8,127,219 shares at December 31, 1995 and 8,137,053
shares at December 31, 1994 .............................................. (86,600) (86,700)
Accumulated translation adjustments ........................................ 2,300 (8,100)
---------- ----------
Total Stockholders' Equity .............................................. 741,100 662,000
---------- ----------
Commitments and contingencies
Total Liabilities and Stockholders' Equity $1,265,500 $1,103,500
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Additional Additional
Paid-in Paid-in
Preferred Capital- Common Capital-
Years ended December 31, 1995, 1994 and 1993 Stock Preferred Stock Common
------------------------------------------- ---------- ---------- ------- ----------
Dollars in thousands
<S> <C> <C> <C> <C>
Balance at January 1, 1993 ............................ $6,400 $345,200
Common stock issued to employees-net
(626,079 shares) ................................... 12,100
Income tax benefit from stock options exercised
recognized upon adoption of FAS 109 ................ 14,400
Payment received from officer on installment
receivables
Aggregate adjustment resulting from the translation
of foreign financial statements
Common stock dividends paid ($.245 per share) ........
Net loss .............................................
---- -------- ------ --------
Balance at December 31, 1993 .......................... 6,400 371,700
Issuance of preferred stock (177,400 shares) ......... $900 $190,600
Common stock issued to employees-net
(577,991 shares) ................................... 100 7,900
Income tax benefit from stock options exercised ...... 1,100
Payment received from officer on installment
receivables
Aggregate adjustment resulting from the translation
of foreign financial statements
Preferred stock dividends ............................
Common stock dividends paid
($.08 per share) ...................................
Net income ...........................................
---- -------- ------ --------
Balance at December 31, 1994 .......................... 900 190,600 6,500 380,700
Common stock issued to employees-net
(329,799 shares) ................................... 5,300
Income tax benefit from stock options exercised ...... 8,200
Aggregate adjustment resulting from the translation
of foreign financial statements
Preferred stock dividends ............................
Common stock dividends paid ($.08 per share) ........
Net Income ...........................................
---- -------- ------ --------
Balance at December 31, 1995 .......................... $900 $190,600 $6,500 $394,200
==== ======== ====== ========
<PAGE>
Installment
Receivables
from
Sale
Accumulated of
Retained Translation Common Treasury
Years ended December 31, 1995, 1994 and 1993 Earnings Adjustments Stock Stock Total
- -------------------------------------------- -------- ----------- ------ --------- ---------
Dollars in thousands
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 ........................... $ 330,700 $ 400 $(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)
Common stock dividends paid ($.245 per share) ....... (13,700) (13,700)
Net loss ............................................ (138,700) (138,700)
--------- -------- ------- -------- ---------
Balance at December 31, 1993 ......................... 178,300 (20,400) (5,400) (86,700) 443,900
Issuance of preferred stock (177,400 shares) ........ 191,500
Common stock issued to employees-net
(577,991 shares) .................................. 8,000
Income tax benefit from stock options exercised ..... 1,100
Payment received from officer on installment
receivables ....................................... 5,400 5,400
Aggregate adjustment resulting from the translation
of foreign financial statements ................... 12,300 12,300
Preferred stock dividends ........................... (14,900) (14,900)
Common stock dividends paid
($.08 per share) .................................. (4,500) (4,500)
Net income .......................................... 19,200 19,200
--------- -------- ----- -------- ---------
Balance at December 31, 1994 ......................... 178,100 (8,100) 0 (86,700) 662,000
Common stock issued to employees-net
(329,799 shares) .................................. 100 5,400
Income tax benefit from stock options exercised ..... 8,200
Aggregate adjustment resulting from the translation
of foreign financial statements ................... 10.400 10,400
Preferred stock dividends ........................... (19,500) (19,500)
Common stock dividends paid ($.08 per share) ....... (4,000) (4,600)
Net Income .......................................... 79,200 79,200
--------- --------- ------- --------- ---------
Balance at December 31, 1995 ......................... $ 233,200 $ 2,300 $ 0 $(86,600) $ 741,100
========= ========= ======= ========= =========
</TABLE>
(END OF RESTUBBED TABLE)
See Notes to Consolidated Financial Statements.
27
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1995 1994 1993
---------- ---------- -----------
In thousands
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers ........................................ $ 1,000,000 $ 913,100 $ 1,103,300
Cash paid to vendors, suppliers, and employees ...................... (784,100) (749,300) (941,200)
Interest paid ....................................................... (17,500) (24,800) (18,300)
Income taxes paid ................................................... (10,300) (14,900) (12,800)
----------- ----------- -----------
Net cash provided by operating activities .......................... 188,100 124,100 131,000
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant, and equipment ......................... (33,600) (47,000) (216,400)
Acquisitions ........................................................ (84,000)
Other assets ........................................................ (18,100) 13,900 (30,000)
----------- ----------- -----------
Net cash used in investing activities .............................. (135,700) (33,100) (246,400)
----------- ----------- -----------
Cash flows from financing activities:
Long-term debt borrowings under credit agreements ................... 2,407,300 3,483,900 2,614,400
Long-term debt repayments under credit agreements ................... (2,445,800) (3,753,800) (2,495,900)
Long-term debt issuance fees ........................................ (1,700) (3,300) (1,100)
Issuance of preferred stock, net .................................... 191,500
Common stock issued from stock plans ................................ 5,300 13,400 12,100
Dividends paid ...................................................... (24,100) (14,500) (13,700)
----------- ----------- -----------
Net cash (used in) provided by financing activities ................ (59,000) (82,800) 115,800
----------- ----------- -----------
Effect of exchange rate changes ...................................... 5,800 2,200 (2,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ................. (800) 10,400 (1,600)
Cash and cash equivalents, beginning of year ......................... 11,300 900 2,500
----------- ----------- -----------
Cash and cash equivalents, end of year ............................... $ 10,500 $ 11,300 $ 900
=========== =========== ===========
Reconciliation of net income (loss) to net cash provided by
operating activities:
Net income (loss) .................................................... $ 79,200 $ 19,200 $ (138,700)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ...................................... 91,700 89,400 83,200
Asset writedowns--restructuring .................................... 73,800
Adjustment of property, plant, and equipment reserves .............. 18,600 22,300 17,400
Receivables--(increase) decrease ................................... (23,900) (3,300) 67,800
Inventories--(increase) decrease ................................... (2,600) 7,400 (48,400)
Adjustment of inventory reserves ................................... 26,600 39,200 44,200
Other current assets--(increase) ................................... (26,200) (13,000) (23,900)
Accounts payable and accrued liabilities--increase (decrease) ...... 13,500 (42,500) 34,300
Income taxes payable and deferred--increase (decrease) ............. 3,100 (2,900) (24,300)
Income tax benefit from stock options exercised .................... 8,200 1,100 14,400
Other assets--net .................................................. (100) 7,200 31,200
----------- ----------- -----------
Total adjustments .................................................. 108,900 104,900 269,700
----------- ----------- -----------
Net cash provided by operating activities ............................ $ 188,100 $ 124,100 $ 131,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Summary of Significant Accounting Policies
United States Surgical Corporation and Subsidiaries (the Company) is
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Consolidation. The consolidated financial statements include the accounts
and transactions of United States Surgical Corporation and Subsidiaries,
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 .................. 2 to 7
Machinery and equipment ......... 3 to 10
Leasehold improvements .......... 3 to 30
</TABLE>
The Company capitalizes interest incurred on funds used to construct
property, plant, and equipment. Interest capitalized during 1995, 1994 and
1993 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. Costs of Other assets are amortized on the straight-line basis over
the following estimated useful lives:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Patents ......................... 10
Computer software costs ......... 3
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.
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. Net income (loss) per common share is
based on the weighted average number of common shares and, where material,
common share equivalents (stock options) outstanding. Common
29
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
share equivalents are not included in the computation of net income (loss)
per share in 1995, 1994 and 1993 since the effect of their inclusion would be
antidilutive.
Note B--Restructuring Charges
The Company recorded restructuring charges of approximately $7 million in
1995. These restructuring charges related primarily to lease termination and
employee severance costs associated with the relocation of one of the
Company's largest international subsidiaries as part of the plan to
centralize the distribution of the Company's products to its European
customers. In addition, severance payments and other charges were incurred in
1995 in relation to the restructuring of the Company's manufacturing plants.
The majority of the cash outlays relative to these restructuring charges were
made in the third and fourth quarters of 1995 with the remainder of the cash
outlays to be made in the subsequent two quarters. The 1995 restructuring
charges were basically offset by the reversal of restructuring cost estimates
in excess of ultimate costs which were originally recognized in the Company's
1993 consolidated statements of operations.
Accrued liabilities at December 31, 1995 and 1994 included $9 million and
$18 million, respectively, which related primarily to severance costs and
accrued lease obligations associated with the Company's 1995 and 1993
restructuring charges. The Company has either terminated or bought out the
leases of the leased properties and paid substantially all employee severance
costs which were part of the 1993 restructuring charges. The majority of the
1995 accrued termination charges and other restructuring charges will be
liquidated by the end of the second quarter 1996.
Note C--Acquisitions
The Company acquired Surgical Dynamics, Inc., (a subsidiary of E-Z-EM, Inc.)
a developer, manufacturer, and distributor of surgical devices for use in
spinal procedures, in November 1995 for $60 million in a cash transaction.
The acquisition was accounted for by the purchase method of accounting.
Goodwill of approximately $40 million and patents resulting from the
acquisition will be amortized on a straight-line basis to operations over 20
years and 10 years, respectively. The Company has made a preliminary
allocation of the purchase price based on the estimated fair values of assets
and liabilities acquired. As additional information is gained, adjustments to
the allocation of the purchase price may occur. Results of operations
subsequent to acquisition are included in the Company's consolidated
financial statements.
The Company completed on September 29, 1995 its 6.1 billion Yen
(approximately $62 million or a present value of $54 million) purchase
acquisition of certain assets and liabilities from the Company's former
distributor in Japan. The Company has made a preliminary allocation of the
purchase price based on the estimated fair values of assets and liabilities
acquired. As additional information is gained, adjustments to the allocation
of the purchase price may occur. The Company and the former distributor had
agreed that all of the conditions to closing the purchase had either been met
or could be met as of April 1, 1995 and, accordingly, had entered into an
agency agreement effective April 1, 1995 under which the Company assumed the
risks and rewards of selling the Company's products to third parties in Japan
and recognized, since April 1, 1995, the former distributor's revenue and
selling expenses in the Company's consolidated financial statements relative
to the sale of the Company's products in Japan. Approximately $24 million was
recorded as goodwill and such goodwill will be amortized over 25 years on a
straight-line basis.
In the third quarter of 1995, the Company acquired through purchase
transactions certain assets of an internal stapling business and a 9.5%
equity interest in a private biopharmaceutical company which will be
accounted for under the cost method. In addition, the Company acquired the
exclusive worldwide rights to market transgenic pig organs from the private
biopharmaceutical company. These two acquisitions did not currently have a
material impact on the Company's consolidated results of operations or
financial position.
The unaudited consolidated results of operations on a pro-forma basis as
though the purchase business combinations noted above, excluding the purchase
accounted for under the cost method, had collectively been completed by the
Company as of the beginning of 1995 and 1994 are as follows (dollars in
thousands, except per share amounts):
30
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Net sales .................... $1,058,100 $1,013,600
Net income ................... $ 74,100 $ 24,300
Net income per common share .. $ .96 $ .17
</TABLE>
The pro-forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisitions been consummated as of the above
dates, nor are they necessarily indicative of future operating results.
Note D--Property, Plant, and Equipment
At December 31, 1995 and 1994, Property, plant, and equipment (at cost)
was comprised of the following items:
<TABLE>
<CAPTION>
1995 1994
-------- --------
In thousands
<S> <C> <C>
Land .............................................. $ 27,500 $ 23,800
Buildings ......................................... 170,500 149,600
Molds and dies .................................... 92,200 100,500
Machinery and equipment ........................... 309,200 321,700
Leasehold improvements ............................ 153,700 155,500
--------- ---------
753,100 751,100
Less allowance for depreciation and amortization .. (248,200) (211,100)
--------- ---------
$ 504,900 $ 540,000
========= =========
</TABLE>
Property, plant, and equipment includes land and buildings in Elancourt,
France with a net book value at December 31, 1995 and 1994 of $82 million and
$70 million, respectively. During 1995 the Company took out of service and
removed from its balance sheet property, plant, and equipment which had an
original cost of $27 million and was fully depreciated.
Note E--Other Assets
At December 31, 1995 and 1994 Other Assets (net of accumulated amortization
of $73 million and $57 million in 1995 and 1994, respectively) was comprised
of the following items:
<TABLE>
<CAPTION>
1995 1994
-------- --------
In thousands
<S> <C> <C>
Patents and licenses ..... $ 86,500 $ 64,000
Goodwill ................. 69,400 5,200
Deferred tax assets ...... 31,600 11,600
Prepaid rent ............. 28,500 19,700
Computer software costs .. 7,800 8,300
Deferred start-up costs .. 0 4,200
Other .................... 29,900 11,000
-------- -------
$253,700 $124,000
======== ========
</TABLE>
During 1995 the Company removed from its Balance Sheet fully amortized
Other Assets with a cost of $24 million.
Note F--Income Taxes
In August 1995, the Company reached agreement with respect to settlement
of all issues raised by the Internal Revenue Service (IRS) in its examination
of the Company's income tax returns for the years 1984 through 1990. Prior to
this resolution, a significant portion of deferred tax assets relating to
available net operating loss and tax credit carryforwards had been fully
reserved by the Company because of uncertainty over the future utilization of
31
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the tax benefits. Based upon current circumstances relative to the IRS audit
and the Company's estimate of future domestic taxable income, it now appears
more likely than not that a significant portion of such fully reserved assets
will be realized in the future. As a result, in the third quarter of 1995 the
Company reduced the valuation allowances related to a significant portion of
these deferred tax assets by $54.3 million (change in valuation allowances in
1995 was a reduction of $75.6 million), increased its current tax liabilities
by $28.6 million for the remaining estimated tax liabilities relating to
years subsequent to 1990, decreased tax assets by $7.4 million, recognized a
net credit to the tax provision of $10.0 million ($.18 per common share) and
recorded a credit to Additional Paid-in Capital (for windfall tax benefits
related to net operating losses generated from stock compensation deductions
in prior years) of $8.3 million.
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.
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>
1995 1994 1993
------- ------- ---------
In thousands
<S> <C> <C> <C>
Domestic (a) ...... $81,100 $35,600 $ (61,800)
Foreign ........... 8,700 (2,900) (75,600)
------- ------- ---------
$89,800 $32,700 $(137,400)
======= ======= =========
</TABLE>
- ----------
(a) Includes Puerto Rico and U.S. branches in foreign locations.
A summary of the provision for income taxes follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
In thousands
<S> <C> <C> <C>
Current:
Federal ............. $ 1,700
Foreign ............. $ 9,700 1,000 $ 4,800
State and local (a).. 3,900 6,500 4,700
Deferred:
Federal ............. (5,700) (900)
Foreign ............. 2,300 500 (8,800)
State and local (a).. 400 4,700 600
------- ------- -------
$10,600 $13,500 $ 1,300
======= ======= =======
</TABLE>
- -----------
(a) Includes Puerto Rico
A reconciliation between income taxes based on the application of the
statutory federal income tax rate (35%) to income (loss) before income taxes
and the provision for income taxes as set forth in the Consolidated
Statements of Operations follows:
32
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
In thousands
<S> <C> <C> <C>
Provision (benefit) for taxes at statutory rates .............................. $ 31,400 $11,400 $(48,100)
Benefit of operating loss carryforward (recognized)/not recognized for
U.S. federal or foreign taxes ............................................... (16,100) 6,500 63,600
Benefit of operating loss and credit carryforward incident to settlement
of IRS tax audit ............................................................ (10,000)
Tax savings from operations in Puerto Rico .................................... (6,600) (7,500) (18,700)
State and local income taxes, net of federal income tax benefit ............... 2,800 900 800
Foreign income taxed at rates different than U.S. statutory rate .............. 8,200 1,600 1,600
Other ......................................................................... 900 600 2,100
-------- ------- --------
$ 10,600 $13,500 $ 1,300
======== ======= ========
</TABLE>
The Company has provided for taxes on the income of its 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 8% (7% in 1994 and 6% in
1993) have been provided on the expected repatriation of the income of this
subsidiary.
At December 31, 1995 and 1994 deferred tax liabilities and assets under
FAS 109 were comprised of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Patent amortization ...................... $ (14,900) $ (21,700)
Depreciation ............................. (34,100) (30,900)
Other amortization ....................... (9,700) (300)
Operating lease .......................... (9,500) (8,500)
Accrued interest ......................... (5,500) (2,200)
Other .................................... (7,100) (8,400)
--------- ---------
Gross deferred tax liabilities ......... (80,800) (72,000)
--------- ---------
Restructuring reserves ................... 34,800 28,700
Inventory reserves ....................... 33,400 32,800
Fixed asset reserves ..................... 25,400 25,300
Accrued expenses ......................... 9,500 9,500
Other .................................... 9,400 15,700
Tax loss and credit carryforwards ........ 143,100 172,300
--------- ---------
Gross deferred tax assets .............. 255,600 284,300
Less: Valuation allowance ................ (129,000) (204,600)
--------- ---------
126,600 79,700
--------- ---------
Net deferred tax assets .................. $ 45,800 $ 7,700
========= =========
</TABLE>
Deferred taxes resulted from temporary differences in the recognition of
revenue and expense for tax and financial statement purposes. The sources of
the temporary differences 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
33
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
lives for financial reporting purposes; expensing certain deferred start-up
costs 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, 1995 current deferred tax assets of $23 million and
non-current deferred tax assets of $32 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 $8 million were included in the Consolidated
Balance Sheet captions Income taxes payable and Deferred income taxes,
respectively.
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 $129 million has been recorded as of December 31, 1995 because of
the uncertainty over the future utilization of the tax benefit of its gross
deferred tax assets. As of January 1, 1995, the valuation allowance was $205
million.
At December 31, 1995 the Company's consolidated subsidiaries have
unremitted earnings of $119 million on which the Company has not accrued a
provision for 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 $31 million at December 31,
1995.
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
Operating Tax Research and
Losses Credits Other Credits
------------- ---------- --------------
In thousands
<S> <C> <C> <C>
Year Scheduled to Expire:
1996 ........................ $1,400
1997 ........................ 1,400
1998 ........................ 1,300 $ 200
1999 ........................ 900 100
2000 ........................ 900 300
2001 ........................ 500 500
2002 ........................ 700
2003 ........................ 800
2004 ........................ 500
2005 ........................ 1,800
2006 ........................ $ 28,100 3,000
2007 ........................ 133,600 6,500
2008 ........................ 39,800 2,800
2009 ........................ 14,400
2010 ........................
-------- ------ -------
$215,900 $6,400 $17,200
======== ====== =======
</TABLE>
In addition, the Company has available for state and foreign income tax
return purposes net operating loss carryforwards of $142 million and $115
million, respectively, and tax credits of $3.5 million, which expire at
various dates.
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
34
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. 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, 1994 and 1995.
With respect to the U.S. federal net operating loss and credit
carryforwards set forth above, the Company estimates that if such
carryforwards are ultimately recognizable, the remainder of such tax assets
would result in increases to Additional Paid-in Capital of up to
approximately $64 million and a reduction of the tax provision up to
approximately $9 million.
Note G--Accrued Liabilities
Included in Accrued liabilities at December 31, 1995 are accrued payroll,
property and sales taxes $17 million (1994--$15 million), accrued commissions
$16 million (1994--$12 million), accrued restructuring charges $9 million
(1994--$18 million) and accrued inventory repurchase $0 million (1994--$17
million).
Note H--Long-Term Debt
At December 31, 1995 the Company's long term debt consisted of $124
million in bank borrowings, $93 million in financing lease obligations
outstanding relating to its European headquarters office building and
distribution center complex in Elancourt, France, and $40 million of notes
payable outstanding to its former Japanese distributor which arose as part of
the Company's acquisition of certain assets from the former Japanese
distributor.
During December 1995, the Company entered into a new five year, $325
million syndicated credit agreement which replaced its previous $350 million
revolving credit facility which was scheduled to mature in January 1997. The
new syndicated credit facility provides the Company with a choice of interest
rates based upon the banks' CD rate, prime rate or the London Interbank
Offered Rate (LIBOR) for US dollar borrowings and Tokyo Interbank Offered
Rate (TIBOR) for yen borrowings. 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, 1995 and 1994 was 7.4% and 7.7%, 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, fixed charges coverage and a
maximum ratio of total debt to total capitalization, as defined. The Company
is prohibited from declaring dividends on its common stock in excess of 20%
of net income, subject to changes in the number of common shares outstanding,
until it achieves investment grade status, as defined. During 1995, the
Company entered into uncommitted Japanese Yen credit agreements with two
Japanese banks for a total of 3 billion Yen (approximately $30 million) in
order to enhance liquidity for its Japanese subsidiary. Additionally, the
Company had $50 million of uncommitted credit agreements with three other
banks. The uncommitted credit agreements are short term in nature. Borrowings
of 800 million Yen ($7.7 million) and $21 million were outstanding and
included in long-term debt as of December 31, 1995. Such borrowings have been
categorized as long-term debt as such borrowings will be refinanced under the
Company's five-year bank credit agreement. The Company is in full compliance
with all of the covenants associated with its various financing agreements.
The Company's French franc denominated financing lease requires principal
amortization in varying amounts over the remaining thirteen year term of the
lease with a balloon payment of approximately 42 million French franc ($8
million) at the end of the lease. Interest is payable at a rate approximately
1.4% above Paris Interbank Offered Rate (PIBOR). After considering the
effects of an interest rate swap agreement, the effective interest rate on
the financing lease debt was approximately 8.05% and 7.9% at December 31,
1995 and 1994, respectively.
35
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's yen-denominated note payable are non-interest bearing and
repayable annually in amounts based upon the higher of 350 million yen or 8% of
the landed value of products shipped to the Company's subsidiary in Japan. In
any event, any notes payable still outstanding on December 31, 2001 must be
repaid on that date. The Company has calculated the present value of these notes
using a discount rate of 4% and the estimated value of products expected to be
shipped to its subsidiary over the next six years. Based upon these assumptions,
the Company estimates that the present value of the final payment on December
31, 2001 will be approximately $15 million.
At December 31, 1995, the scheduled principal repayments under loan
agreements and future minimum payments under a financing lease and note
payable were as follows:
<TABLE>
<CAPTION>
Bank
Credit Financing Note
Facilities Lease Payable Total
------------- --------- --------- -----------
In thousands
<S> <C> <C> <C> <C>
1996 .............................................. $ 9,400 $ 2,800 $ 12,200
1997 .............................................. 9,400 2,400 11,800
1998 .............................................. 9,500 4,300 13,800
1999 .............................................. 10,900 5,000 15,900
2000 .............................................. 11,600 5,900 17,500
After 2000 ........................................ $123,700 119,500 21,900 265,100
-------- -------- ------- --------
123,700 170,300 42,300 336,300
Current portion long-term debt and note payable ... (1,400) (2,800) (4,200)
Amount representing interest ...................... (75,600) (75,600)
-------- -------- ------- --------
Long-term debt .................................... $123,700 $ 93,300 $39,500 $256,500
======== ======== ======= ========
</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 a maximum
of 50 shares of Common Stock together with an additional cash dividend of up
to $27.50 per share with the additional cash dividend 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 57,165,938 and 56,836,139 shares of its $.10 par value
Common Stock outstanding as of December 31, 1995 and 1994, 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, 1995, a
total of 8,712,537 shares had been acquired at a total cost of $89.3 million.
No treasury shares had been acquired in 1994 and 1995. 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
amounted to 17,303,361 and 17,631,774 at December 31, 1995 and 1994,
respectively. The Compensation/Option Committee (the "Committee") of the
Board of Directors is responsible for administering the Company's stock
plans.
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, 1995, 3,839,740
36
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1995.
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, 1995, 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, 1995 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, 1995 and 1994, restricted stock awards and option grants for
134,000 shares and 112,000 shares, respectively, had been granted under the
Outside Directors Stock Plan. As of December 31, 1995 and 1994, 26,000 and
48,000 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, 1995 follows:
<TABLE>
<CAPTION>
Number Option
of Shares Price Range
----------- --------------
<S> <C> <C>
Outstanding January 1, 1993 ............. 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
Granted ............................... 1,570,525 20.50- 26.06
Exercised ............................. (157,195) 4.97- 23.25
Canceled or lapsed .................... (433,049) 7.50- 103.69
----------
Outstanding December 31, 1995 ........... 13,712,897 5.13- 111.94
At December 31, 1995:
Exercisable ........................... 9,531,754 5.13- 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
37
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 137,811 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 390,185 are available for future issuance, at
December 31, 1995.
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>
1995 1994 1993
--------- ---------- ----------
In thousands
<S> <C> <C> <C>
Net Sales:
United States .............................. $ 828,500 $ 775,000 $ 895,500
International (1)
Europe ................................... 357,300 314,700 313,800
Japan .................................... 63,900 0 0
Other .................................... 30,500 27,400 27,200
Inter-area transfers eliminated ............ (257,900) (198,400) (199,300)
---------- ---------- ----------
$1,022,300 $ 918,700 $1,037,200
========== ========== ==========
Operating Profit (Loss):
United States .............................. $ 121,100 $ 71,200 $ 30,500
International
Europe ................................... 84,600 66,300 (63,000)
Japan .................................... 6,200 0 0
Other .................................... 5,300 4,500 (2,600)
Profit on inter-area transfers eliminated .. (106,700) (91,100) (83,800)
---------- ---------- ----------
$ 110,500 $ 50,900 $ (118,900)
========== ========== ==========
Identifiable Assets at December 31:
United States .............................. $ 867,900 $ 807,500 $ 877,100
International
Europe ................................... 349,400 302,800 299,200
Japan .................................... 64,300 0 0
Other .................................... 10,400 5,800 5,700
Inter-area assets eliminated ............... (26,500) (12,600) (11,500)
---------- ---------- ----------
$1,265,500 $1,103,500 $1,170,500
========== ========== ==========
</TABLE>
- ------------
(1) Does not include sales made primarily to international distributors
(1995--$50,200, 1994--$84,800 and 1993-- $69,600) from a location in the
United States. The combination of sales to international distributors and
international sales above approximate 49% in 1995, 46% in 1994 and 40% in
1993 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 a consolidated
shareholders' class action suit. 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.
38
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is committed to certain undertakings, including the
maintenance of specified levels of employment and capitalization for its
Puerto Rican subsidiary.
The future minimum rental commitments for building space, leasehold
improvements, data processing and automotive equipment for all operating
leases as of December 31, 1995, were as follows: 1996--$61 million; 1997--$76
million; 1998--$88 million; 1999--$67 million; 2000--$64 million; after
2000--$197 million. Rent expense was $33 million, $31 million and $34 million
in 1995, 1994 and 1993, respectively. The Company's North Haven lease
agreement includes contingent rent provisions based on formulas utilizing the
consumer price index. The Company's North Haven facilities are leased from a
trust, of which the original developer (the "Owner Participant") holds the
beneficial interest. The Owner Participant has the right to require the
Company or the Company's designee to purchase the Owner Participant's
beneficial interest. This right cannot be exercised by the Owner Participant
until January 1998 and continues for a period of four years thereafter. The
Company's obligation, if the right is exercised, would be to take title to
the beneficial interest in the trust, or find another investor, suitable to
the noteholders who financed these facilities, to take such title. In either
case the Company's obligations as lessee under the lease would not change.
The Company would be obligated, whether or not the right is exercised, to
make payments called for under the existing lease of approximately $57
million annually through the year 2002, a payment of $28 million in January
2003 and nominal annual payments of $100,000 through 2022. In addition, the
Company may be obligated to make an additional payment of approximately $19
million if the right is exercised which could be payable as early as January
1998, or ratably throughout the remaining term of the lease. The foregoing
amounts in the preceding two sentences represent cash flow impacts whereas
the rent expense would aggregate less than $20 million per year.
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, 1995, the
Company had approximately $25 million of foreign currency exchange contracts
outstanding that will mature at various dates through February 1996. Realized
and unrealized foreign currency gains and losses with respect to such
contracts are recognized when incurred and amounted to gains of $.6 million
in 1995 and losses of $4 million and $1 million in 1994 and 1993,
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 200
million ($37 million) of variable rate French franc debt. These swap
agreements expire August 1996 for the U.S. dollar debt and December 1997 for
the French franc debt. 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 PIBOR, 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, 1995, termination of such agreements would require a payment by
the Company of approximately $3.3 million 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, bank CDs, 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.
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 com-
39
<PAGE>
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
prising 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
----------------------------------------
1995 1994
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Cash, cash equivalents and certificates of deposit ....... $ 31,800 $ 32,600 $ 20,600 $ 20,400
Long-term debt ........................................... 256,500 256,500 248,500 248,500
Interest rate swaps payable--net ......................... 500 3,800 400 900
</TABLE>
The Company believes that the other parties to the foreign exchange
contracts and interest rate swaps have the ability to perform under the
contracts and swaps.
Note M--Supplemental Cash Flow Information
The Company has purchased certain assets from its former Japanese
distributor for approximately 6.1 billion Yen ($62 million or a present value
of $53.5 million). In conjunction with this purchase a long-term payable was
recorded as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair Value of net assets acquired ................................................. $ 53.5
Cash paid through December 31, 1995 ............................................... (11.2)
------
Present value of non-interest bearing notes payable to former distributor
over six years ................................................................. $ 42.3
======
</TABLE>
Note N--Adoption of New Accounting Principles
Adoption of FAS 116. In 1995, the Company adopted Statement of Financial
Accounting Standards No. 116 "Accounting for Contributions Received and
Contributions Made" (FAS 116). The effect of the adoption of FAS 116 was not
material.
Adoption of FAS 121. In 1995, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121). In accordance
with FAS 121, the Company evaluates the carrying value of its long lived
assets and identifiable intangibles, including goodwill, when events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. The effect of the adoption of FAS 121 was not material.
Adoption of FAS 123. The Company will adopt the provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (FAS 123) in the first quarter of 1996. The Company, as
provided for by FAS 123, will continue to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" for employee stock
compensation measurement. The anticipated effect of adopting this new
standard is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
40
<PAGE>
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 HOWARD M. ROSENKRANTZ
Chief Executive Officer Chief Financial Officer
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
United States Surgical Corporation
We have audited the accompanying consolidated balance sheets of United
States Surgical Corporation and subsidiaries as of December 31, 1995 and 1994
and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements 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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Stamford, Connecticut
January 22, 1996
42
<PAGE>
Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter(1) Quarter(2,3) Year
--------- -------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
1995
Net sales ............................ $240,600 $263,600 $254,800 $263,300 $1,022,300
Cost of products sold ................ 112,900 117,800 106,500 114,500 451,700
Income before income taxes ........... 18,700 24,800 20,600 25,700 89,800
Net income ........................... 14,400 19,100 25,900 19,800 79,200
Net income per common share
(primary and fully diluted) ........ $ .17 $ .25 $ .37 $ .26 $ 1.05
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
</TABLE>
- ----------
(1) In the third quarter of 1995, the Company reached an agreement with
respect to the settlement of all issues raised by the Internal Revenue
Service in the examination of the Company's income tax returns for the
years 1984 through 1990. As a result of the agreement, the Company
recognized a net credit to the tax provision of $10 million ($.18 per
common share) in the third quarter of 1995.
(2) In the fourth quarter of 1994, the Company reached an agreement to
purchase certain assets of its former Japanese 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).
(3) Cost of products sold in the fourth quarter of 1995 includes $13 million
of inventory and fixed asset reserves ($16 million in the corresponding
period in 1994) resulting from the continued introduction of new products
and the consequent obsolescence of production tooling and inventories.
43
<PAGE>
Common Stock Prices and Dividends
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>
1995
1st Quarter ......................... $.02 $24.25 $18.75
2nd Quarter ......................... .02 24.00 19.13
3rd Quarter ......................... .02 27.75 20.38
4th Quarter ......................... .02 27.25 21.38
1994
1st Quarter ......................... $.02 $32.50 $15.88
2nd Quarter ......................... .02 24.63 16.00
3rd Quarter ......................... .02 28.38 21.25
4th Quarter ......................... .02 27.50 18.25
</TABLE>
At December 31, 1995, the number of record holders of the Company's Common
Stock was 10,381. 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.
Description of the Company's 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 health care reform. 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.
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. The Company continually
expands its product and technology base through investment in internal
research and development and through the acquisition of new products and
technologies that provide better patient care and an effective means of
reducing hospital costs. By offering technologically advanced products which
can replace more expensive, more invasive procedures and by assisting
hospital management in implementing more efficient surgical practices, the
Company seeks to establish and maintain a strong competitive position.
44
<PAGE>
The Company is a leading multinational developer, manufacturer and marketer
of innovative surgical wound closure products. 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 proprietary absorbable copolymer staples or with titanium, stainless steel,
or proprietary absorbable 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.
Five Year Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
In thousands, except per share data 1995(1) 1994(2) 1993(3) 1992 1991
- ----------------------------------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net sales ............................... $1,022,300 $ 918,700 $1,037,200 $1,197,200 $843,600
Income (loss) before income taxes ....... $ 89,800 $ 32,700 $ (137,400) $ 192,900 $130,300
Net income (loss) ....................... $ 79,200 $ 19,200 $ (138,700) $ 138,900 $ 91,200
Net income (loss) per common share and
common share equivalent (primary and
fully diluted) ........................ $ 1.05 $ .08 $ (2.48) $ 2.32 $ 1.58
Average number of common shares and
common share equivalents outstanding .. 57,000 56,600 56,000 59,900 57,800
Dividends declared per common share ..... $ .08 $ .08 $ .245 $ .30 $ .2875
At December 31,
Total assets ............................ $1,265,500 $1,103,500 $1,170,500 $1,168,100 $741,600
Long-term debt .......................... $ 256,500 $ 248,500 $ 505,300 $ 394,500 $251,600
Stockholders' equity (4) ................ $ 741,100 $ 662,000 $ 443,900 $ 590,000 $329,900
</TABLE>
- ----------
(1) In the third quarter of 1995, the Company reached an agreement with
respect to the settlement of all issues raised by the Internal Revenue
Service in the examination of the Company's income tax returns for the
years 1984 through 1990. As a result of the agreement, the Company
recognized a net credit to the tax provision of $10 million ($.18 per
common share) in the third quarter of 1995.
(2) In the fourth quarter of 1994 the Company signed a letter of intent to
purchase certain assets of its independent distributor in Japan, which
included 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 cost.
(3) 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.
(4) Included in Stockholders' equity in 1995 and 1994 is $191.5 million of
convertible preferred stock which has a liquidation value of $200.0
million.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
In 1995 the Company attained sales of $1.02 billion compared with sales of
$919 million in 1994 and $1.04 billion in 1993. Sales increased $ 104 million
or 11% in 1995, decreased $119 million or 11% in 1994 , and decreased $160
million or 13% in 1993. In 1995 the Company reported net income of $79
million or $1.05 per common share (after preferred stock dividends of $20
million), compared with net income of $ 19 million or $.08 per common share
(after preferred stock dividends of $15 million) in 1994, and a net loss of
$139 million or $2.48 per common share in 1993. Net income and net income per
common share increased $60 million and $.97, respectively, in 1995 compared
to 1994, 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. The effect of changes in foreign currency exchange rates on results of
operations was to increase net income by $14 million in 1995 in comparison to
1994. The effects of foreign currency exchange rate changes on net income in
1994 and 1993 were immaterial.
The Company recorded restructuring charges of approximately $7 million
during the second half of 1995 that relate primarily to lease terminations
and employee severance costs associated with the relocation of one of the
Company's largest international subsidiaries and the plan to centralize the
distribution of the Company's products to its European customers. In
addition, severance payments were incurred in relation to the restructuring
of the Company's manufacturing plants. The majority of the cash outlays
relative to these restructuring charges were made during the third and fourth
quarters of 1995, with the remainder to be made by the end of the first half
of 1996. The 1995 restructuring charges were basically offset by the reversal
of restructuring cost estimates in excess of ultimate costs which were
originally recognized in the Company's fourth quarter 1993 consolidated
financial statements.
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. These plans were
adopted when it became apparent that projected worldwide sales growth did not
meet Company expectations. The Company initially announced plans to layoff
approximately 700 administrative staff personnel, close its manufacturing
plants for thirteen days in the fourth quarter of 1993, and adopt a four day
work week for certain manufacturing employees during the early part of 1994.
The Company expanded upon its restructuring plans in 1993 to include real
estate divestitures and consolidations and additional employee voluntary and
involuntary severance programs. Substantially, all payments under these
severance programs have been completed by December 31, 1995.
Restructuring charges recorded in 1993 were $138 million ($130 million or
$2.31 per share net of taxes). These charges consisted primarily of
writedowns of certain real estate to estimated net realizable value ($79
million), provisions for lease buyout expenses ($24 million), accruals for
severance costs ($30 million) and write down of other assets ($5 million).
The Company has either terminated or bought out the leases of the leased
properties and paid substantially all employee severance costs which were
part of the 1993 restructuring charges.
The increase in sales in 1995 to $1.02 billion compared to $919 million in
1994 was primarily due to volume increases and the Company's initiation of
direct distribution of its products to Japanese customers through the
acquisition of certain assets from the Company's former Japanese distributor.
The reduction of inventories at JIT distributors during 1995 had a negative
impact on sales as hospital purchases from JIT distributors exceeded
distributor purchases from the Company by $13.1 million (1994--$28.2
million). Changes in the health care industry continue to significantly
affect the Company's marketplace. Industry consolidations, intense
competition, and pricing pressures due to ongoing reform of the health care
system have continued in 1995. 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 reduction in sales to $919 million in 1994
from $1.04 billion in 1993 was significantly affected by the initial
distributor stocking program in early 1993 which was not repeated in 1994.
Distributor inventory purchases were made in connection with the
implementation of the Company's JIT domestic hospital distribution program
during the first quarter of 1993. The initial stocking of the JIT
distributors precipitated an inventory reduction period during which
hospitals formerly supplied directly by the Company worked their inventories
down and distributors adjusted their own inventories.
46
<PAGE>
The following table analyzes the change in sales in 1995, 1994 and 1993
compared with the prior years.
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(In millions)
<S> <C> <C> <C>
Composition of Sales Increase (Decrease):
Sales volume increase (decrease) ....................... $ 64 $ (96) $(114)
Net price changes* ..................................... 12 (21) (6)
Effects of changes in foreign currency exchange rates .. 28 (2) (40)
---- ----- -----
Sales increase (decrease) ............................. $104 $(119) $(160)
==== ===== =====
</TABLE>
- ---------------
* Approximately $36 million of the sales increase for the year ended December
31, 1995, accounted for in net price changes above, is the result of the
1995 acquisition of certain assets from the Company's former distributor in
Japan.
Sales volume increases and the effects of foreign currency exchange rate
fluctuations accounted for 62% and 27%, respectively, of the total 1995 sales
increase compared with 1994 and 81% and 2%, respectively, of the total 1994
sales decrease compared with 1993.
Gross margin from operations (sales less cost of products sold divided by
sales) was 56% in 1995 and 50% in 1994 and 1993. 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 in
reduced cost of product until 1994, which resulted in improved quarterly
gross margins as the applicable product was sold in the second half of 1994.
Gross margins continued to improve in 1995 as a result of the implementation
of the 1993/1994 restructuring plans. Gross margins in 1993 compared to 1992
were negatively impacted by higher costs associated with the increase in
production 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 reserves for obsolescence of production tooling and inventories,
which are an ongoing cost of business, amounted to $45 million, $61 million
and $62 million, respectively, in the years ended December 31, 1995, 1994 and
1993. The effects of foreign currency exchange rate changes on cost of
products sold in 1995 and 1994 were immaterial. 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 Company's investment in research and development during the past three
years (1995--$43 million; 1994--$38 million; 1993--$51 million) has yielded
numerous product improvements as well as the development of numerous new
products. The increase in research and development expense in 1995 compared
to 1994 resulted primarily from $4.6 million of charges during the third
quarter of 1995 related to certain technologies which the Company decided not
to pursue. 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.
The Company is continuing its commitment to develop and acquire unique new
products for use in new surgical procedures and specialty areas.
Selling, general and administrative expenses expressed as a percentage of
sales were 41% in 1995, 40% in 1994, and 43% in 1993. The increase in
selling, general and administrative expenses as a percentage of sales in 1995
is primarily due to the effects of the initiation by the Company of the
marketing of the Company's products to its Japanese customers as a result of
the acquisition of certain assets from the Company's former Japanese
distributor. The decrease in selling, general and administrative expenses as
a percentage of sales for 1994 results from the major cost saving benefits
from the Company's restructuring program in the form of reduced selling,
general, and administrative expenses as a percentage of sales throughout
1994. The percentage increase in 1993 resulted primarily from higher
depreciation and amortization charges related to the Company's facilities
expansion. Changes in foreign currency exchange rates from those existing in
the prior year had the effect of increasing selling, general, and
administrative expenses by $13 million in 1995, and decreasing selling,
general, and administrative expenses by $6 million in 1994 and $21 million in
1993.
47
<PAGE>
The tax provisions for 1995, 1994 and 1993 related primarily to foreign
taxes including taxes in Puerto Rico. The Company's tax provisions in 1995 and
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 and tax
credit carryforwards which were not previously considered recognizable. The 1993
tax provision is a result of the Company incurring net operating losses in
certain tax jurisdictions for which the Company was not able to recognize the
corresponding tax benefits.
In August 1995, the Company reached agreement with respect to settlement
of all issues raised by the Internal Revenue Service (IRS) in its examination
of the Company's income tax returns for the years 1984 through 1990. Prior to
this resolution, a significant portion of deferred tax assets related to
available net operating loss and tax credit carryforwards had been fully
reserved by the Company because of uncertainty over the future utilization of
the tax benefits. Based upon current circumstances relative to the IRS audit
and the Company's estimate of future domestic taxable income, it now appears
more likely than not that a significant portion of such fully reserved assets
will be realized in the future. As a result, in the third quarter of 1995 the
Company reduced the valuation allowances related to a significant portion of
these deferred tax assets by $54.3 million (change in valuation allowances in
1995 was a reduction of $75.6 million), increased its current tax liabilities
by $28.6 million for the remaining estimated tax liabilities relating to
years subsequent to 1990, decreased tax assets by $7.4 million, recognized a
net credit to the tax provision of $10.0 million ($.18 per common share) and
recorded a credit to Additional Paid-in Capital (for windfall tax benefits
related to net operating losses generated from stock compensation deductions
in prior years) of $8.3 million.
The Company will adopt the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (FAS 123) in the
first quarter of 1996. The Company, as provided for by FAS 123, will continue
to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" for employee stock compensation measurement. The
anticipated effect of adopting this new standard is not expected to have a
material effect on the Company's consolidated financial position or results
of operations.
Financial Condition
The increase in accounts receivable results from the $37 million increase
in sales in the fourth quarter 1995 when compared to the fourth quarter 1994.
The increase in other current assets and income taxes payable results from
the Company's settlement with the Internal Revenue Service referred to above.
The increase in other assets results primarily from an increase in
goodwill ($64 million) and patents ($18 million) resulting from the Company's
acquisition of Japanese distribution rights from the Company's former
Japanese distributor and the business combination with Surgical Dynamics,
Inc. (see Note C of Notes to Consolidated Financial Statements).
The Company's current cash and cash equivalent balances, existing
borrowing capacity and projected operating cash flows are currently in excess
of its foreseeable operating cash flow requirements. Following the issuance
of $200 million of convertible preferred stock in March 1994, the proceeds
from which were used to reduce bank debt, the Company entered into a new $400
million syndicated credit agreement in June 1994, later reduced to $350
million in the first quarter of 1995 as a result of the strong cash flows
currently being generated by the Company.
The Company terminated its existing syndicated credit facility which was
scheduled to mature in January 1997 and entered into a new $325 million
credit agreement in December 1995. This new credit agreement matures January
2001 and provides for certain covenants similar to the credit agreement it
replaced, such as restrictions on asset sales, common stock dividends in
excess of 20% of net income and subsidiary debt as well as required
maintenance of certain minimum levels of tangible net worth and fixed charge
coverage ratios and a stipulated level of debt to total capitalization. The
new credit facility provides for borrowings up to $25 million worth of
Japanese Yen within the facility. During 1995, the Company entered into
uncommitted Japanese Yen credit agreements with two Japanese banks for a
total of 3 billion Yen (approximately $30 million) in order to enhance
liquidity for its Japanese subsidiary. Additionally, the Company had $50
million of uncommitted credit agreements with three other domestic banks. The
Company is in full compliance with all of its 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 28% in 1995
compared to 1994 levels and 78% in 1994 compared to 1993 levels. Additions to
property, plant, and equipment on the accrual method totaled $48 million ($34
million on a cash basis)
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<PAGE>
in 1995, compared with $49 million in 1994, and $187 million in 1993, and
consist of additions to machinery and equipment ($25 million), molds and dies
($11 million) and land and buildings ($12 million). During 1995 the Company
removed from its balance sheet, property, plant, and equipment which had an
original cost of $27 million and is now fully depreciated and out of service.
The change in long-term debt at December 31, 1995 in comparison to the
prior year-end reflects the notes payable related to the acquisition of
Japanese direct distribution rights and the cash flow generated from
operations which enabled the Company to reduce bank debt by $37 million after
recognizing the effect of over $80 million of business acquisitions during
1995.
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 international subsidiaries. As of December 31, 1995 the
Company had approximately $25 million of such contracts outstanding that will
mature at various dates through February 1996. Realized and unrealized
foreign currency gains and losses are recognized when incurred. The weakening
of the dollar relative to most foreign currencies caused the $10 million
movement in the Company's Accumulated Translation Adjustments component of
Stockholders' Equity at December 31, 1995 compared to the prior year.
The Company's North Haven facilities are leased from a trust, of which the
original developer (the "Owner Participant") holds the beneficial interest.
The Owner Participant has the right to require the Company or the Company's
designee to purchase the Owner Participant's beneficial interest. This right
cannot be exercised by the Owner Participant until January 1998 and continues
for a period of four years thereafter. The Company's obligation, if the right
is exercised, would be to take title to the beneficial interest in the trust,
or find another investor, suitable to the noteholders who financed these
facilities, to take such title. In either case the Company's obligations as
lessee under the lease would not change. The Company would be obligated,
whether or not the right is exercised, to make payments called for under the
existing lease of approximately $57 million annually through the year 2002, a
payment of $28 million in January 2003 and nominal annual payments of
$100,000 through 2022. In addition, the Company may be obligated to make an
additional payment of approximately $19 million if the right is exercised
which could be payable as early as January 1998, or ratably throughout the
remaining term of the lease. The foregoing amounts in the preceding two
sentences represent cash flow impacts whereas the rent expense would
aggregate less than $20 million per year.
If, as described above, the Company takes title to the beneficial interest
in the facilities in 1998, it is estimated that the Company's balance sheet
would be affected through an increase in property, plant and equipment of
$339 million, a decrease in other assets of $109 million and an increase in
Long-Term Debt of $230 million.
------------------------------
CAUTIONARY STATEMENT
Certain statements contained in the Chairman's letter, the proxy statement,
and the Annual Report to Stockholders are forward looking. Many factors could
cause actual results to differ from these statements, including loss of
market share through competition, introduction of competing products by other
firms, pressure on prices from competitors and/or customers, regulatory
obstacles to introductions of new products, lack of acceptance of new
products by the health care market, slow rates of conversion by surgeons to
procedures which utilize the Company's products, changes in the healthcare
market, changes in distribution of the Company's products, influence of
health maintenance organizations and group purchasing organizations, and
interest rate and foreign exchange fluctuations. Such factors are discussed
in detail in the Company's filings with the Securities and Exchange
Commission.
----------------------------
49
<PAGE>
Directors (as of March 15, 1996)
JULIE K. BLAKE
Formerly Vice President,
J.P. Morgan & Co. Incorporated
JOHN A. BOGARDUS, JR.
Retired Chairman of the Board
and Chief Executive Officer
Alexander & Alexander Services Inc.
THOMAS R. BREMER
Senior Vice President
and General Counsel
United States Surgical Corporation
LEON C. HIRSCH
Chairman, President and
Chief Executive Officer
United States Surgical Corporation
TURI JOSEFSEN
Executive Vice President and
President, International Operations
United States Surgical Corporation
DOUGLAS L. KING
President
Smyth, Sanford & Gerard Reinsurance
Intermediaries, Inc.
WILLIAM F. MAY
Chairman of the Board
Statue of Liberty-Ellis Island
Foundation, Inc.
BARRY D. ROMERIL+
Executive Vice President and
Chief Financial Officer
Xerox Corporation
HOWARD M. ROSENKRANTZ
Senior Vice President, Finance and
Chief Financial Officer
United States Surgical Corporation
MARIANNE SCIPIONE
Vice President,
Corporate Communications
United States Surgical Corporation
JOHN R. SILBER
President
Boston University
Committees
AUDIT COMMITTEE
William F. May, Chair
Julie K. Blake
John A. Bogardus, Jr.
Douglas L. King
Barry D. Romeril*
EXECUTIVE COMMITTEE
Douglas L. King, Chair*
Leon C. Hirsch,
John A. Bogardus, Jr.
Turi Josefsen
William F. May
NOMINATING COMMITTEE
John A. Bogardus, Jr., Chair
Julie K. Blake*
Douglas L. King
William F. May
COMPENSATION/OPTION COMMITTEE
Douglas L. King, Chair**
John A. Bogardus, Jr.
William F. May
Barry D. Romeril*
John R. Silber
TRANSACTION and FINANCE COMMITTEE
Julie K. Blake, Chair
Leon C. Hirsch
Turi Josefsen*
Barry D. Romeril*
Howard M. Rosenkrantz
John R. Silber
- ----------
+ Elected a director February 29, 1996
* As of February 29, 1996
** Through the Annual Meeting of Stockholders at which date Dr. Silber
will assume the Chair.
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Officers (as of March 15, 1996)
Leon C. Hirsch
Chairman, President
and Chief Executive Officer
Turi Josefsen
Executive Vice President and
President, International Operations
Thomas R. Bremer
Senior Vice President and
General Counsel
Thomas D. Guy
Senior Vice President, Operations
Robert A. Knarr
Senior Vice President and General
Manager, U.S. and Canada
Howard M. Rosenkrantz
Senior Vice President, Finance and
Chief Financial Officer
Peter Burtscher
Group Vice President
Richard A. Douville
Vice President and Treasurer
Richard N. Granger
Vice President, Research
and Development
Charles E. Johnson
Vice President, Education
Louis J. Mazzarese
Vice President, Quality
and Regulatory Affairs
Eitan Nahum
Vice President, Strategic Planning
and Business Development
Joseph C. Scherpf
Vice President and Controller
Jeffrey B. Sciallo
Vice President,
Information Services
Marianne Scipione
Vice President,
Corporate Communications
Wilson F. Smith, Jr.
Vice President, Corporate Accounts
and Distribution
Charles Tribie
Vice President,
Manufacturing
Pamela Komenda
Corporate Secretary
Stockholder Information
MARIANNE SCIPIONE, VICE PRESIDENT
CORPORATE COMMUNICATIONS
United States Surgical Corporation
150 Glover Avenue, Norwalk, CT 06856
Stockholders who wish to receive financial information about the Company by
fax should call (800) 758-5804 and input USSC's identification #901293.
Requests for a copy of the Company's Annual Report to the Securities and
Exchange Commission on Form 10-K or other financial literature may be made by
calling USSC's Investor Relations Department at (203) 845-1333.
AUDITORS
Deloitte & Touche LLP
Stamford, CT 06904
EXCHANGE LISTINGS
Common Stock (Ticker Symbol: USS)
Preferred Stock (Ticker Symbol: USSPrA)
New York Stock Exchange
Options
American Stock Exchange
TRANSFER AGENT AND REGISTRAR
For information on dividends or certificates,
contact First Chicago Trust Company of New York
P.O. Box 2500, Jersey City, NJ 07303-2500
(201) 324-1225
Trademarks of United States Surgical Corporation are in italicized capital
letters.
51
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TEST
<PAGE>
UNITED STATES SURGICAL CORPORATION
1996 EMPLOYEE STOCK OPTION PLAN
1. Purpose of the Plan.
The purpose of the 1996 Employee Stock Option Plan (the "Plan") is to secure
for United States Surgical Corporation (the "Company") and its stockholders the
benefits of the incentive inherent in Common Stock ownership by permitting
selected employees of the Company and its subsidiaries to obtain suitable
recognition for services which have contributed or will contribute materially to
the success of the Company. It is intended that the Plan will aid in retaining,
encouraging and attracting employees of exceptional ability because of the
opportunity offered to them to acquire a proprietary interest, or increase their
proprietary interest, in the business of the Company.
2. Definitions.
(a) "Applicable Federal Rate" is the rate of interest provided pursuant to
Section 1274(d) of the Internal Revenue Code.
(b) "Appreciation Rights" means a right granted under the Plan to receive an
amount representing appreciation in the Fair Market Value of a share of Common
Stock between the date of grant and the date of exercise of such right, payable
in cash or Common Stock.
(c) "Board" means the Board of Directors of the Company.
(d) "Committee" means the Compensation/Option Committee of the Board or any
successor committee appointed by the Board to administer the Plan.
(e) "Common Stock" means the authorized common stock of the Company.
(f) "Company" means United States Surgical Corporation.
(g) "Eligible Employee" means any person who is, at the time of the grant of
an Incentive Award, an officer of the Company, including a person who is also a
member of the Board.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute.
(i) "Fair Market Value" means, at any date, the value of a share of Common
Stock on such date as determined by the Committee by any fair and reasonable
means, provided, however, that in the absence of a specific Committee
determination to the contrary in a particular circumstance, "Fair Market Value"
<PAGE>
means the average of the high and low quoted sales prices of a share of Common
Stock on the New York Stock Exchange on such date or, if no such sales were made
on such date, the closing price of such shares on the New York Stock Exchange on
the next preceding date on which there were such sales.
(j) "Incentive Award" means an Option or Appreciation Right.
(k) "Incentive Stock Option" means an option to purchase Common Stock which
has been granted under the Plan and which is intended to qualify under Section
422 of the Internal Revenue Code and regulations thereunder.
(l) "Nonqualified Stock Option" means an option to purchase Common Stock
which has been granted under the Plan and which is not an Incentive Stock
Option.
(m) "Option" means an Incentive Stock Option or a Nonqualified Stock Option.
(n) "Participant" means any Eligible Employee selected to receive and
accepting an Incentive Award pursuant to Section 5.
(o) "Plan" means the 1996 Employee Stock Option Plan as set forth herein and
as amended from time to time.
(p) "Subsidiary" means any subsidiary corporation, as defined in Section 424
of the Internal Revenue Code, of the Company.
3. Shares of Common Stock Subject to the Plan.
(a) Subject to the provisions of Section 3(c) and Section 8 of the Plan, the
aggregate number of shares of Common Stock that may be issued or transferred
pursuant to Incentive Awards under the Plan shall not exceed 2,500,000. Payment
of cash in lieu of shares shall be deemed to be an issuance of the shares, and
payment pursuant to an Appreciation Right shall be deemed to be an issuance of
the shares covered thereby.
(b) The shares of Common Stock to be delivered under the Plan will be made
available, at the discretion of the Company, either from authorized but unissued
shares of Common Stock or from previously issued shares of Common Stock
reacquired by the Company, including shares purchased on the open market.
(c) If shares covered by any Incentive Award cease to be issuable or
transferable for any reason, such number of shares will no longer be charged
against the limitations provided for in Section 3(a) and may again be made
subject to Incentive Awards. However, shares subject to an Option which has been
surrendered in connection with the exercise of a related Appreciation Right will
not
2
<PAGE>
become available for the grant of any additional Incentive Awards, and shares
subject to that portion of an Incentive Award which has been cancelled pursuant
to Section 9(h) will not become available for the grant of any additional
Incentive Awards.
4. Administration of the Plan.
(a) The Plan will be administered by the Committee, which will consist of
three or more persons (i) who are not eligible to receive Incentive Awards under
the Plan and (ii) who qualify as "disinterested persons" under Rule 16b-3, or
any successor or rule, under the Exchange Act, and (iii) who qualify as "outside
directors" under Section 162(m) of the Internal Revenue Code, as amended, and
regulations issued thereunder ("Section 162(m)"). The maximum number of shares
which may be issuable to any one Participant pursuant to an Incentive Award
shall be 1,500,000.
(b) The Committee has and may exercise such powers and authority of the
Board as may be necessary or appropriate for the Committee to carry out its
functions as described in the Plan. The Committee has authority in its
discretion to determine the Eligible Employees to whom, and the time or times at
which, Incentive Awards may be granted and the number of shares subject to each
Incentive Award. The Committee also has authority to (i) interpret the Plan,
(ii) determine the terms and provisions of the Incentive Award instruments and
(iii) make all other determinations necessary or advisable for Plan
administration. The Committee has authority to prescribe, amend, and rescind
rules and regulations relating to the Plan. All interpretations, determinations,
and actions by the Committee will be final, conclusive, and binding upon all
parties.
(c) No member of the Board or the Committee will be liable for any action
taken or determination made in good faith by the Board or the Committee with
respect to the Plan or any Incentive Award made under the Plan.
5. Grants.
(a) The Committee has authority, in its discretion, after receiving the
recommendations of the management of the Company, to determine and designate
from time to time those Eligible Employees who are to be granted Incentive
Awards. The Committee shall determine the type of each Incentive Award to be
granted and the number of shares covered thereby or issuable upon exercise
thereof. Each Incentive Award will be evidenced by a written instrument briefly
describing the material terms and conditions of the Incentive Award, including
such terms and conditions, consistent with the Plan, as the Committee may deem
advisable.
3
<PAGE>
(b) No person will be eligible for the grant of an Incentive Stock Option
who owns, directly or indirectly, stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company or of any
parent corporation or Subsidiary, within the meaning of Section 422 of the
Internal Revenue Code. This limitation will not apply if, at the time such
Incentive Stock Option is granted, the Incentive Stock Option exercise price is
at least 110% of the Fair Market Value of the Common Stock. In this event, the
Incentive Stock Option by its terms will not be exercisable after the expiration
of five years from the date of grant.
6. Terms and Conditions of Options.
(a) Unless otherwise determined by the Committee, the price at which Common
Stock may be purchased by a Participant under an Option shall be the Fair Market
Value of the Common Stock on the date of grant; provided, however, that in no
event shall the purchase price under an Incentive Stock Option be less than the
Fair Market Value of the Common Stock on the date of grant.
(b) The Committee shall determine the option exercise period of each Option.
The period shall not exceed 15 years from the date of grant.
(c) Upon the exercise of an Option, the purchase price will be payable in
full in cash; or, in the discretion of the Committee, by installment payments or
by a promissory note, in each case secured by shares of Common Stock and bearing
interest at a rate determined by the Committee, but not less than the Applicable
Federal Rate; or by a combination of any of the above. The Committee may permit
installment payments or promissory note payments to be made by the assignment
and delivery to the Company of shares of Common Stock owned by the Participant,
in which case such shares will be valued at the Fair Market Value of the Common
Stock on the date of payment.
(d) With respect to Incentive Stock Options granted under the Plan, the
aggregate Fair Market Value (determined as of the date the Incentive Stock
Option is granted) of the number of shares with respect to which Incentive Stock
Options are exercisable for the first time by a Participant in any calendar year
(under all stock option plans of the Company and Subsidiaries) shall not exceed
$100,000 or such other limit as may be required by the Internal Revenue Code.
(e) No fractional shares will be issued pursuant to the exercise of an
Option nor will any cash payment be made in lieu of fractional shares.
4
<PAGE>
7. Terms and Conditions of Appreciation Rights.
(a) An Appreciation Right may be granted in connection with an Option,
either at the time of grant or at any time thereafter during the term of the
Option.
(b) An Appreciation Right will entitle the Participant, upon exercise, to
surrender such Option or any portion thereof to the extent unexercised, with
respect to the number of shares as to which such Appreciation Right is
exercised, and to receive payment of an amount computed pursuant to Section
7(d). Such Option will, to the extent surrendered, cease to be exercisable.
(c) Subject to Section 7(i), an Appreciation Right granted in connection
with an Option hereunder will be exercisable at such time or times, and only to
the extent, that the related Option is exercisable, and will not be transferable
except to the extent that the related Option may be transferable.
(d) Upon the exercise of an Appreciation Right related to an Option, the
Participant will be entitled to receive payment of an amount determined by
multiplying:
(i) The difference obtained by subtracting the purchase price of a share
of Common Stock specified in the related Option from the Fair Market Value of a
share of Common Stock on the date of exercise of such Appreciation Right, by
(ii) The number of shares as to which such Appreciation Right has been
exercised.
(e) The Committee may also grant to Eligible Employees Appreciation Rights
that are not related to Options. An Appreciation Right granted without
relationship to an Option will be exercisable as determined by the Committee but
in no event after 15 years from the date of grant.
(f) An Appreciation Right granted without relationship to an Option will
entitle the Participant, upon exercise of the Appreciation Right, to receive
payment of an amount determined by multiplying:
(i) The difference obtained by subtracting the Fair Market Value of a
share of Common Stock on the date the Appreciation Right is granted (the "Base
Price") from the Fair Market Value of a share of Common Stock on the date of
exercise of such Appreciation Right, by
(ii) The number of shares as to which such Appreciation Right has been
exercised.
5
<PAGE>
(g) At the time of grant of an Appreciation Right, the Committee may
determine a maximum amount that could be payable with respect to such
Appreciation Right.
(h) Payment of the amount determined under Section 7(d) or (f) may be made
in whole shares of Common Stock valued at their Fair Market value on the date of
exercise of the Appreciation Right, in cash, or in combination of the two, as
the Committee determines in its sole discretion. If the Committee decides that
payment may be made in shares of Common Stock and the amount payable results in
a fractional share, payment for the fractional share will be made in cash.
(i) No Appreciation Right granted to an officer of the Company may be
exercised before six months after the date of grant except in the event that
death or disability of the officer occurs before the expiration of the six-month
period.
8. Adjustment Provisions.
(a) Subject to Section 8(b), if the outstanding shares of Common Stock of
the Company are increased, decreased, or exchanged for a different number or
kind of shares or other securities, or if additional shares or new or different
shares or other securities are distributed with respect to such shares of Common
Stock, through merger, consolidation, sale of all or substantially all the
property of the Company, reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split or other distribution with
respect to such shares of Common Stock, an appropriate and proportionate
adjustment may be made in (i) the maximum number and kind of shares provided in
Section 3, (ii) the number and kind of shares or other securities subject to the
then-outstanding Incentive Awards, and (iii) the purchase price or Base Price
for each share or other unit of any other securities subject to then-outstanding
Incentive Awards without change in the aggregate purchase price and Base Price
as to which such Incentive Awards remain exercisable.
(b) Subject to Section 8(c), upon dissolution or liquidation of the Company
or upon a reorganization, merger, or consolidation of the Company with one or
more corporations as a result of which the Company is not the surviving
corporation, or upon the sale of all or substantially all the property of the
Company, all Incentive Awards then outstanding under the Plan and held by
Participants who have been employed or engaged as a consultant by the Company
for at least one year at such time will be fully vested and exercisable, and the
Committee may provide in connection with such transaction for the continuance of
the Plan and the assumption of such Incentive Awards or the substitution for
such Incentive Awards of new incentive awards covering the stock of a successor
employer corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices.
6
<PAGE>
(c) In the event a Change of Control of the Company occurs, all Incentive
Awards then outstanding under the Plan and held by Participants who have been
employed or engaged as a consultant by the Company for at least one year at such
time under the Plan will be fully vested and exercisable, effective upon the
occurrence of such Change of Control. In the event that any Person makes a
filing under Section 14(d) of the Exchange Act with respect to the Company, the
exercise dates of any outstanding Incentive Awards held by Participants who have
been employed or engaged as a consultant by the Company for at least one year at
such time shall be without further action by the Committee accelerated to make
them fully vested and exercisable. In addition, in the event a Change of Control
of the Company occurs, or in the event that any Person makes a filing under
Section 14(d) of the Exchange Act with respect to the Company, the Committee
may, in its sole discretion, without obtaining stockholder approval, and subject
to the limitations imposed by Section 16 of the Securities Exchange Act of 1934,
as amended, take any one or more of the following actions or any other action
permitted under this Plan, subject in all cases to the limitations of Section
3(a):
(i) Grant Appreciation Rights to holders of outstanding Options as
permitted under Section 7(a);
(ii) Pay cash to Participants in exchange for the cancellation of their
outstanding Incentive Awards in accordance with Section 9(h); and
(iii) Make any other appropriate adjustments or amendments to the Plan
and outstanding Incentive Awards or substitute new Incentive Awards for
outstanding Incentive Awards.
For purposes of this Section 8(c), the following definitions shall apply:
(A) A "Change in Control" of the Company shall have occurred when a
Person, alone or together with its Affiliates and Associates, becomes the
beneficial owner of 20% or more of the general voting power of the Company.
(B) "Affiliate and Associates" shall have the respective meanings
ascribed to such terms in Rule 12b-2, or any successor rule, of the General
Rules and Regulations under the Exchange Act.
(C) "Person" shall mean an individual, firm, corporation or other entity
or any successor to such entity, but "Person" shall not include the Company; any
Subsidiary; any employee benefit plan or employee stock plan of the Company or
any Subsidiary, or any Person organized, appointed established or holding Voting
Stock by, for or pursuant to the terms of such a plan.
7
<PAGE>
(D) "Voting Stock" shall mean shares of the Company's capital stock
having general voting power, with "voting power" meaning the power under
ordinary circumstances (and not merely upon the happening of a contingency) to
vote in the election of directors.
(d) Adjustments under Sections 8(a), (b) and (c) will be made by the
Committee, whose determination as to what adjustments will be made and the
extent thereof will be final, binding, and conclusive. No fractional shares will
be issued under the Plan on account of any such adjustments.
9. General Provisions.
(a) Nothing in the Plan or in any instrument executed pursuant to the Plan
will confer upon any Participant any right to continue in the employ of the
Company or any of its Subsidiaries or affect the right of the Company or any
Subsidiary to terminate the employment of any Participant at any time with or
without cause.
(b) No shares of Common Stock will be issued or transferred pursuant to an
Incentive Award unless and until all then-applicable requirements imposed by
Federal and state securities and other laws, rules and regulations and by any
regulatory agencies having jurisdiction, and by any stock exchanges upon which
the Common Stock may be listed, have been fully met. As a condition precedent to
the issuance of shares pursuant to the grant or exercise of an Incentive Award,
the Company may require the Participant to take any reasonable action to meet
such requirements.
(c) No Participant and no beneficiary or other person claiming under or
through such Participant will have any right, title or interest in or to any
shares of Common Stock allocated or reserved under the Plan or subject to any
Incentive Award except as to such shares of Common Stock, if any, that have been
issued or transferred to such Participant.
(d) The Committee shall adopt rules regarding the withholding of federal,
state or local taxes of any kind required by law to be withheld with respect to
payments and delivery of shares to Participants under the Plan. With respect to
any Incentive Award, the Committee may, in its discretion, permit the
Participant to satisfy, in whole or in part, any tax withholding obligation
which may arise in connection with the exercise of the Incentive Award by
electing to have the Company withhold shares of Common Stock having a Fair
Market Value equal to the amount of the tax withholding.
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<PAGE>
(e) No Incentive Award and no right under the Plan, contingent or otherwise,
will be transferable or assignable or subject to any encumbrance, pledge or
charge of any nature except that, under such rules and regulations as the
Committee may establish pursuant to the terms of the Plan, a beneficiary may be
designated with respect to an Incentive Award in the event of death of a
participant. If such beneficiary is the executor or administrator of the estate
of the Participant, any rights with respect to such Incentive Award may be
transferred to the person or persons or entity (including a trust) entitled
thereto under the will of the holder of such Incentive Award.
(f) The Company may make a loan to a Participant in connection with the
exercise of an Option in an amount not to exceed the aggregate exercise price of
the Option being exercised for the purpose of assisting such Participant to
exercise such Option. The Company may additionally permit payment of all or any
portion of the exercise price of an Option in installment payments. Any such
loan or installment payment arrangement shall be secured by shares of Common
Stock and shall comply in all respects with all applicable laws and regulations.
The Committee may adopt policies regarding eligibility for such arrangements,
the maximum amounts thereof and any terms and conditions not specified in the
Plan upon which such arrangements will be made. In no event will the interest
rate be less than the Applicable Federal Rate.
(g) The Committee may cancel, with the consent of the Participant, all or a
portion of any Option or Appreciation Right granted under the Plan to be
conditioned upon the granting to the Participant of a new Option or Appreciation
Right for the same or a different number of shares as the Option or Appreciation
Right surrendered, or may require such voluntary surrender as a condition to a
grant of a new Option or Appreciation Right to such Participant. Subject to
other provisions of the Plan, such new Option or Appreciation Right shall be
exercisable at the price, during the period and in accordance with any other
terms or conditions specified by the Committee at the time the new Option or
Appreciation Right is granted, all determined in accordance with the provisions
of the Plan without regard to the price, period of exercise, or any other terms
or conditions of the Option or Appreciation Right surrendered.
(h) If authorized by the Committee, the Company may, with the consent of the
Participant and at any time or from time to time, cancel all or a portion of any
Incentive Award granted under the Plan then subject to exercise and discharge
its obligation with respect to the cancelled portion of such Incentive Award
either by payment to the Participant of an amount of cash equal to the excess,
if any, of the Fair Market Value, at such time, of the shares subject to the
portion of the Incentive Award so cancelled over the aggregate purchase price or
Base Price specified in the Incentive Award covering such shares, or by issuance
or transfer to the Participant of shares of Common Stock with a Fair Market
Value, at such time, equal to any such excess, or by a combination of cash and
shares. Upon any such payment of cash
9
<PAGE>
or issuance of shares, there shall be charged against the aggregate limitations
set forth in Section 3(a) a number of shares equal to the number of shares
subject to the portion of the Incentive Award so cancelled.
(i) The Committee may, in its sole discretion, cancel any Incentive Award if
the employment of the Participant holding such Incentive Award is terminated and
such Participant has engaged in activities which are, in the judgment of the
Committee, competitive with, prejudicial to or in conflict with the interests of
the Company or a Subsidiary or has breached the terms of any agreement with the
Company or a Subsidiary with respect to confidentiality and non-use of
information or with respect to disclosure and assignment of inventions and
ideas. Such actions by a Participant, whose employment has been terminated,
prior to, or during six months after, exercise of an Incentive Award shall
constitute a rescission of the exercise, requiring the payment to the Company
of, in the case of an Option, the difference between the purchase price of the
Common Stock as to which the Option was exercised and the Fair Market Value on
the date of exercise of such Common Stock or, in the case of an Appreciation
Right, the amount paid to the Participant upon exercise of the Appreciation
Right, in each case within ten days after notice of such rescission has been
given to the terminated employee by the Company.
10. Amendment and Termination.
(a) The Board shall have the power, in its discretion, to amend, suspend or
terminate the Plan at any time, subject to approval of the stockholders of the
Company to the extent necessary for the continued applicability of Rule 16b3, or
any successor rule under the Exchange Act, or for the continued qualification of
compensation pursuant to Incentive Awards under the Plan as "performance based"
compensation under Section 162(m).
(b) The Committee may, with the consent of a Participant, make such
modifications in the terms and conditions of an Incentive Award as it deems
advisable.
(c) No amendment, suspension or termination of the Plan will, without the
consent of the Participant, impair or adversely affect any right or obligation
under any Incentive Award previously granted under the Plan.
11. Effective Date of Plan and Duration of Plan.
The Plan shall become effective upon its adoption by the Board, subject to
the approval of the Company's stockholders. Unless previously terminated, the
Plan will terminate when no more shares of Common Stock are available for
issuance or transfer pursuant to Incentive Awards under the limitations of
Section 3(a).
10
<PAGE>
UNITED STATES SURGICAL CORPORATION
EXECUTIVE INCENTIVE COMPENSATION PLAN
-------------------------------------
1. PURPOSE
-------
The purposes of the United States Surgical Corporation Executive Incentive
Compensation Plan (the "Plan") are to provide an additional incentive for senior
management employees to maximize the long term performance of the Company,
consistent with the Company's strategic objectives, and to attract, motivate and
retain achievement-oriented senior management employees by providing a
competitive compensation opportunity predicated on the long term success of the
Company.
2. DEFINITIONS
-----------
"Annual Performance Period" means a period corresponding to the fiscal year
of the Company.
"Annual Performance Opportunity" means an opportunity established at the
inception of an Annual Performance Period for a Participant to earn an amount
equal to the Award Value or Award Values established in accordance with this
Plan based on attainment of Performance Objectives applicable to such Annual
Performance Opportunity.
"Average (Weighted) Annual Base Salary" means the total base salary paid
during the Performance Period divided by the number of years in the Performance
Period. For purposes of determining a Participant's base salary at the beginning
of the Performance Period, the Committee may assume that certain annual
percentage increases in base salary will occur during the Performance Period. If
at the end of a Performance Period, it is determined that average (weighted)
annual base salary actually paid during the Performance Period was more than
assumed, then the Committee may make appropriate increases in the Award Values
with respect to an Annual Performance Opportunity or, with respect to a Long
Term Performance Period, in the number of Performance Units awarded or in the
Award Values in respect of such Performance Period. Any such increases shall be
such that the percentages of the Participant's actual average (weighted) annual
base salary equal the percentages that were originally represented by the Award
Values but shall not exceed the maximum Award Value as approved by the
stockholders of the Company. If at the end of the Performance Period it is
determined that Average (Weighted) Annual Base Salary
<PAGE>
actually paid during the Performance Period was less than the assumed amount,
then the Award Values with respect to an Annual Performance Opportunity or, with
respect to a Long Term Performance Period, the number of Performance Units
awarded or the Award Values in respect of such Performance Period shall be
reduced by the Committee. Any such reductions shall be such that the percentages
of the Participant's actual Average (Weighted) Annual Base Salary represented by
the reduced Award Values for the Performance Period do not exceed the
percentages of the Participant's assumed Average (Weighted) Annual Base Salary
that were originally represented by the Award Values.
"Award Value" means an amount, determined by the Committee at the inception
of a Performance Period, which a Participant will be entitled to be paid
following the end of such Performance Period for an Annual Performance
Opportunity or a Performance Unit granted to such Participant at the inception
of such Performance Period, if the Performance Objective(s) applicable to such
Performance Unit is attained at the end of such Performance Period and if the
other terms and conditions of the Plan applicable to such Performance Unit and
of the written document evidencing such Performance Unit are fulfilled. The
Award Value of each Annual Performance Opportunity or Performance Unit granted
for any given Performance Period shall be the same, but need not be the same
as the Award Value of any Annual Performance Opportunity or Performance Unit
granted for any prior or subsequent Performance Period. The Award Value for
any Participant shall not exceed a maximum amount, in dollars, approved by the
stockholders of the Company.
"Board" means the Board of Directors of the Company.
"Beneficiary" means such persons or entities (including a trust or estate)
as a Participant designates at any time and from time to time to receive any
amounts that may become payable under the Plan after such Participant's death,
provided that such designation is made on a form prescribed by and delivered to
the Secretary of the Company, and provided further, that the Company consents to
such designation after it is made. Any designation of a Beneficiary by a
Participant may be revoked by such Participant on a form prescribed for that
purpose by, and delivered to, the Secretary of the Company, or by designating a
different Beneficiary in accordance with the next preceding sentence. If any
amount becomes payable under the Plan in respect of a Participant after such
Participant's death, and if no Beneficiary of the Participant has been so
designated or if no Beneficiary who or which has been so designated is alive or
in existence at the time such amount becomes payable, then such Participant's
Beneficiary shall be the legal representative of the Participant's estate.
-2-
<PAGE>
"Change in Control" means (i) the stockholders of the Company approve any
plan for the liquidation or dissolution of the Company or for a consolidation or
merger of the Company in which the Company would not be the continuing or
surviving corporation or pursuant to which shares of the Company's common stock
would be converted into cash, securities or other property, other than a merger
of the Company in which the holders of the Company's common stock immediately
prior to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, (ii) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, (iii)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), becomes the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
30% or more of the Company's outstanding common stock, or (iv) during any period
of two consecutive years or less, individuals who at the beginning of such
period constitute the entire Board of Directors shall cease for any reason to
constitute a majority there of unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
"Committee" means the Compensation/Option Committee of the Board.
"Company" means United States Surgical Corporation, a Delaware corporation.
"Disability" means termination of employment under circumstances that
entitle a Participant (or that will entitle a Participant after any applicable
waiting period) to disability benefits under the long-term disability insurance
plan of th Company applicable to such Participant at the time of such
termination.
"Participant" means an employee who has been granted an opportunity for an
Annual Performance Opportunity and/or a Performance Unit under the Plan.
"Plan" means the United States Surgical Corporation Executive Incentive
Compensation Plan set forth herein, as it may be amended from time to time.
"Long-Term Performance Period" means a period of three consecutive calendar
years, unless the Committee determines at the inception of any new period that a
different period (i.e.,shorter or longer than three years) shall be used, in
which case it shall mean such different period determined by the Committee.
"Performance Objectives" means performance goals, whichshall be objectively
determinable as contemplated by Section162(m) of the Internal Revenue Code, as
amended, and the regulations issued thereunder ("Section 162(m)"), shall be
selected from performance goals approved by the stockholders of the Company, and
shall be
-3-
<PAGE>
established in writing by the Committee not later than 90 days after the
commencement of the applicable Performance Period to which such Performance
Objectives relate. Such Performance Objectives must state, in terms of an
objective formula or standard, the method for computing the amount of
compensation payable to the Participant if the Performance Objectives are
achieved; provided, that the Committee may in its discretion decrease or
eliminate the award otherwise payable on achievement of such Performance
Objectives based on a failure of a Participant to satisfy other criteria or
goals established by the Committee.
"Performance Unit" means an opportunity granted at the inception of a Long
Term Performance Period for a Participant to earn an amount, equal to or greater
than the Threshold Award Value of such Performance Unit but not in excess of the
Maximum Award Value of such Performance Unit, if the Threshold Performance
Objective applicable to such Performance Unit is attained or exceeded by the end
of such Performance Period and if the other terms and conditions of the Plan
applicable to such Performance Unit and of the document evidencing such
Performance Unit are fulfilled. Every Performance Unit granted under the Plan
shall be evidenced by a written document, executed by an officer of the Company
thereunto duly authorized and delivered to the Participant, which shall be
subject to, and incorporate by reference, the terms and conditions of the Plan,
and which shall contain such other terms and conditions, not inconsistent with
the Plan, as the Committee may prescribe. Such written document need not be
delivered to the Participant at the time such Performance Unit is granted,
provided that no Participant shall have any legally enforceable rights in
respect of such Performance Unit under the Plan or otherwise unless and until
such a written and duly executed document evidencing such Performance Unit is
delivered to him.
"Retirement" means the termination of a Participant's employment with the
Company and its subsidiaries if such termination occurs with the written consent
of the Company (given with specific reference to this Plan).
3. ADMINISTRATION
--------------
(a) This Plan shall be administered by the Committee, which shall consist
exclusively of members of the Board of Directors who shall each be an "outside
director" within the meaning of Section 162(m) and who shall not be eligible to
receive an incentive compensation award under the Plan.
-4-
<PAGE>
(b) The Committee shall have full power and authority, subject to the
provisions of the Plan, to select employees to participate in this Plan from
among those eligible, to determine the Annual Performance Opportunities and/or
Performance Units to be granted each Participant, to establish the Performance
Objectives and Award Values of Annual Performance Opportunities and/or
Performance Units, to determine terms and conditions of the written documents
evidencing Annual Performance Opportunities and/or Performance Units, to
determine the extent to which the Performance Objectives established for Annual
Performance Opportunities and/or Performance Units granted for a Performance
Period have been attained, to interpret this Plan and all documents and
instruments issued hereunder, and to adopt, revise and interpret such rules and
procedures as it may deem necessary or advisable. All decisions under this Plan
shall be final, conclusive, and binding on the Company, each Participant, each
Beneficiary, and any person claiming under or through any of them.
(c) As soon as practicable after the end of each calendar year in a
Performance Period, the Committee shall determine the extent to which the
Performance Objectives established for Annual Performance Opportunities and/or
Performance Units granted for such Performance Period have been attained, based
on financial statements of the Company for such Performance Periods prepared in
accordance with generally accepted accounting principles consistently applied,
or on other criteria, as applicable, and in accordance with this Plan.
4. ELIGIBILITY
-----------
Eligibility to participate under the Plan shall be limited to the corporate
officers of the Company. Long Term grants shall be limited to those corporate
officers of the Company who, in the opinion of the Committee, are in a position,
on or before June 30 of the first calendar year of such Performance Period, to
have a measurable impact on the performance of the Company during such
Performance Period, or who are in such a position on or before such later date
during such first calendar year as the Committee may in special cases approve.
In selecting Participants, the Committee shall consider an individual's duties
and responsibilities, the potential impact such individual may have on the
Company's long-term performance, and such other factors as the Committee deems
relevant or appropriate.
-5-
<PAGE>
5. PERFORMANCE PERIODS AND GRANTS
------------------------------
(a) Annual Incentive Awards. If the Committee determines to establish an
Annual Incentive Opportunity for any Annual Performance Period, it shall
determine the Participants therein and establish Performance Objectives and
Award Values applicable to such Annual Incentive Opportunity, in writing, not
later than the 90th day of the year to which the Performance Objectives relate.
Attainment of Performance Objectives established at the inception of an Annual
Performance Period (as such objectives may be changed or adjusted in accordance
with the provisions of Section 9 below) will entitle a Participant to be paid
the Award Value of a Performance Unit following the end of such Performance
Period, determined in accordance with Section 6 below and subject to the other
provisions of the Plan. The Performance Objectives applicable to any Annual
Performance Opportunity granted to a Participant need not be the same as the
Performance Objectives applicable to any other Annual Performance Opportunity
granted to such Participant or to any other Participant for the same or any
prior or subsequent Annual Performance Period.
(b) Grants of Performance Units. The first Long Term Performance Period
shall begin as of January 1, 1996. Unless otherwise determined by the Board, a
new Long Term Performance Period of three consecutive calendar years shall
commence as of January 1, 1997 and as of January 1 of each subsequent calendar
year prior to the Termination Date referred to in Section 12 of the Plan. For
each Long Term Performance Period, the Committee shall determine the
Participants therein, the number of Performance Units to be granted to each
Participant and the Performance Objectives and Award Values applicable to such
Performance Units, not later than the 90th day after the beginning of such Long
Term Performance Period. Attainment of Performance Objectives established at the
inception of a Long Term Performance Period (as such objectives may be changed
or adjusted in accordance with the provisions of Section 9 below) will entitle a
Participant to be paid the Award Value of a Performance Unit following the end
of such Performance Period, determined in accordance with Section 6 below and
subject to the other provisions of the Plan. The Performance Objectives
applicable to any Performance Unit granted to a Participant need not be the same
as the Performance Objectives applicable to any other Performance Unit granted
to such Participant or to any other Participant for the same or any prior or
subsequent Performance Period.
-6-
<PAGE>
6. EARNED AWARD VALUE DETERMINATION
--------------------------------
Compensation or awards shall be made under the Plan only upon certification
by the Committee in writing that the Performance Objectives and any other
material terms relating to an Annual Performance Opportunity or a Performance
Unit have been satisfied.
At the end of each Annual Performance Period, Annual Performance
Opportunities granted for such Performance Period shall expire if they have not
already expired pursuant to the other provisions of the Incentive Plan. After
the end of each Annual Performance Period, the Committee shall certify in
writing whether the Performance Objectives and any other material terms of such
Annual Performance Opportunity have been satisfied and determine the Award
Value, if any, which each Participant is entitled to be paid for each Annual
Performance Opportunity granted to such Participant for such Annual Performance
Period.
At the end of each Long Term Performance Period, Performance Units granted
for such Long Term Performance Period shall expire if they have not already
expired pursuant to the other provisions of the Plan. After the end of each Long
Term Performance Period, the Committee shall certify in writing whether the
Performance Objectives and any other material terms of such Performance Units
have been satisfied and shall determine the amount, if any, which each
Participant is entitled to be paid for each Performance Unit granted to such
Participant for such Performance Period, as follows:
(a) If the Threshold Performance Objective applicable to a Performance
Unit was not attained or exceeded at the end of such Performance Period, or
if any other term or condition of the Plan applicable to such Performance
Unit or of the written document evidencing such Performance Unit has not
been fulfilled, the Participant shall not be entitled to any payment for
such Performance Unit.
(b) If the Threshold Performance Objective applicable to a Performance
Unit was attained but not exceeded at the end of such Performance Period,
and all other terms and conditions of the Incentive Plan applicable to such
Performance Unit and of the written document evidencing such Performance
Unit have been fulfilled, the Participant shall be entitled to be paid the
Threshold Award Value of such Performance Unit.
(c) If the Target Performance Objective applicable to a Performance Unit
was attained but not exceeded at the end of such Performance Period, and all
other terms and conditions of the Incentive Plan applicable to such
Performance Unit and of the written document evidencing such Performance
Unit have been
-7-
<PAGE>
fulfilled, the Participant shall be entitled to be paid the Target Award
Value of such Performance Unit.
(d) If the Maximum Performance Objective applicable to a Performance
Unit was attained but not exceeded at the end of such Performance Period,
and all other terms and conditions of the Incentive Plan applicable to such
Performance Unit and of the written document evidencing such Performance
Unit have been fulfilled, the Participant shall be entitled to be paid the
Maximum Award Value of such Performance Unit.
(e) If, at the end of such Performance Period, (i) the Threshold
Performance Objective applicable to a Performance Unit was exceeded but the
Target Performance Objective applicable to such Performance Unit was not
attained, or(ii) the Target Performance Objective applicable to a
Performance Unit was exceeded but the Maximum Performance Objective was not
attained, and if in either case (i) or(ii) all other terms and conditions of
the Plan applicable to such Performance Unit and of the written document
evidencing such Performance Unit have been fulfilled, the Participant shall
be entitled to be paid such amount, but, in the case of (i) above, not less
than the Threshold Award Value nor more than the Target Award Value of such
Performance Unit, and, in the case of (ii) above, not less than the Target
Award Value nor more than the Maximum Award Value of such Performance Unit,
as may have been prescribed therefore (whether by schedule, formula or
otherwise) in the written document evidencing such Performance Unit or, if
no such amount was so prescribed, an amount determined by straight-line
matrix interpolation between the Threshold Award Value and Target Award
Value of such Performance Unit(in the case of (i) above) or between the
Target Award Value and Maximum Award Value of such Performance Unit (in the
case of (ii) above).
7. PAYMENT
-------
As soon as practicable after the end of a Performance Period, the Committee
shall determine, in accordance with Section 6 and the other provisions of the
Plan, the amount, if any, which each Participant in such Performance Period is
entitled to be paid for Annual Performance Opportunities and/or Performance
Units granted to him at the inception of such Performance Period, and cash
payment thereof (less any amount which the Company determines should be withheld
pursuant to Paragraph 11(1) below) shall be made as soon as practicable,
provided that amounts payable hereunder may, at the election of each
Participant, be deferred under, and subject to the terms and conditions of, any
deferred compensation plan of the Company that specifically provides for such
deferral and the timing of the election thereof, and, provided further, that in
all events it shall be a condition to the Company's obligation to make such
-8-
<PAGE>
payment, and a condition to the Participant's entitlement to such payment, that
the Participant shall have refrained, at all times prior to the time when such
payment is made (or, in the case of a payment deferred at the election of the
Participant, at all times prior to the time when payment would have been made
had payment not been deferred), from competition which in the good faith opinion
of the Committee is materially detrimental to the Company or any subsidiary of
the Company.
8. TERMINATION OF EMPLOYMENT DURING PERFORMANCE PERIOD
---------------------------------------------------
(a) Except if and to the extent otherwise expressly provided by the
provisions of paragraph (b) below of this Section 8, it shall be a condition to
the Company's obligation to make any payment with respect to an Annual
Performance Opportunity or Performance Unit, and a condition to the
Participant's entitlement to such payment, that the Participant shall remain in
the continuous employ of the Company and its subsidiaries through the end of the
Performance Period for which such Annual Performance Opportunity or Performance
Unit was granted. If a Participant's employment with the Company and its
subsidiaries terminates during a Performance Period, any Annual Performance
Opportunity or Performance Units granted to such Participant for such
Performance Period shall thereupon expire and, except if and to the extent
otherwise expressly provided by the provisions of paragraph (b) below of this
Section 8, the Participant shall not be entitled to any payment for such Annual
Performance Opportunities and/or Performance Units. Notwithstanding the
foregoing, if a Participant voluntarily terminates employment with the Company
and its subsidiaries during a Performance Period, the Committee, at its sole
discretion, may pay such Participant a pro rata portion of any Award Value
applicable to an Annual Performance Opportunity or Performance Unit payment
pursuant to this Section 8(a), provided that such fractional amount shall be
payable at the same time and on the same terms and conditions (including
Performance Objectives) as would have applied under the Plan (including but not
limited to Sections 6 and 7 thereof) and under the written document evidencing
such Annual Performance Opportunities and/or Performance Units had the
Participant's employment with the Company and its subsidiaries continued through
the end of such Performance Period.
(b) If a Participant's employment with the Company and its subsidiaries is
terminated during a Performance Period (i) by death, (ii) by Disability, (iii)
by Retirement, or (iv) by the Company and its subsidiaries without cause (as
determined
-9-
<PAGE>
by the Committee), then the Participant shall be entitled to be paid the amount,
if any, that he would have been entitled to be paid for such Annual Performance
Opportunities and/or Performance Units had his employment with the Company and
its subsidiaries continued through the end of such Performance Period,
multiplied by a fraction, the numerator of which shall be the number of full
calendar months in which the Participant was employed by the Company and its
subsidiaries during such Performance Period, and the denominator of which shall
be the number of full calendar months in which the Participant would have been
employed by the Company and its subsidiaries during such Performance Period had
his employment with the Company and its subsidiaries continued through the end
of such Performance Period. Such fractional amount shall be payable at the same
time and on the same terms and conditions(including Performance Objectives) as
would have applied under the Plan (including but not limited to Sections 6 and
7 thereof) and under the written document evidencing such Annual Performance
Opportunities and/or Performance Units had the Participant's employment with the
Company and its subsidiaries continued through the end of such Performance
Period.
9. CHANGES AND ADJUSTMENTS IN PERFORMANCE OBJECTIVES
-------------------------------------------------
The Committee may, but in no event shall be required to, provide for such
changes and adjustments in the Performance Objectives applicable to an Annual
Performance Opportunity and/or Performance Unit (including those which would
increase or reduce the amount otherwise payable for an Annual Performance
Opportunity and/or Performance Unit hereunder) as the Committee determines,
based on preestablished, objectively determinable criteria, to be necessary or
appropriate to maintain the relationships between performance and reward
contemplated by the Performance Objectives applicable to such Annual Performance
Opportunity and/or Performance Unit at the inception of the Performance Period.
Such criteria may include (a) a stock dividend, stock split, combination of
shares, recapitalization or other change in the capital structure of the Company
or any of its subsidiaries, (b) a merger, consolidation, separation,
reorganization, spin-off, sale of assets, partial or complete liquidation or
dissolution of the Company or any of its subsidiaries or divisions, (c) changes
in accounting practices, (d) any acquisition by the Company or a unit of the
Company, (e) any extraordinary, unusual, or nonrecurring revenues or expenses,
or (f) any other factor that the Committee deems relevant or appropriate.
-10-
<PAGE>
10. CHANGE IN CONTROL
-----------------
Any provisions of the Plan to the contrary notwithstanding, if a Change in
Control of the Company occurs prior to the end of the Performance Period for
which an Annual Performance Opportunity and/or Performance Unit was granted, and
if the Committee shall not have directed otherwise prior to such Change in
Control, then
(i) such Performance Period shall terminate as of the date of such Change
in Control,
(ii) such Annual Performance Opportunity and/or Performance Unit shall
thereupon expire, and
(iii) the Company shall thereupon pay the Participant for such Annual
Performance Opportunity and/or Performance Unit such amount, if any, as the
Committee determines would have been paid to the Participant for such Annual
Performance Opportunity and/or Performance Unit after the end of such
Performance Period had such Change in Control not occurred, multiplied by a
fraction, the numerator of which shall be the number of full calendar months
that elapsed in such foreshortened Performance Period and the denominator of
which shall be the number of full calendar months that would have elapsed in
such Performance Period by the end thereof had such Change in Control not
occurred. Such determination shall be made by the Committee by extrapolating
performance results attained through the end of such foreshortened Performance
Period into the future.
11. GENERAL PROVISIONS
------------------
(a) The grant of an Annual Performance Opportunity and/or Performance Unit
under the Plan to a Participant for any Performance Period shall not create any
right in such Participant or in any other employee to be granted any other
Annual Performance Opportunity and/or Performance Unit for the same or any
prior or subsequent Performance Period.
(b) The Company shall maintain on its books a separate account for each
Participant to which shall be credited such amount, if any, as may from time to
time be payable to such Participant under the Plan. However, all payments to be
made under the Plan shall be paid in cash from the general funds of the Company
and no special or separate fund shall be established and no segregation of
assets shall be made to assure payment of amounts payable under the Plan. To the
extent that any person acquires a right to receive any payment from the Company
under the Plan, such right shall be no
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<PAGE>
greater than the right of an unsecured general creditor of the Company. Nothing
contained in the Plan or in any instrument delivered or executed hereunder
shall create or be construed to create a trust of any kind, or a fiduciary
relationship between the Company and any participant or other person.
(c) The Plan is an unfunded deferred compensation plan for a select group of
management or highly compensated employees. The Plan shall be administered,
interpreted and construed to carry out such intention, and any provision of the
Plan that cannot be so administered, interpreted and construed shall, to that
extent, be disregarded.
(d) No participant or other person shall have any right, title or interest
in or to any asset or investment which may (but need not) be acquired or made by
the Company to aid it in meeting its obligations under the Plan.
(e) No provision of the Plan, nor any aspect of its operation or
administration, nor any document delivered or executed pursuant to or describing
the Plan, shall limit or restrict in any way the right of the Company or a
subsidiary employer to terminate the employment of any employee at any time with
or without cause or assigning a reason therefor, or shall be construed to impose
upon the Company or any subsidiary employer any liability not expressly and
specifically assumed by the Company under the Plan, whether for any forfeiture
of Annual Performance Opportunities and/or Performance Units or rights under
Annual Performance Opportunities and/or Performance Units, or any loss
of eligibility for the future grant of Annual Performance Opportunities and/or
Performance Units, that may result if the employment of any employee should be
so terminated, or otherwise.
(f) Any costs incidental to the administration of the Plan shall be borne by
the Company.
(g) No rights under the Plan, contingent or otherwise, shall be assignable,
alienable or subject to any encumbrance, pledge or charge of any nature, or, to
the full extent permitted by law, be subject to any lien or to attachment, levy
or execution, and no such rights shall be transferable other than by designation
of a Beneficiary or by will or the laws of descent and distribution.
-12-
<PAGE>
(h) By accepting any benefits under the Plan, each Participant, each
Beneficiary and each person claiming under or through any Participant or
Beneficiary, shall be conclusively deemed to have indicated his acceptance and
ratification of, and consent to, all provisions of the Plan and any action or
decision taken or made or to be taken or made under the Plan by the Company, the
Board or any Committee thereof, the Chief Executive Officer, the Secretary, or
other officers of the Company.
(i) The Board may rely upon any information supplied to it by any officer of
the Company, by the Company's independent public accountants or by legal
counsel, and may rely upon the advice of such accountants and counsel, and shall
be fully protected in relying upon any such information and advice.
(j) The fact that a member of the Board shall at the time be, or shall
theretofore have been or thereafter may be, a Participant or eligible to be
selected as a Participant shall not disqualify him from taking part in and
voting at any time as a director in favor of or against amendment or termination
of the Plan or other matters affecting the Plan.
(k)(i) Any instrument to be delivered under the Plan to the Company, the
Board, the Chief Executive Officer or the Secretary of the Company shall be
deemed to have been properly delivered in each case if and when delivered to the
Secretary of the Company in person or three days after deposit thereof, in a
post office box regularly maintained by the United States Government, in an
envelope, properly stamped, addressed to the Secretary of the Company at the
principal office of the Company.
(ii) Any instrument to be delivered under the Plan to a Participant or
employee shall be deemed to have been properly delivered in each case if and
when delivered in person to such Participant or employee or three days after
deposit thereof, in a post office box regularly maintained by the United States
Government, in an envelope, properly stamped, addressed to such Participant or
employee at his address as it appears on the books of the Company.
(iii) Headings are given to sections of the Plan solely as a convenience
to facilitate reference; neither such headings or any numbering or paragraphing
shall be deemed in any way material or relevant to the construction of the Plan
or any provision thereof.
-13-
<PAGE>
(iv) The use of the masculine gender shall also include within its
meaning the feminine.
(l) The Company may withhold any taxes that it determines are required to be
withheld from amounts payable under the Plan under the applicable laws or other
regulations of any governmental authority, whether Federal, state or local and
whether domestic or foreign.
(m) The place of administration of the Plan shall be conclusively deemed to
be within the State of Connecticut, and the validity, construction,
interpretation and administration of the Plan, and of any rules and regulations
or determinations or decisions made thereunder, and the rights of any and all
persons having or claiming to have any interest therein or thereunder, shall be
governed by, and determined exclusively and solely in accordance with, the laws
of the State of Connecticut, without giving effect to the principles of
conflicts of laws thereof. Without limiting the generality of the foregoing, the
period within which any action arising under or in connection with the Plan or
any payment or grant made or purportedly made under or in connection therewith,
must be commenced shall be governed by the laws of the State of Connecticut,
without giving effect to the principles of conflicts of laws thereof,
irrespective of the place where the act or omission complained of took place and
of the residence of any party where the action may be brought.
(n) The Plan is not intended to be a substitute for, or preclude continuance
or establishment of, other incentive compensation, profit participation or bonus
plans of the Company or its subsidiaries, divisions or profit centers or any
other plan, practice or arrangement for the payment of compensation or fringe
benefits, including, without limitation, commissions, prizes, suggestion or
special awards, production or similar bonuses, retirement, profit sharing, group
insurance, stock purchase or stock bonus plans or other bonus plans or
arrangements or any stock option or restricted stock plan, that may now or may
hereafter be in effect for employees generally or any group or class of
employees, and any such plan, practice or arrangement may be continued or
authorized and payment thereunder made independently of the Plan.
(o) Anything in this Plan to the contrary notwithstanding:
-14-
<PAGE>
(i) In the event that any provision of this Plan shall be determined to
be invalid or unenforceable for any reason, in whole or in part, the remaining
provisions of this Plan not so invalid or unenforceable shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law;
(ii) Any provision of this Plan which may be invalid or unenforceable in
any jurisdiction shall be limited by construction thereof, to the end that such
provision shall be valid and enforceable in such jurisdiction; and
(iii) Any provision of this Plan which may for any reason be invalid or
unenforceable in any jurisdiction shall remain in effect and be enforceable in
any jurisdiction in which such provision shall be valid and enforceable.
12. EFFECTIVE DATE AND TERM OF PLAN
-------------------------------
The Plan shall be effective as of the date of its adoption by the Board
(the "Effective Date"), subject to the approval of the stockholders of the
Company of the adoption of the Plan. Annual Performance Opportunities and/or
Performance Units may be granted under the Plan at any time and from time to
time on or after the Effective Date and prior to the date of the Company's
Annual Meeting in the year 2001 (the "Termination Date"). Annual Performance
Opportunities and/or Performance Units may not be granted under the Plan on or
after the Termination Date, but the Plan shall continue in effect in accordance
with its terms on and after the Termination Date with respect to Annual
Performance Opportunities and/or Performance Units granted prior thereto.
13. AMENDMENT OR TERMINATION
------------------------
The Incentive Plan may at any time be terminated, or at anytime and from
time to time be amended, by the Board, provided that no termination or amendment
of the Plan shall, without the consent of affected Participants, affect
adversely any Annual Performance Opportunity and/or Performance Unit granted
prior to such termination or amendment of the Incentive Plan; provided further,
that the approval of the stockholders of any amendments shall be required to the
extent necessary under Section 162(m) of the Internal Revenue Code, as amended.
-15-
<PAGE>
(Front of Proxy Card 1406)
COMMON STOCK
UNITED STATES SURGICAL CORPORATION
Proxy Solicited on Behalf of the Board of Directors
of the Company for Annual Meeting May 2, 1996
P R O X Y
The undersigned hereby constitutes and appoints John A. Bogardus, Jr., Leon
C. Hirsch and William F. May, and each of them, his true and lawful agents and
proxies with full power of substitution in each, to represent and vote all the
Common Shares held by the undersigned at the Annual Meeting of Stockholders of
UNITED STATES SURGICAL CORPORATION to be held at The Equitable building, 787
Seventh Avenue, New York, N.Y. 10019, on Thursday, May 2, 1996, at 2:00 P.M.
(local time), and at any adjournments thereof, as directed on this card upon the
matters set forth on the reverse side hereof, as described in the proxy
statement, and in their discretion upon any other business which may properly
come before said meeting. The undersigned hereby revokes all proxies heretofore
given with respect to such meeting.
Election of Directors - Nominees:
Julie K. Blake, John A. Bogardus, Jr., Thomas R. Bremer, Leon C. Hirsch,
Turi Josefsen, Douglas L. King, William F. May, Barry D. Romeril,
Howard M. Rosenkrantz, Marianne Scipione, John R. Silber.
You are encouraged to specify your choices by marking the appropriate box
(SEE REVERSE SIDE). Shares will be voted in accordance with such choices. IF YOU
DO NOT MARK ANY BOX THE SHARES WILL BE VOTED IN ACCORDANCE WITH THE BOARD OF
DIRECTORS' RECOMMENDATIONS. The named proxies cannot vote your shares unless you
sign and return this card.
(FOLLOWING TEXT IN BOX)
SEE REVERSE
SIDE
(END OF TEXT IN BOX)
(Back of Proxy Card 1406)
(Box with X in middle)
Please Mark your
votes as in this
example 1406
This proxy when properly executed will be voted in the manner directed
herein. If no direction is made, this proxy will be voted FOR election of
directors, FOR proposals 2 and 3 and AGAINST Proposals 4 and 5.
The Board of Directors recommends a vote FOR the election of Directors and
FOR Proposals 2 and 3.
1. Election of
Directors
(see reverse)
(box) FOR (box) WITHHELD
For, except vote withheld from the following nominee(s):
- -------------------------------------------------------------------------------
2. Approval of 1996
Employee Stock
Option Plan and
1996 Option Plan
Grant to CEO
(box) FOR (box) AGAINST (box) ABSTAIN
3. Approval of
Executive Incentive
Compensation Plan
(box) FOR (box) AGAINST (box) ABSTAIN
The Board of Directors recommends a vote AGAINST
Proposals 4 and 5.
4. Approval of Shareholder
Proposal on Director
Compensation
(box) FOR (box) AGAINST (box) ABSTAIN
5. Approval of Shareholder
Proposal for Independent
Board
(box) FOR (box) AGAINST (box) ABSTAIN
SIGNATURE(S)_________________________________ DATE________________
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
The signer hereby revokes all proxies heretofore given
by the signer to vote at said meeting or any adjournments
thereof.
<PAGE>
(Front of Proxy Card 2548)
SERIES A CONVERTIBLE
PREFERRED STOCK
UNITED STATES SURGICAL CORPORATION
Proxy Solicited on Behalf of the Board of Directors
of the Company for Annual Meeting May 2, 1996
P R O X Y
The undersigned hereby constitutes and appoints John A. Bogardus, Jr., Leon
C. Hirsch and William F. May, and each of them, his true and lawful agents and
proxies with full power of substitution in each, to represent and vote all the
Series A Convertible Preferred Shares (each share being entitled to 47.50 votes,
equivalent to .95 of a vote for each 1/50 Interest Depositary Share) held by the
undersigned at the Annual Meeting of Stockholders of UNITED STATES SURGICAL
CORPORATION to be held at The Equitable building, 787 Seventh Avenue, New York,
N.Y. 10019, on Thursday, May 2, 1996, at 2:00 P.M. (local time), and at any
adjournments thereof, as directed on this card upon the matters set forth on the
reverse side hereof, as described in the proxy statement, and in their
discretion upon any other business which may properly come before said meeting.
The undersigned hereby revokes all proxies heretofore given with respect to such
meeting.
Election of Directors - Nominees:
Julie K. Blake, John A. Bogardus, Jr., Thomas R. Bremer, Leon C. Hirsch,
Turi Josefsen, Douglas L. King, William F. May, Barry D. Romeril, Howard
M. Rosenkrantz, Marianne Scipione, John R. Silber.
You are encouraged to specify your choices by marking the appropriate box
(SEE REVERSE SIDE). Shares will be voted in accordance with such choices. IF YOU
DO NOT MARK ANY BOX THE SHARES WILL BE VOTED IN ACCORDANCE WITH THE BOARD OF
DIRECTORS' RECOMMENDATIONS. The named proxies cannot vote your shares unless you
sign and return this card.
(FOLLOWING TEXT IN BOX)
SEE REVERSE
SIDE
(END OF TEXT IN BOX)
(Back of Proxy Card 2548)
(Box with X in middle) Please Mark your
votes as in this
example 2548
This proxy when properly executed will be voted in the manner directed
herein. If no direction is made, this proxy will be voted FOR election of
directors, FOR proposals 2 and 3 and AGAINST Proposals 4 and 5.
The Board of Directors recommends a vote FOR the election of Directors and
FOR Proposals 2 and 3.
1. Election of
Directors
(see reverse)
(box) FOR (box) WITHHELD
For, except vote withheld from the following nominee(s):
- -------------------------------------------------------------------------------
2. Approval of 1996
Employee Stock
Option Plan and
1996 Option Plan
Grant to CEO
(box) FOR (box) AGAINST (box) ABSTAIN
3. Approval of
Executive Incentive
Compensation Plan
(box) FOR (box) AGAINST (box) ABSTAIN
The Board of Directors recommends a vote AGAINST
Proposals 4 and 5.
4. Approval of Shareholder
Proposal on Director
Compensation
(box) FOR (box) AGAINST (box) ABSTAIN
5. Approval of Shareholder
Proposal for Independent
Board
(box) FOR (box) AGAINST (box) ABSTAIN
SIGNATURE(S)_________________________________ DATE________________
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
The signer hereby revokes all proxies heretofore given
by the signer to vote at said meeting or any adjournments
thereof.
