-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WEG/URZLzqa7FJ4mscLd6CBoJfqdT9HfMqurdlRSNFERSJ5T/wTT8oyYTCKyZHmG H2prVGNbKZDJgzIBxe1vDA== 0000950123-97-006167.txt : 19970725 0000950123-97-006167.hdr.sgml : 19970725 ACCESSION NUMBER: 0000950123-97-006167 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970724 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED STATES SURGICAL CORP CENTRAL INDEX KEY: 0000101788 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 132518270 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09776 FILM NUMBER: 97644863 BUSINESS ADDRESS: STREET 1: 150 GLOVER AVE CITY: NORWALK STATE: CT ZIP: 06856 BUSINESS PHONE: 2038451000 MAIL ADDRESS: STREET 1: 150 GLOVER AVENUE CITY: NORWALK STATE: CT ZIP: 06856 FORMER COMPANY: FORMER CONFORMED NAME: AUTO SUTURE SURGICAL CORP DATE OF NAME CHANGE: 19700507 10-Q 1 FORM 10-Q 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 JUNE 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 June 30, 1997 73,357,712 Shares 2 Form 10-Q June 30, 1997 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES INDEX
PART I--FINANCIAL INFORMATION Page ---- Financial Statements: Consolidated Balance Sheets at June 30, 1997 (Unaudited) and December 31, 1996 ........................................................................................ 3 Consolidated Statements of Operations (Unaudited) for the Six Months and Three Months Ended June 30, 1997 and 1996................................................................. 4 Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Six Months Ended June 30, 1997 and 1996 .................................................................. 5 Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1997 and 1996.............................................................................. 6 Notes to Consolidated Financial Statements (Unaudited).................................................... 7 Review by Independent Accountants......................................................................... 9 Independent Accountants' Report and Letter................................................................ 10 Management's Discussion and Analysis of Interim Financial Condition and Results of Operations............................................................................................. 11-14 PART II--OTHER INFORMATION Legal Proceedings......................................................................................... 15 Changes in Securities..................................................................................... 17 Submission of Matters to a Vote of Security Holders....................................................... 17 Exhibits and Reports on Form 8-K.......................................................................... 17 Signature................................................................................................. 17
-2- 3 Form 10-Q June 30, 1997 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, In thousands, except share data 1997 1996 - ---------------------------------------------------------------------------------------------------------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents........................................... $ 130,400 $ 106,700 Receivables, less allowance ($10,700 June 30, 1997 and $11,700 December 31, 1996)....................................... 317,800 287,600 Inventories:........................................................ Finished goods.................................................... 126,000 128,300 Work in process................................................... 29,100 32,300 Raw materials..................................................... 35,700 30,000 ----------- ----------- 190,800 190,600 Other current assets................................................ 85,700 106,700 ----------- ---------- Total Current Assets............................................ 724,700 691,600 ---------- ---------- Property, plant, and equipment at cost................................. 711,000 723,300 Less: Allowance for depreciation and amortization..................... (282,200) (275,600) -------- ---------- 428,800 447,700 Other assets (net)..................................................... 419,600 375,500 ---------- ---------- Total Assets.................................................... $1,573,100 $1,514,800 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................... $ 39,900 $ 29,400 Accrued liabilities................................................. 181,900 177,300 Income taxes payable................................................ 65,900 83,800 Current portion of long-term debt................................... 5,000 4,700 ----------- ------------ Total Current Liabilities....................................... 292,700 295,200 Long-term debt......................................................... 143,900 142,400 Deferred income taxes.................................................. 19,300 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, 80,375,419 at June 30, 1997 and 71,367,780 at December 31, 1996................................................. 8,000 7,100 Additional paid-in capital - common stock........................... 870,400 623,900 Retained earnings................................................... 355,300 318,000 Treasury stock at cost; 7,017,707 shares at June 30, 1997 and 8,080,983 shares at December 31, 1996......................... (96,800) (86,400) Accumulated translation adjustments................................. (21,900) (3,100) Unrealized gain on marketable securities............................ 2,200 2,800 ----------- ------------ Total Stockholders' Equity...................................... 1,117,200 1,053,800 --------- --------- Total Liabilities and Stockholders' Equity...................... $1,573,100 $1,514,800 ========= =========
See Notes to Consolidated Financial Statements -3- 4 Form 10-Q June 30, 1997 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended Three Months Ended June 30, June 30, ---------------------- ---------------------- In thousands, except per share data 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Net sales............................................ $574,600 $549,600 $290,000 $283,600 -------- ------- -------- ------- Costs and expenses: Cost of products sold............................. 230,400 229,000 116,500 116,800 Research and development.......................... 34,000 24,300 17,400 11,900 Selling, general and administrative............... 223,700 226,700 111,000 116,400 Interest (net).................................... - 7,200 (100) 3,200 Special items: Litigation and related costs.................... 24,300 - 24,300 - Restructuring charges........................... 5,800 - 5,800 - ------- ------- ------- ------- 518,200 487,200 274,900 248,300 ------- ------- ------- ------- Income before income taxes........................... 56,400 62,400 15,100 35,300 Income taxes......................................... 8,800 14,300 (2,800) 8,100 -------- ------- -------- --------- Net income........................................... 47,600 48,100 17,900 27,200 Preferred stock dividends............................ 4,700 9,800 - 4,900 --------- --------- ----------- --------- Net income applicable to common shares............... $ 42,900 $ 38,300 $ 17,900 $ 22,300 ======== ======== ======== ======== Average number of common shares outstanding.......... 69,100 58,100 73,600 59,000 ======== ======== ======== ======== Net income per common share (primary and fully diluted)....................... $.62 $.66 $.24 $.38 === === === === Dividends declared per common share.................. $.08 $.04 $.04 $.02 === === === ===
See Notes to Consolidated Financial Statements -4- 5 United States Surgical Corporation and Subsidiaries Form 10-Q Consolidated Statements of Changes in Stockholders' Equity June 30, 1997 (Unaudited) For the six months ended June 30, 1997 and 1996
Additional Additional Paid-in Paid-in Preferred Capital - Common Capital - Retained Dollars In thousands, except share data Stock Preferred Stock Common Earnings - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1996........................ $900 $190,600 $6,500 $394,200 $233,200 Issuance of common stock net (4,300,000 shares)............................ 400 141,400 Common stock issued to employees - net (862,703 shares).......................... 100 18,500 Income tax benefit from stock options exercised..................................... 8,800 Aggregate adjustment resulting from the translation of foreign financial statements... Preferred stock dividends....................... (9,800) Common stock dividends declared ($.04 per share).............................. (2,300) Net income...................................... 48,100 ----- ----------- -------- ----------- -------- BALANCE AT JUNE 30, 1996........................ $900 $190,600 $7,000 $562,900 $269,200 === ======= ===== ======= ======= BALANCE AT JANUARY 1, 1997........................ $900 $190,600 $7,100 $623,900 $318,000 Conversion of Series A convertible preferred stock......................................... (900) (190,600) 700 181,600 Common stock issued for acquisitions (377,922 shares).............................. 14,200 Common stock issued to employees - net (1,685,145 shares)......................... 200 41,400 Income tax benefit from stock options exercised..................................... 9,300 Aggregate adjustment resulting from the translation of foreign financial statements... Preferred stock dividends....................... (4,700) Common stock dividends declared ($.08 per share).............................. (5,600) Unrealized loss on marketable securities........ Net income...................................... 47,600 ----- ----------- ----------- ----------- -------- BALANCE AT JUNE 30, 1997........................ $ 0 $ 0 $ 8,000 $870,400 $355,300 === ========== ======== ======= =======
Unrealized Accumulated Gain On Treasury Translation Marketable Dollars In thousands, except share data Stock Adjustments Securities Total - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1996........................ $(86,600) $2,300 $ 741,100 Issuance of common stock net (4,300,000 shares)............................ 141,800 Common stock issued to employees - net (862,703 shares).......................... 200 18,800 Income tax benefit from stock options exercised..................................... 8,800 Aggregate adjustment resulting from the translation of foreign financial statements... (4,000) (4,000) Preferred stock dividends....................... (9,800) Common stock dividends declared ($.04 per share).............................. (2,300) Net income...................................... 48,100 ---------- --------- -------- BALANCE AT JUNE 30, 1996........................ $(86,400) $(1,700) $942,500 ======= ====== ======= BALANCE AT JANUARY 1, 1997........................ $(86,400) $(3,100) $2,800 $1,053,800 Conversion of Series A convertible preferred stock......................................... 9,200 0 Common stock issued for acquisitions (377,922 shares).............................. 14,200 Common stock issued to employees - net (1,685,145 shares)......................... (19,600) 22,000 Income tax benefit from stock options exercised..................................... 9,300 Aggregate adjustment resulting from the translation of foreign financial statements... (18,800) (18,800) Preferred stock dividends....................... (4,700) Common stock dividends declared ($.08 per share).............................. (5,600) Unrealized loss on marketable securities........ (600) (600) Net income...................................... 47,600 ----------- ----------- ------- ---------- BALANCE AT JUNE 30, 1997........................ $(96,800) $(21,900) $2,200 $1,117,200 ============ =========== ======= ==========
See Notes to Consolidated Financial Statements -5- 6 Form 10-Q June 30, 1997 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, ------------------------------------- In thousands 1997 1996 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers........................................ $ 530,000 $ 512,500 Cash paid to vendors, suppliers and employees....................... (454,600) (445,800) Interest paid (net)................................................. (400) (8,200) Income taxes paid................................................... (10,900) (10,300) -------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................... 64,100 48,200 -------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant, and equipment......................... (26,800) (22,500) Advance - Progressive Angioplasty Systems........................... (15,000) Acquisitions........................................................ (1,700) Other assets........................................................ (20,100) (5,700) -------- ------------ NET CASH USED IN INVESTING ACTIVITIES............................. (61,900) (29,900) -------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term debt borrowings........................................... 66,700 1,083,600 Long-term debt repayments........................................... (55,500) (1,184,400) Issuance of common stock (net)...................................... 141,800 Acquisition of common stock for treasury............................ (4,100) Common stock issued from stock plans................................ 25,800 18,800 Dividends paid...................................................... (10,300) (12,100) -------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 22,600 47,700 -------- ----------- Effect of exchange rate changes........................................ (1,100) 600 -------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS................................................. 23,700 66,600 Cash and cash equivalents, beginning of period...................... 106,700 10,500 ------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $130,400 $ 77,100 ======= =========== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME............................................................. $ 47,600 $ 48,100 -------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation...................................................... 31,600 32,900 Amortization...................................................... 12,500 10,600 Adjustment of property, plant, and equipment reserves............. 1,800 10,900 Receivables -- (increase)......................................... (44,600) (33,900) Inventories -- (increase)......................................... (11,800) (24,300) Adjustment of inventory reserves.................................. 6,600 7,500 Other current assets -- decrease/(increase)....................... 4,800 (7,100) Accounts payable/accrued liabilities -- increase/(decrease)............................................. 15,900 (600) Income taxes payable and deferred -- (decrease)...................................................... (9,600) (4,700) Income tax benefit from stock options exercised................... 9,300 8,800 --------- ------------ Total adjustments............................................... 16,500 100 -------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. $ 64,100 $ 48,200 ======== ============
See Notes to Consolidated Financial Statements -6- 7 Form 10-Q June 30, 1997 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. GENERAL The accompanying unaudited consolidated financial statements for the six-month and three-month periods ended June 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 six-month and three-month periods ended June 30, 1997 and 1996 have been reflected. All such adjustments are of a normal recurring nature. It is suggested that the June 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 had 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 six months ended June 30, 1997 would have been $.65 per common share. 4. TENDER OFFER The Company's $17 per share tender offer for Circon Corporation common stock has expired and an amended tender offer to acquire 973,174 shares at $14.50 per share began on June 16, 1997 and terminated on July 14, 1997. The offer to acquire the 973,174 shares of Circon Corporation common stock was oversubscribed. As a result of this tender offer, coupled with the 1,000,100 shares previously purchased by the Company, a total of approximately 14.9% of Circon Corporation's common stock outstanding is owned by the Company. This represents the maximum amount of shares the Company can purchase without triggering Circon's "poison pill". The Company will pay for the 973,174 shares by July 31, 1997 with its cash on hand. The previously owned Circon Corporation stock (1,000,100 shares), along with other marketable securities, are included in other assets. These available-for-sale securities have a fair value of approximately $19 million at June 30, 1997 and a cost of approximately $17 million. -7- 8 Form 10-Q June 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 June 30, 1997 are $.24 basic earnings per common share and $.24 diluted earnings per common share as compared to $.38 basic earnings per share and $.37 diluted earnings per share for the quarter ended June 30, 1996. The pro forma earnings per common share computed under the provisions of FAS 128 for the six months ended June 30, 1997 are $.62 basic earnings per common share and $.60 diluted earnings per common share, as compared to $.66 basic earnings per common share and $.65 diluted earnings per common share for the six months ended June 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 will 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 in the next two quarters of 1997. 8. DERIVATIVE FINANCIAL INSTRUMENTS 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 June 30, 1997 the Company's foreign currency exchange contracts have all matured and the outstanding foreign currency option contracts will mature throughout 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. 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. -8- 9 Form 10-Q June 30, 1997 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES REVIEW BY INDEPENDENT ACCOUNTANTS The June 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. -9- 10 Form 10-Q June 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 June 30, 1997, and the related consolidated statements of operations for the six month and three month periods ended June 30, 1997 and 1996 and the consolidated statements of changes in stockholders' equity and cash flows for the six-month periods ended June 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 JULY 18, 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 June 30, 1997 and 1996, as indicated in our report dated July 18, 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 June 30, 1997 is incorporated by reference in Registration Statement Nos. 33-59729, 333-23677, and 333-27591 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 JULY 18, 1997 -10- 11 Form 10-Q June 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 second quarter of 1997 the Company attained sales of $290 million compared with sales of $284 million in the second quarter of 1996. In the first half of 1997, the Company achieved sales of $575 million compared with sales of $550 million in the first half of 1996. Sales increased 2% in the second quarter and increased 5% in the first half of 1997 in comparison to the corresponding periods in 1996. In the second quarter of 1997, the Company reported net income, as adjusted, for the effects of litigation costs ($24 million or $.24 per common share), restructuring charges ($6 million or $.06 per common share) and benefit resulting from an IRS examination ($7 million or $.10 per common share) of $33 million and $.44 per common share as compared with net income of $27 million and $.38 per common share (after preferred dividends of $5 million) in the second quarter of 1996. The effect of changes in foreign currency exchange rates on results of operations was to decrease net income by $7 million in the second quarter of 1997 in comparison to the corresponding period in 1996. In the first half 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 $62 million and $.83 per common share (after preferred dividends of $5 million) as compared with net income of $48 million and $.66 per common share (after preferred dividends of $10 million) in the first half of 1996. The effect of changes in foreign currency exchange rates on results of operations was to decrease net income by $10 million in the first half of 1997 in comparison to the corresponding period in 1996. The following table analyzes the increase in sales in the second quarter and first half of 1997 compared with the corresponding periods in 1996:
Three Months Ended Six Months Ended In thousands June 30, 1997 June 30, 1997 ------------ ------------------------- ----------------- Composition of Sales Increase: Sales volume increases $27,200 $66,500 Net price changes (7,700) (19,400) Effects of changes in foreign currency exchange rates (13,100) (22,100) ------- ------ Sales Increase $ 6,400 $25,000 ======= ======
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. International sales were adversely affected by $8 million and $14 million in the three months and six months ended June 30, 1997, respectively, due to an industry price reduction mandated by the French government. -11- 12 Form 10-Q June 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 decreased to 40% in the second quarter and first half of 1997 compared to 41% and 42%, respectively, in the corresponding periods in 1996. The reduction in cost of products sold and improved gross margins over the comparable periods 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 60% in the second quarter and first half 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 second quarter and $3 million in the first half of 1997. The Company's expenditures for research and development increased to $17 million in the second quarter and $34 million in the first half of 1997 from $12 million and $24 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 second quarter and 39% in the first half of 1997, compared with 41% in the comparable periods in 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 $9 million in the second quarter and first half 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 majority of the cash outlays relative to these restructuring charges were made in the second quarter of 1997 with the remainder to be made in the next two quarters of 1997. The decrease in net interest in the first half of 1997, compared to the first half of 1996, 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 June 30, 1997 are $.24 basic earnings per common share and $.24 diluted earnings per common share as compared to $.38 basic earnings per share and $.37 diluted earnings per share for the quarter ended June 30, 1996. The pro forma earnings per common share computed under the provisions of FAS 128 for the six months ended June 30, 1997 are $.62 basic earnings per common share and $.60 diluted earnings per common share, as compared to $.66 basic earnings per common share and $.65 diluted earnings per common share for the six months ended June 30, 1996. -12- 13 Form 10-Q June 30, 1997 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION The Company's current substantial 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 will improve 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 $14 million to approximately $36 million at June 30, 1997. The increase in bank borrowings during the first half 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 ($30 million) since December 31, 1996 results substantially from the sales of capital equipment which have extended payment terms, sales of spine cages which accelerated significantly in the first half of 1997 and the receivables of its newly created Korean subsidiary. The decrease in other current assets ($21 million) since December 31, 1996 reflects the release from escrow to available cash of $9 million related to the settlement of the class action suits against the Company. Additions to property, plant, and equipment totaled $27 million in the first half of 1997 compared with $23 million in the corresponding period in 1996, and consist primarily of additions to machinery and equipment ($18 million), molds and dies ($6 million), and leasehold improvements ($2 million). The increase in other assets since December 31, 1996 ($44 million) includes the increase in prepaid rent for the Company's North Haven facilities lease. -13- 14 Form 10-Q June 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 June 30, 1997 the Company's foreign currency exchange contracts have all matured and the outstanding foreign currency option contracts will mature throughout 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 second quarter and first half 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 second quarter and first half of 1997. -14- 15 Form 10-Q June 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 is scheduled to be argued in August, 1997. 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 intends to petition 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 consolidated action brought as class actions (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), a hearing was held on May 7, 1997, before the United States District Court for the District of Connecticut, for consideration of approval of the settlement of the case entered into in November, 1996 between the Company and counsel for the plaintiffs. On May 7, 1997, an order and final judgment was signed and entered by the Court approving and directing the implementation of the settlement of such actions. E. 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. F. 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. -15- 16 G. 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. -16- 17 Item 2. Changes in Securities c. On April 25, 1997, the Company issued 84,874 shares (fair value approximately $2.7 million) of its $.10 par value Common Stock in the acquisition, by means of a share exchange of the outstanding common stock, of Hirsch Industries, Inc., a privately held company. The transaction was exempt from registration under Section 4 (2) of the Securities Act of 1933, as amended. There was no prior affiliation between Leon C. Hirsch, the Company's Chairman and Chief Executive Officer and Hirsch Industries, Inc. prior to this transaction. Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders held on May 1, 1997 the following members were elected to the Board of Directors:
Votes For Votes Withheld -------------- -------------- Julie K. Blake 62,800,596 2,357,311 John A. Bogardus, Jr. 62,667,778 2,490,130 Thomas R. Bremer 62,690,864 2,467,043 Leon C. Hirsch 62,616,564 2,541,344 Turi Josefsen 62,638,055 2,519,852 Douglas L. King 62,685,588 2,472,319 William F. May 62,638,731 2,519,177 James R. Mellor 62,774,518 2,383,390 Barry Romeril 62,794,871 2,363,036 Howard M. Rosenkrantz 62,744,199 2,413,708 Marianne Scipione 62,745,433 2,412,474 John R. Silber 62,751,687 2,406,220
There were no broker non-votes. Item 6. Exhibits and Reports on Form 8-K c. Exhibits (10) Material Contracts 10(a) Amendment to Lease Agreement dated June 1997. Filed herewith. 10(b) Agreement dated May 1997 with Baker Properties Limited Partnership. Filed herewith. Exhibit 27 - Financial Data Schedule. d. Reports on Form 8-K - There were no reports on Form 8-K filed for the period ended June 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:/s/ Richard A. Douville ------------------------------ Richard A. Douville (Senior Vice President and Chief Financial Officer) Dated: July 22, 1997 -17- EX-10.A 2 AMENDMENT TO LEASE AGREEMENT 1 AMENDMENT TO LEASE AGREEMENT THIS LEASE AMENDMENT (the "Amendment"), dated as of June , 1997, between STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT, NATIONAL ASSOCIATION, a national banking association, having its principal place of business at 750 Main Street, Hartford, Connecticut 06103, not in its individual capacity, except as expressly provided herein, but solely as Owner Trustee under the Trust Agreement, as Lessor, and UNITED STATES SURGICAL CORPORATION, a Delaware corporation, having its principal place of business at 150 Glover Avenue, Norwalk, Connecticut 06856, as Lessee. W I T N E S S E T H: WHEREAS, the parties hereto entered into a Lease Agreement (the "Lease") on January 14, 1993; and WHEREAS, the parties are desirous of amending certain terms of said Lease in order to better accommodate their mutual business interests. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Lessor and the Lessee do hereby agree as follows: SECTION 1. DEFINITIONS; INTERPRETATION. For the purposes hereof, terms used herein and not otherwise defined herein shall have the meanings assigned to them in Appendix A to the Lease, except that the definition of Deferred Contingent CPI Rent therein is deleted and replaced with the following: "Deferred Contingent CPI Rent" (a) as of any date shall mean in the event the Lessee shall have made the election to defer the payment of Contingent CPI Rent in accordance with the proviso to the third sentence of the second paragraph of Section 4(b) of the Lease, the excess of the amount calculated as Contingent CPI Rent in accordance with the first sentence of such paragraph over all amounts paid on or prior to such date in respect of such amount and (b) as of any date prior to the eighteenth Basic Rent Payment Date, shall mean, in the event that the Lessor has not made the election provided for in the first sentence of the second paragraph of Section 4(b) of the Lease, the excess of (x) the amount that would have been calculated as the 1 2 Contingent CPI Rent amount pursuant to such sentence as if the Lessor had made such election, over (y) all amounts paid on or prior to such date in respect of Contingent CPI Rent. SECTION 2. CONTINGENT CPI RENT. Section 4(b) of the Lease is hereby deleted therefrom and replaced with the following: (b) Contingent CPI Rent. Subject to the next succeeding paragraph, the Lessee shall also pay to the Lessor, as Contingent CPI Rent, on each of the fourteenth, sixteenth and eighteenth Basic Rent Payment Dates (each, a "Contingent CPI Rent Payment Date") during the Basic Lease Term, an amount equal to 50% of the product of (i) $345,000,000 multiplied by (ii) the total percentage increase in CPI for the period beginning September 30, 1997 and ending with the September 30 immediately preceding such Contingent CPI Rent Payment Date; provided that, in calculating the total percentage increase in CPI for any such period, to the extent the percentage increase in CPI for any one-year period beginning and ending on a September 30 shall exceed 2.5% per annum, such excess shall not be taken into account in such calculation; and provided, further, that if the aggregate amount of Contingent CPI Rent payable by the Lessee on all three Contingent CPI Rent Payment Dates exceeds $18,500,000, the Lessee shall have the option, exercisable in its sole discretion by the delivery of written notice to the Lessor, to pay such excess over $18,500,000 in equal annual installments without interest on every second Basic Rent Payment Date through the end of the Basic Lease Term beginning on the twenty-second Basic Rent Payment Date. In lieu of receiving Contingent CPI Rent on each of the Contingent CPI Rent Payment Dates pursuant to the immediately preceding paragraph, the Lessor shall have the option exercisable in its sole discretion by the delivery of written notice to the Lessee and the Indenture Trustee to elect to have a one-time calculation of Contingent CPI Rent in an amount equal to the lesser of (i) $18,500,000 and (ii) the product of (A) 6.25 multiplied by (B) 50% of $345,000,000 multiplied by (C) the total percentage increase in CPI for the period beginning December 31, 1992 and ending with September 30, 1998; provided that, in calculating the total percentage increase in CPI for such period, (1) to the extent the percentage increase in CPI for the 2 3 period from December 31, 1992 to September 30, 1993 shall exceed 1.875% or for any one-year period thereafter beginning and ending on a September 30 shall exceed 2.5%, such excess shall not be taken into account in such calculation and (2) if the percentage increase in CPI for any such period described in the preceding clause (1) shall be less than zero, the percentage increase in CPI for such period shall be deemed to be zero for purposes of such calculation. Written notice of such election must be delivered by the Lessor to the Lessee and the Indenture Trustee no later than January 13, 2000. If the Lessor makes this election, the amount calculated as Contingent CPI Rent shall be paid in a single lump sum on July 14, 2000, provided that the Lessee shall have the option, exercisable in its sole discretion, subject to the last sentence of this paragraph, by written notice to the Lessor, to pay the amount calculated as Contingent CPI Rent in semiannual installments on the remaining Basic Rent Payment Dates through the end of the Basic Lease Term beginning on the fifteenth Basic Rent Payment Date, together with interest on the unpaid portion of such amount at the prime rate as announced from time to time by Morgan Guaranty Trust Company of New York, but in no event more than 7.65% per annum (calculated on the basis of a 360-day year of twelve 30-day months). Each semiannual installment of the calculated amount of Contingent CPI Rent shall be in the amount that would produce a schedule of level payments of principal and interest over the period until the last Basic Rent Payment Date assuming an interest rate of 7.65% per annum. The Lessee shall not be entitled to exercise its option to defer payment of Contingent CPI Rent if the Lessee shall have elected to purchase the Premises on the fifteenth Basic Rent Payment Date pursuant to Section 7, or if an offer by the Lessee to purchase the Beneficial Interest pursuant to Section 13.04 of the Participation Agreement shall have been accepted by the Owner Participant, or if the Lessee shall be in default in its obligation to make such an offer. 3 4 SECTION 3. CONTINGENT CPI RENT. Section 7(a) of the Lease is hereby deleted therefrom and replaced with the following: (a) Purchase Options. The Lessee shall have the right to purchase the Premises (i) on the fifteenth Basic Rent Payment Date during the Basic Lease Term and on every second Basic Rent Payment Date through the end of the Basic Lease Term beginning on the twenty-second Basic Rent Payment Date or (ii) on the date of expiration of the Basic Lease Term or any Renewal Term, in each case at a purchase price equal to the Fair Market Sales Value of the Premises as of such Basic Rent Payment Date or expiration date, as the case may be, exclusive of the value of any Modifications during the Lease Term paid for by the Lessee and exclusive of the value of any part of the DePaola Parcels purchased by the Lessor with funds provided by or on behalf of the Lessee; provided that such purchase price shall be determined without regard to the Notes or the Indenture and in no event shall the purchase price be less than the aggregate principal amount of the Notes then Outstanding together with all accrued and unpaid interest thereon (after giving effect to any payment of Basic Rent on such date) plus any applicable Make Whole Premium plus any Deferred Contingent CPI Rent. It shall be a condition to the purchase of the Premises by the Lessee on the fifteenth Basic Rent Payment Date during the Basic Lease Term pursuant to this Section 7(a) that the Owner Participant shall not have required the Lessee to make an offer to purchase the Beneficial Interest pursuant to Section 13.04 of the Participation Agreement unless the Owner Participant shall not have accepted such offer. SECTION 4. OTHER TERMS. All other terms and conditions of the Lease, not inconsistent herewith, shall continue in full force and effect. 4 5 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed as of the date first set forth above. STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By: _______________________________ Name: _____________________________ Title: ____________________________ Date: _____________________________ UNITED STATES SURGICAL CORPORATION By: _______________________________ Name: _____________________________ Title: ____________________________ Date: _____________________________ 5 EX-10.B 3 MAY 1997 AGREEEMENT 1 AGREEMENT THIS AGREEMENT, dated as of May 30, 1997, between BAKER PROPERTIES LIMITED PARTNERSHIP, Owner Participant, having its principal place of business at 485 Washington Avenue Pleasantville, NY 10570 ("Baker"), and UNITED STATES SURGICAL CORPORATION, a Delaware corporation, having its principal place of business at 150 Glover Avenue, Norwalk, Connecticut 06856 ("USSC"). W I T N E S S E T H: WHEREAS, the parties hereto entered into a Participation Agreement (the "PA") on January 14, 1993; and WHEREAS, pursuant to said PA, Baker is the holder of the Beneficial Interest in the Trust Estate; and WHEREAS, USSC is the Lessee under the Lease, covering USSC's manufacturing facility in North Haven, Connecticut; and WHEREAS, the parties are desirous of setting time frames and other parameters for the exercise of certain option rights under said PA and Lease in order to better accommodate their mutual business interests. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Baker and USSC do hereby agree as follows: SECTION 1. DEFINITIONS; INTERPRETATION. For the purposes hereof, terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Amendment (defined hereinbelow). SECTION 2. BAKER EXERCISE OF OPTION UNDER SECTION 13.04 OF THE PARTICIPATION AGREEMENT. Baker hereby agrees that it will not, prior to April 10, 2000, exercise its option under Section 13.04 of the Participation Agreement to require USSC to make an offer to purchase the Beneficial Interest. 1 2 SECTION 3. BAKER CPI RENT. Baker hereby agrees that it shall not cause or permit the Owner Trustee to exercise its option to elect a one-time calculation of Contingent CPI Rent pursuant to the second paragraph of Section 4(b) of the Lease prior to January 1, 2000. SECTION 4. BAKER CPI RENT PAYMENTS. A. Baker hereby authorizes and directs the Owner Trustee to enter into the Amendment to Lease Agreement (the "Amendment") with USSC in the form attached hereto as Exhibit A. Said Amendment provides for the delay by one year of each of the Contingent CPI Rent payments otherwise due pursuant to the first paragraph of Section 4(b) of the Lease. B. USSC agrees that it shall, on January 14, 1999 and January 14, 2000, make secured interest-free loans to Baker (or to Baker's designee, Baker Capital, Ltd.; Baker and Baker's designee hereinafter designated as "Borrower") in amounts equal to (or if requested by Baker, a lesser amount) the payments of Contingent CPI Rent that would have been due under the Lease on each such date had the Lease not been amended by the Amendment. The principal amount of such loans shall be repaid by Borrower subject to the conditions of the Notes evidencing the loans. C. The principal amount of the loans provided for in Section 4B shall be advanced to Borrower against delivery of Notes in the forms attached hereto as Exhibits B and C and delivery of security to USSC in any of three forms as described below. Baker may, at its option, select among each of the three forms of security or a combination thereof and may during the term of such loans make substitutions of one form of security for another. The forms of security shall include: (i) Pledges of Cash, Cash Equivalents, and/or Marketable Securities, to be held in escrow by Morgan Guaranty Trust Company of New York ("Morgan") as escrow agent, in value at least equal to the principal amount of the loans and pursuant to an Escrow Agreement approved by Morgan and the parties hereto. Said Escrow Agreement shall provide that the Marketable Securities be held in escrow until February 1, 2001 (or the earlier payment of such Notes in full), and will permit USSC to cause the transfer of portions of such Marketable Securities from the Escrow Agent to USSC upon USSC's certification to the Escrow Agent that (1) payment due under any Note has not been paid; and (2)(A) Contingent CPI Rent in an amount at least equal to the amount to be transferred has either been actually received by the Owner 2 3 Participant or was paid by USSC but was not actually received by the Owner Participant solely due to the occurrence of an Indenture Event of Default caused by a breach in the obligations, representations and warranties of the Owner Participant under the Operative Documents, or (B) a Note has become payable or a mandatory prepayment of any Note in an amount at least equal to the amount to be transferred has become due under the provisions of the second or fifth paragraphs thereof. Sufficient Marketable Securities shall be transferred to USSC in the event of such certification to equal in value the amount due but unpaid under any such Note. For purposes of this section, "Cash Equivalents" shall include investments in mutual funds which are restricted to investments in taxable or tax-exempt money market instruments and which can be liquidated by the holder of such fund(s) upon not more than 24 hours notice. For purposes of this section, "Marketable Securities" shall mean i) equity securities listed on the New York Stock Exchange, the American Stock Exchange, or traded on the NASDAQ, of companies with a minimum market capitalization in each case of $1.0 billion, and/or ii) debt securities rated at least single "A" or better by Standard & Poor's. For purposes of the calculations under this Section, common stocks shall be valued, at any time, at 75% of their market value at the time of such valuation. If the value of such pledged Cash, Cash Equivalents or Marketable Securities (as so calculated) shall at any time be less than the principal balance of such Notes outstanding, USSC shall have the right to require Baker, and Baker shall have the obligation, to pledge, within ten calendar days of Baker's receipt of notice by USSC of its exercise of such right, additional Cash, Cash Equivalents or Marketable Securities hereunder to the extent required to bring the total of pledged Marketable Securities to a value at least equal to the amount of said principal balance. Failure of Baker to pledge such additional Marketable Securities within said ten calendar days shall entitle USSC to require the Escrow Agent to transfer to USSC all of the Marketable Securities already so pledged, and shall constitute a default under the Notes. If the value of such pledged Cash, Cash Equivalents or Marketable Securities (as so calculated) shall at any time exceed the principal balance of such Notes outstanding, Baker shall have the right to remove from the Escrow Account Cash, Cash Equivalents or Marketable Securities having a value (as so calculated) up to the amount of such excess. (ii) Letters of credit (LCs) issued by Mellon Bank, Pittsburgh or such other bank as USSC may approve in its reasonable discretion in amounts equal to the principal amount of the loans. Such LCs shall not expire before February 1, 2001 (or shall be renewable through such date) or the earlier payment of such Notes in full, and will permit USSC to draw against them upon its certification to the issuing bank that (1) payment due under any Note has not been 3 4 paid; and (2)(A) Contingent CPI Rent in an amount at least equal to the amount to be drawn against the LC has either been actually received by the Owner Participant or was paid by USSC but was not actually received by the Owner Participant solely due to the occurrence of an Indenture Event of Default caused by a breach in the obligations, representations and warranties of the Owner Participant under the Operative Documents, (B) a Note has become payable or a mandatory prepayment of any Note in an amount drawn has become due under the provisions of the second or fifth paragraphs thereof, or (C) the bank issuing the LC(s) gives notice of non-renewal of such LC(s) to be effective on any date prior to February 1, 2001. (iii) Certificates of deposit (CD's) to be held in the name of Mellon Bank, Pittsburgh as escrow agent in amounts equal to the principal amount of the loans and pursuant to an Escrow Agreement approved by USSC. Said Escrow Agreement shall provide that the CDs be held in escrow until February 1, 2001 (or the earlier payment of such Notes in full), and will permit USSC to withdraw funds from such CDs upon its certification to the escrow agent that (1) payment due under any Note has not been paid; and (2)(A) Contingent CPI Rent in an amount at least equal to the amount to be withdrawn has either been actually received by the Owner Participant or was paid by USSC but was not actually received by the Owner Participant solely due to the occurrence of an Indenture Event of Default caused by a breach in the obligations, representations and warranties of the Owner Participant under the Operative Documents, or (B) a Note has become payable or a mandatory prepayment of any Note in an amount at least equal to the amount drawn has become due under the provisions of the second or fifth paragraphs thereof. SECTION 5. TRANSFER OF OWNER PARTICIPANT'S INTEREST. Baker hereby agrees that it may not transfer any of its right, title or interest in the Trust Estate, the Operative Documents, this Agreement or the Notes unless such transfer is in compliance with and satisfies the terms and conditions of Section 13.02 of the PA and the transferee enters into an agreement of the type referred to in Section 13.02(d) of the PA with respect to this Agreement and the Notes. SECTION 6. USSC OPTION TO PURCHASE. In consideration of Baker's agreement to the foregoing Sections of this Agreement, USSC agrees to enter into the Amendment of even date herewith. 4 5 SECTION 7. AMENDMENT. This Agreement is contingent on the approval of the Amendment by a majority in interest of the current Note Holders under the PA no later than August 1, 1997. If such approval has not been obtained by such date, this Agreement shall be terminated and shall be of no further force or effect. SECTION 8. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed as of the date first set forth above. BAKER PROPERTIES LIMITED PARTNERSHIP By: Baker Companies, Inc. its general partner By: _______________________________ Name: _____________________________ Title: ____________________________ Date: _____________________________ UNITED STATES SURGICAL CORPORATION By: _______________________________ Name: _____________________________ Title: ____________________________ Date: _____________________________ 5 6 Exhibit B PROMISSORY NOTE January 14, 1999 FOR VALUE RECEIVED, [BAKER PROPERTIES LIMITED PARTNERSHIP] [BAKER CAPITAL, LTD.], of , NY 10016 ("Maker") hereby promises to pay to the order of UNITED STATES SURGICAL CORPORATION, of 150 Glover Avenue, Norwalk, CT 06851 ("USSC"), in lawful money of the United States of America, in immediately available funds, the principal amount of ($ .00) Dollars, without interest, on January 1, 2001. Maker also agrees to pay any expenses and costs incurred by holder, including reasonable attorneys' fees and disbursements, in collecting the amounts due hereunder or enforcing the provisions hereof. The entire principal balance of this Note will be immediately due and payable without notice or demand upon the occurrence of Maker's insolvency, filing in bankruptcy, or failure of Baker Properties Limited Partnership to comply with the requirements of the seventh sentence of Section 4(C)(i) of the Agreement between Maker and USSC dated June , 1997. In the event of a default for a period of more than 15 days in the payment provided for hereinabove, Maker shall pay to the holder hereof interest on the unpaid principal amount hereof from time to time at a rate which is 3% over the prime rate announced from time to time by Mellon Bank of Pittsburgh, PA. Maker hereby waives all notices and demands whatsoever in connection with this Note. Maker shall make mandatory prepayments of this Note in the amount, and on the date, of any Designated Payment (as defined below) actually received by the Owner Participant pursuant to that certain Participation Agreement entered into by Maker, USSC and certain other parties on January 14, 1993, as amended from time to time, and/or any of the other Operative Documents (as defined in said Participation Agreement), or that was made by USSC but was not actually received by the Owner Participant solely due to the occurrence of an Indenture Event of Default caused by a breach in the obligations, representations and warranties of the Owner Participant under the Operative Documents. For purposes of this Note, "Designated Payment" shall mean (i) any payment of Contingent CPI Rent or Deferred Contingent CPI Rent, or (ii) any payment received by the Owner Participant in lieu of Contingent CPI Rent or Deferred Contingent CPI Rent and paid in respect of Adjusted Termination Amount or the purchase price for the Beneficial Interest pursuant to Section 13.04 of the Participation Agreement or the Premises pursuant to Section 7(a) of the Lease. 6 7 Maker may at any time prepay this Note, in whole or in part, without penalty, provided, however, that such prepayments, and any other payments made by Maker hereunder, shall be applied first to holder's expenses which are payable by Maker hereunder, and the remainder to principal. This Note is secured by a [Pledge of Marketable Securities held by Morgan Guaranty Trust Company of New York] [Letter of Credit issued by Mellon Bank] [a Certificate of Deposit] in an amount at least equal to the principal amount hereof. Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned to them in said Participation Agreement. This Note shall be governed by, and construed in accordance with, the laws of the State of New York. [BAKER PROPERTIES LIMITED PARTNERSHIP] By: Baker Companies, Inc. its general partner ___________________________________ By: Name: _____________________________ Title: ____________________________ 7 8 Exhibit C PROMISSORY NOTE January 14, 2000 FOR VALUE RECEIVED, [BAKER PROPERTIES LIMITED PARTNERSHIP] [BAKER CAPITAL, LTD.], of , NY 10016 ("Maker") hereby promises to pay to the order of UNITED STATES SURGICAL CORPORATION, of 150 Glover Avenue, Norwalk, CT 06851 ("USSC"), in lawful money of the United States of America, in immediately available funds, the principal amount of ($ .00) Dollars, without interest, on January 1, 2001. Maker also agrees to pay any expenses and costs incurred by holder, including reasonable attorneys' fees and disbursements, in collecting the amounts due hereunder or enforcing the provisions hereof. The entire principal balance of this Note will be immediately due and payable without notice or demand upon the occurrence of Maker's insolvency, filing in bankruptcy, or failure of Baker Properties Limited Partnership to comply with the requirements of the seventh sentence of Section 4(C)(i) of the Agreement between Maker and USSC dated June , 1997. In the event of a default for a period of more than 15 days in the payment provided for hereinabove, Maker shall pay to the holder hereof interest on the unpaid principal amount hereof from time to time at a rate which is 3% over the prime rate announced from time to time by Mellon Bank of Pittsburgh, PA. Maker hereby waives all notices and demands whatsoever in connection with this Note. Maker shall make mandatory prepayments of this Note in the amount, and on the date, of any Designated Payment (as defined below) actually received by the Owner Participant pursuant to that certain Participation Agreement entered into by Maker, USSC and certain other parties on January 14, 1993, as amended from time to time, and/or any of the other Operative Documents (as defined in said Participation Agreement), or that was made by USSC but was not actually received by the Owner Participant solely due to the occurrence of an Indenture Event of Default caused by a breach in the obligations, representations and warranties of the Owner Participant under the Operative Documents. For purposes of this Note, "Designated Payment" shall mean (i) any payment of Contingent CPI Rent or Deferred Contingent CPI Rent, or (ii) any payment received by the Owner Participant in lieu of Contingent CPI Rent or Deferred Contingent CPI Rent and paid in respect of Adjusted Termination Amount or the purchase price for the Beneficial Interest pursuant to Section 13.04 of the Participation Agreement or the Premises pursuant to Section 7(a) of the Lease. Notwithstanding the foregoing, if the Note dated January 14, 1999 from the Maker to USSC shall be outstanding, the amount of any Designated Payment hereunder shall be reduced by the amounts thereof paid in respect of such Note. Maker may at any time prepay this Note, in whole or in part, without penalty, provided, however, that such 8 9 prepayments, and any other payments made by Maker hereunder, shall be applied first to holder's expenses which are payable by Maker hereunder, and the remainder to principal. This Note is secured by a [Pledge of Marketable Securities held by Morgan Guaranty Trust Company of New York] [Letter of Credit issued by Mellon Bank] [a Certificate of Deposit] in an amount at least equal to the principal amount hereof. Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned to them in said Participation Agreement. This Note shall be governed by, and construed in accordance with, the laws of the State of New York. [BAKER PROPERTIES LIMITED PARTNERSHIP] By: Baker Companies, Inc. its general partner ___________________________________ By: Name: _____________________________ Title: ____________________________ 9 EX-27 4 FINANCIAL DATA SCHEDULE
5 United States Surgical Corporation Financial Data Schedule Article 5 of Regulation S-X 6-MOS DEC-31-1996 JUN-30-1997 130,400 0 328,500 10,700 190,800 724,700 711,000 282,200 1,573,100 292,700 0 0 0 8,000 1,109,200 1,573,100 574,600 574,600 230,400 230,400 287,800 0 0 56,400 8,800 47,600 0 0 0 47,600 .62 .62
-----END PRIVACY-ENHANCED MESSAGE-----