<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 1-9776
UNITED STATES SURGICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2518270
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 GLOVER AVENUE, NORWALK, CONNECTICUT 06856
(Address of principal executive offices) (Zip Code)
(203) 845-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.10 par value New York Stock Exchange
Depositary Shares, representing
one-fiftieth interests in Series A
Convertible Preferred Stock,
$5 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant (based on the closing sales price for Common Stock of $39.375 and
for Depositary Shares of $38.25 on December 31, 1996 and, for purposes of this
computation only, the assumption that all directors and officers of the
registrant are affiliates) was approximately $2.4 billion.
The number of outstanding shares of Common Stock, $.10 par value, of the
registrant was 63,286,797 shares on December 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Definitive Proxy Statement
for the 1997 Annual Meeting of Stockholders of the Registrant
Incorporated By Reference Into Part III, Items 10, 11, 12 and 13
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UNITED STATES SURGICAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX
PART I
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ITEM PAGE
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1. Business ......................................................................................................... 1
2. Properties ....................................................................................................... 12
3. Legal Proceedings ................................................................................................ 12
4. Submission of Matters to a Vote of Security Holders .............................................................. 14
Executive Officers of the Registrant ............................................................................. 15
PART II
5. Market for Registrant's Common Stock and Related
Stockholder Matters ............................................................................................ 17
6. Selected Financial Data .......................................................................................... 18
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................................................................... 19
8. Financial Statements and Supplementary Data ...................................................................... 23
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................. 23
PART III
10. Directors and Executive Officers of the Registrant ............................................................... 24
11. Executive Compensation ........................................................................................... 24
12. Security Ownership of Certain Beneficial Owners and
Management ..................................................................................................... 24
13. Certain Relationships and Related Transactions ................................................................... 24
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .................................................................................................... 24
Signatures........................................................................................................ 27
Index to Consolidated Financial Statements
and Financial Statement Schedule................................................................................ F-1
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PART I
ITEM 1. BUSINESS.
NATURE OF BUSINESS
United States Surgical Corporation (the Company) is a Delaware
corporation primarily engaged in developing, manufacturing and marketing a
proprietary line of technologically advanced surgical wound management products
to hospitals throughout the world. The Company currently operates domestically
and internationally through subsidiaries, divisions and distributors. Except
where the context otherwise requires, the term Company includes the Company's
divisions and subsidiaries.
The market that the Company services continues to be adversely affected
by cost consciousness on the part of health care providers and payors and is
experiencing 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.
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
single use and reusable), single use surgical clip appliers and single use
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 single use instruments and DLUs are
expended after a single use or, in the case of reloadable single use
instruments, after a single surgical procedure.
The Company is a leading manufacturer and marketer of specialized wound
management products designed for use in the field of minimally invasive surgery.
This surgical technique (also referred to as laparoscopic or endoscopic surgery)
requires incisions of up to one half inch through which various procedures are
performed using laparoscopic instruments and optical devices, known as
laparoscopes or endoscopes, for viewing inside the body cavity. Laparoscopy
generally provides patients with significant reductions in post-operative
hospital stay, pain, recuperative time and hospital costs, with improved
cosmetic results, and with the ability to return to work and normal life in a
shorter time frame. The Company has developed and markets single use surgical
clip appliers and stapling instruments designed for laparoscopic uses in a
variety of sizes and configurations. The Company's products in this area also
include trocars, which provide entry ports to the body in laparoscopic surgery,
and a line of instruments which allows the surgeon to see, cut, clamp, retract,
suction, irrigate or otherwise manipulate tissue during a laparoscopic
procedure. The Company also designs and markets laparoscopes. Applications for
minimally invasive surgery currently include cholecystectomy (gall bladder
removal), hysterectomy, hernia repair, bladder suspension for urinary stress
incontinence, anti-reflux procedures for correction of heartburn, and various
forms of bowel, stomach, gynecologic, urologic, and thoracic (chest) surgery.
The Company believes that laparoscopy can also be used effectively in many other
surgical procedures.
The Company offers certain of its products in both single use and
reusable versions. Single use instruments reduce the user's capital investment,
eliminate the risks and costs associated with maintenance, sterilizing and
repair of reusable instruments, and provide the surgeon with a new sterile
instrument for each procedure, offering more efficacious and safer practice for
both patients and operating room personnel. Reusable instruments provide an
alternative for surgeons and hospitals preferring this approach.
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Trademarks of United States Surgical Corporation are in italicized capital
letters.
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The Company continues to expand manufacturing and marketing of its line
of suture products. The Company believes that sutures, which represent a major
portion of the wound closure market, are a natural complement to its other wound
management products. This market is currently dominated by another manufacturer.
However, the Company expects continuing growth in its share of the suture
portion of the market as a result of its sales efforts and by offering
technologically advanced suture products. There can be no assurance that
continued growth in suture sales will be realized, given competition and
possible reluctance of some surgeons to use sutures which have different
handling characteristics, even if they offer clinical advantages.
The Company has taken steps to diversify beyond the general surgery
market and explore new growth areas in surgery where it can utilize its
manufacturing expertise, research and development experience and the skills of
its sales force. To this end, the Company is building a line of surgical
specialty instrumentation and technology for cardiovascular, oncological,
urological and orthopedic procedures. The Company believes that minimally
invasive instrumentation and more advanced techniques can be applied to these
specialty practices. The Company plans to obtain such technologies through
internal research and development and by acquiring, investing in, or creating
alliances with, other firms or persons who have developed such technology.
Although the Company believes that these areas of surgical practice offer
significant opportunities for revenue growth and profitability, considerable
risks may be involved and there can be no assurance that favorable results will
be achieved. Costs of acquiring or developing instruments for use in specialty
applications may be significant, which could adversely affect both near term and
longer term results if successful products are not developed and introduced. In
addition, considerable competition exists for products used in these surgical
specialties, including competitors developing other techniques and from sources
of more traditional products. Further, acceptance of newer techniques, even with
demonstrated clinical advantages, may be slow given concerns as to expenditures
for newer practices by health care payors and requirements for extensive
training with newer approaches. The Company believes that, despite the
uncertainties inherent in development of new technologies, the patient and the
health care market will be better served by the introduction of more efficacious
and less traumatic procedures across the operating room environment.
PRODUCT CONTRIBUTION
The Company's current products constitute a single business segment.
Surgical wound management products accounted for all of the Company's net sales
and profits in each of the years ended December 31, 1996, 1995 and 1994.
AUTO SUTURE Stapling Products and Clip Appliers
AUTO SUTURE stapling products consist of single use and reusable (in the
latter case, primarily stainless steel) instruments that utilize and can be
reloaded with single use loading units (DLUs) containing surgical staples. The
staples are made of titanium, stainless steel, or a proprietary absorbable
copolymer. The Company markets both single use instruments and reusable
stainless steel instruments in a variety of sizes and configurations for use in
various surgical applications. Although the Company predominately markets single
use staplers, the availability of both reusable and single use staplers gives
surgeons the opportunity of using either in accordance with their preference.
The Company's stapling instruments have application in abdominal, thoracic,
gynecologic, obstetric, urologic and other fields of surgery. Common uses of
AUTO SUTURE staplers include closure and resection (the removal of tissue or
organs), stapling and transection of tissue, anastomosis (the surgical joining
of hollow structures, as in organ reanastomosis), vessel occlusion, biopsies,
skin and fascia closure and Cesarean section deliveries.
The Company's PREMIUM PLUS CEEA instrument, designed for circular
anastomoses, provides ease of insertion and removal from the lumen in bowel
resections, while retaining the advantage of superior anastomotic security.
AUTO SUTURE clip applier instruments individually apply a sequence of
titanium, stainless steel, or absorbable clips for ligation of blood vessels and
other tubular body structures. They are offered in a variety of clip sizes for
use in a broad range of surgical procedures. Clip appliers marketed by the
Company are single use instruments which provide the surgeon with a new,
sterilized instrument for each procedure. The Company's LDS single use staplers
simultaneously ligate and divide tubular body structures.
The materials used in the Company's absorbable staples and clips are
proprietary copolymers developed and manufactured by the Company. The copolymers
are radio transparent, facilitate postoperative diagnosis without X-ray or CAT
scan interference, maintain significant strength during the critical
postoperative period, and are totally absorbed during subsequent months.
The Company believes that, where applicable, AUTO SUTURE staplers and
clip appliers provide benefits to surgeons, patients and hospitals that are
superior to manual suturing methods. Depending on the type of operation and
instruments used, these benefits may include: shorter operating time resulting
in less time under anesthesia; reduction in blood loss; reduction in tissue
handling, which can result in reduced tissue trauma and edema; lowering of the
incidence of postoperative infection; enhanced cosmetic results; and faster
healing. These benefits reduce the overall medical cost of the operation by
significantly reducing operating room time, postoperative care and
anesthesiology services. The Company believes these benefits are advantageous to
the total health care system.
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AUTO SUTURE Products for Minimally Invasive Surgery
The Company provides a full line of products to serve the needs of the
surgical community in performing minimally invasive surgery, including a number
of proprietary products not offered by any other company.
The Company markets a line of single use trocars. The initial application
of a trocar results in a sharp obturator tip or a cutting instrument within the
trocar making a small opening in the abdominal wall or chest cavity. The
obturator or cutting instrument is then removed, leaving the trocar sleeve in
place to serve as an access tube through which a laparoscope and other surgical
instruments may be inserted. Each single use trocar is used in a single surgical
procedure, assuring a sharp obturator point or cutting instrument for each
application and eliminating the expense and risks of resharpening and
resterilizing associated with reusable trocars. The Company's trocars are
available in a wide range of sizes, some of which are offered with radiolucent
sleeves to permit unobstructed X-rays. The Company expects to introduce during
early 1997 a resposable (in which components of a device may be reused a number
of times) version of its trocars, which offers the advantages of its existing
products but permits a part of the trocar assembly to be reutilized, allowing
hospitals a choice of approaches but maintaining the advantages of a sharp,
sterile cutting instrument for each procedure.
The Company's VERSAPORT trocar features the unique VERSASEAL system, the
first self-adjusting trocar seal which accommodates 5mm to 12mm instrument sizes
without the need for a converter. The VERSAPORT trocar reduces the costs,
additional inventory, and operating room time associated with the use of
converters, and provides surgeons with a better seal and reduced friction on
instruments in laparoscopic procedures. The Company's VERSAPORT RPF trocar
system incorporates modifications which significantly lower penetration force.
The Company also offers the VISIPORT trocar, which incorporates a viewing lens
on the trocar tip for direct visualization during penetration of the body
cavity, and a blunt tip trocar for use in open laparoscopy.
The Company markets endoscopic clip appliers under the ENDO CLIP name,
which have application in a variety of surgical procedures and have gained
widespread acceptance for use in laparoscopic cholecystectomy, a procedure which
has become the standard technique for removal of the gallbladder, and in other
procedures. These products are designed to be applied through the Company's
proprietary trocars to ligate a variety of tissue structures and to perform
dissection, and are available in both resposable and single use versions.
The Company markets a variety of its MULTIFIRE instruments which are
designed for endoscopic application, including staplers for endoscopic
procedures, which may be reloaded with new DLUs several times during a single
surgery. The Company's staplers are used in a variety of procedures, including
appendectomies, laparoscopically assisted vaginal hysterectomies, and general,
gynecologic and thoracic procedures, and in bowel procedures such as colectomies
and interior resections.
The Company offers various instruments for use in conjunction with its
line of trocars, including a variety of hand instruments designed especially for
use in minimally invasive surgery which fit through its trocars, as well as
advanced suction and irrigation devices.
The Company offers a number of laparoscopic products which enhance
clinical outcomes and offer the opportunity for hospitals to realize cost
savings. The Company's 5mm ENDO CLIP applier offers the surgeon the same
ligating capability as the 10mm instrument while reducing the size of the
incision required for the procedure.
The Company's ENDO STITCH instrument and associated DLUs allow the
surgeon to suture and tie knots laparoscopically by passing a proprietary
needle, with different types of the Company's proprietary suture material
attached, between two jaws (located at the end of an endoscopic shaft) quickly,
accurately and easily in comparison with manual endoscopic suturing techniques.
The Company believes that the ENDO STITCH instrument facilitates more difficult
laparoscopic procedures, is useful in open procedures for suturing in locations
which are difficult for the surgeon to access, and aid in both open and
laparoscopic procedures. The Company believes that increasing market acceptance
of this product may depend on conversion of more difficult procedures to the
endoscopic technique.
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The Company is continuing its steps to offer miniaturized instruments for
minimally invasive surgery. The Company offers the MINISITE line of 2mm
endoscope, trocar, and accessory products (including miniaturized hand
instruments), and is introducing miniaturized versions of its current line of
products. The Company believes that its miniaturized line of instruments may
have application in a wide variety of procedures, including areas in which
minimally invasive procedures are not presently applied, such as trauma,
diagnostic, and rehabilitative procedures, and may enable some procedures to be
performed under conscious sedation outside the traditional operating room
environment. In addition, the smaller instruments may allow laparoscopic
post-operative review after surgery without hospitalization or general
anesthesia, which the Company believes may also help reduce health care costs
and improve clinical outcomes.
Although the Company intends to continue improving and expanding its
product lines applicable to general surgery, it believes that laparoscopic and
other more advanced techniques may be applied to additional surgical
applications, including surgical specialties. In addition, the Company is
offering for sale capital equipment for use in connection with its device
products in order to provide more comprehensive programs for improving
treatment. During 1996, the Company announced several new products and
techniques for such purposes and continues research and development toward these
ends.
The Company has developed specialized wound closure instrumentation for
use in vascular procedures, including its VCS vascular clip applier, a device
which permits arteriotemies, venotemies, and vascular anastomoses without
penetration of the inner wall of the vessel. The Company introduced in 1996, the
MINI HARVEST system products for use in a new minimally invasive technique for
harvesting the saphenous vein from a patient's leg in connection with
cardiovascular surgery, requiring only a few small incisions rather than an
incision running the length of the patient's leg, minimizing patient discomfort
and scarring. The Company believes its products may also be used for a variety
of minimally invasive cardiovascular and peripheral vascular surgeries, and is
developing additional instruments for use in such procedures. While the Company
believes its products may be useful in coronary surgery, surgeons practicing in
this field have not traditionally performed minimally invasive surgery or used
single use instruments extensively and no assurance can be given as to the
acceptance of such products or techniques in this area.
During the latter part of 1996, the Company announced the development
of a line of instruments for minimally invasive coronary artery bypass graft
surgery. The product line was launched in January 1997. The MINI-CABG line of
instruments will allow surgeons to operate on a beating heart through a 3- to
4-inch incision between the ribs instead of the 12-inch incision associated with
traditional approaches. The Company believes that the techniques permitted by
these instruments will permit reduced operating time, recuperating time and
costs, and reduce risks associated with current practices.
The Company's MINI-CABG instruments include the AUTO SUTURE Universal
Retractor Base system, which maintains an operative window through the chest
incision and includes a fully adjustable retractor, the Site-Light for
illumination of the operative site, and the Site-Blower for maintaining a clean
operative field; the AUTO SUTURE Indicator 30 MINI-CABG Site Stabilizer, which
provides the surgeon with a means of controlling the heart movement throughout
the delicate procedure; and the AUTO SUTURE SURGISTICH instrument, which allows
the surgeon to sew vessels together in a very confined space. Considerable
competition exists for entry into the cardiovascular field, including
competition from more traditional approaches, from technology which adopts the
same approach as the Company's MINI-CABG line of instruments, and from
technology which allows alternative techniques for minimally invasive coronary
surgery. The Company believes its products will be competitive, but can provide
no assurance as to their success or acceptance in the marketplace.
Endoscopic products are offered individually, in pre-assembled kits and
in custom kits designed for specific surgical procedures such as
cholecystectomy, hernia repair, laparoscopically assisted vaginal hysterectomy,
bowel and other procedures. Kits are intended to offer the surgeon and operating
room staff convenience and ease of accessibility to instruments, and provide a
cost efficient means of purchasing the Company's products for hospital materials
management departments.
During 1996, the Company also obtained exclusive worldwide rights to
proprietary new technology developed to reduce restenosis, the narrowing or
partial occlusion of blood vessels, in patients following balloon angioplasty or
stenting procedures. The new technology places a tiny radioactive guide wire in
the artery, delivering either gamma or beta radiation to the damaged portion of
the vessel. The radiation is intended to decrease the proliferation of the
tissue that clogs the vessel. A filing with the Food and Drug Administration
(FDA) for clinical studies is anticipated in the near future.
The Company is continuing development of technology in women's
healthcare with its first new system which is designed for a comprehensive
approach to breast care. The Company's ABBI system, incorporating a stereotactic
table and the Company's ABBI system biopsy device, is used to perform core
needle and needle localization for advanced breast biopsy. This system allows a
one-step, minimally invasive process for breast biopsy, offering the surgeon
increased accuracy and control, and helping hospitals reduce procedural and
operating room costs. The one piece larger specimen obtained by the ABBI system
provides pathologists with pattern recognition which aids in the diagnosis of
different cancers and facilitates physicians' decision making for improved
results. The Company offers the stereotactic tables under a strategic alliance
with Lorad, a unit of Trex Medical Corporation and a leading manufacturer of
stereotactic equipment.
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The Company also entered into a worldwide sales and marketing agreement
during 1996 that will allow utilization of NeoVision's Sonopsy (tm) Ultrasound
Guided Breast Biopsy System in connection with the Company's ABBI system. The
Sonopsy system uses automated three-dimensional ultrasound imaging to locate a
suspicious lesion, followed by real-time imaging to guide the physician in
placing the ABBI breast biopsy instrument. The addition of the Sonopsy system to
the ABBI system is designed to offer physicians a combination of ultrasound and
x-ray imaging for breast biopsy. The Company believes this approach will permit
physicians to biopsy lesions that can be imaged, with the potential for an
increase in the number of patients that can take advantage of the ABBI system.
Other companies market or are developing equipment and devices for
performing minimally invasive breast biopsies which remove tissue samples in
fragmented pieces, or for diagnostic procedures without biopsies through medical
imaging, and there can be no assurance as to the impact of such competing
products on the Company's penetration into this field. However, the Company
believes that the ABBI system, which provides a larger specimen, offers
advantages over competing devices.
In the orthopedic field, Surgical Dynamics, Inc. ("Surgical Dynamics" or
"SDI"), a subsidiary of the Company, is a leading developer and manufacturer of
spinal cages and other instrumentation for spine surgery and of instruments for
arthroscopic procedures.
Surgical Dynamics offers an endoscopic spinal system, consisting of a
variety of instruments for application in lumbar discectomy and fusion, and in
video assisted thoracic spine procedures. SDI's spinal cages represent a new
technological advance in implantable spine devices. They provide a supporting
lattice for bone in-growth for patients with back injury or degenerative disease
with many advantages over present practices for repairing the spine, and can
reduce post-operative pain and recovery time. The FDA approved the RAY TFC
threaded fusion cage device in October, 1996, following expedited review of
SDI's PMA (pre-market approval) application to the FDA based on SDI's four-year
clinical trial. SDI had previously received regulatory approval for use of the
device in Europe and Japan. The device is currently available in the
marketplace. Several other companies are developing or currently offer such
devices, and such competition could adversely impact the Company's opportunities
in this area.
Surgical Dynamics also introduced a number of new products during 1996.
The DURA CLOSE Clip Applier permits both spine and brain surgeons to achieve a
water-tight closure of the dura, the outer covering of the brain and spinal
cord. The ARTHROSEW Suturing Device simplifies suturing in a confined area,
which the Company believes will be useful in performing arthroscopic and open
shoulder repair surgery. The S-D SORB Suture Anchor system provides the surgeon
with a quick and efficient means of anchoring soft tissue to bone in
arthroscopic shoulder procedures. Made from the Company's proprietary LACTOMER
copolymer, the anchor provides secure holding power for the critical healing
period and is absorbed by the body, eliminating the need to leave residual
metal.
Surgical Dynamics' E-Z TAC absorbable surgical tack, also introduced in
1996, offers a unique surgical solution for anterior instability shoulder
injuries. The E-Z TAC surgical tack is also made from the Company's proprietary
LACTOMER copolymer. Surgical Dynamics also introduced, in 1996, the first
reusable disposable 4mm arthroscope that provides the same visual quality as the
finest scopes on the market, but at significantly reduced purchase and
maintenance costs for its customers.
Surgical Dynamics sells through outside salespersons, and maintains its
own training, research and development, marketing and sales management
organizations. Surgical Dynamics has trained a substantial number of surgeons in
procedures utilizing its products.
Although the Company believes that spinal surgery offers the potential
for new markets for its endoscopic products, sales of these products may depend
on acceptance of the procedure by orthopedic surgeons and neurosurgeons. In
addition, specialized training may be required.
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SUTURE PRODUCTS
Sutures comprise a major portion of the wound closure market. Since
surgical procedures which use staples also require manual suturing, the Company
considers sutures to be a natural complement to its stapling instrumentation.
The Company is continuing its planned expansion into this mature but global
market. The Company's product line includes both non-absorbable products and
absorbable suture products. The Company believes that its sutures have
significant technological advantages over competitors' products. The Company's
BIOSYN suture, introduced in 1995, is the first synthetic, absorbable suture
which combines the benefits of a monofilament suture with many of the advantages
of braided sutures, such as ease of handling and knot holding capability. The
Company believes that its BIOSYN sutures will compete effectively with its
competitors' gut, absorbable braided and absorbable monofilament sutures (both
short and long term), providing uses across a wide variety of surgical
applications. The Company believes that the versatility of the BIOSYN suture
will provide hospitals with an efficacious suture material that permits material
standardization and code consolidation. However, the success of the BIOSYN
suture will depend on a number of factors, including the surgical community's
acceptance of products which are different from products to which they have
become accustomed.
SURGIPRO mesh fabrics are designed for applications in both open and
endoscopic surgery such as hernia repair, and SURGALLOY needles are designed to
meet the needs of the specialty surgeons in fields such as cardiovascular,
opthalmological, plastic surgery, neurosurgery, and others.
The suture program also allows the Company to compete more effectively
for contracts with customers that prefer to purchase all of the hospital's wound
closure needs from a single vendor, particularly as individual hospitals, buying
groups and hospital alliances continue to consolidate their purchasing.
OTHER PRODUCTS
In 1995, the Company introduced the CHEMOSITE Infusion Port line of
products, which it had acquired from a privately held manufacturer. An infusion
port is a device implanted into a patient to provide repeated access to the
vascular system, such as for delivery of medications, blood products and
nutrition fluids, or the withdrawal of blood samples. The principal use of an
infusion port today is for delivery of chemotherapeutic agents to cancer
patients. Infusion ports have replaced external catheters to a large extent, and
are commonly used by surgeons. Several companies offer competing products, with
Bard Corporation holding an approximately 55% share of domestic sales of these
products. The Company believes that its CHEMOSITE Infusion Port line of products
is competitive.
The Company owns approximately 9% of the outstanding shares of Alexion
Pharmaceuticals, Inc., which is traded on the NASDAQ System. The Company also
maintains an alliance with Alexion with respect to worldwide marketing rights to
market Alexion's transgenetically engineered non-human cells, tissues, and
organs. The Company has certain options to fund Alexion's future research and
development and pay royalties on any resulting product sales. Although the
Company believes that Alexion's technology is highly promising, substantial
additional research and development and clinical trials, including premarket
approval by the FDA, will be required before any products could be introduced to
the market, and no assurance can be given that the products will be successful
in human transplantation. Moreover, a number of other companies are engaged in
similar research, and such competition could adversely impact the Company's
opportunities in this area.
The Company entered into an alliance in 1996 with V. I. Technologies,
Inc. and obtained exclusive worldwide rights to market V.I. Technologies' human
fibrin glue for wound healing applications. The product is a tissue adhesive,
treated by a unique method to address viral transmission concerns, and is
intended to be used during surgical procedures to augment or replace sutures or
staples for wound closure. V.I. Technologies' fibrant sealant is nearing
completion of Phase II clinical trials, and will be initiating Phase III
clinical studies in the United States in the near future, following which
premarket approval by the FDA will be required before the product may be
introduced to the market. A number of other companies are engaged in similar
research, and such competition could adversely impact the Company's
opportunities in this area. No assurance can be given as to the potential
market for such products.
The Company entered into an alliance in 1996 with Neoprobe Corporation
and obtained exclusive worldwide (except for certain Asian countries) rights to
market Neoprobe's proprietary RIGScan (tm) system for location of colorectal
cancer by means of a hand-held probe which detects low-energy radioactive drugs
that target and attach to cancer cells. Neoprobe has completed its Phase III
clinical trials for the FDA and submitted a Biologic License Application (BLA)
in December 1996.
The Company obtained rights during 1996 to a license on an exclusive
worldwide basis to market Misonix, Inc.'s ultrasonic cutting technology, which
uses high frequency sound waves to coagulate and divide tissue during surgery,
and plans to introduce a cutting device utilizing the licensed technology and is
introducing the ULTRA-SHEARS ultra-sonic cutting device utilizing the licensed
technology, eliminating many of the risks associated with traditional
electro-surgery. Ultra-sonic energy does not pass electrical current through the
body at any time, so there are no concerns about stray current effecting other
organs or surrounding tissue. Developed in conjunction with Misonix, Inc., the
system consists of a reusable generator and single-use hand instrument and is
applicable in a wide variety of open and laparoscopic surgical procedures. It
will be available in the second half of 1997.
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During 1996, the Company acquired a controlling interest in Medolas
Gesellschaft fur Medizintechnik GmbH, a German laser developer and manufacturer,
together with exclusive worldwide rights to market Medolas' excimer lasers for
transmyocardial revascularization (frequently known as TMR), a promising
surgical procedure that creates pathways for blood to reach oxygen-starved heart
tissue in patients with coronary artery problems. The Company has obtained an
investigative device exemption and is conducting Phase I trials in the U.S.
with its own excimer laser technology. Other companies are developing
competing products.
The Company will unveil a new technology for treating benign prostate
hyperplasia (BPH) during 1997, an enlargement of the prostate that constricts
the urethra, making urination difficult and causing other bothersome symptoms.
This condition affects more than 13 million men worldwide and results in more
than 500,000 surgical procedures annually. The most common procedure for the BPH
uses electrocautery to burn away prostate tissue. Although effective, the
procedure requires general or spinal anesthesia, uncomfortable and confining
post-operative catheterization and a four to six week recovery period. The
procedure also has potentially serious side effects -- including impotence --
and costs more than $8,000.
The Company's Radio Frequency Therapy (RFT) system is completely
automated and uses radio waves and a flexible scope, which most surgeons already
own. The Company's system, combined with the scope, is designed to allow
surgeons to perform the procedure in their offices using only local anesthesia.
Patients should not require postoperative catheterization and should be able to
resume normal activities in a few days. The RFT system will not only be better
for the patient, but will offer the first truly cost-effective minimally
invasive approach to BPH. The Company expects to file with the FDA during 1997.
The Company expects competition related to its RFT system, including
competition from other device manufacturers and from treatment by means of
drugs.
MARKETING AND SALES
Domestically, the Company markets its products to surgeons and materials
managers of hospitals primarily through the sales employees of its Auto Suture
Company division. Outside the United States, the Company markets its products in
23 countries and in the Commonwealth of Puerto Rico by direct sales employees of
17 sales and marketing subsidiaries, and through its authorized distributors in
61 other countries. In 6 additional countries the Company sells its products
directly to the user through the distributor sales department at its
headquarters.
The Company maintains its own direct sales force employed by subsidiaries
operating in Algeria, Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Italy, Japan, Luxembourg, Morocco, the Netherlands, New
Zealand, Norway, Poland, Puerto Rico, Russia, Spain, Sweden, Switzerland,
Tunisia and the United Kingdom. The Company acquired certain assets of its
Japanese distributor during 1995 in order to begin marketing its products
directly in Japan.
All sales employees of the Auto Suture Company, of the Company's
subsidiaries, and of the Company's authorized international distributors receive
intensive training with respect to the Company's products, consisting of an
extensive training course that prepares them to provide surgeons and hospital
personnel with technical assistance, including scrubbing in surgery as technical
advisors in connection with the use of the Company's products. The training
courses are developed and conducted by the Company at its expense. The training
course includes an introduction to anatomy and physiology, the study of surgical
terminology, aseptic surgical techniques such as scrubbing, gowning, gloving and
operating room protocol and the use of the Company's instruments on artificial
foam organs for sales demonstrations and on anesthetized animals in the
laboratory for teaching purposes. The Company's training curriculum also
prepares sales personnel to assist hospital administrators in implementing
efficient surgical practices and in realizing the economic benefits afforded by
the Company's products.
The Company demonstrates its products on artificial foam organs and
through the use of films, video cassettes, technical manuals and surgical
atlases.
The Company also sells to domestic distributors under a program known as
Just-in-Time (JIT) distribution. Under the JIT program, the Company sells its
products to a distributor selected by a participating hospital and the
distributor sells the products to the hospital on an as needed basis. The
Company compensates the distributor for handling and other services. Distributor
sales are common in the medical products industry. The Company's JIT program
responds to customer needs, many of whom desire distributorship arrangements in
order to avoid costs associated with inventory management. The Company believes
that distribution arrangements may negate distributor incentives to promote
competing brands, allow the Company's technical sales force more time to support
user surgeons and hospital management, and provide the Company with
opportunities to enhance or protect its competitive position through an
additional channel of sales. Sales through the JIT program currently comprise
approximately 39% of the Company's domestic business.
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The Company is committed to the continuing education of the surgical
community by assisting a substantial number of medical schools, hospitals and
educational organizations in training residents, nurses, surgeons and
administrators in the techniques of wound management using AUTO SUTURE and
Surgical Dynamics' instrumentation. With the increasing number of advanced
surgical procedures being performed using the minimally invasive approach, the
Company also supports proctorships and preceptorships where an experienced
surgeon clinically assists and teaches a surgeon in the operating room.
Initially, the primary focus of the training programs was on laparoscopic
cholycestectomy. Widespread training has been accomplished for that procedure,
and the emphasis in future training will be on more advanced applications of
laparoscopy, including hernia, bowel, and thoracic procedures, laparoscopically
assisted vaginal hysterectomies, laparoscopic bladder suspension, and procedures
for the correction of esophageal reflux, orthopedics, and cardiovascular
procedures. The Company believes that acceptance of endoscopic and other more
advanced techniques as the preferred method in a broad range of procedures will
be an important element of the Company's future growth.
Numerous studies have shown that, in addition to reduced patient recovery
time, laparoscopy is a safe and efficacious technique. However, and particularly
in more complex procedures, surgeons must receive adequate training before
achieving competency to perform laparoscopy. The Company supports certification
of surgeons in this technique to ensure that the Company's products are used
properly. The costs of training for newer, more complicated procedures and
concerns as to reimbursement for newer procedures in view of changes in the
health care system have affected the rate at which the surgical community is
learning the more advanced laparoscopic procedures. More advanced applications
of laparoscopy may become specialized rather than practiced broadly by the
general surgical community. In addition, specialty surgeons may not be
experienced in minimally invasive surgery and may require familiarization with
this approach prior to acceptance in their practices.
The Company markets to hospital administrators and purchasing groups as
well as to surgeons, by demonstrating the economic efficiencies of the Company's
products and by assisting hospital management in realizing the benefits of
minimally invasive surgery. In 1995, the Company implemented its PARTNERING WITH
USSC program, which is designed to help hospital administrators reduce costs,
enhance quality and increase revenue. The program encompasses the Company's BEST
PRACTICES program, which assists hospitals in a continuous effort to perform
surgery more efficiently, enabling hospitals to analyze and reduce systemwide
costs, provides surgeon and staff training programs and development of clinical
guidelines for high-quality and efficient patient care through minimally
invasive surgery, and assistance with managed care contracting and customized
marketing materials. The Company also provides training programs for primary
care physicians in the use and advantages of minimally invasive surgery, as they
become the gatekeepers to managed care. These approaches are designed to assist
hospitals in remaining competitive in the current health care environment.
During 1996, the Company expanded its PARTNERING WITH USSC program to
provide hospitals with turn-key marketing and management practice programs.
These include the Company's WOMEN'S INITIATIVE, designed to help hospitals
become the provider of choice in women's health care, and the Company's
PHYSICIAN'S INITIATIVE, which assists physicians with management of their
practices. The PHYSICIAN'S INITIATIVE includes the Outcomes Measurement Tool, a
software program designed to help providers document the competitive advantages
of their surgical practices to managed care organizations, and the Practice
Benchmarking Tool, a program which helps physicians compare their practice to
national norms.
International sales represented approximately 50% of the Company's net
sales in 1996, 49% in 1995, and 46% of the Company's net sales in 1994.
International sales included sales through international subsidiaries, which
were approximately 45% in 1996, 44% in 1995, and 37% in 1994, of consolidated
net sales and sales to international distributors and to end users in countries
not otherwise serviced by the Company, which were approximately 5% in 1996 and
1995, and 9% in 1994, of the consolidated net sales. (See Note L of Notes to
Consolidated Financial Statements for additional information by geographical
area.)
Orders for the Company's products are generally filled on a current
basis, and order backlog is not material to the Company's business.
MANUFACTURING AND QUALITY ASSURANCE
Manufacturing is conducted principally at two facilities: North Haven,
Connecticut, and Ponce, Puerto Rico. Manufacturing includes major assembly and
packaging of products. The Company produces all material for its synthetic
absorbable staples, clips, tacks and sutures, including suture anchors,
internally. Needles contained in certain of the Company's suture products are
produced at its facilities in North Haven, Connecticut. Other needles and suture
materials are supplied by several manufacturers. The Company's reusable steel
surgical staplers, components for the products the Company manufactures, and a
minor portion of the Company's DLUs and the disposable laparoscope are supplied
by several independent non-affiliated vendors using the Company's proprietary or
licensed designs. Surgical Dynamics RAY TFC threaded fusion cages are supplied
by independent non-affiliated vendors using proprietary licensed designs.
Raw materials necessary for the manufacture of parts and components and
packaging supplies for all of the Company's products that are manufactured by it
are readily available from numerous third-party suppliers.
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The Company considers quality assurance to be a significant aspect of its
business. It has a staff of professionals and technical employees who develop
and implement standards and procedures for quality control and quality
assurance. These standards and procedures cover detailed quality specifications
for parts, components, materials, products, packaging and labeling, testing of
all raw materials, in-process subassemblies and finished products, and
inspection of vendors' facilities and performance to assure compliance with the
Company's standards. The Company has obtained International Standards
Organization ("ISO 9000") certification for its plants in Connecticut and Puerto
Rico.
RESEARCH AND DEVELOPMENT
The Company believes that research and development is an important factor
in its future growth. The Company engages in a continuing product research,
development and improvement program at its Norwalk and North Haven, Connecticut
facilities and through funding of research and development activities at major
universities and other third parties. It employs a staff of engineers,
designers, toolmakers and machinists that performs research and development as
well as manufacturing support functions. During 1996, 1995, and 1994, the
Company's research and development expenses were approximately $58,000,000,
$43,100,000, and $37,500,000, respectively. Within the past three years the
Company has introduced 28 new products that are the result of research and
development conducted by the Company. Approximately 51% of 1996 sales revenues
were generated from the sale of products introduced within the preceding five
years.
The Company focuses its research and development resources on products
and redesign of existing products which are best suited to customer needs in the
current cost conscious health care environment, including an aggressive program
of exploring new opportunities for advancement in the surgical field.
PATENTS AND TRADEMARKS
Patents are significant to the conduct of the Company's business. The
Company owns or obtained exclusive rights to 144 new U.S. patents issued in 1996
(including patents purchased through acquisitions of companies or technology),
166 such patents issued in 1995, and 117 such patents issued in 1994. Overall,
the Company currently owns approximately 700 unexpired U.S. utility and design
patents covering products it has developed or acquired and having expiration
dates ranging from less than one year to 17 years. No patents will expire in the
near future which are material to the Company's results of operation or
financial position. Moreover, the Company has many additional U.S. patent
applications pending. The Company's practice and experience is to develop or
acquire rights or licenses to innovative patented products and continuously
update its existing technology. The Company also has a significant number of
foreign patents and pending applications.
The Company has registered various trademarks in the U.S. Patent and
Trademark Office and has other trademarks which have acquired both national and
international recognition. The Company also has trademark registrations or
pending applications in a number of foreign countries.
See Item 3, "Legal Proceedings", for details of certain patent
infringement actions to which the Company is a party.
COMPETITION
There is intense competition in the markets in which the Company engages
in business. Products competitive with the Company's staplers, clip appliers and
sutures include various absorbable and non-absorbable sutures, staples, clips
and tape, as well as single use staplers. Many major companies that compete with
the Company, such as Ethicon, Inc. ("Ethicon"), a Johnson & Johnson subsidiary
and Davis & Geck, a division of American Home Products Corporation, have a wider
range of other medical products and dominate much of the markets for these other
products. Ethicon markets, in addition to sutures and other wound closure
products, single use skin staplers, clip appliers, and internal staplers. Davis
& Geck markets single use skin staplers, clip appliers and suture materials. The
Company believes that these major companies will continue their efforts to
develop and market competitive devices.
The market for products for minimally invasive surgery is highly
competitive. The Company believes it is the leader in this field as the result
of its successful innovative efforts and superior products. Ethicon, through a
division known as Ethicon Endo-Surgery, markets a line of endoscopic instruments
directly competitive with the Company's products and is its principal competitor
in minimally invasive surgery. The Company believes that Ethicon devotes
considerable resources to research and development and sales efforts in this
field. Numerous other companies manufacture and distribute single use endoscopic
instruments. In addition, manufacturers of reusable trocars and other reusable
endoscopic instruments, including Richard Wolf Medical Instruments Corp. (a
subsidiary of Richard Wolf, GmbH) and Karl Storz Endoscopy-America Inc. (a
subsidiary of Karl Storz, GmbH), compete directly with the Company.
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Industry studies show Ethicon currently has approximately 79% of the
suture market, while Davis & Geck has about 11% of this market. The Company
expects that, because the size of the total sutures market is relatively stable,
any increase in the Company's market share in this area will have to be earned
at the expense of the other current market participants. The Company believes
that the technological advantages of its sutures will enable it to compete
effectively with these companies and that its market share in sutures will
continue to grow.
The Company also expects intense competition in sales of products for
specialty surgical application. A broad range of companies, including Ethicon,
presently offer products for use in cardiovascular, urologic, orthopedic, and
oncological procedures. Many of such companies have significantly greater
capital than the Company and are expected to devote substantial resources to
development of newer technologies which would be competitive with products which
the Company may offer. There are also a number of smaller companies engaged in
the development of surgical specialty devices and products which are developed
by such firms and could present additional competition.
The Company's principal methods of competing are the development of
innovative products, the performance and breadth of its products, its
technically trained sales force, educational services, including sponsorship of
training programs in advanced laparoscopic techniques, and more recently,
assisting hospital management with cost containment and marketing programs. The
Company's major competitors have greater financial resources than the Company.
Some of its competitors, particularly Ethicon, have engaged in substantial price
discounting and other significant efforts to gain market share, including
bundled contracts for a wide variety of healthcare products with group
purchasing organizations. In the current health care environment, cost
containment has become a significant factor in purchasing decisions by
hospitals. As a result, the Company's traditional advantage of product
superiority has been impacted. The Company has responded to this aspect of
competition by competitive pricing and by offering products which meet hospital
cost containment needs, while maintaining the technical superiority of its
products and the support of its sales organization.
The Company collaborates with some of the most prestigious academic
medical centers in the world to establish Centers of Excellence for training in
many diverse disciplines. These centers are devoted to teaching residents and
surgeons in the use of new instrumentation, developing new technologies,
conducting preclinical trials and other research projects. In today's managed
care environment, these multi-center studies also bring into sharper focus the
cost benefits of a wide range of US Surgical and Surgical Dynamics products.
The Company believes that the advantages of its various products and its
customer assistance programs will continue to provide the best value to its
customers. However, there is considerable competition in the industry and no
assurance can be given as to the Company's competitive position. The impact of
competition will likely have a continuing effect on sales volumes and on prices
charged by the Company. In addition, increased cost consciousness has revived
competition from reusable instruments to some extent. The Company believes that
single use instruments are safer and more cost efficient for hospitals and the
healthcare system than are reusable instruments, but it cannot predict the
extent to which reusable instruments will competitively impact the Company. The
Company also offers reusable instruments, and is introducing resposable
instruments, components of which may be reused a certain number of times, to
respond to the preferences of its customers.
GOVERNMENT REGULATION
The Company's business is subject to varying degrees of governmental
regulation in the countries in which it operates. In the United States, the
Company's products are subject to regulation as medical devices by the the FDA,
as well as by other federal and state agencies. These regulations pertain to the
manufacturing, labeling, development and testing of the Company's devices as
well as to the maintenance of required records. An FDA regulation requires
prompt reporting by all medical device manufacturers of an event or malfunction
involving a medical device where such device caused or contributed to death or
serious injury or is likely to do so.
Federal law provides for several routes by which the FDA reviews medical
devices prior to their entry into the marketplace. In the past, the Company's
stapling and endoscopic products have been cleared by the FDA under the most
expedited form of pre-market review since the initiation of the program or have
not required FDA approval. The Company, along with the rest of the industry, had
for several years experienced lengthy delays in the FDA approval process. More
recently, the timeliness of the FDA's review process in instances where
pre-market approval is not required has improved. Timely product approval is
important to the Company's maintaining and/or obtaining technological
competitive advantages. Other than lengthy FDA product approval delays, the
Company has not encountered any other unusual regulatory impediments to the
introduction of new products. To the extent the Company develops products for
use in more advanced surgical procedures, the regulatory process may be more
complex and time consuming. Many of these future products may require lengthy
human clinical trials and the Pre-Market Approval of the FDA relating to class
III medical devices. The Company knows of no reason to believe that it will not
be able to obtain regulatory approval for its products, to the extent efficacy,
safety and other standards can be demonstrated, but the lengthy approval process
will require additional capital, risk of entry by competitors, and risk of
changes in the marketplace prior to market approvals being obtained.
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Overseas, the degree of government regulation affecting the Company
varies considerably among countries, ranging from stringent testing and approval
procedures in certain locations to simple registration procedures in others,
while in some countries there is virtually no regulation of the sale of the
Company's products. In general, the Company has not encountered material delays
or unusual regulatory impediments in marketing its products internationally.
Establishment of uniform regulations for European Economic Area nations took
place on January 1, 1995. The new regulations subject the Company to a single
regulatory scheme for all of the participating countries. The Company has taken
the necessary steps to assure ongoing compliance with these new, more rigorous
regulations, including obtaining ISO 9000 certifications of its operations. The
Company expects that it will be able to market its products in Europe with a
single registration applicable to all participating countries. The Company is
also able to respond to various local regulatory requirements existing in all
other international markets.
HEALTH CARE MARKET
The health care industry continues to undergo change, led primarily by
market forces which are demanding greater efficiencies and reduced costs.
Government proposed health care mandates in the United States have not occurred,
and it is unclear whether, and to what extent, any future government mandate
will affect the domestic health care market. Industry led changes are expected
to continue irrespective of any governmental efforts toward health care reform.
The scope and timing of any further government sponsored proposals for health
care reform are presently unclear.
The primary trend in the industry is toward cost containment. Payors and
managed care organizations have been able to exercise greater influence through
managed treatment and hospitalization patterns, including a shift from
reimbursement on a retrospective basis to prospective limits for patient
treatment. Hospitals have been severely impacted by the resulting cost
restraints and are competing for business and becoming more sophisticated in
management and marketing. The increasing use of managed care, centralized
purchasing decisions, consolidations among hospitals and hospital groups, and
integration of health care providers, are continuing to affect purchasing
patterns in the health care system. Purchasing decisions are often shared by a
coalition of surgeons, nursing staff, and hospital administrators, with
purchasing decisions taking into account whether a product reduces the cost of
treatment and/or attracts additional patients to a hospital. All of these
factors, along with competition, have contributed to continuing reductions in
prices for the Company's products and, in the near term, to slower acceptance of
more advanced surgical procedures in which the Company's products are used,
given hospital and surgeon concerns as to the costs of training and
reimbursement by payors. In addition, the primary care physician is expected to
exercise significant influence on referrals of patients for surgical procedures
under managed care.
The Company could potentially benefit from this focus on cost containment
and on managed care. Stapling, minimally invasive surgery and spinal cages
decrease operating room time including anesthesia, patient recovery time and in
many cases are highly cost effective. Doctors, patients, employers and payors
all value decreased patient recovery time. This could lead to potential
increases in volume as surgical stapling, minimally invasive procedures and
spinal cages are selected over alternative techniques. However, an undue focus
on discrete costs or similar limits which fail to consider the overall value of
these advanced techniques could adversely impact the Company. Some hospitals may
also lose per night revenues through reduced post-operative care requirements as
to procedures performed by laparoscopy, which could influence their analysis of
acceptance of newer procedures. The Company is adapting itself to this
environment by promoting the cost effectiveness of its products, by striving to
efficiently produce the highest quality products at the lowest cost, and by
assisting hospitals and payors in achieving meaningful cost reductions for the
health care system while retaining the quality of care permitted by the
Company's products.
Internationally, several factors have slowed the pace of conversion from
traditional to minimally invasive procedures in overseas markets. In addition,
the socialization of health care in many developed, international countries
results in patients having less influence on the type of care they receive.
Finally, foreign government cost containment efforts may slow down the process
of obtaining reimbursement approvals for procedures using the Company's
products. The Company expects these factors to continue to impact growth in
those foreign countries where they are present. In addition, the Company is
experiencing pricing pressures from competition and from cost containment
efforts by health care payors in France and other foreign countries.
EMPLOYEES
At December 31, 1996, the Company employed 6,133 persons, 5,145
domestically and 988 in foreign countries. None of the Company's domestic
employees is represented by a labor union for purposes of collective bargaining.
The Company considers its relations with its employees to be excellent.
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ITEM 2. PROPERTIES.
The Company owns its corporate headquarters, which is located at 150
Glover Avenue, Norwalk, Connecticut, and owns or leases other facilities,
primarily in Norwalk and North Haven, Connecticut, in Ponce, Puerto Rico,
Elancourt, France, and in seventeen other foreign countries. The Norwalk
corporate headquarters includes executive and administrative facilities and
research laboratories. The other facilities in the United States and the
facilities in Puerto Rico and in foreign countries consist of administrative
offices, manufacturing, research, warehouse, distribution, and sterilizer
operation space. The North Haven, Connecticut and Puerto Rico facilities are the
primary manufacturing facilities of the Company. The facilities at each of these
locations are leased by the Company under long term operating leases.
During 1992 and 1993, the Company expanded its facilities in North Haven,
Connecticut, Ponce, Puerto Rico, and various locations in Europe to accommodate
anticipated increased demand for its products, and constructed a European
headquarters, training, and distribution facility in Elancourt, a suburb of
Paris, France. The Elancourt properties are leased under a 15 year financing
lease and a portion of the facility is being used by the Company as a surgeon
training facility and for administrative offices. The Company is presently
attempting to sublease the unutilized portion of its Puerto Rico facility.
The Company's facilities and equipment are in good operating condition,
are suitable for their respective uses and are adequate for current needs.
ITEM 3. LEGAL PROCEEDINGS.
A. In July, 1989, Ethicon, Inc. filed a complaint against the Company in
the United States District Court for the District of Connecticut alleging
infringement of a single United States patent relating to trocars. In
counterclaims, the Company has alleged, among other grounds, that Ethicon's
actions tortiously interfered with the Company's business dealings and that
Ethicon is infringing three of the Company's patents. The parties' cross-motions
for preliminary injunctions were denied by the District Court in April 1991. The
Company, as part of its motion to dismiss Ethicon's complaint, had moved that
the Court correct the inventorship of the patent at issue to include the
Company's licensor. The Court had held evidentiary hearings on the Company's
motion to dismiss in 1995, and in September, 1996, granted the Company's motion
to correct inventorship in favor of the Company's licensor. The Company's motion
to dismiss Ethicon's claims against the Company based on revised inventorship is
currently pending before the Court. The Company's counterclaims against Ethicon
also remain pending. No trial date has been set. In the opinion of management,
based upon the advice of counsel, the Company has valid claims against Ethicon
and meritorious defenses against the claims by Ethicon. The Company believes
that the ultimate outcome of this action should not have a materially adverse
effect on the Company's consolidated financial statements.
B. In March, 1992, the Company filed a complaint in the United States
District Court for the District of Connecticut against Johnson & Johnson
subsidiaries Johnson & Johnson Hospital Supplies, Inc. and Ethicon, Inc.,
alleging infringement of United States patents issued to the Company covering
the Company's endoscopic multiple clip applier. In February, 1994, a jury
returned a verdict in favor of the defendants, holding that the Company's patent
claims were invalid. The Company's appeal of the verdict to the United States
Court of Appeals for the Federal Circuit was denied, and the Company filed a
petition for a writ of certiorari with the United States Supreme Court seeking
to overturn the lower court decisions. The United States Supreme Court accepted
the Company's petition and, on April 29, 1996, vacated the decision of the
United States Court of Appeals for the Federal Circuit denying the Company's
appeal from the jury verdict. The Supreme Court remanded the case to the Court
of Appeals for reconsideration in light of its recent decision in Markman v.
Westview Instruments, Inc., holding that patent claims should be interpreted by
a judge rather than by a jury. The Company participated significantly on behalf
of the prevailing party in the Markman appeal. The Company filed a motion with
the Court of Appeals for remand of the case to the District Court for further
proceedings and for a new trial in accordance with the Markman decision. On
January 3, 1997, the Court of Appeals denied the Company's motion, ruling that a
new trial was not required under the Markman decision. The Company has filed a
motion for rehearing by the full bench of the Court of Appeals for the Federal
Circuit. The Company believes it has meritorious claims against the defendants
in the case.
C. In August, 1996, Applied Medical Resources Corporation ("Applied
Medical") filed a complaint against the Company in the United States District
Court for the Eastern District of Virginia alleging infringement by the Company
of patents related to trocar seal systems. The Company has filed a counter
claim, alleging patent infringement by Applied Medical of a patent held by the
Company as to trocar safety mechanisms. In the opinion of management, based upon
the advice of counsel, the Company has meritorious defenses against the claims
by Applied Medical. The Company believes that the ultimate outcome of this
action should not have a materially adverse effect on the Company's consolidated
financial statements.
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D. In August and September 1992, four complaints brought by shareholders
as class actions were filed in the United States District Court for the District
of Connecticut, naming the Company and two executives as defendants. The
complaints allege wrongful conduct in violation of federal securities law and
related state law which resulted in damages in connection with the plaintiff
shareholders' purchases of the Company's common stock. During the second quarter
of 1993, the Company and certain executive officers were named as defendants in
additional complaints styled as shareholder class actions, making comparable
allegations to those in the earlier filed complaints. In June, 1993, the Court
entered orders consolidating these cases. In February and March 1994, three
additional complaints brought by shareholders as class actions were filed in the
United States District Court for the District of Connecticut, naming the Company
and certain executives as defendants. The complaints allege wrongful conduct in
violation of federal securities laws in connection with the plaintiff
shareholders' purchases of the Company's common stock. On April 12, 1995, the
Court dismissed a majority of the claims which had been brought under the
federal securities laws by purchasers of the Company's common stock. In
November, 1996, the Company entered an agreement in settlement of the case with
counsel for the plaintiffs, subject to approval of the U.S. District Court for
the District of Connecticut, and to certain other conditions which are expected
to be met. The principal terms of the settlement are as follows: issuance and
payment to the members of the class of 315,000 shares of the Company's common
stock, $3.5 million in cash, and issuance of contingent stock rights with
respect to each of the 315,000 shares of common stock issued in the settlement.
If the Company's common stock reaches a price of $70 per share for either forty
five consecutive trading days or one hundred trading days in total during the
two year period from the date of issuance of the 315,000 shares of common stock
to the members of the class, the contingent stock rights will extinguish. The
payment and issuance of the common stock and contingent stock rights will take
place on final court approval of the settlement and the plan for distribution of
the securities and cash to members of the class. The Company has provided for
the estimated cost of the settlement in its consolidated financial statements,
the substantial portion of which will be funded by the Company's insurance
carriers. Certain individually named defendants named in the case assigned to
the Company during 1995 various insurance claims relating to the reduction of
the terms of certain outstanding option grants to which they agreed to in
connection with the settlement of a shareholder derivative claim. The Company
believes this assignment facilitated the Company's ability to obtain insurer
funding of this settlement. The Company also believes that it and the
individually named defendants have substantial defenses against the shareholder
class action claims; however, because of the continued expenses, distractions
and potential risks of litigation, the Company concluded that a settlement on
terms largely funded by insurance coverage was in the Company's and
shareholders' best interests.
E. In September, 1993, Ethicon, Inc. filed a Complaint against the
Company in the United States District Court for the District of Delaware
alleging that the Company's manufacture, use and sale of surgical staples used
in a variety of the Company's staplers infringes certain patents. Ethicon, Inc.
subsequently amended its complaint to add Ethicon Endo-Surgery and Design
Standards Corporation, a Connecticut corporation and a supplier to the Company,
as co-plaintiffs. The Company successfully moved to transfer the case to the
United States District Court for the District of Connecticut. In December, 1993,
the Company asserted counterclaims against Ethicon, Inc. and Ethicon
Endo-Surgery for, among other things, infringing the Company's patents relating
to surgical staples. In addition, the Company has asserted counterclaims against
Design Standards Corporation for breach of its contractual obligations to the
Company and for statutory unfair trade practices by purporting to assign rights
to Ethicon which belong to the Company. In December, 1995, the Company filed
motions for summary judgment as to the validity of and the lack of any
infringement with respect to the Ethicon patents, and the plaintiffs filed a
motion for summary judgment against the Company's counterclaims. The motions
remain pending and no trial date has been set. In the opinion of management,
based upon the advice of counsel, the Company has meritorious defenses against
the claims asserted in this action and valid claims against the plaintiffs. The
Company believes that the ultimate outcome of this action should not have a
materially adverse effect on the Company's consolidated financial statements.
F. In February, 1994, Ethicon Endo-Surgery filed suit against the Company
in the United States District Court for the Southern District of Ohio, alleging
infringement by the Company's instruments of a single patent for a safety
lockout mechanism on a linear cutter/stapler. In June, 1994, the Court denied
the plaintiffs' motion for a preliminary injunction against the Company. In
August, 1995, after a hearing as to the construction of Ethicon's patent claims,
the Court ruled in favor of the Company and dismissed Ethicon's claims. Ethicon
appealed the decision and, in August, 1996, the Court of Appeals for the Federal
Circuit substantially affirmed the District Court's decision that the Company's
products do not literally infringe Ethicon's patent, remanding the case to the
District Court for clarification of certain of the bases for the District
Court's dismissal of Ethicon's claims. Ethicon's request for rehearing by the
Court of Appeals has been denied, and the Company has moved for summary judgment
on the remaining aspects of Ethicon's case. The Company previously had asserted
counterclaims against Ethicon which have also been dismissed, without prejudice.
In the opinion of management, based upon the advice of counsel, the Company has
meritorious defenses against the claims asserted in the complaint. The Company
believes that the ultimate outcome of this action should not have a materially
adverse effect on the Company's consolidated financial statements.
-13-
<PAGE> 16
G. In November, 1995, the Company acquired Surgical Dynamics, Inc.
("Surgical Dynamics"), a privately held company which develops, manufactures and
markets surgical devices for use in spinal procedures. In January, 1995,
Surgical Dynamics sought declaratory judgment in the United States District
Court for the Central District of California that its spinal fusion cage
product, the Ray FTC device, did not infringe a patent owned by Karlin, Inc. and
licensed to Sofomar Danek Group, Inc. and that such patent is invalid. The
defendants filed counterclaims for patent infringement and unfair trade
practices. Discovery is continuing and no trial date has been set. In the
opinion of management, based upon the advice of counsel, Surgical Dynamics is
not infringing any rights of the defendants and has valid defenses against the
defendants' counterclaims. The Company believes that the ultimate outcome of
this action should not have a materially adverse effect on the Company's
consolidated financial statements.
H. In September, 1996, the Company filed a complaint in the Chancery
Court in the State of Delaware against Circon Corporation and individual members
of its Board of Directors, asking the Court to enjoin and void a preferred share
purchase agreement and various compensation arrangements adopted by Circon in
response to the Company's cash tender offer for all outstanding common shares of
Circon Corporation. Discovery is continuing and no trial date has been set. In
the opinion of management, based upon the advice of counsel, the Company has
valid claims against the defendants.
I. The Company is engaged in other litigation, primarily as a defendant
in cases involving product liability claims. The Company is also involved in
various other cases. The Company believes it is adequately insured in material
respects against the product liability claims and, based upon advice of counsel,
that the Company has meritorious defenses and/or valid cross claims in these
actions. The Company believes that the ultimate outcome of these actions should
not have a materially adverse effect on the Company's consolidated financial
statements.
* * * * * * *
In the opinion of management, based upon the advice of counsel, the
ultimate outcome of the above actions, individually or in the aggregate, should
not have a materially adverse effect on the Company's consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-14-
<PAGE> 17
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information pertaining to the
executive officers of the Company as of January 1, 1997:
<TABLE>
<CAPTION>
Acting as
Name Age Position Such Since
---- --- -------- ----------
<S> <C> <C> <C>
Leon C. Hirsch 69 Chairman of the Board and July 1996
Chief Executive Officer (Chairman of the Board,
President and Chief Executive Officer
1987 - July 1996)
(Officer since 1964)
Howard M. Rosenkrantz 53 President and July 1996
Chief Operating Officer (Senior Vice President, Finance
and Chief Financial Officer
1992 - July 1996)
(Officer since 1981)
Turi Josefsen 60 Executive Vice President and 1994
President, International Operations (Executive Vice President and
President and Chief Executive Officer
of Auto Suture Companies
1992 - 1994)
(Officer since 1971)
Robert A. Knarr 48 Executive Vice President, 1997
Sales and Marketing, North America (Previously Senior Vice President
and General Manager,
U.S. and Canada,
1994 - 1996)
(Officer since 1983)
Thomas R. Bremer 43 Senior Vice President and 1994
General Counsel (Officer since 1989)
Richard A. Douville 41 Senior Vice President and 1997
Chief Financial Officer (Vice President, Treasurer and
Chief Financial Officer
July 1996 - December 1996,
Vice President and Treasurer
1993 - July 1996)
(Officer since 1993)
Thomas D. Guy 53 Senior Vice President, Operations 1994
(Officer since 1981)
Peter Burtscher 56 Group Vice President 1993
(Officer since 1982)
Richard N. Granger 40 Vice President, Research 1993
and Development (Officer since 1992)
Charles E. Johnson 48 Vice President, Education 1994
(Officer since 1993)
Louis J. Mazzarese 51 Vice President, Quality 1992
and Regulatory Affairs (Officer since 1991)
Eitan Nahum 47 Vice President, Strategic Planning and 1995
Business Development (Officer since 1995)
Joseph C. Scherpf 53 Vice President and 1984
Controller (Officer since 1983)
</TABLE>
-15-
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Jeffrey B. Sciallo 47 Vice President, Information Services 1997
and Treasurer (Vice President,
Information Services
1995 - 1996)
(Officer since 1995)
Marianne Scipione 50 Vice President, Corporate 1981
Communications (Officer since 1975)
Wilson F. Smith, Jr. 51 Vice President, Corporate Accounts 1995
and Distribution (Officer since 1993)
Charles Tribie 44 Vice President, Manufacturing 1995
(Officer since 1995)
Pamela Komenda 43 Corporate Secretary 1989
(Officer since 1988)
</TABLE>
Various of the above-named persons are also officers of one or more of the
Company's subsidiaries. Leon C. Hirsch and Turi Josefsen are husband and wife.
No other family relationship exists between any of the above-named persons.
Officers are elected for annual terms to hold office until their successors are
elected, or until their earlier resignation or removal by the Board of
Directors. All of the executive officers have for at least the past five years
held high level management or executive positions with the Company or its
subsidiaries, except for Mr. Douville, who joined the Company in 1993, and Mr.
Nahum, who joined the Company in 1995. Mr. Douville was previously employed from
1977 to 1992 by the accounting firm of Deloitte & Touche, where he was a
partner, and was Vice President and Controller with PepsiCo. Foods International
from 1992 until joining the Company. Mr. Nahum was President and Chief Executive
Officer of Bogen Communications, Inc. from 1994-1995. From 1989-94 he was with
Sharplan Lasers, Inc., a subsidiary of Laser Industries serving as its President
from 1991-94.
-16-
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol USS. The following table sets forth for the periods indicated the
high and low of the daily sales prices, which represent actual transactions, as
reported by the New York Stock Exchange. In addition, the table sets forth the
amounts of quarterly cash dividends per share that were declared and paid by the
Company.
<TABLE>
<CAPTION>
CASH
DIVIDENDS DAILY SALES PRICES
PAID HIGH LOW
---- ---- ---
1996
<S> <C> <C> <C> <C>
1st Quarter $.02 $33.13 $19.75
2nd Quarter .02 38.75 29.38
3rd Quarter .02 43.75 26.50
4th Quarter .02 46.63 35.75
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
</TABLE>
At December 31, 1996, the number of record holders of the Company's
Common Stock was 8,663. 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.
- 17 -
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
In thousands, except per share data 1996 1995(1) 1994(2) 1993(3) 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales............................ $1,112,700 $1,022,300 $ 918,700 $1,037,200 $1,197,200
Income (loss) before income taxes.... $ 141,700 $ 89,800 $ 32,700 $ (137,400) $ 192,900
Net income (loss).................... $ 109,100 $ 79,200 $ 19,200 $ (138,700) $ 138,900
Net income (loss) per common share
and common share equivalent
(primary and fully diluted)....... $ 1.48 $ 1.05 $ .08 $ (2.48) $ 2.32
Average number of common shares
and common share equivalents
outstanding....................... 60,500 57,000 56,600 56,000 59,900
Dividends declared
per common share.................. $ .08 $ .08 $ .08 $ .245 $ .30
At December 31,
Total assets......................... $1,514,800 $1,265,500 $1,103,500 $1,170,500 $1,168,100
Long-term debt....................... $ 142,400 $ 256,500 $ 248,500 $ 505,300 $ 394,500
Stockholders' equity (4)............. $1,053,800 $ 741,100 $ 662,000 $ 443,900 $ 590,000
</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 1996, 1995 and 1994 is $191.5
million of convertible preferred stock which has a liquidation value of
$200.0 million.
- 18 -
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
In 1996 the Company attained sales of $1.11 billion compared with sales
of $1.02 billion in 1995 and $919 million in 1994. Sales increased $90 million
or 9% in 1996, increased $104 million or 11% in 1995 , and decreased $119
million or 11% in 1994. In 1996 the Company reported net income of $109 million
or $1.48 per common share (after preferred stock dividends of $20 million)
compared with $79 million or $1.05 per common share (after preferred stock
dividends of $20 million) in 1995 and net income of $19 million or $.08 per
common share (after preferred stock dividends of $15 million) in 1994. Net
income and net income per common share increased $30 million and $.43,
respectively, in 1996 compared to 1995, increased $60 million and $.97,
respectively, in 1995 compared to 1994, and increased $158 million and $2.56,
respectively, in 1994 compared to 1993. The effect of changes in foreign
currency exchange rates on results of operations was to decrease net income by
$8 million in 1996 in comparison to 1995, and 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 was immaterial.
The increase in sales in 1996 to $1.11 billion compared to $1.02 billion
in 1995 was primarily due to volume increases attributable to new product
introductions and a full year of direct distribution of its products to Japanese
customers through the acquisition of certain assets from the Company's former
Japanese distributor as of April 1, 1995. Sales were negatively impacted by the
continuing reduction of inventories at JIT distributors due to hospital
purchases from JIT distributors exceeding distributor purchases from the Company
by $24.1 million, $13.1 million and $28.2 million for 1996, 1995 and 1994,
respectively. 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 systems worldwide
continue to affect the Company. The rate of acceptance of newer procedures
utilizing the Company's products also continues to be affected by uncertainty
surrounding health care reform and by the increased educational requirements for
more complex procedures.
The following table analyzes the change in sales in 1996, 1995 and 1994 compared
with the prior years.
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
COMPOSITION OF SALES INCREASE (DECREASE):
Sales volume increase (decrease) $ 117 $ 64 $ (96)
Net price changes(A)(B) (12) 12 (21)
Effects of changes in foreign
currency exchange rates (15) 28 (2)
----- ----- -----
Sales increase (decrease) $ 90 $ 104 $(119)
===== ===== =====
</TABLE>
(A) Approximately $13 million and $36 million of the sales increase
accounted for in net price changes for 1996 and 1995, respectively, is
the result of the 1995 acquisition of the Company's former Japanese
distributor and the change from distributor pricing to subsidiary
pricing as of April 1, 1995. In addition, the sales for 1996 include
twelve months of subsidiary operations in Japan as compared to three
months of distributor operations through the former Japanese
distributor and eight months of operations as a subsidiary in 1995. The
Company receives higher selling prices when selling as a subsidiary to
the ultimate customer than was previously recognized by the Company
when sales were made at distributor prices to the Company's former
distributor.
(B) Prices were adversely effected by approximately $7 million in 1996 due
to changes in reimbursement to French public hospitals by France's
Social Security Administration. Despite the reduction in reimbursement,
sales in France are expected to increase in 1997 when compared to 1996
sales.
Sales volume accounted for 130% of the 1996 sales increase, 62% of the
1995 sales increase and 81% of the 1994 sales decrease.
-19-
<PAGE> 22
Gross margin from operations (sales less cost of products sold divided by
sales) was 59% in 1996 compared with 56% in 1995 and 50% in 1994. 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 throughout 1995 and 1996 as a result of the
implementation of the 1993/1994 restructuring plans, higher sales volumes and
ongoing cost savings initiatives as well as the inclusion, effective April 1,
1995, of higher margin sales resulting from the acquisition of certain assets
from the Company's former Japanese distributor. The reserves for obsolescence of
production tooling and inventories, which are an ongoing cost of business,
amounted to $30 million, $45 million and $61 million, respectively, in the years
ended December 31, 1996, 1995 and 1994. The effects of foreign currency exchange
rate changes on cost of products sold in 1996, 1995 and 1994 were immaterial.
The Company's investment in research and development during the past
three years (1996 - $58 million; 1995 - $43 million; 1994 - $38 million) has
yielded numerous product improvements as well as the development of numerous new
products. The $15 million increase in research and development expense in 1996
compared to 1995 is primarily attributable to increased spending towards
developing advanced surgical techniques which could be used for additional
surgical applications, including surgical specialties. Several of these products
are scheduled to be introduced in 1997. 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 40% in 1996, 41% in 1995 and 40% in 1994. The increase in 1996 for
selling, general and administrative expenses 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 resulted from the
major cost saving benefits from the Company's restructuring program. Changes in
foreign currency exchange rates from those existing in the prior year had the
effect of decreasing selling, general, and administrative expenses by $6 million
in 1996 and $6 million in 1994, and increasing selling, general, and
administrative expenses by $13 million in 1995.
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 made during 1996. Such remaining restructuring charges at
December 31, 1996 will have no effect on liquidity. 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. There were no material
changes to accrued restructuring charges for 1996.
The decrease in interest expense in 1996 is due to the interest savings
from the repayment of certain domestic bank debt and the subsequent investment
of the remaining proceeds from the Company's common stock offering during the
second quarter of 1996.
The tax provisions for 1996, 1995 and 1994 related primarily to foreign
taxes including taxes in Puerto Rico. The Company's tax provisions in 1996, 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.
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 circumstances relative to the IRS audit and the Company's estimate of
future domestic taxable income, it is 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.
-20-
<PAGE> 23
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (FAS 123) in 1996.
No compensation has been recorded relative to stock option plans. 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.
FINANCIAL CONDITION
The increase in Accounts receivable results primarily from the $20
million increase in sales in the fourth quarter 1996 when compared to the fourth
quarter 1995 and sales of the Company's new ABBI system biopsy device which is a
capital equipment purchase by hospitals and, accordingly, results in longer
payment periods.
Inventory was increased during 1996 in order to support a higher level of
sales in 1996 as compared to 1995. In addition, new products introduced in 1996
and the later part of 1995, including the Company's new ABBI system biopsy
device, had the effect of increasing inventory balances.
The increase in Other current assets in 1996 is primarily attributable to
the $22 million increase in net current deferred tax assets.
The increase in Other assets during 1996 is primarily attributable to the
investment in Circon Corporation's common stock and associated acquisition costs
(see Note C of Notes to Consolidated Financial Statements), the increase in
prepaid rent related to the Company's North Haven facility lease agreement, and
the increase in tax assets. During 1996, tax assets increased as the Company
reduced by $70.9 million the valuation allowance relating to tax assets. These
tax assets consisted of previously reserved net operating loss carryforwards and
tax credit carryforwards. Due to continuing increases in the levels of current
and projected future domestic taxable income, it is more likely than not that
such tax assets will ultimately be realized. Approximately $40.9 million of such
increase in tax assets in 1996 relates to the anticipated utilization of tax
deductions generated in prior years relating to compensation arising from the
exercise of stock options. The benefit associated with such tax deductions is
credited to Additional paid-in capital-common stock.
The Company's substantial 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. In the second
quarter of 1996, the Company sold 4.3 million shares of its common stock in a
public offering for approximately $141.8 million of proceeds net of issuance
costs. A portion of the proceeds were used to repay certain domestic bank debt
and the balance of the proceeds, which is reflected in the $106.7 million of
cash and cash equivalents at December 31, 1996, will be used for general
corporate purposes, including partially financing the Company's existing tender
offer for Circon Corporation. The Company issued $200 million of convertible
preferred stock in March 1994, the proceeds from which were used to reduce bank
debt.
In June 1994, the Company entered into a new $400 million syndicated
credit agreement, later reduced by the Company 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 then terminated this 1994 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. The Company has
entered into an additional conditional committed bank term loan facility of $175
million during the third quarter of 1996 to exclusively finance its pending
tender offer for Circon Corporation (see Note C of Notes to Consolidated
Financial Statements). This conditional term loan facility has similar terms and
conditions to the Company's present syndicated bank credit facility. Throughout
1996 and 1995, the Company entered into additional uncommitted facilities for 5
billion Japanese Yen (approximately $44 million) with two Japanese banks and
$125 million with five other banks which are short term in nature. Such
borrowings under the uncommitted facilities have been categorized as long-term
debt as such borrowings will be refinanced under the Company's long-term bank
credit agreement. The Company is in full compliance with all of its covenants
associated with its various bank and leasing agreements.
-21-
<PAGE> 24
The Company increased its capital spending in 1996 by 26% compared to
1995 levels as a result of investing in new and more efficient production and
information processing equipment. The Company's building programs were
essentially completed by 1995 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 $44 million in 1996 ($42 million on a cash basis)
compared with $48 million in 1995, and $49 million in 1994, and consist
primarily of additions to machinery and equipment ($26 million), molds and dies
($14 million) and land and buildings ($3 million). During 1996 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 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, 1996 the
Company had approximately $29 million of such contracts outstanding that will
mature at various dates through February 1997. Realized and unrealized foreign
currency gains and losses are recognized when incurred. The strengthening of the
dollar relative to most foreign currencies caused the $5.4 million movement in
the Company's Accumulated translation adjustments component of Stockholders'
equity at December 31, 1996 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 is obligated to make contingent rental payments
based upon the consumer price index. There are presently several alternatives
available to the Owner Participant and the Company relative to the additional
contingent rental payments. The earliest potential payment of approximately $19
million could be due as early as January 1998 if the Owner Participant exercises
the right to sell the facility to the Company. If this right is not exercised,
and the Owner Participant does not elect the one-time payment of contingent rent
of approximately $19 million, the determination of the additional contingent
rental payments will be based upon movements in the consumer price index during
the period September 1996 to September 1999 with an annual cap on the consumer
price index movement of 2.5% per year. If the second option is chosen,
additional contingent rental payments cannot exceed approximately $39 million as
stipulated in the agreement. Under the second option, the Company can elect to
pay free of interest from 2004 to 2023 the additional contingent rental payments
in excess of $19 million. The present value of the contingent rental payments
under the second option of approximately $23 million would be a charge to rent
expense during the contingent rent period, September 1996 to September 1999, in
comparison to the $19 million charge under the other option. Through December
31, 1996, the Company has accrued $4.5 million related to contingent rental
payments. If, as described above, the Company takes title to the beneficial
interest in the facilities in January 1998, it is estimated that the Company's
December 31, 1997 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.
The Company plans to issue a call for redemption on April 1, 1997 of
the outstanding convertible preferred stock. Although an additional dividend is
payable as a premium for a call of such stock, the terms of the redemption are
such that, given the range in which the Company's common stock has traded
recently, holders of such convertible preferred stock would likely find it more
advantageous to convert the preferred shares into common shares prior to
redemption, in which case no additional dividend premium would be paid by the
Company. The conversion or redemption of such convertible preferred stock will
eliminate the preferred dividend payment on such convertible preferred stock
following the date of redemption or conversion, which will have a positive
effect on the Company's cash position, and increase common stock outstanding by
approximately 8.5 million shares.
* * * * * *
The Company may, from time to time, provide estimates as to future
performance, including comments on financial estimates made by the analyst
community. These forward looking statements are estimates, and may or may not be
realized by the Company. The Company undertakes no duty to update such forward
looking statements. Many factors could cause actual results to differ from these
forward looking statements, including loss of market share through competition,
introduction of competing products by other firms, pressure on prices from
competition or purchasers of the Company's products, regulatory obstacles to
development of new products which are important to the Company's growth, lack of
acceptance of new products by the health care market, slow rates of conversion
by surgeons to procedures which utilize the Company's markets, and interest rate
and foreign exchange fluctuations.
-22-
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
A. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED).
The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1995 (in thousands, except per share
data).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER(1) QUARTER(2)(3)(4) YEAR
------- ------- ---------- ---------------- ----
1996
<S> <C> <C> <C> <C> <C>
Net sales............................... $266,000 $283,600 $280,000 $283,100 $1,112,700
Cost of products sold................... 112,200 116,800 116,100 115,500 460,600
Income before income taxes.............. 27,100 35,300 38,000 41,300 141,700
Net income ............................. 20,900 27,200 29,200 31,800 109,100
Net income per common
share (primary and fully diluted)..... $.28 $.38 $.39 $.43 $1.48
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
</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) The fourth quarter of 1996 contains three months of subsidiary operations
of the Company's Japanese subsidiary as compared to the fourth quarter of
1995 which contained two months of subsidiary operations. In November
1995 the Company's Japanese subsidiary adopted a November 30 year end to
be consistent with the fiscal year end of other subsidiaries and,
accordingly, recorded only two months of Japanese subsidiary operations
in the fourth quarter of 1995.
(3) Sales were adversely effected in the fourth quarter 1996 by changes in
reimbursement to French public hospitals by France's Social Security
Administration. Despite the reduction in reimbursement, sales in France
are expected to increase in 1997 when compared to 1996 sales.
(4) Cost of products sold in the fourth quarter of 1995 includes $13 million
of inventory and fixed asset reserves resulting from the continued
introduction of new products and the consequent obsolescence of
production tooling and inventories.
B. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE.
See Index to Consolidated Financial Statements and Financial Statement
Schedule on page F-1 herein.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not Applicable.
-23-
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
A. DIRECTORS
The section entitled "Election of Directors" in the Definitive Proxy
Statement for the 1997 Annual Meeting of Stockholders of the registrant (the
1997 Proxy Statement) is hereby incorporated by reference.
B. OFFICERS
See Part I.
C. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
The section entitled "Executive Compensation and Transactions -
Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
1997 Proxy Statement is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section entitled "Executive Compensation and Transactions" in the
1997 Proxy Statement is hereby incorporated by reference, except for those
portions entitled "Performance Graph" and "Report of Compensation Committee".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The sections entitled "Outstanding Shares, Voting Rights and Principal
Stockholders" and "Share Ownership of Management" in the 1997 Proxy Statement
are hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled "Executive Compensation and Transactions - Certain
Transactions" in the 1997 Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. AND d. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE.
See Index to Consolidated Financial Statements and Financial
Statement Schedule on Page F-1 herein.
b. REPORTS ON FORM 8-K.
None.
c. EXHIBITS.
(The Company will furnish a copy of any exhibit upon payment of 15
cents per page plus postage.)
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
(a) Certificate of Incorporation filed March 14, 1990 -
Exhibit 3(a) to registrant's Form 8-B declared effective
August 3, 1990.*
(b) Certificate of Merger filed May 1, 1990 - Exhibit 3(b) to
registrant's Form 8- B declared effective August 3, 1990.*
(c) Certificate of Amendment filed May 15, 1991 - Exhibit 3(c)
to registrant's Form 10-K for 1991.*
(d) By-laws, as amended January 30, 1996. Exhibit 3(d) to
registrant's Form 10-K for 1995.
(e) Certificate of Designations relating to the issuance of
the Company's Series A Convertible Preferred Stock, filed
March 28, 1994. Exhibit 3(e) to registrant's Form 10-K for
1993.*
-24-
<PAGE> 27
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
(a) Credit Agreement dated as of December 20, 1995 among
registrant, signatory banks, Morgan Guaranty Trust Company
of New York as Documentation Agent, NationsBank, N.A., as
Administrative Agent, and The Bank of New York, as Yen
Administrative Agent. Exhibit 4(a) to registrant's Form
10-K for 1995.
(b) Amendment No. 1 to Credit Agreement dated as of December
20, 1995 (10(a) above), dated September 16, 1996. Exhibit
(10)(b) to registrant's Form 10-Q for the period ended
September 30, 1996.
(c) $175 million credit agreement dated September 16, 1996
among registrant and signatory banks, related to
acquisition financing. Exhibit (10)(a) to registrant's
Form 10-Q for the period ended September 30, 1996.
(10) MATERIAL CONTRACTS.
(a) 1981 Employee Stock Option Plan. Exhibit 10 (a) (1) to
registrant's Form 10-K for 1987. * +
(b) 1990 Employee Stock Option Plan, as amended. Exhibit 10
(b) to registrant's Form 10-K for 1996 *+
(c) 1993 Employee Stock Option Plan, as amended through
February 4, 1997. Filed herewith. +
(d) 1996 Employee Stock Option Plan. Exhibit 10 (a) to
registrant's Form 10-Q for the period ended June 30, 1996.
*+
(e) Installment Option Purchase Agreement with Leon C. Hirsch
dated September 10, 1984, as amended through May 18, 1994.
Exhibit 10 (j) to registrant's Form 10-K for 1994.+
(f) Outside Directors Stock Plan - Exhibit 10(a)(4) to
registrant's Form 10-K for 1988.* +
(g) Amendment to Outside Directors Stock Plan adopted May 1,
1990 - Exhibit 10(j) to registrant's Form 10-K for 1990.*
+
(h) Long-Term Incentive Plan - Exhibit 10(a)(5) to
registrant's Form 10-K for 1988.* +
(i) Executive Incentive Compensation Plan. Exhibit 10 (b) to
registrant's Form 10-Q for the period ended June 30,
1996.*+
(j) Lease Agreement dated as of January 14, 1993 between State
Street Bank and Trust Company of Connecticut, National
Association, as Lessor and the registrant, as Lessee -
Exhibit 10(o) to registrant's Form 10-K for 1992.*
(k) Participation Agreement dated as of January 14, 1993 among
registrant, Lessee, Baker Properties Limited Partnership,
Owner Participant, The Note Purchasers listed in Schedule
1 thereto, State Street Bank and Trust Company of
Connecticut, National Association, Owner Trustee, and
Shawmut Bank Connecticut, N.A., Indenture Trustee -
Exhibit 10(p) to registrant's Form 10-K for 1992.*
(l) Lease and financing agreements dated January 4, 1994
between registrant's French subsidiary, A.S.E. Partners,
and (i) the Corporation for the Financing of Commercial
Buildings ("FINABAIL") and (ii) the Association for the
Financing of Commercial Buildings ("U.I.S.") - Exhibit
10(r) to registrant's Form 10-K for 1993.*
(m) Lease and financing agreement dated December 26, 1991
between registrant's subsidiary, U.S.S.C. Puerto Rico,
Inc., and The Puerto Rico Industrial Development Company
("PRIDCO") - Exhibit 10(s) to registrant's Form 10-K for
1993.*
-25-
<PAGE> 28
(11) Computation of Net Income Per Common Share. Filed
herewith.
(12) Statement of Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends. Filed
herewith.
(21) Subsidiaries of the registrant. Filed herewith.
(27) Financial Data Schedule. Filed herewith.
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are located in SEC File No. 1-9776.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of this report.
-26-
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 4th day of February, 1997.
UNITED STATES SURGICAL CORPORATION
(REGISTRANT)
By: /s/ RICHARD A. DOUVILLE
-----------------------------------
(RICHARD A. DOUVILLE
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Leon C. Hirsch
- ------------------------------ Chairman of the Board, February 4, 1997
(Leon C. Hirsch) and Chief Executive Officer
(Principal Executive Officer)
and Director
/s/ Julie K. Blake Director February 4, 1997
- ------------------------------
(Julie K. Blake)
/s/ John A. Bogardus, Jr. Director February 4, 1997
- ------------------------------
(John A. Bogardus, Jr.)
/s/ Thomas R. Bremer Director February 4, 1997
- ------------------------------
(Thomas R. Bremer)
/s/ Turi Josefsen Director February 4, 1997
- ------------------------------
(Turi Josefsen)
/s/ Douglas L. King Director February 4, 1997
- ------------------------------
(Douglas L. King)
/s/ William F. May Director February 4, 1997
- ------------------------------
(William F. May)
/s/ Barry D. Romeril Director February 4, 1997
- ------------------------------
(Barry D. Romeril)
/s/ Howard M. Rosenkrantz President and February 4, 1997
- ------------------------------ Chief Operating Officer
(Howard M. Rosenkrantz) and Director
/s/ Marianne Scipione Director February 4, 1997
- ------------------------------
(Marianne Scipione)
/s/ John R. Silber Director February 4, 1997
- ------------------------------
(John R. Silber)
/s/ Joseph C. Scherpf Vice President and Controller February 4, 1997
- ------------------------------ (Principal Accounting Officer)
(Joseph C. Scherpf)
</TABLE>
-27-
<PAGE> 30
UNITED STATES SURGICAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report and Consent .................................. F-2
Management Report on Responsibility for Financial Reporting ............... F-3
Consolidated Balance Sheets - December 31, 1996 and 1995 .................. F-4
Consolidated Statements of Operations - Years Ended December 31, 1996,
1995 and 1994 ........................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1996, 1995 and 1994 .................................. F-6
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994 ........................................................... F-7
Notes to Consolidated Financial Statements ................................ F-8
Schedule II - Valuation and Qualifying Accounts ........................... S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
F-1
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
UNITED STATES SURGICAL CORPORATION
We have audited the accompanying consolidated financial statements and
financial statement schedule of United States Surgical Corporation and
subsidiaries listed in the Index to Consolidated Financial Statements and
Financial Statement Schedule of the Annual Report on Form 10-K of United States
Surgical Corporation for the year ended December 31, 1996. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of United States Surgical
Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Stamford, Connecticut
January 21, 1997
INDEPENDENT AUDITORS' CONSENT
TO INCORPORATION BY REFERENCE IN REGISTRATION STATEMENTS
ON FORM S-3 AND FORM S-8
We consent to the incorporation by reference in United States Surgical
Corporation's Registration Statements Nos. 33-53297 and 33-59729 on Form S-3 and
Registration Statements Nos. 2-64804, 2-78663, 33-3419, 33-13997, 33-37328,
33-38710, 33-40171, 33-53827, 33-53825, 33-59278 and 33-61912 on Form S-8 of our
report dated January 21, 1997 and appearing on page F-2 of the Annual Report on
Form 10-K for the year ended December 31, 1996.
Deloitte & Touche LLP
Stamford, Connecticut
January 21, 1997
F-2
<PAGE> 32
MANAGEMENT REPORT ON RESPONSIBILITY
FOR FINANCIAL REPORTING
The management of United States Surgical Corporation and its subsidiaries (the
"Company") has the responsibility for preparing the accompanying consolidated
financial statements and related notes. The consolidated financial statements
were prepared in accordance with generally accepted accounting principles and
necessarily include amounts based upon judgments and estimates by management.
Management also prepared the other information in the annual report and is
responsible for its accuracy and consistency with the consolidated financial
statements.
Management of the Company has established and maintains a system of internal
controls that provide reasonable assurance that the accounting records may be
relied upon for the preparation of the consolidated financial statements.
Management continually monitors the system of internal controls for compliance.
Also, the Company maintains an internal auditing function that independently
assesses the effectiveness of the internal controls and recommends possible
improvements thereto. The Company's consolidated financial statements have been
audited by Deloitte & Touche LLP, independent auditors. Management has made
available to Deloitte & Touche LLP all the Company's financial records and
related data. In addition, in order to express an opinion on the Company's
consolidated financial statements, Deloitte & Touche LLP considered the internal
accounting control structure in order to determine the extent of their auditing
procedures for the purpose of expressing such opinion but not to provide
assurance on the internal control structure. Management believes that the
Company's system of internal controls is adequate to accomplish the objectives
discussed herein.
The Board of Directors monitors the internal control system through its Audit
Committee which consists solely of outside directors. The Audit Committee meets
periodically with the independent auditors, internal auditors and senior
financial management to determine that they are properly discharging their
responsibilities.
Leon C. Hirsch
Chief Executive Officer
Richard A. Douville
Senior Vice President
and Chief Financial Officer
F-3
<PAGE> 33
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
In thousands, except share data 1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 106,700 $ 10,500
Receivables, less allowance of $11,700 (1996); $8,200 (1995) 287,600 247,300
Inventories:
Finished goods ............................................. 128,300 92,700
Work in process ............................................ 32,300 28,800
Raw materials .............................................. 30,000 39,700
----------- -----------
190,600 161,200
Other current assets ........................................ 106,700 72,900
----------- -----------
Total Current Assets .................................... 691,600 491,900
----------- -----------
Property, plant, and equipment (net) .......................... 447,700 504,900
Other assets (net) ............................................ 375,500 268,700
----------- -----------
Total Assets ............................................ $ 1,514,800 $ 1,265,500
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 29,400 $ 28,600
Accrued liabilities ......................................... 177,300 148,900
Income taxes payable ........................................ 83,800 78,600
Current portion of long-term debt ........................... 4,700 4,200
----------- -----------
Total Current Liabilities ............................... 295,200 260,300
Long-term debt ................................................ 142,400 256,500
Deferred income taxes ......................................... 23,400 7,600
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, 71,367,780 at December 31, 1996 and 65,293,157 at
December 31, 1995 .......................................... 7,100 6,500
Additional paid-in capital - common stock ................... 623,900 394,200
Retained earnings ........................................... 318,000 233,200
Treasury stock at cost; 8,080,983 shares at
December 31, 1996 and 8,127,219 shares at
December 31, 1995 .......................................... (86,400) (86,600)
Accumulated translation adjustments ......................... (3,100) 2,300
Unrealized gain on marketable securities .................... 2,800
----------- -----------
Total Stockholders' Equity .............................. 1,053,800 741,100
----------- -----------
Commitments and contingencies
Total Liabilities and Stockholders' Equity .............. $ 1,514,800 $ 1,265,500
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 34
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
In thousands, except per share data 1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Net sales ............................. $1,112,700 $1,022,300 $918,700
---------- ---------- --------
Costs and expenses:
Cost of products sold ............... 460,600 451,700 463,600
Research and development ............ 58,000 43,100 37,500
Selling, general and administrative . 443,400 417,000 366,700
Interest (net) ...................... 9,000 20,700 18,200
---------- ---------- --------
Total costs and expenses ........... 971,000 932,500 886,000
Income before income taxes ............ 141,700 89,800 32,700
Income taxes .......................... 32,600 10,600 13,500
---------- ---------- --------
Net income ............................ 109,100 79,200 19,200
Preferred stock dividends ............. 19,500 19,500 14,900
---------- ---------- --------
Net income applicable to
common stock ........................ $ 89,600 $ 59,700 $ 4,300
========== ========== ========
Average number of common shares
outstanding ......................... 60,500 57,000 56,600
========== ========== ========
Net income per common share
(primary and fully diluted) ......... $ 1.48 $ 1.05 $ .08
========== ========== ========
Dividends paid per common share ....... $ .08 $ .08 $ .08
========== ========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 35
United States Surgical Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Additional Additional
Paid-in Paid-in
Preferred Capital - Common Capital - Retained
Years ended December 31, 1996, 1995 and 1994 Stock Preferred Stock Common Earnings
-------------------------------------------------------------------------------------------------------------------------
In thousands, except share data
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 .................... $6,400 $371,700 $178,300
Issuance of preferred stock (177,400 shares) . $900 $190,600
Common stock issued to employees-net
(577,991 shares) ........................... 100 7,900
Income tax benefit from stock
options exercised .......................... 1,100
Payment received from officer on installment
receivables ................................
Aggregate adjustment resulting from the
translation of foreign financial statements
Preferred stock dividends .................... (14,900)
Common stock dividends paid
($.08 per share) ........................... (4,500)
Net income ................................... 19,200
---- -------- ------ -------- --------
BALANCE AT DECEMBER 31, 1994 .................. 900 190,600 6,500 380,700 178,100
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 .................... (19,500)
Common stock dividends paid
($.08 per share) ........................... (4,600)
Net income ................................... 79,200
---- -------- ------ -------- --------
BALANCE AT DECEMBER 31, 1995 .................. 900 190,600 6,500 394,200 233,200
Issuance of common stock,
net (4,300,000 shares) ..................... 400 141,400
Common stock issued to employees-net
(1,780,534 shares) ......................... 200 39,100
Income tax benefit from stock
options exercised .......................... 49,200
Aggregate adjustment resulting from the
translation of foreign financial statements
Preferred stock dividends .................... (19,500)
Common stock dividends paid
($.08 per share) ........................... (4,800)
Unrealized gain on marketable securities (net)
Net income ................................... 109,100
---- -------- ------ -------- --------
BALANCE AT DECEMBER 31, 1996 .................. $900 $190,600 $7,100 $623,900 $318,000
==== ======== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Installment Unrealized
Accumulated Receivables Gain On
Treasury Translation from Sale of Marketable
Years ended December 31, 1996, 1995 and 1994 Stock Adjustments Common Stock Securities Total
----------------------------------------------- ----------------------------------------------------------------------------
In thousands, except share data
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 .................... $(86,700) $(20,400) $(5,400) $ 443,900
Issuance of preferred stock (177,400 shares) . 191,500
Common stock issued to employees-net
(577,991 shares) ........................... 8,000
Income tax benefit from stock
options exercised .......................... 1,100
Payment received from officer on installment
receivables ................................ 5,400 5,400
Aggregate adjustment resulting from the
translation of foreign financial statements 12,300 12,300
Preferred stock dividends .................... (14,900)
Common stock dividends paid
($.08 per share) .......................... (4,500)
Net income ................................... 19,200
-------- -------- ------- ----------
BALANCE AT DECEMBER 31, 1994 .................. (86,700) (8,100) 0 662,000
Common stock issued to employees-net
(329,799 shares) ........................... 100 5,400
Income tax benefit from stock
options exercised .......................... 8,200
Aggregate adjustment resulting from the
translation of foreign financial statements 10,400 10,400
Preferred stock dividends .................... (19,500)
Common stock dividends paid
($.08 per share) .......................... (4,600)
Net income ................................... 79,200
-------- -------- ------- ----------
BALANCE AT DECEMBER 31, 1995 .................. (86,600) 2,300 0 741,100
Issuance of common stock,
net (4,300,000 shares) ..................... 141,800
Common stock issued to employees-net
(1,780,534 shares) ......................... 200 39,500
Income tax benefit from stock
options exercised .......................... 49,200
Aggregate adjustment resulting from the
translation of foreign financial statements (5,400) (5,400)
Preferred stock dividends .................... (19,500)
Common stock dividends paid
($.08 per share) .......................... (4,800)
Unrealized gain on marketable securities (net) $2,800 2,800
Net income ................................... 109,100
-------- -------- ------- ------ ----------
BALANCE AT DECEMBER 31, 1996 .................. $(86,400) $ (3,100) $ 0 $2,800 $1,053,800
======== ======== ======= ====== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 36
United States Surgical Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
In thousands 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers ........................................... $ 1,071,600 $ 1,000,000 $ 913,100
Cash paid to vendors, suppliers, and employees ......................... (892,400) (784,100) (749,300)
Interest paid (net) .................................................... (9,500) (17,500) (24,800)
Income taxes paid ...................................................... (15,500) (10,300) (14,900)
----------- ----------- -----------
Net cash provided by operating activities ............................. 154,200 188,100 124,100
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant, and equipment ............................ (42,300) (33,600) (47,000)
Acquisitions ........................................................... (15,000) (84,000)
Other assets ........................................................... (51,600) (18,100) 13,900
----------- ----------- -----------
Net cash used in investing activities ................................. (108,900) (135,700) (33,100)
----------- ----------- -----------
Cash flows from financing activities:
Long-term debt borrowings under credit agreements ...................... 1,080,300 2,407,300 3,483,900
Long-term debt repayments under credit agreements ...................... (1,184,900) (2,445,800) (3,753,800)
Long-term debt issuance fees ........................................... -- (1,700) (3,300)
Issuance of common stock, net .......................................... 141,800 -- --
Issuance of preferred stock, net ....................................... -- -- 191,500
Common stock issued from stock plans ................................... 39,300 5,300 13,400
Dividends paid ......................................................... (24,300) (24,100) (14,500)
----------- ----------- -----------
Net cash provided by (used in) financing activities ................... 52,200 (59,000) (82,800)
----------- ----------- -----------
Effect of exchange rate changes .......................................... (1,300) 5,800 2,200
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ..................... 96,200 (800) 10,400
Cash and cash equivalents, beginning of year ............................. 10,500 11,300 900
----------- ----------- -----------
Cash and cash equivalents, end of year ................................... $ 106,700 $ 10,500 $ 11,300
=========== =========== ===========
Reconciliation of net income to net cash provided by operating activities:
Net income ............................................................... $ 109,100 $ 79,200 $ 19,200
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation .......................................................... 65,400 71,000 69,800
Amortization .......................................................... 21,300 20,700 19,600
Adjustment of property, plant, and equipment reserves ................. 20,600 18,600 22,300
Receivables -- (increase) ............................................. (44,300) (23,900) (3,300)
Inventories -- (increase) decrease .................................... (40,100) (2,600) 7,400
Adjustment of inventory reserves ...................................... 9,700 26,600 39,200
Other current assets -- (increase) .................................... (19,200) (26,200) (13,000)
Accounts payable and accrued liabilities -- increase (decrease) ....... 14,000 13,500 (42,500)
Income taxes payable and deferred -- (decrease) increase ............. (31,600) 3,100 (2,900)
Income tax benefit from stock options exercised ....................... 49,200 8,200 1,100
Other assets -- net ................................................... 100 (100) 7,200
----------- ----------- -----------
Total adjustments .................................................. 45,100 108,900 104,900
----------- ----------- -----------
Net cash provided by operating activities ................................ $ 154,200 $ 188,100 $ 124,100
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 37
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), operating outside the United States, are
included in the consolidated financial statements on a fiscal-year basis ending
November 30.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents includes cash on
hand, interest bearing demand deposits, and interest bearing short-term
investments with original maturities of one month or less.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out method) or market.
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 4
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 1996, 1995 and 1994
was immaterial.
OTHER ASSETS. The Company capitalizes and includes in Other assets the
costs of acquiring patents on its products, licenses to use purchased patents
for current and future products, the costs of computer software developed and
used in its information processing systems and goodwill arising from the excess
of cost over the fair value of net assets of purchased businesses. The Company
evaluates the carrying value of its long lived assets and identifiable
intangibles, including goodwill, for possible impairments which, if applicable,
are recognized when events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Costs of Other assets are
amortized on the straight-line basis over the following estimated useful lives:
<TABLE>
<CAPTION>
Years
----------------------------------------------------
<S> <C>
Patents and licenses........................ 5 to 10
Computer software costs..................... 2 to 3
Goodwill.................................... 10 to 40
</TABLE>
In addition, Other assets contains investments held in certain marketable
securities which are recorded at fair value.
F-8
<PAGE> 38
REVENUE RECOGNITION. Revenues from sales, net of estimated returns, 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 PER COMMON SHARE. Net income per common share is based on the
weighted average number of common shares and, where material, common share
equivalents (stock options, contingent stock, contingent stock right issuances,
and convertible preferred stock) outstanding. Common share equivalents are not
included in the computation of net income per share in 1996, 1995 and 1994 since
the effect of their inclusion would be antidilutive.
ADOPTION OF FAS 123. In 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). FAS 123 encourages, but does not require companies to
record at fair value compensation cost for stock-based employee compensation
plans. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
Certain comparative amounts in the Consolidated Balance Sheet and related
Notes to Consolidated Financial Statements as of December 31, 1995 have been
adjusted to conform to the 1996 presentation.
NOTE B - COMMON STOCK OFFERING
In the second quarter of 1996 the Company sold an additional 4.3 million shares
of its Common stock in a public offering for approximately $141.8 million net of
issuance costs. A portion of the proceeds was used to repay certain domestic
bank debt and the balance of the proceeds which is reflected in the $106.7
million of cash and cash equivalents at December 31, 1996 will be used for
general corporate purposes, including partially financing the Company's current
tender offer (see Note C). The impact of this issuance of common stock had an
immaterial effect on net income per common share in 1996.
F-9
<PAGE> 39
NOTE C - TENDER OFFER
On August 2, 1996 the Company commenced an offer to purchase all of the
outstanding shares of common stock of Circon Corporation at a price of $18 per
share, net to the seller in cash. As a result of Circon's inability to deliver
improved financial performance, the tender offer was reduced to $17 per share
effective December 16, 1996. Circon Corporation has placed several impediments
between its shareholders and the present tender offer. The Company is presently
seeking legal remedy to remove these impediments to complete this transaction.
Currently, the tender offer has been extended through February 13, 1997. As of
December 13, 1996 (the termination date of the previous tender period),
7,726,896 common shares had been tendered. These shares, plus the 1,000,100
shares previously purchased by the Company, represented approximately 66% of
Circon Corporation's outstanding common stock as reported by Circon in its
public reports for the period ended September 30, 1996. The Circon Corporation
common stock, along with other securities, are included in Other assets. These
available-for-sale securities have a fair value of approximately $21 million and
a cost of approximately $17 million at December 31, 1996.
NOTE D - 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 severance-related restructuring charges were made in the
third and fourth quarters of 1995 with the remainder of the cash outlays
occurring during 1996. The 1995 restructuring charges were substantially 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, 1996 and 1995 included approximately
$4 million and $9 million, respectively, which related primarily to severance
costs and accrued lease obligations associated with the Company's 1995 and 1993
restructuring charges. Such remaining restructuring charges at December 31, 1996
will have no effect on liquidity. The Company has either terminated or bought
out the leases of the leased properties and paid substantially all employee
severence costs which were part of the 1993 restructuring charges. The majority
of the 1995 accrued termination charges and other restructuring charges were
liquidated during 1996.
NOTE E - 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 $58 million resulting from the acquisition will be amortized on a
straight-line basis to operations over 20 years. The Company has made an
allocation of the purchase price based on the estimated fair values of assets
and liabilities acquired. Results of operations subsequent to acquisition are
included in the Company's consolidated financial statements.
F-10
<PAGE> 40
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 from the Company's former distributor in Japan.
The Company has made an allocation of the purchase price based on the estimated
fair values of net assets acquired. 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 2.5 billion Yen ($22 million)
was recorded as goodwill.
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 biopharmaceutical company (Alexion Pharmaceutical Company). In
addition, the Company acquired the exclusive worldwide rights to market
transgenic pig organs from Alexion. In the third quarter of 1996, the Company
acquired 80% of a foreign corporation (Medolas Gesellschaft fur Medizintechnik
GmbH) through a purchase transaction along with an option to purchase the
remaining 20% in the future. This foreign corporation will exclusively supply
the Company with products in the medical field. These acquisitions did not
currently have a material impact on the Company's consolidated results of
operations or financial position.
The unaudited 1995 consolidated results of operations on a pro-forma basis
as though the 1995 purchase business combinations of Surgical Dynamics, Inc.,
and certain assets from the Company's former Japanese distributor, and excluding
the purchase of Alexion, had collectively been completed by the Company as of
the beginning of 1995 is as follows (dollars in thousands, except per share
amount):
<TABLE>
<CAPTION>
Twelve Months Ended
December 31, 1995
-----------------
<S> <C>
Net sales ............................................ $1,058,100
Net income ........................................... $ 74,100
Net income per common share .......................... $ .96
</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.
F-11
<PAGE> 41
NOTE F - PROPERTY, PLANT, AND EQUIPMENT
At December 31, 1996 and 1995, Property, plant, and equipment (at cost)
was comprised of the following items:
<TABLE>
<CAPTION>
<S> <C> <C>
In thousands 1996 1995
--------- ---------
Land ........................................... $ 26,700 $ 27,500
Buildings ...................................... 164,100 170,500
Molds and dies ................................. 88,600 92,200
Machinery and equipment ........................ 289,300 309,200
Leasehold improvements ......................... 154,600 153,700
--------- ---------
723,300 753,100
Less allowance for depreciation and amortization (275,600) (248,200)
--------- ---------
$ 447,700 $ 504,900
========= =========
</TABLE>
Property, plant, and equipment includes land and buildings in Elancourt,
France with a net book value at December 31, 1996 and 1995 of $79 million and
$82 million, respectively. During 1996 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 G - OTHER ASSETS
At December 31, 1996 and 1995 Other assets (net of accumulated
amortization of $57 million and $73 million in 1996 and 1995, respectively) was
comprised of the following items:
<TABLE>
<CAPTION>
In thousands 1996 1995
-------- --------
<S> <C> <C>
Goodwill .............................. $ 83,700 $ 69,400
Patents and licenses .................. 76,300 86,500
Prepaid rent .......................... 71,100 28,500
Deferred tax assets ................... 59,900 31,600
Investments at fair value ............. 21,000 4,400
Certificates of deposit ............... 19,000 15,000
Computer software costs ............... 12,500 7,800
Other ................................. 32,000 25,500
-------- --------
$375,500 $268,700
======== ========
</TABLE>
During 1996 the Company removed from its Balance Sheet fully amortized
Other assets with a cost of $11 million.
Investments at fair value consist of available-for-sale securities which
have an original cost of $17 million and $4 million at December 31, 1996 and
1995, respectively.
F-12
<PAGE> 42
NOTE H - INCOME TAXES
A summary of the source of income (loss) before income taxes follows:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Domestic (a) ............. $131,500 $71,600 $ 35,600
Foreign .................. 10,200 18,200 (2,900)
-------- ------- --------
$141,700 $89,800 $ 32,700
======== ======= ========
</TABLE>
(a) Includes Puerto Rico and U.S. branches in foreign locations.
A summary of the provision for income taxes follows:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Current:
Federal (b) ............. $ 7,900 $ 1,700
Foreign ................. 9,100 $ 9,700 1,000
State and local (a) ..... 7,100 3,900 6,500
Deferred:
Federal ................. 500 (5,700) (900)
Foreign ................. 900 2,300 500
State and local (a) ..... 7,100 400 4,700
------- -------- --------
$32,600 $ 10,600 $ 13,500
======= ======== ========
</TABLE>
(a) Includes local tax provision of Puerto Rico subsidiary.
(b) Includes federal tax provision of Puerto Rico subsidiary.
A reconciliation between income taxes based on the application of the
statutory federal income tax rate (35%) to income before income taxes and the
provision for income taxes as set forth in the Consolidated Statements of
Operations follows:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Provision for taxes
at statutory rates $ 49,600 $ 31,400 $ 11,400
Benefit of operating loss carryforward
(recognized)/not recognized for
U.S. federal or foreign taxes (17,300) (16,100) 6,500
Benefit of operating loss and credit
carryforward incident to settlement
of IRS tax audit (10,000)
Tax savings from operations
in Puerto Rico (7,000) (6,600) (7,500)
State and local income taxes,
net of federal income tax
benefit 4,000 2,800 900
Foreign income taxed at rates
different than U.S.
statutory rate 2,700 8,200 1,600
Other 600 900 600
-------- -------- --------
$ 32,600 $ 10,600 $ 13,500
======== ======== ========
</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 9% (8% in 1995) have been provided on
the expected repatriation of the income of this subsidiary.
F-13
<PAGE> 43
At December 31, 1996 and 1995 deferred tax liabilities and assets under
FAS 109 were comprised of the following:
<TABLE>
<CAPTION>
In thousands 1996 1995
----------------------------------------------------------------
<S> <C> <C>
Patent amortization $ (16,800) $ (14,900)
Depreciation (50,100) (34,100)
Other amortization (1,900) (9,700)
Operating lease (18,800) (9,500)
Accrued interest (2,500) (5,500)
Withholding taxes (12,000) (5,900)
Other (6,700) (1,200)
--------- ---------
Gross deferred tax liabilities (108,800) (80,800)
--------- ---------
Restructuring reserves 21,700 34,800
Inventory reserves 40,400 33,400
Fixed asset reserves 40,600 25,400
Accrued expenses 8,500 9,500
Other 13,600 9,400
Tax loss and credit carryforwards 122,300 143,100
Gross deferred tax assets 247,100 255,600
Less: Valuation allowance (58,100) (129,000)
--------- ---------
189,000 126,600
--------- ---------
Net deferred tax assets $ 80,200 $ 45,800
========= =========
</TABLE>
Deferred taxes resulted from temporary differences in the recognition of
revenue and expense for tax and financial statement purposes. The sources of the
deferred taxes include: the use of accelerated methods of computing depreciation
for income tax purposes and the straight-line method for financial reporting
purposes; expensing certain patent costs as incurred for income tax purposes and
capitalizing and amortizing them over their estimated useful lives for financial
reporting purposes; and other temporary differences applicable to current and
deferred assets and liabilities.
At December 31, 1996 and 1995 net current deferred tax assets of $45
million and $23 million, respectively, and net non-current deferred tax assets
of $60 million and $32 million, respectively, were included in the Consolidated
Balance Sheet captions Other current assets and Other assets, respectively.
Current deferred tax liabilities of $1 million in 1996 and 1995 and non-current
deferred tax liabilities of $23 million in 1996 and $8 million in 1995 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 returns which were not
recognized for financial accounting purposes. The continuing increases in levels
of current and projected future domestic taxable income enabled the Company to
reduce the valuation allowance in 1996. A valuation allowance in the amount of
$58 million has been recorded as of December 31, 1996 because of the uncertainty
over the future utilization of the tax benefit of certain of its gross deferred
domestic and foreign tax assets. As of January 1, 1996 and 1995, the valuation
allowance was $129 million and $205 million, respectively.
At December 31, 1996 the Company's consolidated subsidiaries have
unremitted earnings of $120 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 $36 million at December 31,
1996.
F-14
<PAGE> 44
The Company has available for U.S. Federal income tax return purposes the
following net operating loss and tax credit carryforwards:
<TABLE>
<CAPTION>
NET INVESTMENT RESEARCH
OPERATING TAX AND OTHER
IN THOUSANDS LOSSES CREDITS CREDITS
- ---------------------------------------------------------------------------------
YEAR SCHEDULED TO EXPIRE:
<S> <C> <C> <C>
1997 .................... $ 1,400
1998 .................... 1,300
1999 .................... $ 600 1,100 $ 100
2000 .................... 100 1,000 300
2001 .................... 600 500 500
2002 .................... 700
2003 .................... 800
2004 .................... 100 1,000
2005 .................... 1,800
2006 .................... 400 3,000
2007 .................... 88,200 6,500
2008 .................... 41,200 2,800
2009 .................... 13,900
2010 .................... 4,300
2011 .................... 3,700 500
-------- ------- -------
$153,100 $ 5,300 $18,000
======== ======= =======
</TABLE>
In addition, the Company has available for state and foreign income tax
return purposes net operating loss carryforwards of $92 million and $91 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 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 tax benefit recognized from
compensation deductions arising from the exercise of stock options was
approximately $49 million in 1996, $8 million in 1995, and was immaterial in
1994. Of the $49 million in tax benefit recognized in 1996, approximately $8
million relates to stock options exercised in 1996 and approximately $41 million
relates to stock options exercised prior to 1996.
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 $18 million.
F-15
<PAGE> 45
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 the tax benefits.
Based upon circumstances relative to the IRS audit and the Company's estimate of
future domestic taxable income, it is 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.
NOTE I - ACCRUED LIABILITIES
Included in Accrued liabilities at December 31, 1996 are accrued rent for the
Company's North Haven facilities $34 million (1995 - $14 million), accrued
shareholders' settlement and associated fees $20 million (1995 - $13 million),
accrued payroll, property and sales taxes $19 million (1995 - $17 million),
accrued commissions $16 million (1995 - $16 million) and accrued restructuring
charges $4 million (1995 - $9 million).
NOTE J - LONG-TERM DEBT
At December 31, 1996, 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
In thousands Facilities Lease Payable Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 .................... $ 7,500 $ 3,200 $ 10,700
1998 .................... 5,400 3,700 9,100
1999 .................... 6,800 4,300 11,100
2000 .................... 7,600 5,100 12,700
2001 .................... $ 22,400 8,100 19,200 49,700
After 2001 .............. 87,500 87,500
--------- --------- --------- --------
22,400 122,900 35,500 180,800
Current portion of
long-term debt and
note payable ............ (1,500) (3,200) (4,700)
Amount representing
interest ................ (33,700) (33,700)
--------- --------- --------- --------
Long-term debt .......... $ 22,400 $ 87,700 $ 32,300 $142,400
========= ========= ========= ========
</TABLE>
At December 31, 1996 the Company's long term debt consisted of $22 million
in Yen denominated bank borrowings, $88 million in French Franc denominated
financing lease obligations outstanding relating to its European headquarters
office building and distribution center complex in Elancourt, France, and $32
million in Yen denominated 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. In the second quarter of 1996 the Company
sold 4.3 million shares of its common stock in a public offering for
approximately $141.8 million of proceeds net of issuance costs. A portion of the
proceeds were used to repay certain domestic bank debt and the balance of the
proceeds which is reflected in the $106.7 million of cash and cash equivalents
at December 31, 1996 will be used for general corporate purposes, including
partially financing the Company's existing tender offer for Circon Corporation.
F-16
<PAGE> 46
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, 1996 and
1995 was 5.3% and 7.4%, respectively. The interest expense in 1996, 1995 and
1994 was $14 million, $23 million and $21 million, respectively. Such interest
expense has been reduced, as reflected on the Consolidated Statement of
Operations by interest income of $5 million, $2 million and $3 million in 1996,
1995 and 1994, respectively.
The Company has entered into an additional conditional committed bank term
loan facility of $175 million during the third quarter of 1996 to exclusively
finance its tender offer. This conditional term loan facility has similar terms
and conditions to the Company's present syndicated bank credit facility.
The new credit agreement, conditional term loan facility, 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. Additionally, during 1996 and 1995, the Company entered into
uncommitted facilities for 5 billion Japanese Yen (approximately $44 million)
with two Japanese banks and $125 million with five other banks. The uncommitted
credit agreements are short term in nature. Borrowings under these agreements
were approximately $15 million at December 31, 1996. 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 twelve 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 6.8% and 8.05% at December 31, 1996 and 1995,
respectively.
The Company's yen-denominated note payable is 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 five years. Based upon these
assumptions, the Company estimates that the present value of the final payment
on December 31, 2001 will be approximately $16 million.
F-17
<PAGE> 47
NOTE K - 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. The shares trade in
units of depositary shares, with each depositary share representing one-fiftieth
interest in one share of preferred stock. 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 number of shares of Common Stock with a market value equal
to $1,025 (equivalent to $20.50 per depositary share) 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. However,
holders of the Convertible Preferred Stock are expected to convert the preferred
stock rather than accept redemption, the holders of the preferred stock forgoing
any additional preferred stock dividend payment by the Company but receiving a
greater number of common shares than would be the case on a redemption.
Following conversion on redemption, no further preferred dividends are payable.
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 63,286,797 and 57,165,938 shares of its $.10 par value
Common Stock outstanding as of December 31, 1996 and 1995, 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, 1996, 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 1995 and 1996. 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 18,015,704 and 17,303,361 at December 31, 1996 and 1995,
respectively. The Compensation/Option Committee (the "Committee") of the Board
of Directors is responsible for administering the Company's stock plans. The
Company's stock option plans vest for periods up to five years from the date of
grant.
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, 1996, 3,839,740 shares were
issued and vested under the Incentive Plan and 142,160 shares were cancelled.
There were no restricted stock grants during the three-year period ended
December 31, 1996. The Plan was terminated during the first quarter of 1996.
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, 1996, 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.
F-18
<PAGE> 48
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 4,500,000 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, 1996 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 1996 Employee Stock Option Plan (the "1996 Option Plan") provides for
grants to Officers of the Company of options and stock appreciation rights for
up to 2,500,000 shares of the Company's Common Stock at no less than the per
share market price at the date of grant. As of December 31, 1996 no stock
appreciation rights have been granted. Subject to a maximum exercise period of
fifteen years, the exercise period of awards under the 1996 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 which
are exercisable for a period up to ten years. At December 31, 1996 and 1995,
restricted stock awards and option grants for 154,000 shares and 134,000 shares,
respectively, had been granted under the Outside Directors Stock Plan. As of
December 31, 1996 and 1995, 6,000 and 26,000 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, 1996 follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
----------------------------------------------------------------
<S> <C> <C>
OUTSTANDING JANUARY 1, 1994 . 11,505,553 $54.12
Granted ................... 2,287,869 21.24
Exercised ................. (347,487) 10.63
Canceled or lapsed ........ (713,319) 48.22
----------
OUTSTANDING DECEMBER 31, 1994 12,732,616 49.56
Granted ................... 1,570,525 23.71
Exercised ................. (157,195) 13.98
Canceled or lapsed ........ (433,049) 31.86
----------
OUTSTANDING DECEMBER 31, 1995 13,712,897 47.57
Granted ................... 3,718,975 27.42
Exercised ................. (1,649,755) 21.73
Canceled or lapsed ........ (226,450) 35.21
----------
OUTSTANDING DECEMBER 31, 1996 15,555,667 45.67
==========
At December 31, 1996:
Exercisable ............... 10,062,421 51.97
==========
</TABLE>
F-19
<PAGE> 49
The following tables summarize information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RANGE OF REMAINING WEIGHTED
EXERCISE NUMBER CONTRACTUAL AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
$6.09 -$24.56 6,191,098 6.6 Years $ 21.55
25.59 - 47.88 5,980,244 4.1 Years 42.34
53.69 - 73.00 279,057 4.5 Years 60.06
75.13 - 98.69 2,769,117 3.6 Years 98.25
103.50 - 111.94 336,151 5.1 Years 103.99
------------------------------------------
15,555,667 5.0 Years $ 45.67
==========================================
</TABLE>
<TABLE>
<CAPTION>
RANGE OF WEIGHTED
EXERCISE NUMBER AVERAGE
PRICES EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
$ 6.09 - $24.56 2,966,843 $ 20.92
25.59 - 47.88 4,318,753 45.52
53.69 - 73.00 261,557 59.42
75.13 - 98.69 2,179,117 98.13
103.50 -111.94 336,151 103.99
----------------------
10,062,421 $ 51.97
======================
</TABLE>
Under the USSC Employees 1979 Stock Purchase Plan (the "1979 Purchase
Plan") and the 1994 Employees Stock Purchase Plan (the "1994 Purchase Plan"),
all eligible employees may authorize payroll deductions of up to 10% of their
base earnings, as defined, to purchase shares of the Company's Common Stock at
85% of the market price when such deductions are made. There are no charges or
credits to income in connection with the Purchase Plan. The plans will continue
in effect as long as shares authorized under the Purchase Plan remain available
for issuance thereunder. The Company has reserved 2,400,000 shares of its Common
Stock for issuance under the 1979 Purchase Plan, of which 135,648 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 278,146 are available
for future issuance, at December 31, 1996.
The estimated fair value of options granted during 1996 and 1995 were
$8.91 per share and $7.82 per share, respectively. The Company applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its stock option and purchase plans. No compensation cost has
been recognized for its fixed stock option plans and its stock purchase plans.
Had compensation cost for the Company's stock option plans and its stock
purchase plans been determined based on the fair value at the option grant dates
for awards in accordance with the accounting provisions of FAS 123, the
Company's net income and earnings per share for the years ended December 31,
1996 and 1995 would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
Net income applicable to common shareholders
<S> <C> <C>
As reported $89,600 $59,700
Pro forma $77,200 $55,900
</TABLE>
<TABLE>
<CAPTION>
Net income per common share and common share equivalent
<S> <C> <C>
As reported $1.48 $1.05
Pro forma $1.26 $ .98
</TABLE>
F-20
<PAGE> 50
The fair value of options granted under the Company's fixed stock option
plans during 1996 and 1995 was estimated on the dates of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used: dividend yield of approximately .3%, expected volatility of
approximately 32%, risk free interest rate of approximately 6%, and expected
lives of option grants of approximately four years. Pro forma compensation cost
related to shares purchased under the Employee Stock Purchase Plan is measured
based on the discount from market value. The effects of applying FAS 123 in this
pro forma disclosure are not indicative of future pro forma effects. FAS 123
does not apply to awards prior to 1995, and additional awards in future years
are anticipated.
NOTE L - 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. Intercompany transactions are made at
established transfer prices.
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES:
United States ..................... $ 955,600 $ 828,500 $ 775,000
International (1) .................
Europe ......................... 366,300 365,300 321,400
Japan .......................... 99,900 63,900 0
Other .......................... 33,200 30,500 27,400
Inter-area transfers eliminated ... (342,300) (265,900) (205,100)
----------- ---------- ----------
$ 1,112,700 $1,022,300 $ 918,700
=========== ========== ==========
OPERATING PROFIT:
United States ..................... $ 176,200 $ 121,100 $ 71,200
International .....................
Europe ......................... 103,000 87,500 72,100
Japan .......................... 32,900 6,800 0
Other .......................... 6,800 5,400 4,900
Profit on inter-area transfers
eliminated ........................ (168,200) (110,300) (97,300)
----------- ---------- ----------
$ 150,700 $ 110,500 $ 50,900
=========== ========== ==========
IDENTIFIABLE ASSETS AT
DECEMBER 31:
United States ..................... $ 1,099,100 $ 867,900 $ 807,500
International .....................
Europe ......................... 351,500 349,400 302,800
Japan .......................... 77,500 64,300 0
Other .......................... 12,000 10,400 5,800
Inter-area assets eliminated ...... (25,300) (26,500) (12,600)
----------- ---------- ----------
$ 1,514,800 $1,265,500 $1,103,500
=========== ========== ==========
</TABLE>
(1) Does not include sales made primarily to international distributors (1996
- $53,800, 1995 - $50,200 and 1994 - $84,800) from a location in the
United States. The combination of sales to international distributors and
international sales above approximate 50% in 1996, 49% in 1995 and 46% in
1994 of consolidated sales, respectively.
F-21
<PAGE> 51
NOTE M - 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 (see Item 3). In the opinion of management, based upon advice
of counsel, the ultimate outcome of these lawsuits should not have a material
adverse effect on the Company's consolidated financial statements.
In November, 1996 the Company entered into an agreement in settlement of
the shareholder class action suits filed against the Company and certain
individually named defendants. The principal terms of the settlement are as
follows: issuance and payment to the members of the class of 315,000 shares of
the Company's common stock (fair value $12.2 million), $3.5 million in cash, and
issuance of contingent stock rights (fair value $2.9 million) with respect to
each of the 315,000 shares of common stock issued in the settlement. If the
Company's common stock reaches a price of $70 per share for either forty five
consecutive trading days or one hundred trading days in total during the two
year period from the date of issuance of the 315,000 shares of common stock to
the members of the class, the contingent stock rights will extinguish. The
payment and issuance of the common stock and contingent stock rights will take
place on final court approval of the settlement and the plan for distribution of
the securities and cash to members of the class. The Company has provided for
the estimated cost of the settlement in its consolidated financial statements,
the substantial portion of which will be funded by the Company's insurance
carriers. Certain individually named defendants in the case assigned to the
Company during 1995 various insurance claims relating to the reduction of the
terms of certain outstanding option grants to which they agreed to in connection
with the settlement of a shareholder derivative claim. The Company believes this
assignment facilitated the Company's ability to obtain insurer funding of this
settlement. The Company also believes that it and the individually named
defendants have substantial defenses against the shareholder class action
claims; however, because of the continued expenses, distractions and potential
risks of litigation, the Company concluded that a settlement on terms largely
funded by insurance coverage was in the Company's and shareholders' best
interests.
The Company is committed to certain undertakings, including the
maintenance of specified levels of employment and capitalization for its Puerto
Rican subsidiary.
Under an agreement with Progressive Angioplasty Systems, Inc. (PAS) dated
February 4, 1997, the Company purchased 12.5% of PAS for $15 million and has a
six month evaluation period in which to exercise its right to acquire the
remaining 87.5% PAS. The purchase price, if the option is exercised, is $75
million of the Company's common stock, with an additional $75 million of the
Company's common stock payable when or if certain milestones and sales
objectives are met.
The future minimum rental commitments for building space, leasehold
improvements, data processing and automotive equipment for all operating leases
as of December 31, 1996, were as follows: 1997 - $82 million; 1998 - $95
million; 1999 - $73 million; 2000 - $69 million; 2001 - $68 million; after 2001
- - $145 million. Rent expense was $40 million, $33 million and $31 million in
1996, 1995 and 1994, 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 is obligated to make additional contingent rental
payments based upon the consumer price index. There are presently several
alternatives available to the Owner Participant and the Company relative to the
additional
F-22
<PAGE> 52
contingent rental payments. The earliest potential payment of approximately $19
million could be due as early as January 1998 if the Owner Participant exercises
the right to sell the facility to the Company. If this right is not exercised,
and the Owner Participant does not elect the one-time payment of contingent rent
of approximately $19 million, the determination of the additional contingent
rental payments will be based upon movements in the consumer price index during
the period September 1996 to September 1999 with an annual cap on the consumer
price index movement of 2.5% per year. If the second option is chosen,
additional contingent rental payments cannot exceed approximately $39 million as
stipulated in the agreement. Under the second option, the Company can elect to
pay free of interest from 2004 to 2023 the additional contingent rental payments
in excess of $19 million. The present value of the contingent rental payments
under the second option of approximately $23 million would be a charge to rent
expense during the contingent rent period, September 1996 to September 1999, in
comparison to the $19 million charge under the other option. Through December
31, 1996, the Company has accrued $4.5 million related to contingent rental
payments.
NOTE N - 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, 1996, the
Company had approximately $29 million of foreign currency exchange contracts
outstanding that will mature at various dates through February 1997. Realized
and unrealized foreign currency gains and losses with respect to such contracts
which were immaterial in 1996 and 1995 are recognized when incurred and amounted
to losses of $4 million in 1994.
The Company swapped with certain banks its exposure to floating interest
rates on $50 million of its variable rate U.S. dollar debt and 200 million ($38
million) of variable rate French franc debt. The U.S. dollar debt swap
agreements expired in August 1996, and the French franc debt swap agreements
will expire in December 1997. The Company made interest payments at rates of
approximately 7.8% for the U.S. dollar swap and 8.1% for the French franc swap
and received 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 French franc interest rate swap agreement at
December 31, 1996, termination would require a payment by the Company of
approximately $1.8 million dollars. The Company does not currently intend to
terminate the remaining interest rate swap agreement prior to the expiration
date.
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 from two to five years. The Company has not
incurred losses related to these investments.
F-23
<PAGE> 53
The Company sells products in the surgical wound management field in most
countries of the world. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base. Ongoing credit evaluations of customers' financial
condition are performed and, generally, no collateral is required. In certain
European countries the Company's receivables are not paid until the customers
receive governmental reimbursement for their purchases. The Company has not
encountered difficulty in ultimately collecting accounts receivable in these
countries. The Company maintains reserves for potential credit losses and such
losses, in the aggregate, have not 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
-----------------------------------------------
1996 1995
--------------------- ---------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash, cash equivalents and
certificates of deposit .. $133,100 $133,500 $ 31,800 $ 32,600
Long-term debt ............... 142,400 142,400 256,500 256,500
Interest rate swaps
payable - net ............. 400 2,200 500 3,800
</TABLE>
The Company believes that the other parties to the above related financial
instruments have the ability to perform under such agreements.
NOTE O - SUPPLEMENTAL CASH FLOW INFORMATION
The Company purchased certain assets from its former Japanese distributor for
approximately 6.1 billion Yen ($62 million or a present value of $53.5 million
at date of purchase in 1995). In conjunction with this purchase a long-term
payable was recorded in 1995 as follows:
<TABLE>
<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
from acquisition $ 42.3
======
</TABLE>
F-24
<PAGE> 54
SCHEDULE II
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- --------- -------- ---------- ------
In thousands
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts ....... $ 8,200 $ 4,800 $ 1,300(A) $11,700
Reserve for inventory valuation ....... 74,100 9,700 16,800(B) 67,000
Reserve for fixed assets valuation .... 74,800 20,600 4,100(C) 91,300
Year ended December 31, 1995:
Allowance for doubtful accounts ....... $ 7,300 $ 1,300 $ 400(A) $ 8,200
Reserve for inventory valuation ....... 60,900 26,600 13,400(B) 74,100
Reserve for fixed assets valuation .... 59,300 18,600 3,100(C) 74,800
Year ended December 31, 1994:
Allowance for doubtful accounts ....... $ 5,000 $ 2,400 $ 100(A) $ 7,300
Reserve for inventory valuation ....... 48,700 39,200 27,000(B) 60,900
Reserve for fixed assets valuation .... 40,100 22,300 3,100(C) 59,300
</TABLE>
(A) Represents amounts written off. Normal recurring credits and returns are
charged against sales.
(B) Represents disposition of inventory which has been superseded by a new
generation of products.
(C) Represents disposition of fixed assets.
S-1
<PAGE> 55
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
(10)(c) 1993 Employee Stock Option Plan, as amended through
February 4, 1997. Filed herewith.
(11) Computation of Net Income Per Common Share. Filed
herewith.
(12) Statement of Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends. Filed
herewith.
(21) Subsidiaries of the registrant. Filed herewith.
(27) Financial Data Schedule. Filed herewith.
<PAGE> 1
UNITED STATES SURGICAL CORPORATION
1993 EMPLOYEE STOCK OPTION PLAN
(Restated to reflect amendments and adjustments through February 4, 1997)
1. Purpose of the Plan.
The purpose of the 1993 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 key 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) "Appreciation Right" 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.
(b) "Board" means the Board of Directors of the Company.
(c) "Committee" means the Compensation/Option Committee of the Board or
any successor committee appointed by the Board to administer the Plan.
(d) "Common Stock" means the authorized common stock of the Company.
(e) "Company" means United States Surgical Corporation.
(f) "Eligible Employee" means any person who is, at the time of the
grant of an Incentive Award, (i) a key employee of the Company or any
Subsidiary, but not including any such person who is an officer or a
member of the Board, or (ii) a consultant performing services for the
Company or any Subsidiary which are equivalent or similar to services
performed by key employees of the Company and its Subsidiaries.
<PAGE> 2
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute.
(h) "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" 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.
(i) "Incentive Award" means an Option or Appreciation Right.
(j) "Option" means an option to purchase Common Stock which has been
granted under the Plan. Options shall not be treated as incentive stock
options as defined in Section 422 of the Internal Revenue Code.
(k) "Participant" means any Eligible Employee selected to receive an
Incentive Award pursuant to Section 5.
(l) "Plan" means the 1993 Employee Stock Option Plan as set forth
herein and as amended from time to time.
(m) "Subsidiary" means any subsidiary corporation, as defined in
Section 425 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 6,100,000. 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.
2
<PAGE> 3
(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 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.
(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.
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> 4
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.
(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 the
assignment and delivery to the Company of shares of Common Stock owned
by the Participant; 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 established by
the Internal Revenue Service; or by a combination of any of the above.
Any shares assigned and delivered to the Company upon exercise of an
Option in payment or partial payment of the purchase price will be
valued at the Fair Market Value of the Common Stock on the exercise
date. 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) 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.
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) 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.
4
<PAGE> 5
(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) 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.
(f) Payment of the amount determined under Section 7(d) 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 a
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.
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
5
<PAGE> 6
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.
(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 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,
and subject to any 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 Associate" 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
6
<PAGE> 7
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.
(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.
7
<PAGE> 8
(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 established
by the Internal Revenue Service.
(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 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 or
issuance of shares, there shall be charged against the aggregate
limitations set
8
<PAGE> 9
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 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.
(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. 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).
9
<PAGE> 1
EXHIBIT 11
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
EXHIBIT TO FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1996
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
------------------------------------------
In thousands, except per share data 1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Net income $109,100 $79,200 $19,200
Preferred stock dividends 19,500 19,500 14,900
-------- ------- -------
Net income applicable to common stock $ 89,600 $59,700 $ 4,300
======== ======= =======
Average number of common shares and
common share equivalents outstanding:
Average number of common shares
outstanding 60,500 57,000 56,600
Contingent share issuance 200 -- --
Add common share equivalents - options
to purchase common shares - net -- -- --
-------- ------- -------
Average number of common shares and
common share equivalents outstanding 60,700 57,000 56,600
======== ======= =======
Net income per common share and
common share equivalent (primary and
fully diluted) $ 1.48 $ 1.05 $ .08
======== ======= =======
</TABLE>
The computation does not assume conversion of the Company's preferred stock into
common since the result would be antidilutive. Net income applicable to common
stock in 1996, 1995 and 1994 was computed solely on the weighted average number
of common shares outstanding during the period, since the inclusion of common
share equivalents would be antidilutive.
<PAGE> 1
EXHIBIT 12
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
In thousands, except ratios Years Ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C>
Determination of earnings:
Income (loss) before provision for
income taxes $141,700 $ 89,800 $32,700 $(137,400) $192,900
Fixed charges 27,100 33,600 31,200 30,800 23,400
-------- -------- ------- --------- --------
Total earnings as defined 168,800 123,400 63,900 (106,600) 216,300
-------- -------- ------- --------- --------
Fixed charges and other:
Interest expense 13,700 22,600 21,000 19,400 15,500
Interest portion of rent expense 13,400 11,000 10,200 11,400 7,900
-------- -------- ------- --------- --------
Fixed charges 27,100 33,600 31,200 30,800 23,400
Capitalized interest 100 200 300 9,500 6,400
-------- -------- ------- --------- --------
Total fixed charges and capitalized
interest 27,200 33,800 31,500 $ 40,300 $ 29,800
========= ========
Preferred stock dividends (1) 30,000 30,000 22,900
-------- -------- -------
Combined fixed charges, capitalized
interest and preferred stock
dividends $ 57,200 $ 63,800 $54,400
======== ======== =======
Ratio of Earnings to Fixed Charges
and Capitalized Interest 6.2 3.7 2.0 N.M.(2) 7.3
======== ======== ======= ========= ========
Ratio of Earnings to Combined
Fixed Charges, Capitalized Interest
and Preferred Stock Dividends 3.0 1.9 1.2
======== ======== =======
</TABLE>
The ratio of earnings to fixed charges and capitalized interest and to combined
fixed charges, capitalized interest and preferred stock dividends is computed by
dividing the sum of earnings before provision for income taxes and fixed charges
(excluding capitalized interest) by total fixed charges and capitalized
interest, or by the sum of total fixed charges and capitalized interest and
preferred stock dividends. Total fixed charges and capitalized interest includes
all interest (including capitalized interest) and the interest factor of all
rentals, assumed to be one-third of consolidated rent expense.
(1) Preferred stock dividends have been increased to an amount representing the
pretax earnings which would be required to cover such dividend requirements,
assuming a statutory tax rate of 35%.
(2) Earnings were inadequate to cover fixed charges. The dollar amount of the
deficiency at 12/31/93 is $147 million. If the restructuring charges of $138
million were excluded from the calculation, the dollar amount of the deficiency
would have been $9 million.
<PAGE> 1
EXHIBIT 21
UNITED STATES SURGICAL CORPORATION
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1996
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION
NAME OF INCORPORATION
- --------------------------------------------------------------------------------
<S> <C>
ARR, Inc ........................................................ Delaware
ASE Continuing Education Center S A ............................. France
ASE Partners S A ................................................ France
Auto Suture Austria GmbH ........................................ Austria
Auto Suture Belgium B V ......................................... Holland
Auto Suture Company, Australia .................................. Connecticut
Auto Suture Company, Canada ..................................... Connecticut
Auto Suture Company, Netherlands ................................ Connecticut
Auto Suture Company, U K ........................................ Connecticut
Auto Suture Deutschland GmbH .................................... Germany
Auto Suture Eastern Europe, Inc ................................. Delaware
Auto Suture Espana, S A ......................................... Spain
Auto Suture Europe Holdings, Inc ................................ Connecticut
Auto Suture Europe, S A ......................................... France
Auto Suture France, S A ......................................... France
Auto Suture European Services Center, S A ....................... France
Auto Suture International, Inc .................................. Connecticut
Auto Suture Italia, S p A ....................................... Italy
Auto Suture Japan, Inc .......................................... Japan
Auto Suture Norden Co ........................................... Connecticut
Auto Suture Poland, Limited Liability Company ................... Poland
Auto Suture Puerto Rico, Inc .................................... Connecticut
Auto Suture Russia, Inc ......................................... Delaware
Auto Suture (Schweiz) AG ........................................ Switzerland
Auto Suture Surgical Instruments ................................ Russia
Surgical Dynamics, Inc .......................................... Delaware
Surgical Dynamics, Europe, S A .................................. France
Surgical Dynamics, Japan KK ..................................... Japan
USSC AG ......................................................... Switzerland
USSC (Deutschland) GmbH ......................................... Germany
USSC Financial Services, Inc .................................... Connecticut
USSC FSC Inc .................................................... Barbados
USSC Medical GmbH ............................................... Germany
USSC Puerto Rico, Inc ........................................... New York
</TABLE>
None of the registrant's subsidiaries does business under
any name other than its corporate name.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
United States Surgical Corporation
Financial Data Schedule
Article 5 of regulation S-X
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 106,700
<SECURITIES> 0
<RECEIVABLES> 299,300
<ALLOWANCES> 11,700
<INVENTORY> 190,600
<CURRENT-ASSETS> 691,600
<PP&E> 723,300
<DEPRECIATION> 275,600
<TOTAL-ASSETS> 1,514,800
<CURRENT-LIABILITIES> 295,200
<BONDS> 0
0
900
<COMMON> 7,100
<OTHER-SE> 1,045,800
<TOTAL-LIABILITY-AND-EQUITY> 1,514,800
<SALES> 1,112,700
<TOTAL-REVENUES> 1,112,700
<CGS> 460,600
<TOTAL-COSTS> 460,600
<OTHER-EXPENSES> 496,600
<LOSS-PROVISION> 4,800
<INTEREST-EXPENSE> 9,000
<INCOME-PRETAX> 141,700
<INCOME-TAX> 32,600
<INCOME-CONTINUING> 109,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,100
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.48
</TABLE>
