<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO____________
COMMISSION FILE NO. 1-9776
UNITED STATES SURGICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2518270
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 GLOVER AVENUE, NORWALK, CONNECTICUT 06856
(Address of principal executive offices) (Zip Code)
(203) 845-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Number of shares of Common Stock,
par value $.10 per share,
outstanding at September 30, 1997 75,703,242 Shares
<PAGE> 2
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I--FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets at September 30, 1997 (Unaudited) and
December 31, 1996 ................................................................................... 3
Consolidated Statements of Operations (Unaudited) for the Nine Months and
Three Months Ended September 30, 1997 and 1996....................................................... 4
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the
Nine Months Ended September 30, 1997 and 1996 ....................................................... 5
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 1997 and 1996.................................................................... 6
Notes to Consolidated Financial Statements (Unaudited)............................................... 7 - 10
Review by Independent Accountants.................................................................... 11
Independent Accountants' Report and Letter........................................................... 12
Management's Discussion and Analysis of Interim Financial Condition and Results
of Operations........................................................................................ 13 - 16
PART II--OTHER INFORMATION
Legal Proceedings.................................................................................... 17 - 18
Changes in Securities................................................................................ 19
Exhibits and Reports on Form 8-K..................................................................... 19
Signature............................................................................................ 19
</TABLE>
-2-
<PAGE> 3
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
In thousands, except share data 1997 1996
- --------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 41,400 $ 106,700
Receivables, less allowance ($11,000 September 30, 1997 and
$11,700 December 31, 1996) ................................ 335,500 287,600
Inventories:
Finished goods ............................................. 130,200 128,300
Work in process ............................................ 27,600 32,300
Raw materials .............................................. 38,000 30,000
----------- -----------
195,800 190,600
Other current assets ......................................... 82,500 106,700
----------- -----------
Total Current Assets ..................................... 655,200 691,600
----------- -----------
Property, plant, and equipment at cost .......................... 710,900 723,300
Less: Allowance for depreciation and amortization .............. (287,200) (275,600)
----------- -----------
423,700 447,700
Other assets (net) .............................................. 615,700 375,500
----------- -----------
Total Assets ............................................. $ 1,694,600 $ 1,514,800
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 38,400 $ 29,400
Accrued liabilities .......................................... 188,500 177,300
Income taxes payable ......................................... 64,200 83,800
Current portion of long-term debt ............................ 4,900 4,700
----------- -----------
Total Current Liabilities ................................ 296,000 295,200
Long-term debt .................................................. 132,600 142,400
Deferred income taxes ........................................... 36,100 23,400
Stockholders' equity:
Preferred stock $5.00 par value, authorized 2,000,000 shares;
9.76% Series A cumulative convertible, redeemed on
April 1, 1997; 177,400 shares outstanding at
December 31, 1996 (liquidation value -
$200 million at December 31, 1996) ......................... 900
Additional paid-in capital - preferred stock ................. 190,600
Common stock $.10 par value, authorized 250,000,000 shares;
issued, 82,718,449 at September 30, 1997 and 71,367,780 at
December 31, 1996 .......................................... 8,300 7,100
Additional paid-in capital - common stock .................... 959,900 623,900
Retained earnings ............................................ 384,000 318,000
Treasury stock at cost; 7,015,207 shares at September 30, 1997
and 8,080,983 shares at December 31, 1996 .................. (96,800) (86,400)
Accumulated translation adjustments .......................... (31,800) (3,100)
Unrealized gain on marketable securities ..................... 6,300 2,800
----------- -----------
Total Stockholders' Equity ............................... 1,229,900 1,053,800
----------- -----------
Total Liabilities and Stockholders' Equity ............... $ 1,694,600 $ 1,514,800
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE> 4
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ------------------------
In thousands, except per share data 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ................................. $869,600 $829,600 $295,000 $280,000
-------- -------- -------- --------
Costs and expenses:
Cost of products sold .................. 352,600 345,100 122,200 116,100
Research and development ............... 51,900 40,100 17,900 15,800
Selling, general and administrative .... 334,500 335,700 110,800 109,000
Interest (net) ......................... 300 8,300 300 1,100
Special items:
Litigation and related costs ......... 24,300 -- -- --
Restructuring charges ................ 5,800 -- -- --
-------- -------- -------- --------
769,400 729,200 251,200 242,000
-------- -------- -------- --------
Income before income taxes ................ 100,200 100,400 43,800 38,000
Income taxes .............................. 21,100 23,100 12,300 8,800
-------- -------- -------- --------
Net income ................................ 79,100 77,300 31,500 29,200
Preferred stock dividends ................. 4,700 14,600 -- 4,900
-------- -------- -------- --------
Net income applicable to common shares .... $ 74,400 $ 62,700 $ 31,500 $ 24,300
======== ======== ======== ========
Average number of common shares outstanding 70,800 59,600 74,000 62,500
======== ======== ======== ========
Net income per common share
(primary and fully diluted) ............ $ 1.05 $ 1.05 $ .43 $ .39
======== ======== ======== ========
Dividends declared per common share ....... $ .12 $ .06 $ .04 $ .02
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 5
Form 10-Q
September 30, 1997
United States Surgical Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the nine months ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Additional Additional
Paid-in Paid-in
Preferred Capital - Common Capital - Retained
In thousands, except share data Stock Preferred Stock Common Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996........................ $900 $190,600 $6,500 $394,200 $233,200
Issuance of common stock in public
offering-net (4,300,000 shares)............... 500 141,300
Common stock issued to employees
from stock plans-net (1,275,457 shares)....... 100 27,900
Income tax benefit from stock options
exercised..................................... 27,900
Aggregate adjustment resulting from the
translation of foreign financial statements...
Preferred stock dividends....................... (14,600)
Common stock dividends declared
($.06 per share).............................. (3,600)
Unrealized gain on marketable securities........
Net income...................................... 77,300
---- -------- ------ -------- --------
BALANCE AT SEPTEMBER 30, 1996................... $900 $190,600 $7,100 $591,300 $292,300
==== ======== ====== ======== ========
BALANCE AT JANUARY 1, 1997........................ $900 $190,600 $7,100 $623,900 $318,000
Conversion of Series A convertible preferred
stock (8,450,491 common shares)............... (900) (190,600) 700 181,600
Common stock issued for acquisitions
(2,452,726 shares)............................ 300 92,500
Common stock issued for litigation
settlement (105,000 shares)................... 7,000
Common stock issued to employees
from stock plans-net (1,850,871 shares)....... 200 45,000
Income tax benefit from stock options
exercised..................................... 9,900
Aggregate adjustment resulting from the
translation of foreign financial statements...
Preferred stock dividends....................... (4,700)
Common stock dividends declared
($.12 per share).............................. (8,400)
Unrealized gain on marketable securities........
Net income...................................... 79,100
---- -------- ------ -------- --------
BALANCE AT SEPTEMBER 30, 1997................... $ 0 $ 0 $8,300 $959,900 $384,000
==== ======== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Accumulated Gain On
Treasury Translation Marketable
In thousands, except share data Stock Adjustments Securities Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996........................ $(86,600) $2,300 $ 741,100
Issuance of common stock in public
offering-net (4,300,000 shares)............... 141,800
Common stock issued to employees
from stock plans-net (1,275,457 shares)....... 200 28,200
Income tax benefit from stock options
exercised..................................... 27,900
Aggregate adjustment resulting from the
translation of foreign financial statements... (400) (400)
Preferred stock dividends....................... (14,600)
Common stock dividends declared
($.06 per share).............................. (3,600)
Unrealized gain on marketable securities........ $6,500 6,500
Net income...................................... 77,300
-------- ------- ------ ----------
BALANCE AT SEPTEMBER 30, 1996................... $(86,400) $ 1,900 $6,500 $1,004,200
======== ======= ====== ==========
BALANCE AT JANUARY 1, 1997........................ $(86,400) $(3,100) $2,800 $1,053,800
Conversion of Series A convertible preferred
stock (8,450,491 common shares)............... 9,200 0
Common stock issued for acquisitions
(2,452,726 shares)............................ 92,800
Common stock issued for litigation
settlement (105,000 shares)................... 7,000
Common stock issued to employees
from stock plans-net (1,850,871 shares)....... (19,600) 25,600
Income tax benefit from stock options
exercised..................................... 9,900
Aggregate adjustment resulting from the
translation of foreign financial statements... (28,700) (28,700)
Preferred stock dividends....................... (4,700)
Common stock dividends declared
($.12 per share).............................. (8,400)
Unrealized gain on marketable securities........ 3,500 3,500
Net income...................................... 79,100
-------- ------- ------ ----------
BALANCE AT SEPTEMBER 30, 1997................... $(96,800) $(31,800) $6,300 $1,229,900
======== ======= ====== ==========
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE> 6
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
In thousands 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers .......................................... $ 802,000 $ 786,400
Cash paid to vendors, suppliers and employees ......................... (694,100) (659,200)
Interest paid (net) ................................................... (400) (9,000)
Income taxes paid ..................................................... (21,600) (11,900)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 85,900 106,300
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment ........................... (41,100) (32,300)
Acquisitions .......................................................... (70,400) (14,400)
Other assets .......................................................... (56,000) (32,900)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ............................... (167,500) (79,600)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings ............................................. 93,200 1,088,200
Long-term debt repayments ............................................. (86,500) (1,188,300)
Issuance of common stock in public offering (net) ..................... 141,800
Acquisition of common stock for treasury .............................. (4,100)
Common stock issued from stock plans .................................. 29,000 28,200
Dividends paid ........................................................ (13,100) (18,200)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................... 18,500 51,700
----------- -----------
Effect of exchange rate changes .......................................... (2,200) (300)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ................................................... (65,300) 78,100
Cash and cash equivalents, beginning of period ........................ 106,700 10,500
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $ 41,400 $ 88,600
=========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
NET INCOME ............................................................... $ 79,100 $ 77,300
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ........................................................ 46,700 48,900
Amortization ........................................................ 18,900 15,800
Adjustment of property, plant, and equipment reserves ............... 1,700 14,600
Receivables -- (increase) ........................................... (67,900) (38,200)
Inventories -- (increase) ........................................... (16,900) (31,600)
Adjustment of inventory reserves .................................... 10,400 8,700
Other current assets -- decrease/(increase) ......................... 5,900 (34,300)
Accounts payable/accrued liabilities --
increase .......................................................... 6,800 9,500
Income taxes payable and deferred --
(decrease)/increase ............................................... (8,700) 7,700
Income tax benefit from stock options exercised ..................... 9,900 27,900
----------- -----------
Total adjustments ................................................. 6,800 29,000
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................ $ 85,900 $ 106,300
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-6-
<PAGE> 7
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements for the
nine-month and three-month periods ended September 30, 1997 and 1996 have
been prepared in accordance with the instructions to Form 10-Q. All
adjustments which, in the opinion of management, are necessary for a fair
presentation of the consolidated financial statements for the nine-month
and three-month periods ended September 30, 1997 and 1996 have been
reflected. All such adjustments are of a normal recurring nature. It is
suggested that the September 30, 1997 consolidated financial statements
be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
2. INCOME TAXES
The Company is currently in the process of having its federal tax returns
for the years 1991 through 1993 surveyed by the IRS. Incident to such IRS
examination, during the second quarter of 1997 the IRS documented its
intention to accept the Company's tax filing positions with respect to
the years 1991 through 1993 on a basis such that certain previously
established tax reserves are no longer required. As a result, in the
second quarter of 1997 the Company reduced its current liability by $7
million, recognizing a credit to the tax provision of $7 million ($.10
per common share). The effective tax rate in 1997, excluding the effect
of the aforementioned $7 million credit, is 28%, compared to an effective
tax rate of 23% for 1996. The effective tax rate for 1997 reflects the
expectation that for 1997 the Company will recognize tax benefits arising
from the utilization of certain foreign net operating loss carryforwards
and tax credits, the availability of U.S. tax benefits arising from the
utilization of the Company's foreign sales corporation, and the continued
beneficial impact of the wage-based tax credit under Section 936 of the
Internal Revenue Code related to operations in Puerto Rico.
3. REDEMPTION OF PREFERRED STOCK
During the first quarter of 1997, the Company called for redemption on
April 1, 1997 all the issued and outstanding shares of its Series A
Convertible Preferred Stock in accordance with the original terms of the
offering memorandum. The redemption of the convertible preferred stock
has eliminated the preferred dividend payment subsequent to April 1, 1997
and had a positive effect on the Company's cash position. Common shares
outstanding as a result of the called redemption have increased by
approximately 8.5 million shares. Assuming the Company had the ability to
convert and converted the preferred stock on January 1, 1997, net income
for the nine months ended September 30, 1997 would have been $1.08 per
common share.
4. TENDER OFFER
The Company commenced a new cash tender offer for all of the outstanding
Circon Corporation (Circon) common stock on August 5, 1997 for $16.50 per
share until September 25, 1997. The new offer was extended until October
23, 1997. The Company previously purchased 1,973,274 shares of Circon
common stock as a result of a previous tender offer. This represents
14.9% of Circon's outstanding common stock, the maximum amount of shares
the Company can purchase without triggering Circon's "poison pill". The
Circon common stock, along with other marketable securities, have a fair
value of approximately $43 million and a cost of approximately $34
million at September 30, 1997.
-7-
<PAGE> 8
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Cont'd.)
5. ADOPTION OF FAS 128
The Company will adopt the Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (FAS 128) in the fourth quarter of 1997, as
required. The Company will continue to apply APB Opinion No. 15,
"Earnings Per Share" until the adoption of FAS 128. The new standard
specifies the computation, presentation and disclosure requirements for
earnings per share. The pro forma earnings per common share computed
under the provisions of FAS 128 for the quarter ended September 30, 1997
are $.43 basic earnings per common share and $.41 diluted earnings per
common share as compared to $.39 basic earnings per share and $.37
diluted earnings per share for the quarter ended September 30, 1996. The
pro forma earnings per common share computed under the provisions of FAS
128 for the nine months ended September 30, 1997 are $1.05 basic earnings
per common share and $1.02 diluted earnings per common share, as compared
to $1.05 basic earnings per common share and $1.02 diluted earnings per
common share for the nine months ended September 30, 1996.
6. LITIGATION
The Company established a reserve and expensed approximately $24 million
($.24 per common share) for damages and other related costs during the
second quarter 1997 relative to an award by the United States District
Court for the Eastern District of Virginia in the action by Applied
Medical Resources Corporation against the Company alleging infringement
of patents related to trocar seal systems. The accrued reserve for
damages of $20.5 million is expected to be liquidated from the Company's
operating cash flows and cash on hand.
7. RESTRUCTURING
The Company recorded restructuring charges of approximately $6 million
($.06 per common share) during the second quarter of 1997. These
restructuring charges related primarily to employee severance costs
associated with the Company's consolidation of manufacturing and certain
marketing operations. The majority of the cash outlays relative to these
restructuring charges were made in the second quarter of 1997 with the
remainder to be made by the end of 1997.
The Company had an additional restructuring of operations in early
October 1997, which resulted in staff reductions of approximately 150
employees and facility disposals as part of the Company's ongoing cost
cutting initiatives. The costs associated with these terminations and
facility disposals is approximately $11 million and will be recorded as a
charge in the results of operations for the three months ended December
31, 1997. Additional terminations during the fourth quarter of 1997 may
be necessary in order to attain the Company's cost cutting objectives.
The majority of cash outlays relative to this restructuring will take
place over the next six months and the residual payments will extend
through the next twelve months.
8. ACQUISITIONS
The Company exercised its option during the third quarter of 1997 to
acquire Progressive Angioplasty Systems, Inc (PAS) in a purchase
transaction utilizing the Company's common stock. The cost of the
acquisition, inclusive of a payment for attainment of certain milestones,
was $78 million (approximately 2.1 million shares of common stock).
Additionally, the Company will potentially pay up to $72 million in
additional purchase price consideration, also in common stock, if and
when certain additional milestones and sales objectives are achieved. In
addition, the Company assumed pre-acquisition liabilities as part of this
acquisition. The Company has recorded intangible assets for patents, with
an amortization period of 10 years, and goodwill, with an amortization
period of 25 years, as a result of the acquisition. The Company has
included in its results of operations, the operating results of PAS
subsequent to September 22, 1997, which is the date of acquisition.
-8-
<PAGE> 9
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Cont'd.)
The Company acquired NeoVision Corporation during the third quarter of
1997 in a purchase transaction for approximately $43 million in cash.
The Company has recorded intangible assets for patents, with an
amortization period of 10 years, and goodwill, with an amortization
period of 25 years, as a result of the acquisition. The Company has
included in its results of operations, the operating results of NeoVision
subsequent to September 8, 1997, which is the date of acquisition.
The Company purchased certain assets of DRS Medical Systems during the
third quarter of 1997 for approximately $2 million in cash. The Company
has included in its results of operations the results from this asset
purchase subsequent to September 12,1997, which is the date of the
transaction.
The purchase price allocations for the above mentioned acquisitions are
preliminary and may be adjusted as additional information is obtained.
The Company purchased Smith & Nephew, Inc.'s spinal-product business
during the third quarter of 1997 for approximately $17 million in cash.
The Company has recorded intangible assets for patents ($3 million), with
an amortization period of 10 years, and goodwill ($13 million), with an
amortization period of 30 years, as a result of the purchase. The Company
has included in its results of operations the results from this asset
purchase subsequent to September 12, 1997, which is the date of the
transaction.
The unaudited consolidated results of operations on a pro-forma basis for
the above transactions, assuming they had collectively occurred at the
beginning of 1997, and 1996 are as follows (in thousands, except per
share amounts).
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---------- ----------
<S> <C> <C>
Net Income applicable to common shares $ 61,400 $ 53,200
Net Income per common share
(primary and fully diluted) $ .84 $ .86
</TABLE>
9. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June of 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", which requires a statement of comprehensive income
to be included in the financial statements for fiscal years beginning
after December 15,1997. The Company is presently designing such statement
and, accordingly, will include such statement beginning with the first
quarter of 1998.
In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information". SFAS 131
requires disclosures of certain information about operating segments and
about products and services, the geographic areas in which a company
operates, and their major customers. The Company is presently in the
process of evaluating the effect this new standard will have on
disclosures in the Company's financial statements and the required
information will be reflected in the year ended December 31, 1998
financial statements.
-9-
<PAGE> 10
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
10. RELATED PARTY TRANSACTIONS
The Company acquired from Seragen, Inc. (Seragen) a license to the
worldwide rights to Seragen's fusion protein technology for restenosis in
cardiovascular applications and a right of first refusal for intravenous
infusion pump technology for use in connection with a second fusion
protein. On signing, the Company received a warrant for the purchase of
500,000 shares of Seragen common stock at a purchase price of $.5625 per
share. The Company paid Seragen $5.0 million for such license and may be
committed to make additional payments to Seragen of $22.5 million upon
the completion of certain milestones. In addition, the Company may choose
to conduct, at its expense, various clinical studies and fund all
pre-clinical studies, clinical trials and regulatory filings related to
the licensed technology. If the Company does not proceed with the
development of the restenosis technology, all rights to the restenosis
technology will revert to Seragen and the Company will receive $5.0
million of the common stock of Seragen, valued at the lower of market
prices at date of license acquisition or date of reversion of the
technology to Seragen.
Seragen is a publicly traded company whose shares have been delisted from
the Nasdaq on September 9,1997 due to insufficient current levels of
tangible assets. The shares now trade on the OTC Bulletin Board under the
symbol SRGN. As of September 30, 1997, Leon C. Hirsch, Chairman and Chief
Executive Officer of the Company and Turi Josefsen, Executive Vice
President and President, International Operations, also of the Company,
on a combined basis held approximately 27% of the voting stock of
Seragen. Boston University, whose Chancellor, John R. Silber, is
a member of the Board of Directors of the Company, and is also a director
of Seragen, held approximately 48% of the voting stock of Seragen at
September 30, 1997.
-10-
<PAGE> 11
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
REVIEW BY INDEPENDENT ACCOUNTANTS
The September 30, 1997 and 1996 consolidated financial statements included in
this Quarterly Report on Form 10-Q have been reviewed by Deloitte & Touche LLP,
in accordance with established professional standards and procedures for such a
review. In addition, the December 31, 1996 consolidated balance sheet was
audited by Deloitte & Touche LLP, in accordance with generally accepted auditing
standards.
-11-
<PAGE> 12
Form 10-Q
September 30, 1997
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
UNITED STATES SURGICAL CORPORATION
We have reviewed the accompanying consolidated balance sheet of United States
Surgical Corporation and subsidiaries as of September 30, 1997, and the related
consolidated statements of operations for the nine month and three month periods
ended September 30, 1997 and 1996 and the consolidated statements of changes in
stockholders' equity and cash flows for the nine-month periods ended September
30, 1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion. Based on our review, we
are not aware of any material modifications that should be made to such
consolidated financial statements for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United States Surgical Corporation
and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated January 21,
1997 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1996 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
STAMFORD, CONNECTICUT
OCTOBER 17, 1997
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
INDEPENDENT ACCOUNTANTS' LETTER
United States Surgical Corporation
150 Glover Avenue
Norwalk, CT 06856
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim consolidated
financial information of United States Surgical Corporation and subsidiaries for
the periods ended September 30, 1997 and 1996, as indicated in our report dated
October 17, 1997; because we did not perform an audit, we expressed no opinion
on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 is
incorporated by reference in Registration Statement Nos. 33-59729, 333-23677,
333-27591 and 333-34075 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
STAMFORD, CONNECTICUT
OCTOBER 17, 1997
-12-
<PAGE> 13
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In the third quarter of 1997, the Company attained sales of $295 million
compared with sales of $280 million in the third quarter of 1996. In the first
nine months of 1997, the Company achieved sales of $870 million compared with
sales of $830 million in the first nine months of 1996. Sales increased 5% in
the third quarter and the first nine months of 1997 in comparison to the
corresponding periods in 1996.
In the third quarter of 1997, the Company reported net income of $32 million and
$.43 per common share as compared with net income of $29 million and $.39 per
common share (after preferred dividends of $5 million) in the third quarter of
1996. The effect of changes in foreign currency exchange rates from those
existing in 1996 on results of operations had the effect of decreasing net
income by $7 million in the third quarter of 1997 in comparison to the
corresponding period in 1996.
In the first nine months of 1997, the Company reported net income, as adjusted,
for the effect of litigation costs ($24 million or $.25 per common share),
restructuring charges ($6 million or $.06 per common share) and benefits
resulting from an IRS examination ($7 million or $.10 per common share) of $93.8
million and $1.26 per common share (after preferred dividends of $5 million) as
compared with net income of $77 million and $1.05 per common share (after
preferred dividends of $15 million) in the first nine months of 1996. The effect
of changes in foreign currency exchange rates from those existing in 1996 on
results of operations was to decrease net income by $17 million in the first
nine months of 1997 in comparison to the corresponding period in 1996.
The following table analyzes the increase in sales in the third quarter and
first nine months of 1997 compared with the corresponding periods in 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
In thousands September 30, 1997 September 30, 1997
- ------------ ------------------ ------------------
<S> <C> <C>
Composition of Sales Increase:
Sales volume increases $ 38,200 $ 104,700
Net price changes (9,900) (29,300)
Effects of changes in foreign
currency exchange rates (13,300) (35,400)
--------- ---------
Sales Increase $ 15,000 $ 40,000
========= =========
</TABLE>
Changes in the health care industry continue to significantly affect the
Company's marketplace. Industry consolidations, intense competition, and pricing
pressures due to ongoing reform of the health care system continue in 1997.
In addition, changes in the sales mix of the Company's products will have a
direct effect on the Company's future gross profit margins. International sales
were adversely affected by $3 million and $16 million in the three months and
nine months ended September 30, 1997, respectively, due to an industry price
reduction mandated by the French government.
-13-
<PAGE> 14
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cost of products sold expressed as a percentage of sales was 41% in the third
quarter and first nine months of 1997 compared to 41% and 42%, respectively, in
the corresponding periods in 1996. The reduction, as a percentage of sales, in
cost of products sold and improved gross margins over the comparable year to
date period in 1996 is primarily attributable to higher sales volumes and
ongoing cost savings initiatives. Gross margin from operations (sales less cost
of products sold divided by sales) was 59% in the third quarter and first nine
months of 1997 in comparison to 59% and 58%, respectively, for the corresponding
periods in 1996. Changes in foreign currency exchange rates from those existing
in the comparable 1996 periods decreased cost of products sold by $1 million in
the third quarter and $4 million in the first nine months of 1997.
The Company's expenditures for research and development increased to $18 million
in the third quarter and $52 million in the first nine months of 1997 from $16
million and $40 million, respectively, in the corresponding periods in 1996. The
Company is continuing its commitment to develop and acquire unique new products
and technologies for use in new surgical procedures and specialty areas, and
accordingly, is incurring significant clinical and development related costs.
Selling, general and administrative expenses expressed as a percentage of sales
decreased to 38% in the third quarter and first nine months of 1997, compared
with 39% in the third quarter and 40% in the first nine months of 1996. Changes
in foreign currency exchange rates from those existing in 1996 had the effect of
decreasing selling, general, and administrative expenses by $5 million and $14
million in the third quarter and first nine months of 1997, respectively.
The Company recorded restructuring charges of approximately $6 million during
the second quarter of 1997. These restructuring charges related primarily to
employee severance costs associated with the Company's consolidation of
manufacturing and certain marketing operations. The Company had an additional
restructuring of operations in early October 1997, which resulted in staff
reductions of approximately 150 employees and facility disposals as part of the
Company's ongoing cost cutting initiatives. The costs associated with these
terminations and facility disposals is approximately $11 million and will be
recorded as a charge in the results of operations for the three months ended
December 31, 1997. Additional terminations during the fourth quarter of 1997 may
be necessary in order to attain the Company's cost cutting objectives. The
majority of cash outlays relative to this restructuring will take place over the
next six months and the residual payments will extend through the next twelve
months.
The decrease in net interest in the first nine months of 1997, compared to the
comparable 1996 period, is attributable to the reduction of bank borrowings with
the proceeds from the Company's public common stock offering in June 1996 and
the interest income generated by the Company's substantial cash and cash
equivalents which are invested in high quality short-term liquid money market
instruments.
The Company will adopt the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128) in the fourth quarter of 1997, as required. The
Company will continue to apply APB Opinion No. 15, "Earnings Per Share" until
the adoption of FAS 128. The new standard specifies the computation,
presentation and disclosure requirements for earnings per share. The pro forma
earnings per common share computed under the provisions of FAS 128 for the
quarter ended September 30, 1997 are $.43 basic earnings per common share and
$.41 diluted earnings per common share as compared to $.39 basic earnings per
share and $.37 diluted earnings per share for the quarter ended September 30,
1996. The pro forma earnings per common share computed under the provisions of
FAS 128 for the nine months ended September 30, 1997 are $1.05 basic earnings
per common share and $1.02 diluted earnings per common share, as compared to
$1.05 basic earnings per common share and $1.02 diluted earnings per common
share for the nine months ended September 30, 1996.
-14-
<PAGE> 15
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company is presently implementing changes required for its information
systems relative to the new millenium "year 2000". The Company does not
anticipate that the required changes will have a material effect on the
Company's financial position and results of operations.
FINANCIAL CONDITION
The Company's current cash and cash equivalent balances, existing borrowing
capacity and projected operating cash flows are currently in excess of its
foreseeable operating cash flow requirements. The redemption of the Company's
Series A Convertible Preferred Stock into common stock on April 1, 1997 improved
the Company's liquidity by approximately $18 million on an annual basis through
the replacement of the preferred stock dividend by the common stock dividend on
the newly issued shares. The Company's existing borrowing capacity consists of a
$325 million syndicated credit facility and a conditional committed term loan
facility of $175 million with similar terms to the present syndicated facility.
The Company's uncommitted facilities have been increased slightly since December
31, 1996, and presently consist of 6 billion Japanese Yen and $145 million.
Borrowings have been categorized as long-term debt as such borrowings can be
refinanced under the Company's five-year syndicated bank credit agreement.
Outstanding bank borrowings increased since December 31, 1996 by $9 million to
approximately $31 million at September 30, 1997. The increase in bank borrowings
during the first nine months of 1997 is primarily attributable to the Company's
ability to borrow under its Yen denominated committed and uncommitted credit
facilities at interest rates of approximately 1% for enhanced working capital
management. The credit agreements and the Company's operating lease for its
primary domestic manufacturing, distribution and warehousing complex in North
Haven, Connecticut, provide for certain restrictions on 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 generally limited
to declaring dividends on its common stock up to 20% of net income, subject to
changes in the number of common shares outstanding, until it meets certain
financial objectives, as defined. The Company is in full compliance with all of
the covenants associated with its various financing agreements.
The increase in accounts receivable ($48 million) since December 31, 1996
is due principally to continued ABBI machine sales, significant growth in SDI
and suture sales, and in some competitive situations extended terms.
The decrease in other current assets ($24 million) since December 31, 1996
reflects the release from escrow to available cash of $15 million related to
the settlement of the class action suits against the Company.
Additions to property, plant, and equipment totaled $41 million in the first
nine months of 1997 compared with $32 million in the corresponding period in
1996, and consist primarily of additions to machinery and equipment ($29
million), molds and dies ($9 million), and leasehold improvements ($3 million).
The increase of $240 million in other assets since December 31, 1996 is
primarily attributable to the intangible assets acquired (see Note 8,
Acquisitions, in Notes to Consolidated Financial Statements) in the transactions
completed during the third quarter of 1997, as well as an increase in prepaid
rent relative to the North Haven facilities lease.
-15-
<PAGE> 16
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 routinely 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 September 30, 1997 the Company's foreign currency exchange contracts
have all matured and the outstanding foreign currency option contracts
will mature throughout the fourth quarter of 1997. Realized and
unrealized foreign currency gains and losses are recognized when incurred
and are included as a component of selling, general and administrative
expenses in the consolidated statements of operations and cash paid to
vendors, suppliers and employees in the consolidated statements of cash
flows. Realized and unrealized foreign currency gains and losses were
immaterial during the third quarter and first nine months of 1997.
In addition, the Company routinely enters into interest rate swap
agreements to reduce its exposure to interest rate fluctuations. The net
gain or loss from the exchange of interest rate payments, is included in
interest (net) in the consolidated statements of operations and interest
paid (net) in the consolidated statements of cash flows. As a result of
the Company's interest rate hedging program, fluctuations in interest
rates have had an immaterial effect on the Company during the third
quarter and first nine months of 1997.
-16-
<PAGE> 17
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A. In the pending action by Ethicon, Inc. ("Ethicon") 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 (see
Item 3 of Part I of the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, and Item 1 of Part II of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997), Ethicon has filed an appeal of
the Court's dismissal of Ethicon's claim based on the Court's previous decision
correcting the inventorship of the patent in favor of the Company's licensor.
Ethicon's appeal was argued in August, 1997. The parties are awaiting a decision
on the appeal. In the opinion of management, based upon the advice of counsel,
the Company has valid claims against Ethicon.
B. In the pending action by the Company in the United States District
Court for the District of Connecticut against Johnson & Johnson subsidiaries
Johnson & Johnson Hospital Supplies, Inc. and Ethicon alleging infringement of
United States patents issued to the Company covering the Company's endoscopic
multiple clip applier, the Company's motion for rehearing of the United States
Court of Appeals for the Federal Circuit decision was denied thereby affirming
the verdict against the Company. The Company filed a petition with the U.S.
Supreme Court for review of the Court of Appeals decision. The Company believes
it has meritorious claims against the defendants in the case.
C. In the action by Applied Medical Resources Corporation 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 (see Item 3 of Part I of the Company's Annual Report on Form 10-K for
the year ended December 31 1996, and Item 1 of Part II of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997), judgment on
the verdict, including the damages, has been entered by the Court for $20.5
million. The Company has recorded such judgment as a charge in its statement of
operations for the three months ended June 30, 1997. The Company has filed an
appeal of the verdict.
D. In the pending action by Ethicon Endo-Surgery 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 (See Item 3 of Part I of the
Company's Annual Report on Form 10-K for the year ended December 31, 1996), on
June 30, 1997 the District Court entered summary judgment in favor of the
Company dismissing Ethicon Endo-Surgery's sole remaining claim. Ethicon
Endo-Surgery has filed an appeal of the summary judgment.
E. In the pending action by Surgical Dynamics, Inc. ("Surgical
Dynamics") against Sofamor Danek Group, Inc. ("Sofamor Danek") and Karlin, Inc.
("Karlin") in the United States District Court for the Central District of
California, in which Surgical Dynamics sought declaratory judgment that its
spine fusion cage product, the Ray TFC device, did not infringe a patent owned
by Karlin and licensed to Sofamor Danek (see Item 3 of Part I of the Company's
Annual Report on Form 10-K for the year ended December 31, 1996), on June 5,
1997 the Court granted Surgical Dynamics' motion for summary judgment of
noninfringement and dismissed the defendants' counterclaims for patent
infringement. Sofamor Danek and Karlin filed an appeal of the summary judgment.
-17-
<PAGE> 18
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION (CONT.)
F. In September, 1996, the Company filed a complaint in the Chancery
Court in the State of Delaware against Circon Corporation ("Circon") 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. The Company filed an amended
and supplemental complaint in September, 1997 to add an additional request for
an order enjoining the Circon board of directors from reinstating Mr. Richard
Auhll, a current Circon board member and chief executive officer of Circon, in
the event he is defeated at the annual meeting of shareholders of Circon on
October 6, 1997, to declare void the purported appointment of two other Circon
directors during 1997 and to enjoin the Circon board of directors from expanding
the number of directors while the Company's tender offer is in existence. On
September 17, 1997, the Court denied the Company's motion for an order for
expedited discovery and scheduling of a preliminary injunction hearing.
Discovery is continuing and no trial date has been set. In August, 1997, the
Company filed an action in the Chancery Court in the State of Delaware against
Circon requesting an order compelling Circon to hold an annual meeting of Circon
shareholders. The Court entered a consent order ordering Circon to hold an
annual meeting of shareholders on October 6, 1997. In August, 1997, the Company
also filed a complaint in Chancery Court in the State of Delaware against Circon
to inspect and copy certain information about Circon shareholders in connection
with such annual meeting of shareholders. The Court entered a consent order
ordering Circon to promptly provide the Company with certain information about
Circon shareholders.
G. On October 21, 1997, Imagyn Medical Technologies California, Inc.
("Imagyn") filed an action in the United States District Court for the Eastern
District of Virginia, alleging infringement of two patents by the Company's
ABBI breast biopsy product. In the opinion of management, based upon the advice
of counsel, the Company has meritorious defenses against the claims by Imagyn.
H. The Company is engaged in other litigation, primarily as
the defendant, in cases involving product liability claims.
* * * * * *
The Company believes it is adequately insured in all material respects
against the product liability claims referred to above. In the opinion of
management, based on the advice of counsel, the ultimate outcome of all of the
aforementioned pending lawsuits should not have a materially adverse effect on
the Company's consolidated financial statements.
-18-
<PAGE> 19
Form 10-Q
September 30, 1997
UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES
PART. II. OTHER INFORMATION (CONT.)
Item 2. Changes in Securities
On September 22, 1997, the Company issued 2,074,804 shares (fair value
approximately $74 million) of its $.10 par value Common Stock in the acquisition
by means of a share exchange of the outstanding common stock, of Progressive
Angioplasty Systems, Inc., a privately held company.
Item 6. Exhibits and Reports on Form 8-K
c. Exhibits
Exhibit 27 - Financial Data Schedule.
d. Reports on Form 8-K - There were no reports filed on Form
8-K for the quarter ended September 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATES SURGICAL CORPORATION
Registrant
By: ____________________________________________
Richard A. Douville
(Senior Vice President and
Chief Financial Officer)
Dated: October 21, 1997
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 41,400
<SECURITIES> 0
<RECEIVABLES> 346,500
<ALLOWANCES> 11,000
<INVENTORY> 195,800
<CURRENT-ASSETS> 655,200
<PP&E> 710,900
<DEPRECIATION> 287,200
<TOTAL-ASSETS> 1,694,600
<CURRENT-LIABILITIES> 296,000
<BONDS> 0
8,300
0
<COMMON> 0
<OTHER-SE> 1,221,600
<TOTAL-LIABILITY-AND-EQUITY> 1,694,600
<SALES> 869,600
<TOTAL-REVENUES> 869,600
<CGS> 352,600
<TOTAL-COSTS> 352,600
<OTHER-EXPENSES> 416,200
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 300
<INCOME-PRETAX> 100,200
<INCOME-TAX> 21,100
<INCOME-CONTINUING> 79,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,100
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
