-----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, KPvoBTukxjmAS/FqoiNOSOnYBqtUGyChMN1e1i+7z27cY+ZXb1CaeUIlQxDwiik+ l+pK+hVq1VmCUTHLayOg2Q== 0000950123-98-000846.txt : 19980204 0000950123-98-000846.hdr.sgml : 19980204 ACCESSION NUMBER: 0000950123-98-000846 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980203 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-K SEC ACT: SEC FILE NUMBER: 001-09776 FILM NUMBER: 98520365 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-K 1 UNITED STATES SURGICAL CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR 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) Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- Common Stock, $.10 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing sales price for Common Stock of $29.3125 on December 31, 1997 and, for purposes of this computation only, the assumption that all directors and officers of the registrant are affiliates) was approximately $2.2 billion. The number of outstanding shares of Common Stock, $.10 par value, of the registrant was 75,883,266 shares on December 31, 1997. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Definitive Proxy Statement for the 1998 Annual Meeting of Stockholders of the Registrant Incorporated By Reference Into Part III, Items 10, 11, 12 and 13 2 UNITED STATES SURGICAL CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 INDEX PART I ITEM PAGE - ---- ---- 1. Business .......................................................... 1 2. Properties ........................................................ 11 3. Legal Proceedings ................................................. 11 4. Submission of Matters to a Vote of Security Holders ............... 13 Executive Officers of the Registrant .............................. 14 PART II 5. Market for Registrant's Common Stock and Related Stockholder Matters ............................................. 16 6. Selected Financial Data ........................................... 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 18 8. Financial Statements and Supplementary Data ....................... 24 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................................ 24 PART III 10. Directors and Executive Officers of the Registrant ................ 25 11. Executive Compensation ............................................ 25 12. Security Ownership of Certain Beneficial Owners and Management ...................................................... 25 13. Certain Relationships and Related Transactions .................... 25 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................................................... 25 Signatures......................................................... 28 Index to Consolidated Financial Statements and Financial Statement Schedule................................. F-1 3 PART I ITEM 1. BUSINESS. NATURE OF BUSINESS United States Surgical Corporation (the Company) is a Delaware corporation primarily engaged in developing, manufacturing and marketing a proprietary line of technologically advanced surgical products to hospitals throughout the world. The Company specializes in technologies that improve patient care and lower health care costs. The Company develops, manufactures and markets surgical staplers, laparoscopic products and sutures and products in numerous surgical specialties including spine surgery; vascular and cardiovascular surgery and interventional cardiology; urology; and breastcare. The Company has also recently completed the acquisition of Valleylab, the world's leading manufacturer and marketer of electrosurgical and ultrasound surgical products. The Company currently operates domestically and internationally through subsidiaries, divisions and distributors. Except where the context otherwise requires, the term Company includes the Company's divisions and subsidiaries. The market that the Company services continues to be adversely affected by cost consciousness on the part of health care providers and payors and is experiencing slower growth rates resulting from efforts to reduce costs and by uncertainties connected with health care reform. The Company believes, however, that in the evolving domestic health care system, its products offer a significant opportunity for reducing costs for the total health care system while providing considerable advantages for the patient. The Company has also been impacted negatively by aggressive pricing by competition and the increasing use of managed care, centralized purchasing decisions by group purchasing organizations, consolidations among hospitals and hospital groups, and integration of health care providers. To respond to these business conditions, the Company has expanded its marketing efforts to meet the needs of hospital management through cost effective pricing programs, by assisting hospitals in implementing more efficient surgical practices, and by demonstrating the favorable economics associated with the use of the Company's products. The Company has also implemented a strategy to expand its product lines beyond general surgery through a program of acquisitions and alliances in a number of surgical specialties where the Company believes market conditions and product innovation offer substantial growth opportunities, including the following acquisitions: Surgical Dynamics and the Smith & Nephew spinal products business (spine surgery); Progressive Angioplasty Systems and a controlling interest in Medolas (vascular and cardiovascular surgery and interventional cardiology); the strategic alliance with Trex Medical and the acquisition of NeoVision (breastcare); and the acquisition of Valleylab. In addition, the Company continues to expand its product and technology base in its established businesses through investment in internal research and development and acquisition of new technologically advanced products that provide better patient care and an effective means of reducing hospital costs. Although the Company believes that these areas of surgical practice offer significant opportunities for revenue growth and profitability, considerable risks may be involved and there can be no assurance that favorable results will be achieved. Costs of acquiring or developing instruments for use in specialty applications continue to be significant, which could adversely affect both near term and longer term results if successful products are not developed and introduced. In addition, considerable competition exists for products used in these surgical specialties, including competitors developing other techniques and from sources of more traditional products. Further, acceptance of newer techniques, even with demonstrated clinical advantages, may be slow given concerns as to expenditures for newer practices by health care payors and requirements for extensive training with newer approaches. The Company believes that, despite the uncertainties inherent in development of new technologies, the patient and the health care market will be better served by the introduction of more efficacious and less traumatic procedures across the operating room environment. - --------------- Trademarks of United States Surgical Corporation are in italicized capital letters. -1- 4 PRODUCT CONTRIBUTION The Company's current products constitute a single business segment. Surgical products accounted for all of the Company's net sales and profits in each of the years ended December 31, 1997, 1996 and 1995. WOUND CLOSURE PRODUCTS AUTO SUTURE Stapling Products, Clip Appliers, Products for Minimally Invasive Surgery and Suture Products The Company is a leading multinational developer, manufacturer and marketer of innovative surgical wound closure products. In this category, principal products consist of a series of surgical stapling instruments (both single use and reusable), and single use loading units (DLUs) for use with stapling instruments and single use surgical clip appliers. The instruments are an alternative to manual suturing techniques utilizing needle/suture combinations which enable surgeons to reduce blood loss, tissue trauma and operating time while joining internal tissue, reconstructing or sealing off organs, removing diseased tissue, occluding blood vessels and closing skin, either with titanium, stainless steel, or proprietary absorbable copolymer staples or with titanium, stainless steel, or proprietary absorbable copolymer clips. Surgical stapling also makes possible several surgical procedures which cannot be achieved with surgical needles and suturing materials. The single use instruments and DLUs are expended after a single use or, in the case of reloadable single use instruments, after a single surgical procedure. The Company offers certain of its products in both single use and reusable versions. Single use instruments reduce the user's capital investment, eliminate the risks and costs associated with maintenance, sterilizing and repair of reusable instruments, and provide the surgeon with a new sterile instrument for each procedure, offering more efficacious and safer practice for both patients and operating room personnel. Reusable instruments provide an alternative for surgeons and hospitals. The materials used in the Company's absorbable staples and clips are proprietary copolymers developed and manufactured by the Company. The Company is a leading manufacturer and marketer of specialized wound management products designed for use in the field of minimally invasive surgery. This surgical technique (also referred to as laparoscopic or endoscopic surgery) requires incisions of up to one half inch in diameter through which various procedures are performed using laparoscopic instruments and optical devices, known as laparoscopes or endoscopes, for viewing inside the body cavity. Laparoscopy generally provides patients with significant reductions in post-operative hospital stay, pain, recuperative time and hospital costs, with improved cosmetic results, and with the ability to return to work and normal life in a shorter time frame. The Company has developed and markets single use surgical clip appliers and stapling instruments in a variety of sizes and configurations designed for laparoscopic uses. The Company's products in this area also include trocars, which provide entry ports to the body in laparoscopic surgery, and a line of instruments which allows the surgeon to see, cut, cauterize, clamp, retract, suction, irrigate or otherwise manipulate tissue during a laparoscopic procedure. The Company also designs and markets laparoscopes. Applications for minimally invasive surgery currently include cholecystectomy (gall bladder removal), hysterectomy, hernia repair, bladder suspension for urinary stress incontinence, anti-reflux procedures for correction of heartburn, and various forms of bowel, stomach, gynecologic, urologic, pediatric and thoracic (chest) surgery. The Company believes that laparoscopy can also be used effectively in many other surgical procedures. Sutures comprise a major portion of the wound closure market. Since most surgical procedures which use staples also require manual suturing, the Company considers sutures to be a natural complement to its stapling instrumentation. The Company is continuing its expansion into this mature global market. The Company offers a complete suture product line, including both absorbable products and non-absorbable suture products. The Company believes that its sutures have significant technological advantages over competitors' products. The Company's BIOSYN suture, introduced in late 1995, is the first synthetic, absorbable suture which combines the benefits of a monofilament suture with many of the advantages of braided sutures, such as ease of handling and knot holding capability. BIOSYN sutures compete effectively with its competitors' gut, absorbable braided and absorbable monofilament sutures (both short and long term), providing uses across a wide variety of surgical applications. BIOSYN sutures provide hospitals with an efficacious suture material that permits material standardization and code consolidation. USSC expects to introduce a dyed version of BIOSYN in early 1998. BIOSYN and POLYSORB, USSC'S synthetic absorbable sutures, are designed to address all of the surgeons absorbable suture needs in two absorbable suture materials. SURGIPRO mesh fabrics are designed for applications in both open and endoscopic surgery such as hernia repair. SURGALLOY needles are designed to meet the sharpness and strength requirements of the specialty surgeons in fields such as cardiovascular, opthalmological, plastic surgery, neurosurgery, and others. The Company's suture sales strategy allows the Company to compete more effectively for contracts with customers that prefer to purchase all of the hospital's wound closure needs from a single vendor, particularly as individual hospitals, buying groups and hospital alliances continue to consolidate their purchasing. -2- 5 SPINE SURGERY PRODUCTS In the orthopedic field, Surgical Dynamics, Inc. ("Surgical Dynamics" or "SDI"), a subsidiary of the Company, is a leading developer and manufacturer of spinal cages and other instrumentation for spine surgery and instruments for arthroscopic procedures. Surgical Dynamics offers an endoscopic spinal system, consisting of a variety of instruments for application in lumbar discectomy and fusion, and in video assisted thoracic spine procedures. Surgical Dynamics' RAY TFC (threaded fusion cage) device represents a new technological advance in implantable spine devices. They provide a supporting lattice for bone in-growth for patients with degenerative disc disease with many advantages over present practices for fusing the spine, and can reduce post-operative pain and recovery time. Several other companies are developing or currently offer such devices, and such competition could adversely impact the Company's opportunities in this area. The DURA CLOSE Clip Applier permits both spine and brain surgeons to achieve a sutureless, water-tight closure of the dura, the outer covering of the brain and spinal cord. The ARTHROSEW Suturing Device simplifies suturing in a confined area, which the Company believes will be useful in performing arthroscopic and open shoulder repair surgery. The SDsorb Suture Anchor system provides the surgeon with a quick and efficient means of anchoring soft tissue to bone in arthroscopic shoulder procedures. Made from the Company's proprietary LACTOMER copolymer, the anchor provides secure holding power for the critical healing period and is absorbed by the body, eliminating the need to leave residual metal. Surgical Dynamics' E-Z TAC absorbable surgical tack, offers a unique surgical solution for anterior instability shoulder injuries and is also made from the Company's proprietary LACTOMER copolymer. Surgical Dynamics also offers a reusable disposable 4mm arthroscope that provides the same visual quality as the finest scopes on the market, but at significantly reduced purchase and maintenance costs for its customers. Surgical Dynamics introduced in 1997 the SDsorb Meniscal Stapler which provides surgeons with a simple, cost-effective means to repair the meniscus, the shock-absorbing cartilage in the knee. During the later part of 1997, Surgical Dynamics acquired Smith & Nephew's spinal product business, including spinal instrumentation systems for cervical, thoracic and lumbar procedures, and instruments for minimally invasive spinal surgery. This acquisition enables Surgical Dynamics to offer spine surgeons a broader range of products including rigid spinal fixation systems. Surgical Dynamics sells through distributor sales networks and maintains its own training, research and development, marketing and sales management organizations. Surgical Dynamics has trained a substantial number of surgeons in procedures utilizing its products. Although the Company believes that spinal surgery offers the potential for new markets for its products, sales of these products may depend on acceptance of the procedure by orthopedic surgeons and neurosurgeons. In addition, specialized training may be required. Surgical Dynamics' spinal products include products designed to be permanently implanted in the human body. There has been substantial litigation in the spinal implant industry in recent years and the Company faces the business risk of financial exposure to product liability claims. VASCULAR THERAPIES Products for Vascular and Cardiovascular Surgery and Interventional Cardiology During the latter part of 1997, the Company established Vascular Therapies, a new division to develop and market the Company's products for vascular and cardiovascular surgery and interventional cardiology. The Company offers specialized instrumentation for use in vascular procedures, including its VCS vascular clip applier, a device which permits arteriotomies, venotomies, and vascular anastomoses without penetration of the inner wall of the vessel. During 1997, the Company received FDA approval of the Company's ONE-SHOT instrument for joining small vessels, including coronary arteries. The ONE-SHOT simultaneously applies a sequence of non-penetrating titanium clips around the everted edges of the two vessels to be joined. The clips allow the smooth inner linings of the two vessels to line up, creating a connection and unobstructed path for blood flow. The device can be used in open and minimally invasive vascular surgery such as coronary artery bypass graft surgery which simplifies the process of creating the bypass and significantly reducing operating time. The MINI HARVEST system products permit minimally invasive harvesting of the saphenous vein from a patient's leg in connection with cardiovascular surgery. This procedure requires only a few small incisions rather than an incision running the length of the patient's leg, minimizing patient discomfort and scarring. -3- 6 The MINI-CABG line of instruments allows surgeons to operate on a beating heart through a 3 to 4-inch incision between the ribs instead of the 12-inch incision associated with traditional approaches. The MINI-CABG products permit reduced operating time, recuperating time and costs, and reduce risks associated with current practices. The Company's MINI-CABG instruments include the AUTO SUTURE Universal Retractor Base system, which maintains an operative window through the chest incision and includes a fully adjustable retractor, the Site-Light for illumination of the operative site, and the Site-Blower for maintaining a clean operative field; the AUTO SUTURE Indicator 30 MINI-CABG Site Stabilizer, which provides the surgeon with a means of controlling the heart movement throughout the delicate procedure; the AUTO SUTURE SURGISTICH instrument, which allows the surgeon to sew vessels together in a very confined space; and the THORA-LIFT, a reusable rib retractor launched in 1997. The Company has developed CARDIOSTICH, an automated stitcher and associated DLUs and valve holder for minimally invasive cardiac applications. The Company believes the techniques permitted by these instruments will allow for smaller incisions, reduced operating time and reduced risks associated with current practices. The Company expects to have CARDIOSTICH available for sale in the first half of 1998. The Company also expects to launch in the first half of 1998 procedure kits for both standard and minimally invasive beating and arrested heart procedures. During the later part of 1997, the Company acquired Progressive Angioplasty Systems, Inc., a developer and marketer of a line of coronary stents and balloon angioplasty catheters. Angioplasty is performed to enlarge vessels that have become blocked due to a build up of plaque. During angioplasty, a balloon-tipped catheter is inserted through a vessel in the patient's arm or leg and guides the balloon to the obstruction. The balloon is inflated, which presses plaque back against the vessel wall, increasing the diameter of the artery and restoring blood flow to the coronary artery. Coronary stents are tiny metal scaffolds deployed in the vessel in conjunction with balloon angioplasty to reduce restenosis, the narrowing or partial occlusion of the vessel occurring within six months following the angioplasty procedure. The PARAGON coronary stent is made of martinsitic nitinol, is balloon expandable and is designed for improved trackability, flexibility and radiopacity. The PARAGON coronary stent received regulatory approval in Europe in late 1997 and completed a Phase II IDE clinical trial in the United States. The angioplasty balloon catheter products include the CHAMPION over the wire catheters and the TNT rapid exchange catheters which come in a variety of sizes and configurations, including high pressure balloon materials and WRAP, a unique design to lower balloon profiles for improved lesion crossability. The Company is continuing development of a new technology to reduce restenosis in patients following balloon angioplasty and stenting procedures. Intravascular radiation therapy is a new technology which places a tiny radioactive guide wire or balloon catheter in the artery, delivering either gamma or beta radiation to the damaged portion of the vessel. The radiation is intended to decrease the proliferation of the scar tissue that reclogs the vessel following angioplasty or stenting. A Phase I IDE clinical trial for the ANGIORAD Gamma Wire System was commenced during the later part of 1997. The Company is also developing the RADIANT Beta Balloon Catheter System to deliver beta radiation to the lesion site following a balloon angioplasty or stenting procedure. The Company is also continuing development of products for transmyocardial revascularization and percutaneous transmyocardial revascularization (frequently known as TMR and PTMR, respectively), promising cardiovascular surgical and interventional cardiology procedures that are designed to create pathways for blood to reach oxygen-starved heart tissue in patients with coronary artery problems. In connection with this program, the Company owns a controlling interest in Medolas Gesellschaft fur Medizintechnik GmbH, a German laser developer and manufacturer, and has exclusive worldwide rights to market Medolas' excimer lasers for TMR and PTMR. The excimer laser dissolves tissue in a photo-ablative process, as opposed to burning tissue in a heat-intensive process. During the later part of 1997, the Company entered into an alliance with The Spectranetics Corporation (Spectranetics) under which the Company purchases excimer laser systems and fiber optic probes and has co-exclusive rights to their excimer laser coupling technology for TMR and PTMR. The Company believes that the approximately 200 currently installed Spectranetics' excimer laser systems can also be modified for TMR. A Phase II IDE clinical trial is expected in 1998. The Company believes its products may also be used for a variety of minimally invasive cardiovascular and peripheral vascular surgeries and endovascular procedures, and is developing additional instruments for use in such procedures. While the Company believes its products may be useful in coronary surgery, surgeons practicing in this field have not traditionally performed minimally invasive surgery or used single use instruments extensively and no assurance can be given as to the acceptance of such products or techniques in this area. Considerable competition exists for entry into the interventional cardiology, vascular and cardiovascular fields, including competition from more traditional approaches, from technology which adopts the same approach as the Company's line of instruments, and from technology which allows alternative techniques. The Company believes its products will be competitive, but can provide no assurance as to success or timing of the development programs or regulatory approvals or the success or acceptance of the products in the marketplace. -4- 7 BREASTCARE PRODUCTS The Company is continuing development of a comprehensive approach to breast care. The Company's ABBI system, incorporates a stereotactic table and the Company's ABBI biopsy device. The ABBI biopsy device combines wire localization with removal of a biopsy specimen. This system allows a one-step, minimally invasive process for breast biopsy, offering the surgeon increased accuracy and control, and helping hospitals reduce procedural and operating room costs. The one piece larger specimen (5 mm to 20 mm in diameter) obtained by the ABBI system aids in specimen orientation and diagnosis during pathology assessment, and facilitates physicians' decision making for improved results. The Company offers the stereotactic tables under a strategic alliance with Lorad, a unit of Trex Medical Corporation and a leading manufacturer of stereotactic equipment. The Company received FDA approval in the later part of 1997 to market its MIBB minimally invasive breast biopsy device. MIBB permits doctors to remove multiple tissue samples as small as 2mm in diameter using either stereotactic x-ray (the ABBI system) or 3-D ultrasound (the SONOPSY system) technology. The Company's SONOPSY system incorporates a proprietary breast compression device with an automated three-dimensional ultrasound scanner to accurately locate and biopsy suspicious lesions using MIBB or USSC's core needle biopsy products. The Company acquired the SONOPSY system during the later part of 1997 in connection with its acquisition of NeoVision Corporation with which it previously had a sales and marketing agreement. The Company expects to offer multiple versions of SONOPSY, including a version that integrates ABBI and SONOPSY so that the clinician can simultaneously image by ultrasound or x-ray for biopsy guidance, potentially increasing the number of women who can benefit from ABBI or MIBB biopsies. During the later part of 1997, the Company enhanced its ultrasound technology capabilities by acquiring the assets of DRS Medical Systems, Inc., a developer and marketer of ultrasound systems for medical applications. Other companies market or are developing equipment and devices for performing minimally invasive breast biopsies which remove tissue samples in fragmented pieces, or for diagnostic procedures without biopsies through medical imaging, and there can be no assurance as to the impact of such competing products on the Company's penetration into this field. However, the Company believes that the ABBI biopsy device, which provides a larger specimen, the MIBB biopsy device, which provides smaller specimens, and the SONOPSY system offer a comprehensive approach to imaging and diagnosis for breast care, providing significant advantages over competing devices. In January, 1998, the Company introduced its NAVIGATOR Gamma Guidance System. The NAVIGATOR System and the Company's LYMPHAZURIN Blue Dye are principal products designed for use by surgeons during a lymphatic mapping procedure. Current treatment standards for many cancer patients call for an Axiallary Lymph Node Dissection (ALND) in conjunction with resection of the primary tumor. In this procedure, up to 25 lymph nodes are harvested in order to obtain critical staging information. Due to the radical nature of this surgery, ALND is associated with a high degree of post-operative morbidity. Lymphatic mapping is a minimally invasive technique that allows the surgeon to harvest the sentinel (primary) lymph node from the affected nodal basin through a small incision. The NAVIGATOR System is used to track a radioactive mapping agent in the lymph node basin while the LYMPHAZURIN is used to dye the appropriate lymph nodes blue, thus aiding in the identification of the sentinel node. The procedure is designed to provide a less traumatic patient staging with lower morbidity and costs compared to the more radical ALND procedure. The lymphatic mapping procedure is currently being utilized for staging patients who have been diagnosed with malignant melanoma and breast cancer. Other companies market or are developing products for lymphatic mapping or for diagnostic procedures without lymphatic mapping, and such competition could adversely impact the Company's opportunities in this area. VALLEYLAB ACQUISITION In December, 1997, the Company entered into an agreement with Pfizer, Inc. to acquire Valleylab, a leading manufacturer of electrosurgical and ultrasound surgical products based in Boulder, Colorado, which has been in existence for over 30 years. The Valleylab acquisition, which is the largest acquisition in the Company's history, was completed in early 1998 (see Note T of Notes to Consolidated Financial Statements). -5- 8 Valleylab's products consist primarily of electrosurgical generators, pencils, accessories, and patient return pads. In addition, Valleylab products include ultrasound cutting devices including generators, handpieces, tubing and titanium tips, and laparoscopic surgical devices. Electrocautery, which has been utilized in surgery since the 1920's, offers a safe, versatile and effective method to cut and coagulate tissue and is utilized in a broad range of surgical applications. Electrical current flows from the generator to the active electrode (an electrosurgical pencil or other surgical instrument) and then through the body tissue to the patient return pad where it is collected and returned to the generator. Ultrasonic aspiration systems use a combination of mechanical vibration and suction to selectively fragment tissue. An ultrasonic aspirator system consists of an ultrasonic generator, a handpiece and a single-use pack containing tubing and titanium tips. A transducer within the handpiece vibrates the hollow titanium tip at ultrasonic frequencies while suction is applied to the tip core. When applied to a surgical site, tissue with high water content is fragmented and aspirated. Valleylab is currently developing several additional products and product enhancements which use radio-frequency energy and are designed to improve clinical outcomes and reduce procedure cost and duration. Several other companies are developing or currently offer such products, and such competition could adversely impact the Company's opportunities in this area. The Company believes that such products will be competitive but can provide no assurance as to the success or timing of the development programs or regulatory approvals or the success or acceptance of the products in the marketplace. The Valleylab acquisition constitutes a major milestone in the Company's strategy to grow through acquisition. The Company believes that Valleylab offers a major opportunity for the Company to acquire a leading medical device company with strong brand name recognition, an established customer base and demonstrated profitability. The Company believes that the Valleylab business provides substantial growth opportunities principally through innovative product upgrades, aggressive expansion of international sales through the Company's subsidiaries and international distributor network, and through Valleylab's substantial expertise and product development activities in women's healthcare and radiofrequency energy which will complement the Company's internal product development efforts in these areas. OTHER PRODUCTS The Company is continuing development of a new technology for treating benign prostate hyperplasia (BPH), an enlargement of the prostate that constricts the urethra, making urination difficult and causing other bothersome symptoms. This condition affects more than 13 million men worldwide and results in more than 500,000 surgical procedures annually. The most common procedure for BPH uses electrocautery to burn away prostate tissue. Although effective, the procedure requires general or spinal anesthesia, uncomfortable and confining post-operative catheterization and a four to six week recovery period. The procedure also has potentially serious side effects -- including impotence -- and costs approximately $8,000. The Company's Radio Frequency Therapy (RFT) system is completely automated and uses radio waves and a flexible scope, which most surgeons already own. The Company's system, combined with the scope, is designed to allow surgeons to perform the procedure in their offices using only local anesthesia and with shorter operating time. Patients should not require postoperative catheterization and should be able to resume normal activities in a few days. The RFT system will not only be better for the patient, but will offer the first truly cost-effective minimally invasive approach to BPH. It will be available outside the United States during the first half of 1998. The Company expects competition related to its RFT system, including competition from other device manufacturers and from treatment by means of drugs, and such competition could adversely impact the Company's opportunities in this area. The Company maintains an alliance with V.I. Technologies, Inc. and obtained exclusive worldwide rights to market V.I. Technologies' human fibrin glue for wound healing applications. The product is a tissue adhesive, treated by a unique method to address viral transmission concerns, and is intended to be used during surgical procedures to augment or replace sutures or staples for wound closure. The Company also owns approximately 9% of the outstanding shares of Alexion Pharmaceuticals, Inc., which is traded on the NASDAQ System. The Company maintains an alliance with Alexion with respect to worldwide manufacturing and marketing rights to market Alexion's transgenetically engineered non-human cells, tissues, and organs. The Company has certain options to fund Alexion's future research and development and pay royalties on any resulting product sales. During the later part of 1997, the Company purchased additional equity, exclusive licensing rights and certain xenograft manufacturing assets from Alexion. Although the Company believes that the V.I. Technologies and Alexion Pharmaceutical technologies are highly promising, substantial additional research and development and clinical trials, including premarket approval by the FDA, will be required before any products could be introduced to the domestic market, and no assurance can be given that the products will be successful. Moreover, a number of other companies are engaged in similar research, and such competition could adversely impact the Company's opportunities in these areas. -6- 9 MARKETING AND SALES Domestically, the Company markets its products to surgeons, nurses and materials managers of hospitals primarily through the sales employees of its Auto Suture Company division. Outside the United States, the Company markets its products in 25 countries and in the Commonwealth of Puerto Rico by direct sales employees of 20 sales and marketing subsidiaries, and through its authorized distributors in 64 other countries. The Company maintains its own direct sales force employed by subsidiaries operating in Algeria, Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Italy, Japan, Korea, Luxembourg, Morocco, the Netherlands, New Zealand, Norway, Poland, Puerto Rico, Russia, Spain, Sweden, Switzerland, Tunisia and the United Kingdom. During 1997, the Company established subsidiaries in Korea and Brazil to begin marketing its products directly to customers. All sales employees of the Auto Suture Company, of the Company's subsidiaries, and of the Company's authorized international distributors receive specialized training with respect to the Company's products, consisting of an extensive training course that prepares them to provide surgeons and hospital personnel with technical assistance, including scrubbing in surgery as technical advisors, in connection with the use of the Company's products. The training courses are developed and conducted by the Company at its expense. The training course includes an introduction to anatomy and physiology, the study of surgical terminology, aseptic surgical techniques such as scrubbing, gowning, gloving and operating room protocol and the use of the Company's instruments. The Company's training curriculum also prepares sales personnel to assist hospital administrators in implementing efficient surgical practices and in realizing the economic benefits afforded by the Company's products. The Company demonstrates its products on artificial foam organs and through the use of films, video cassettes, technical manuals and surgical atlases. The Company also sells to domestic distributors under a program known as Just-in-Time (JIT) distribution. Under the JIT program, the Company sells its products to a distributor selected by a participating hospital and the distributor sells the product to the hospital on an as needed basis. Sales through the JIT program currently comprise approximately 42% of the Company's domestic business. The Company reflects its commitment to the continuing education of the surgical community by assisting a substantial number of medical schools, hospitals and educational organizations in training residents, nurses, surgeons and administrators in the techniques of wound management using all of the Company's product lines. With the increasing number of advanced surgical procedures being performed, the Company also supports proctorships and preceptorships where an experienced surgeon clinically assists and teaches a surgeon in the operating room. The Company markets to hospital administrators and hospitals through purchasing groups as well as to surgeons, by demonstrating the economic efficiencies of the Company's products and by assisting hospital management in realizing the benefits of minimally invasive surgery. The Company's PARTNERING WITH USSC program, is designed to help hospital administrators reduce costs, enhance quality and increase revenue. The program encompasses the Company's BEST PRACTICES program, which assists hospitals in a continuous effort to perform surgery more efficiently, enabling hospitals to analyze and reduce systemwide costs. This program also provides surgeon and staff training programs and development of clinical guidelines for high-quality and efficient patient care through minimally invasive surgery, as well as assistance with managed care contracting and customized marketing materials. The Company also provides training programs for primary care physicians in the use and advantages of minimally invasive surgery, as they become the gatekeepers to managed care. These approaches are designed to assist hospitals in remaining competitive in the current health care environment. During 1997, the Company continued to expand its PARTNERING WITH USSC program to provide hospitals with turn-key marketing and management practice programs. These include the Company's WOMEN'S INITIATIVE, designed to help hospitals become the provider of choice in women's health care, and the Company's PHYSICIAN'S INITIATIVE, which assists physicians with management of their practices. The PHYSICIAN'S INITIATIVE includes the Outcomes Measurement Tool, a software program designed to help providers document the competitive advantages of their surgical practices to managed care organizations, and the Practice Benchmarking Tool, a program which helps physicians compare their practice to national norms. International sales represented approximately 47% of the Company's net sales in 1997, 50% in 1996, and 49% in 1995. International sales included sales through international subsidiaries, which were approximately 42% in 1997, 45% in 1996, and 44% in 1995, of consolidated net sales and sales to international distributors and to end users in countries not otherwise serviced by the Company, which were approximately 5% in 1997, 1996 and 1995, of the consolidated net sales. (See Note N of Notes to Consolidated Financial Statements for additional information by geographical area.) Orders for the Company's products are generally filled on a current basis, and order backlog is not material to the Company's business. -7- 10 MANUFACTURING AND QUALITY ASSURANCE Manufacturing is conducted principally at two facilities: North Haven, Connecticut, and Ponce, Puerto Rico. Manufacturing includes major assembly and packaging of products. The Company produces all material for its synthetic absorbable staples, clips, tacks and sutures, including suture anchors, internally. Needles contained in certain of the Company's suture products are produced at its facilities in North Haven, Connecticut. Other needles and suture materials are supplied by several manufacturers. The Company's reusable steel surgical staplers, components for the products the Company manufactures, and a minor portion of the Company's DLUs and the disposable laparoscope are supplied by several independent non-affiliated vendors. Surgical Dynamics RAY TFC threaded fusion cages are supplied by independent non-affiliated vendors using proprietary licensed designs. Raw materials necessary for the manufacture of parts and components and packaging supplies for all of the Company's products that are manufactured by it are readily available from numerous third-party suppliers. The Company considers quality assurance to be a significant aspect of its business. It has a staff of professionals and technical employees who develop and implement standards and procedures for quality control and quality assurance. These standards and procedures cover detailed quality specifications for parts, components, materials, products, packaging and labeling, and testing of all raw materials, in-process subassemblies and finished products, to assure compliance with the Company's standards. The Company has obtained International Standards Organization ("ISO 9000") certification for its plants in Connecticut and Puerto Rico. RESEARCH AND DEVELOPMENT The Company believes that research and development is an important factor in its future growth. The Company engages in a continuing product research, development and improvement program at its Norwalk and North Haven, Connecticut and Menlo Park, California facilities and through funding of research and development activities at major universities and other third parties. It employs a staff of engineers, designers, toolmakers and machinists that performs research and development as well as manufacturing support functions. During 1997, 1996, and 1995, the Company's research and development expenses were approximately $71,800,000, $58,000,000, and $43,100,000, respectively. Within the past three years the Company has introduced 39 new products that are the result of research and development conducted by the Company. Approximately 45% of 1997 sales revenues were generated from the sale of products introduced within the preceding five years. The Company focuses its research and development resources on products and redesign of existing products which are best suited to customer needs in the current cost conscious health care environment, including an aggressive program of exploring new opportunities for advancement in the surgical field. PATENTS AND TRADEMARKS Patents are significant to the conduct of the Company's business. The Company owns or obtained exclusive rights to 122 new U.S. patents issued in 1997 (including patents purchased through acquisitions of companies or technology), 144 such patents issued in 1996, and 166 such patents issued in 1995. Overall, the Company currently owns approximately 860 unexpired U.S. utility and design patents covering products it has developed or acquired and having expiration dates ranging from less than one year to 17 years. No patents will expire in the near future which are material to the Company's results of operation or financial position. Moreover, the Company has many additional U.S. patent applications pending. The Company's practice and experience is to develop or acquire rights or licenses to innovative patented products and continuously update its existing technology. The Company also has a significant number of foreign patents and pending applications. The Company has registered various trademarks in the U.S. Patent and Trademark Office and has other trademarks which have acquired both national and international recognition. The Company also has trademark registrations or pending applications in a number of foreign countries. See Item 3, "Legal Proceedings", for details of certain patent infringement actions to which the Company is a party. -8- 11 COMPETITION There is intense competition in the markets in which the Company engages in business. Products competitive with the Company's staplers, clip appliers and sutures include various absorbable and non-absorbable sutures, staples, clips and tape, as well as single use staplers. Many major companies that compete with the Company, such as Ethicon, Inc. ("Ethicon"), a Johnson & Johnson subsidiary and Sherwood-Davis & Geck, a division of American Home Products Corporation, have a wider range of other medical products and dominate much of the markets for these other products. Ethicon markets, in addition to sutures and other wound closure products, single use skin staplers, clip appliers, and internal staplers. Sherwood-Davis & Geck markets single use skin staplers, clip appliers and suture materials. The Company believes that these major companies will continue their efforts to develop and market competitive devices. The market for products for minimally invasive surgery is highly competitive. The Company believes it is the leader in this field as the result of its successful innovative efforts and superior products. Ethicon, through a division known as Ethicon Endo-Surgery, markets a line of endoscopic instruments directly competitive with the Company's products and is its principal competitor in minimally invasive surgery. The Company believes that Ethicon devotes considerable resources to research and development and sales efforts in this field. Numerous other companies manufacture and distribute single use endoscopic instruments. In addition, manufacturers of reusable trocars and other reusable endoscopic instruments, including Richard Wolf Medical Instruments Corp. (a subsidiary of Richard Wolf, GmbH) and Karl Storz Endoscopy-America Inc. (a subsidiary of Karl Storz, GmbH), compete directly with the Company. The latest market studies show Ethicon currently has in excess of 70% of the domestic suture market. The Company expects that, because the size of the total sutures market is relatively stable, any increase in the Company's market share in this area will have to be earned at the expense of the other current market participants. The Company believes that the technological advantages of its sutures will enable it to compete effectively with these companies and that its market share in sutures will continue to grow. There is intense competition in sales of products for use in spinal, vascular, cardiovascular, interventional cardiology, breast biopsy, urologic, orthopedic and oncological procedures. A broad range of companies presently offer products or are developing products for use in such procedures. Many of such companies have significantly greater capital than the Company and are expected to devote substantial resources to development of newer technologies which would be competitive with products which the Company may offer. There are also a number of smaller companies which offer such products which present additional competition. Competitors which are developing or offering products in spine procedures include Spine-Tech, Inc. and Sofamor Danek, Group, Inc. Principal competitors which are developing or offering cardiovascular, vascular and interventional cardiology products include Johnson & Johnson's Ethicon and Cordis subsidiaries, Boston Scientific Corporation, Medtronic, Inc., Guidant Corporation, C.R. Bard, Inc., Heartport, Inc. and CardioThoracic Systems, Inc. Ethicon, through its acquisition of Biopsys Medical, Inc. and its alliance with Fischer Imaging Corporation, offers products which compete directly with the Company's ABBI System. The market for Valleylab's electrosurgical and ultrasound surgical products is highly competitive with competition from other manufacturers and from suppliers with products employing other technologies. Competitive pricing pressure and the introduction of new products by competitors could have an adverse effect on Valleylab's revenues and profitability. Competitors of Valleylab products include Minnesota Mining and Manufacturing Company, ConMed Corporation and Erbe Electromedizin GmbH. The Company believes that Valleylab's strong brand name recognition, established customer base and growth opportunities available through product upgrades, expansion of international sales and development of new innovative products will enable it to compete effectively in this field. The Company's principal methods of competing are the development of innovative products, the performance and breadth of its products, its technically trained sales force, educational services, including sponsorship of training programs in advanced laparoscopic techniques, and more recently, assisting hospital management with cost containment and marketing programs. Some of the Company's major competitors have greater financial resources than the Company. Some of its competitors, particularly Ethicon, have engaged in substantial price discounting and other significant efforts to gain market share, including bundled contracts for a wide variety of healthcare products with group purchasing organizations. In the current health care environment, cost containment has become a significant factor in purchasing decisions by hospitals. As a result, the Company's traditional advantage of product superiority has been impacted. The Company has responded to this aspect of competition by competitive pricing and by offering products which meet hospital cost containment needs, while maintaining the technical superiority of its products and the support of its sales organization. The Company collaborates with some of the most prestigious academic medical centers in the world to establish Centers of Excellence for training in many diverse disciplines. These centers are devoted to teaching residents and surgeons in the use of new instrumentation, developing new technologies, conducting preclinical trials and other research projects. In today's managed care environment, these multi-center studies also bring into sharper focus the cost benefits of a wide range of the Company's products. -9- 12 The Company believes that the advantages of its various products and its customer assistance programs will continue to provide the best value to its customers. However, there is considerable competition in the industry and no assurance can be given as to the Company's competitive position. The impact of competition will likely have a continuing effect on sales volumes and on prices charged by the Company. In addition, increased cost consciousness has revived competition from reusable instruments to some extent. The Company believes that single use instruments are safer and more cost efficient for hospitals and the healthcare system than are reusable instruments, but it cannot predict the extent to which reusable instruments will competitively impact the Company. The Company also offers reusable instruments, and is introducing resposable instruments, components of which may be reused a certain number of times, to respond to the preferences of its customers. GOVERNMENT REGULATION The Company's business is subject to varying degrees of governmental regulation in the countries in which it operates. In the United States, the Company's products are subject to regulation as medical devices by the FDA, as well as by other federal and state agencies. These regulations pertain to the manufacturing, labeling, development and testing of the Company's devices as well as to the maintenance of required records. An FDA regulation requires prompt reporting by all medical device manufacturers of an event or malfunction involving a medical device where such device caused or contributed to death or serious injury or is likely to do so. Federal law provides for several routes by which the FDA reviews medical devices prior to their entry into the marketplace. In the past, the Company's stapling and endoscopic products have been cleared by the FDA under the most expedited form of pre-market review or have not required FDA approval. The Company, along with the rest of the industry, had for several years experienced lengthy delays in the FDA approval process. More recently, the timeliness of the FDA's review has improved. Timely product approval is important to the Company's maintaining and/or obtaining technological competitive advantages. Other than lengthy FDA product approval delays, the Company has not encountered any other unusual regulatory impediments to the introduction of new products. To the extent the Company develops products for use in more advanced surgical procedures, the regulatory process may be more complex and time consuming. Many of these future products may require lengthy human clinical trials and the Pre-Market Approval of the FDA relating to class III medical devices. The Company knows of no reason to believe that it will not be able to obtain regulatory approval for its products, to the extent efficacy, safety and other standards can be demonstrated, but the lengthy approval process will require additional capital, risk of entry by competitors, and risk of changes in the marketplace prior to market approvals being obtained. Overseas, the degree of government regulation affecting the Company varies considerably among countries, ranging from stringent testing and approval procedures in certain locations to simple registration procedures in others, while in some countries there is virtually no regulation of the sale of the Company's products. In general, the Company has not encountered material delays or unusual regulatory impediments in marketing its products internationally. Establishment of uniform regulations for European Economic Area nations took place on January 1, 1995. The new regulations subject the Company to a single regulatory scheme for all of the participating countries. The Company has taken the necessary steps designed to assure ongoing compliance with these new, more rigorous regulations, including obtaining ISO 9000 certifications of its operations. The Company expects that it will be able to market its products in Europe with a single registration applicable to all participating countries. The Company is also able to respond to various local regulatory requirements existing in all other international markets. HEALTH CARE MARKET The health care industry continues to undergo change, led primarily by market forces which are demanding greater efficiencies and reduced costs. Government proposed health care mandates in the United States have not occurred, and it is unclear whether, and to what extent, any future government mandate will affect the domestic health care market. Industry led changes are expected to continue irrespective of any governmental efforts toward health care reform. The scope and timing of any further government sponsored proposals for health care reform are presently unclear. The primary trend in the industry is toward cost containment. Payors and managed care organizations have been able to exercise greater influence through managed treatment and hospitalization patterns, including a shift from reimbursement on a retrospective basis to prospective limits for patient treatment. Hospitals have been severely impacted by the resulting cost restraints and are competing for business and becoming more sophisticated in management and marketing. The increasing use of managed care, centralized purchasing decisions through group purchasing organizations, consolidations among hospitals and hospital groups, and integration of health care providers, are continuing to affect purchasing patterns in the health care system. Purchasing decisions are often shared by a coalition of surgeons, nursing staff, and hospital administrators, with purchasing decisions taking into account whether a product reduces the cost of treatment and/or attracts additional patients to a hospital. All of these factors, along with competition, have contributed to continuing reductions in prices for the Company's products and, in the near term, to slower acceptance of more advanced surgical procedures in which the Company's products are used, given hospital and surgeon concerns as to the costs of training and reimbursement by payors. In addition, the primary care physician is expected to exercise significant influence on referrals of patients for surgical procedures under managed care. -10- 13 The Company could potentially benefit from this focus on cost containment and on managed care. Stapling, minimally invasive surgery and spinal cages decrease operating room time including anesthesia, patient recovery time and in many cases are highly cost effective. Doctors, patients, employers and payors all value decreased patient recovery time. This could lead to potential increases in volume as surgical stapling, minimally invasive procedures and spinal cages are selected over alternative techniques. However, an undue focus on discrete costs or similar limits which fail to consider the overall value of these advanced techniques could adversely impact the Company. Some hospitals may also lose per night revenues through reduced post-operative care requirements as to procedures performed by laparoscopy, which could influence their analysis or acceptance of newer procedures. The Company is adapting itself to this environment by promoting the cost effectiveness of its products, by striving to efficiently produce the highest quality products at the lowest cost, and by assisting hospitals and payors in achieving meaningful cost reductions for the health care system while retaining the quality of care permitted by the Company's products. Internationally, several factors have slowed the pace of conversion from traditional to minimally invasive procedures or acceptance of surgical techniques that utilize the Company's products. The socialization of health care in many developed, international countries results in surgeons and patients having less influence on the type of care the patients receive. Cost containment efforts by governments often slow down the process of obtaining reimbursement for procedures that are performed with the Company's products. The Company expects these factors to continue to impact growth in foreign countries. In addition, the Company is experiencing pricing pressures from competition and from cost containment efforts by health care payors in many foreign countries. EMPLOYEES At December 31, 1997, the Company employed 5,776 persons, 4,717 domestically and 1,059 in foreign countries. None of the Company's domestic employees is represented by a labor union for purposes of collective bargaining. The Company considers its relations with its employees to be excellent. ITEM 2. PROPERTIES. The Company owns its corporate headquarters, which is located at 150 Glover Avenue, Norwalk, Connecticut, and owns or leases other facilities, primarily in Norwalk and North Haven, Connecticut, in Ponce, Puerto Rico, Elancourt, France, and in nineteen other foreign countries. The Norwalk corporate headquarters includes executive and administrative facilities and research laboratories. The other facilities in the United States and the facilities in Puerto Rico and in foreign countries consist of administrative offices, manufacturing, research, warehouse, distribution, and sterilizer operation space. The North Haven, Connecticut and Puerto Rico facilities are the primary manufacturing facilities of the Company. The facilities at each of these locations are leased by the Company under long term operating leases. During 1992 and 1993, the Company expanded its facilities in North Haven, Connecticut, Ponce, Puerto Rico, and various locations in Europe to accommodate anticipated increased demand for its products, and constructed a European headquarters, training, and distribution facility in Elancourt, a suburb of Paris, France. The Elancourt properties are leased under a 15 year financing lease and a portion of the facility is being used by the Company as a surgeon training facility and for administrative offices. The Company is presently attempting to arrange early termination of its lease of the unutilized portion of its Puerto Rico facility. The Company's facilities and equipment are in good operating condition, are suitable for their respective uses and are adequate for current needs. ITEM 3. LEGAL PROCEEDINGS. A. In July, 1989, Ethicon, Inc. filed a complaint against the Company in the United States District Court for the District of Connecticut alleging infringement of a single United States patent relating to trocars. In counterclaims, the Company has alleged, among other grounds, that Ethicon's actions tortiously interfered with the Company's business dealings and that Ethicon is infringing three of the Company's patents. The parties' cross-motions for preliminary injunctions were denied by the District Court in April 1991. The Company, as part of its motion to dismiss Ethicon's complaint, had moved that the Court correct the inventorship of the patent at issue to include the Company's licensor. The Court had held evidentiary hearings on the Company's motion to dismiss in 1995, and in September, 1996, granted the Company's motion to correct inventorship in favor of the Company's licensor. The Company's motion to dismiss Ethicon's claims against the Company based on revised inventorship was granted. Ethicon 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. The parties are awaiting a decision on the appeal. The Company's counterclaims against Ethicon also remain pending. No trial date has been set. In the opinion of management, based upon the advice of counsel, the Company has valid claims against Ethicon and meritorious defenses against the claims by Ethicon. -11- 14 B. In March, 1992, the Company filed a complaint in the United States District Court for the District of Connecticut against Johnson & Johnson subsidiaries Johnson & Johnson Hospital Supplies, Inc. and Ethicon, Inc., alleging infringement of United States patents issued to the Company covering the Company's endoscopic multiple clip applier. In February, 1994, a jury returned a verdict in favor of the defendants, holding that the Company's patent claims were invalid. The Company's appeal of the verdict to the United States Court of Appeals for the Federal Circuit was denied, and the Company filed a petition for a writ of certiorari with the United States Supreme Court seeking to overturn the lower court decisions. The United States Supreme Court accepted the Company's petition and, in April, 1996, vacated the decision of the United States Court of Appeals for the Federal Circuit denying the Company's appeal from the jury verdict. The Supreme Court remanded the case to the Court of Appeals for reconsideration. On January 3, 1997, the Court of Appeals denied the Company's motion, ruling that a new trial was not required. The Company filed a petition with the U.S. Supreme Court for review of the United States Court of Appeals decision and on November 3, 1997, the Supreme Court declined to review the Court of Appeals decision. C. In September, 1993, Ethicon, Inc. filed a Complaint against the Company in the United States District Court for the District of Delaware alleging that the Company's manufacture, use and sale of surgical staples used in a variety of the Company's staplers infringes certain patents. Ethicon, Inc. subsequently amended its complaint to add Ethicon Endo-Surgery and Design Standards Corporation, a Connecticut corporation and a supplier to the Company, as co-plaintiffs. The Company successfully moved to transfer the case to the United States District Court for the District of Connecticut. In December, 1993, the Company asserted counterclaims against Ethicon, Inc. and Ethicon Endo-Surgery for, among other things, infringing the Company's patents relating to surgical staples. In addition, the Company has asserted counterclaims against Design Standards Corporation for breach of its contractual obligations to the Company and for statutory unfair trade practices by purporting to assign rights to Ethicon which belong to the Company. In December, 1995, the Company filed motions for summary judgment as to the validity of and the lack of any infringement with respect to the Ethicon patents, and the plaintiffs filed a motion for summary judgment against the Company's counterclaims. The motions remain pending and no trial date has been set. In the opinion of management, based upon the advice of counsel, the Company has meritorious defenses against the claims asserted in this action and valid claims against the plaintiffs. D. In February, 1994, Ethicon Endo-Surgery filed suit against the Company in the United States District Court for the Southern District of Ohio, alleging infringement by the Company's instruments of a single patent for a safety lockout mechanism on a linear cutter/stapler. In June, 1994, the Court denied the plaintiffs' motion for a preliminary injunction against the Company. In August, 1995, after a hearing as to the construction of Ethicon's patent claims, the Court ruled in favor of the Company and dismissed Ethicon's claims. Ethicon appealed the decision and, in August, 1996, the Court of Appeals for the Federal Circuit substantially affirmed the District Court's decision. Ethicon's request for rehearing by the Court of Appeals was denied, and the Company moved for summary judgment on the remaining aspects of Ethicon's case. On June 30, 1997, the District Court entered summary judgment in favor of the Company dismissing Ethicon's sole remaining claim. Ethicon has filed an appeal of the summary judgment. In the opinion of management, based upon the advice of counsel, the Company has meritorious defenses against the claims asserted in the complaint. E. In November, 1995, the Company acquired Surgical Dynamics, Inc. ("Surgical Dynamics"), a privately held company which develops, manufactures and markets surgical devices for use in spinal procedures. In January, 1995, Surgical Dynamics sought declaratory judgment in the United States District Court for the Central District of California that its spinal fusion cage product, the Ray FTC device, did not infringe a patent owned by Karlin, Inc. and licensed to Sofamor Danek Group, Inc. and that such patent is invalid. The defendants filed counterclaims for patent infringement and unfair trade practices. On June 30, 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. Oral argument on the appeal before the United States Court of Appeals for the Federal Circuit is set for February 5, 1998. In the opinion of management, based upon the advice of counsel, Surgical Dynamics is not infringing any rights of the defendants and has valid defenses against the defendants' counterclaims. F. In September, 1996, the Company filed a complaint in the Chancery Court in the State of Delaware against Circon Corporation and individual members of its Board of Directors, asking the Court to enjoin and void a preferred share purchase agreement and various compensation arrangements adopted by Circon in response to the Company's cash tender offer for all outstanding common shares of Circon Corporation. 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, chief executive officer of Circon, who was 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. Discovery is continuing and no trial date has been set. -12- 15 G. 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, judgment on the verdict was entered by the Court for $20.5 million which the Company recorded as a charge in its statement of operations. The Company has filed an appeal of the verdict. H. 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. On November 6, 1997, the Company filed a motion to transfer the case to the United States District Court for the District of Connecticut. On November 21, 1997, the Court granted the Company's motion and the case has been transferred. On November 10, 1997, the Company filed an answer and counterclaims against Imagyn alleging patent infringement of United States patents issued to the Company by a number of Imagyn's endoscopic products. In the opinion of management, based upon the advise of counsel, the Company has meritorious defenses against the claims by Imagyn. I. In February, 1997, the Company was sued as a third-party defendant in an action filed by Sam F. Liprie ("Liprie") against Omnitron International, Inc. and certain other persons in the 215th District Court of Harris County, Texas. The Company is aligned with Liprie by virtue of acquiring a licensing agreement in September, 1996 of technology developed by Liprie. In this litigation, Omnitron International, Inc. and NeoCardia L.L.C. ("NeoCardia") (collectively, "Omnitron") have made allegations involving the right to technology related to restenosis prevention. The defendants are aligned with third-party defendants, Guidant Corporation and ACS Delaware Corporation (collectively, "Guidant"), who were brought into the suit by Liprie. The third party defendants are asserting rights to the same technology by virtue of an asset sale with NeoCardia. They are likewise asking the court to declare that the Company does not have any rights to the disputed technology. In counterclaims, the Company has alleged tortious interference and misappropriation of trade secrets, and has sought injunctive relief. This case is set for trial on February 16, 1998. In the opinion of management, based upon the advice of counsel, the Company has meritorious defenses against the claims asserted in the complaint. J. The Company is engaged in other litigation, primarily as a defendant in cases involving product liability claims. The Company is also involved in various other cases. The Company believes it is adequately insured in material respects against the product liability claims and, based upon advice of counsel, that the Company has meritorious defenses and/or valid cross claims in these actions. * * * * * * * Based on information currently available and established reserves, it is the opinion of management, based upon the advice of counsel, that the ultimate resolution of pending legal proceedings should not have a material adverse effect on the Company's consolidated financial statements. However, based on future developments and as additional information becomes known, it is possible that the ultimate resolution of such matters could have a material adverse effect on the Company's results of operations in a particular future period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. -13- 16 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information pertaining to the executive officers of the Company as of January 1, 1998:
Acting as Name Age Position Such Since ---- --- -------- ---------- Leon C. Hirsch 70 Chairman of the Board and July 1996 Chief Executive Officer (Chairman of the Board, President and Chief Executive Officer 1987 - July 1996) (Officer since 1964) Howard M. Rosenkrantz 54 President and July 1996 Chief Operating Officer (Senior Vice President, Finance and Chief Financial Officer 1992 - July 1996) (Officer since 1981) Turi Josefsen 61 Executive Vice President and 1994 President, International Operations (Executive Vice President and President and Chief Executive Officer of Auto Suture Companies 1992 - 1994) (Officer since 1971) Robert A. Knarr 49 Executive Vice President, 1997 Sales and Marketing, North America (Senior Vice President and General Manager, U.S. and Canada, 1994 - 1996) (Officer since 1983) Thomas R. Bremer 44 Senior Vice President and 1994 General Counsel (Officer since 1989) Richard A. Douville 42 Senior Vice President and 1997 Chief Financial Officer (Vice President, Treasurer and Chief Financial Officer July 1996 - December 1996, Vice President and Treasurer 1993 - July 1996) (Officer since 1993) Peter Burtscher 57 Vice President, Sales and Marketing, 1997 Latin America and Pacific Rim (Group Vice President 1993 - 1996) (Officer since 1982) Richard N. Granger 41 Vice President, Research 1993 and Development (Officer since 1992) Charles E. Johnson 49 Vice President, Education 1994 (Officer since 1993) Bernard Mardirossian 46 Vice President, Finance and 1997 Distribution, International (Senior Director International Accounting 1992 - 1997) Louis J. Mazzarese 52 Vice President, Quality 1992 and Regulatory Affairs (Officer since 1991) Eitan Nahum 48 Vice President, Strategic Planning and 1995 Business Development
-14- 17 David Renker 41 Vice President, Human Resources 1997 (Senior Director, Human Resources 1994 - 1997) Joseph C. Scherpf 54 Vice President and 1984 Controller (Officer since 1983) Jeffrey B. Sciallo 48 Vice President, Information Services 1997 and Treasurer (Vice President, Information Services 1995 - 1996) (Officer since 1995) Marianne Scipione 51 Vice President, Corporate 1981 Communications (Officer since 1975) Charles Tribie 45 Vice President, Manufacturing 1995 Pamela Komenda 44 Corporate Secretary 1989 (Officer since 1988)
Various of the above-named persons are also officers of one or more of the Company's subsidiaries. Leon C. Hirsch and Turi Josefsen are husband and wife. No other family relationship exists between any of the above-named persons. Officers are elected for annual terms to hold office until their successors are elected, or until their earlier resignation or removal by the Board of Directors. All of the executive officers have for at least the past five years held high level management or executive positions with the Company or its subsidiaries, except for Mr. Douville, who joined the Company in 1993, and Mr. Nahum, who joined the Company in 1995. Mr. Douville was previously employed from 1977 to 1992 by the accounting firm of Deloitte & Touche, where he was a partner, and was Vice President and Controller with PepsiCo. Foods International from 1992 until joining the Company. Mr. Nahum was President and Chief Executive Officer of Bogen Communications, Inc. from 1994-1995. From 1989-94 he was with Sharplan Lasers, Inc., a subsidiary of Laser Industries serving as its President from 1991-94. -15- 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the New York Stock Exchange under the symbol USS. The following table sets forth for the periods indicated the high and low of the daily sales prices, which represent actual transactions, as reported by the New York Stock Exchange. In addition, the table sets forth the amounts of quarterly cash dividends per share that were declared and paid by the Company. CASH DIVIDENDS DAILY SALES PRICES PAID HIGH LOW ---- ---- --- 1997 1st Quarter $.04 $47.00 $29.50 2nd Quarter .04 38.88 30.00 3rd Quarter .04 40.25 28.00 4th Quarter .04 33.38 23.25 1996 1st Quarter $.02 $33.13 $19.75 2nd Quarter .02 38.75 29.38 3rd Quarter .02 43.75 26.50 4th Quarter .02 46.63 35.75 At December 31, 1997, the number of record holders of the Company's Common Stock was 6,910. See discussion below in Management's Discussion and Analysis of Financial Condition and Results of Operations as to restrictions imposed by a credit agreement on registrant's level of dividend payments. -16 - 19 ITEM 6. SELECTED FINANCIAL DATA.
Years Ended December 31, - ---------------------------------------------------------------------------------------------------------------- In thousands, except per share data 1997(1) 1996 1995(2) 1994(3) 1993(4) - ---------------------------------------------------------------------------------------------------------------- Net sales ............................. $1,172,100 $1,112,700 $1,022,300 $ 918,700 $1,037,200 Income (loss) before income taxes ..... $ 121,000 $ 141,700 $ 89,800 $ 32,700 $ (137,400) Net income (loss) ..................... $ 94,100 $ 109,100 $ 79,200 $ 19,200 $ (138,700) Net Income(loss) per basic common share (5) .................... $ 1.24 $ 1.48 $ 1.05 $ .08 $ (2.48) Average number of basic common shares outstanding (5)............... 72,100 60,500 57,000 56,600 56,000 Net Income(loss) per diluted common share (5)..................... $ 1.21 $ 1.43 $ 1.04 $ .08 $ (2.48) Average number of diluted common shares outstanding (5)............... 73,700 62,600 57,400 56,900 56,000 Dividends paid per common share ....... $ .16 $ .08 $ .08 $ .08 $ .245 At December 31, Total assets .......................... $1,726,000 $1,514,800 $1,265,500 $ 1,103,500 $1,170,500 Long-term debt ........................ $ 131,300 $ 142,400 $ 256,500 $ 248,500 $ 505,300 Stockholders' equity (6)............... $1,256,900 $1,053,800 $ 741,100 $ 662,000 $ 443,900
(1)In the second quarter of 1997, the Company recorded litigation costs of $24 million ($.24 per basic common share), restructuring charges of $6 million ($.06 per basic common share), and the tax benefit resulting from an IRS examination of $7 million ($.10 per basic common share). In the fourth quarter of 1997, the Company recorded restructuring charges of $12 million ($.11 per basic common share), and wrote off the carrying value of two terminated license/distribution agreements of $3 million each ($.05 per basic common share). In addition, the Company expensed $4 million of certain software related costs, previously capitalized, ($.04 per basic common share) as a result of a mandated change in accounting standards. (2)In the third quarter of 1995, the Company reached an agreement with respect to the settlement of all issues raised by the Internal Revenue Service in the examination of the Company's income tax returns for the years 1984 through 1990. As a result of the agreement, the Company recognized a net credit to the tax provision of $10 million ($.18 per basic common share) in the third quarter of 1995. (3)In the fourth quarter of 1994 the Company signed a letter of intent to purchase certain assets of its independent distributor in Japan, which included inventory of the Company's products purchased by the independent distributor but not yet sold to third parties at December 31, 1994. Sales and net income were reduced by $17 million and $8 million ($.14 per basic common share), respectively, in anticipation of the pending reacquisition of these products and valuing these products at the Company's cost. (4)Income (loss) before income taxes and net income (loss) for 1993 include restructuring charges of $137.6 million and $129.6 million ($2.31 per basic common share), respectively. (5)In the fourth quarter of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS 128), as required. The previously reported earnings per share, and share outstanding information, have been restated as required by FAS 128. (6)Included in Stockholders' equity in 1996, 1995 and 1994 is $191.5 million of convertible preferred stock which had a liquidation value of $200.0 million. The preferred stock was redeemed and converted into common shares on April 1, 1997. -17- 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS In 1997 the Company attained sales of $1.17 billion compared with sales of $1.11 billion in 1996 and $1.02 billion in 1995. Sales increased $59 million or 5% in 1997, increased $90 million or 9% in 1996, and increased $104 million or 11% in 1995. In 1997 the Company reported net income of $94.1 million. Net income, as adjusted, for the effect of litigation costs ($24 million or $.24 per basic common share), restructuring charges ($18 million or $.18 per basic common share), the termination of two distribution/license agreements ($6 million of $.05 per basic common share), the expensing, as a result of a mandated change in accounting, of previously capitalized software related costs ($4 million or $.04 per basic common share), and the benefits resulting from an IRS examination ($7 million or $.10 per basic common share) was $124 million or $1.65 per basic common share (after preferred stock dividends of $5 million) compared with $109 million or $1.48 per basic common share (after preferred stock dividends of $20 million) in 1996 and net income of $79 million or $1.05 per basic common share (after preferred stock dividends of $20 million) in 1995. Net income and net income per basic common share, as adjusted, increased $15 million and $.17, respectively, in 1997 compared to 1996, increased $30 million and $.43, respectively, in 1996 compared to 1995, and increased $60 million and $.97, respectively, in 1995 compared to 1994. The effect of changes in foreign currency exchange rates on results of operations was to decrease net income by $27 million in 1997 in comparison to 1996, decrease net income by $8 million in 1996 in comparison to 1995, and increase net income by $14 million in 1995 in comparison to 1994. The increase in sales in 1997 to $1.17 billion compared to $1.11 billion in 1996 was primarily due to volume increases attributable to new product introductions, specifically the substantial growth of the Company's Surgical Dynamics (SDI) business, as well as the Company's ABBI device, and related products. The increase in 1997 sales was partially offset by a reduction in the Company's core mechanical products business as continuing industry pricing pressures, and competition impact the marketplace in which the Company operates. Sales were negatively impacted by the reduction of inventories at JIT distributors due to hospital purchases from JIT distributors exceeding distributor purchases from the Company by $24.1 million and $13.1 million for 1996 and 1995, respectively. JIT inventories stabilized in 1997. The following table analyzes the change in sales in 1997, 1996 and 1995 compared with the prior years. 1997 1996 1995 ----- ----- ----- (IN MILLIONS) COMPOSITION OF SALES INCREASE: Sales volume increase.................. $144 $117 $ 64 Net price changes (A)(B)............... (35) (12) 12 Effects of changes in foreign currency exchange rates.............. (50) (15) 28 ----- ----- ----- Sales increase....................... $ 59 $ 90 $ 104 ===== ===== ===== (A)Approximately $13 million and $36 million of the sales increase accounted for in net price changes for 1996 and 1995, respectively, is the result of the 1995 acquisition of the Company's former Japanese distributor and the change from distributor pricing to subsidiary pricing as of April 1, 1995. In addition, the sales for 1996 include twelve months of subsidiary operations in Japan as compared to three months of distributor operations through the former Japanese distributor and eight months of operations as a subsidiary in 1995. The Company receives higher selling prices when selling as a subsidiary to the ultimate customer than was previously recognized by the Company when sales were made at distributor prices to the Company's former distributor. (B)Prices were adversely effected by approximately $16 million and $7 million, respectively, in 1997 and 1996 due to changes in reimbursement to French public hospitals by France's Social Security Administration. Sales volume accounted for all of the sales increases in 1997 and 1996 and 62% of the 1995 sales increase. -18- 21 Gross margin from operations (sales less cost of products sold divided by sales) was 60% in 1997 compared with 59% in 1996 and 56% in 1995. The reduction, as a percentage of sales, in cost of products sold and improved gross margins over the comparable 1996 period are primarily attributable to higher sales volumes of the Company's SDI products and the ongoing corporate wide cost saving initiatives. Gross margins continued to improve throughout 1995 and 1996 as a result of the implementation of the 1993/1994 restructuring plans, higher sales volumes and ongoing cost savings initiatives as well as the inclusion, effective April 1, 1995, of higher margin sales resulting from the acquisition of certain assets from the Company's former Japanese distributor. The reserves for obsolescence of production tooling and inventories, which are an ongoing cost of business, amounted to $12 million, $30 million and $45 million, respectively, in the years ended December 31, 1997, 1996 and 1995. Changes in foreign currency exchange rates from those existing in the prior year had the effect of decreasing cost of products sold by $5 million in 1997, and were immaterial in 1996 and 1995. The Company's investment in research and development during the past three years (1997 - $72 million; 1996 - $58 million; 1995 - $43 million) has yielded numerous product improvements as well as the development of numerous new product lines as the Company continues to broaden its product offerings. The $14 million increase in research and development expense in 1997 compared to 1996 is primarily attributable to increased spending towards developing advanced surgical techniques which could be used for additional surgical applications, including surgical specialties, and significant clinical costs primarily in the vascular, cardiovascular and interventional cardiology field in which the Company plans to significantly increase its presence in 1998. The increase in research and development expense in 1996 as compared to 1995 is also attributable to increased spending towards developing advanced surgical techniques and products, some of which were introduced throughout 1997. The increase in research and development expense in 1995 compared to 1994 resulted primarily from $4.6 million of charges during the third quarter of 1995 related to certain technologies which the Company decided not to pursue. The Company is continuing its on-going commitment to develop and acquire unique new products and technologies for use in new surgical procedures and specialty areas. Selling, general and administrative expenses expressed as a percentage of sales were 40% in 1997 (38% after adjusting for the unusual termination costs of distribution/license agreements and expensing of capitalized computer software costs in the fourth quarter of 1997 as set forth in the first paragraph on page 18), 40% in 1996 and 41% in 1995. The increase in selling, general, and administrative expenses in 1997 as compared to 1996, is attributable to $10 million of fourth quarter expenses attributable to certain previously capitalized software costs ($4 million), and two distribution/license agreements ($6 million) which the Company decided to terminate. In addition, 1997 selling, general, and administrative expense contains the intangible amortization, as well as the selling, general and administrative expense of its recent 1997 acquisitions. The increase in 1996 and 1995 in selling, general and administrative expenses is primarily due to the effects of the initiation by the Company of the marketing of the Company's products to its Japanese customers as a result of the acquisition of certain assets from the Company's former Japanese distributor. Changes in foreign currency exchange rates from those existing in the prior year had the effect of decreasing selling, general, and administrative expenses by $19 million in 1997 and $6 million in 1996, and increasing selling, general, and administrative expenses by $13 million in 1995. The Company recorded restructuring charges of $6 million during the second quarter of 1997 which 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 during the fourth quarter of 1997 of $12 million which also related to additional employee termination and facility disposals as part of the Company's cost cutting objectives. Collectively, the 1997 restructuring charges resulted in over 450 employee terminations worldwide, which should save the Company approximately $19 million on an annual basis. The majority of the cash outlays relative to the second quarter restructuring were made during the third and fourth quarter of 1997 with the remainder to be made in 1998. All of the cash outlays relative to the fourth quarter 1997 restructuring will be made in 1998. The Company recorded restructuring charges of approximately $7 million during the fourth quarter of 1995. These restructuring charges related primarily to lease terminations and employee severance costs associated with the relocation of one of the Company's largest international subsidiaries and the plan to centralize the distribution of the Company's products to its European customers. In addition, severance payments were incurred in relation to the restructuring of the Company's manufacturing plants. The majority of the cash outlays relative to these restructuring charges were made during the third and fourth quarters of 1995, with the remainder made during 1996. The 1995 restructuring charges were basically offset by the reversal of restructuring cost estimates in excess of ultimate costs which were originally recognized in the Company's fourth quarter 1993 consolidated statements of operations. There were no material adjustments to previously accrued restructuring charges in 1997. The decrease in interest expense in 1997 and 1996 as compared to 1995 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 investment of the remaining proceeds in high quality short-term liquid money market instruments. -19- 22 The tax provision for 1997, relates to domestic state and federal taxes, including taxes in Puerto Rico, as well as foreign taxes, while the provisions for 1996 and 1995 related primarily to foreign taxes and taxes in Puerto Rico. The Company's tax provisions in 1997, 1996 and 1995 reflect the lower effective tax rates on a subsidiary's operations in Puerto Rico and the availability of a tax credit under Section 936 of the Internal Revenue Code and the tax benefit of certain net operating loss and tax credit carryforwards which were not previously considered recognizable.In addition, in 1997 the Company's tax provision reflects a reduction in federal taxes due to certain tax benefits arising from the operation of the Company's Foreign Sales Corporation. The Company is currently in the process of having its federal income tax returns for the years 1991 through 1993 surveyed by the Internal Revenue Service (IRS). Incident to such examination, during the second quarter of 1997 the IRS documented its intention to accept the Company's tax filing position with respect to 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. In August 1995, the Company reached agreement with respect to settlement of all issues raised by the IRS in its examination of the Company's income tax returns for the years 1984 through 1990. Prior to this resolution, a significant portion of deferred tax assets related to available net operating loss and tax credit carryforwards had been fully reserved by the Company because of uncertainty over the future utilization of the tax benefits. Based upon circumstances relative to the IRS audit and the Company's estimate of future domestic taxable income, it is more likely than not that a significant portion of such fully reserved assets will be realized in the future. As a result, in the third quarter of 1995 the Company reduced the valuation allowances related to a significant portion of these deferred tax assets by $54.3 million (change in valuation allowances in 1995 was a reduction of $75.6 million), increased its current tax liabilities by $28.6 million for the remaining estimated tax liabilities relating to years subsequent to 1990, decreased tax assets by $7.4 million, recognized a net credit to the tax provision of $10.0 million ($.18 per basic common share) and recorded a credit to Additional paid-in capital (for windfall tax benefits related to net operating losses generated from stock compensation deductions in prior years) of $8.3 million. In the fourth quarter of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128 "Earnings Per Share"(SFAS 128), as required and restated the previously reported earnings per share in conformity with FAS 128. The new standard specifies the computation, presentation, and disclosure requirements for earnings per share. The Financial Accounting Standards Board issued Accounting Standards (SFAS 130), "Reporting Comprehensive Income", in June 1997 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 disclosure of certain information about operating segments and about products and services, geographic areas in which a company operates, and their major customers. The Company is presently in the process of evaluating the effect that 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. FINANCIAL CONDITION The increase in Receivables results primarily from the $19 million increase in sales in the fourth quarter 1997 when compared to the fourth quarter 1996 and sales of the Company's ABBI system biopsy device which is a capital equipment purchase by hospitals and, accordingly, results in longer payment periods. In addition, in some competitive situations extended payment terms have also contributed to the increase in accounts receivable. Inventory was increased during 1997 in order to support a higher level of sales in 1997 as compared to 1996. In addition, new products introduced late in 1997, primarily resulting from the Company's 1997 acquisitions, had the effect of increasing inventory balances. The increase in Other assets during 1997 is primarily attributable to the intangibles acquired in the Company's 1997 acquisitions (see Note E of Notes to Consolidated Financial Statements), and the increase in prepaid rent related to the Company's North Haven facility lease agreement. The increase in Accrued liabilities of $33 million during 1997 results from the accrual of estimated settlement and related costs relative to ongoing litigation and litigation related matters in which the company is a defendant. 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. In the second quarter of 1996, the Company sold 4.3 million shares of its common stock in a public offering for approximately $141.8 million of proceeds net of issuance costs. A portion of the proceeds were used to repay certain domestic bank debt and the balance of the proceeds was used for general corporate purposes, including financing the Company's 1997 various cash acquisitions. -20- 23 The Company entered into a $325 million credit agreement in December 1995. This credit agreement matures January 2001 and provides for certain covenants such as restrictions on asset sales, common stock dividends in excess of 20% of net income and subsidiary debt as well as required maintenance of certain minimum levels of tangible net worth and fixed charge coverage ratios and a stipulated level of debt to total capitalization. The credit facility provides for borrowings up to $25 million worth of Japanese Yen. The Company entered into an additional conditional committed bank term loan facility of $175 million during the third quarter of 1996 to exclusively finance its pending tender offer for Circon Corporation (see Note C of Notes to Consolidated Financial Statements). This conditional term loan facility has similar terms and conditions to the Company's present syndicated bank credit facility. Throughout 1997 and 1996, the Company entered into additional uncommitted facilities for 6 billion Japanese Yen (approximately $50 million) with three Japanese banks and $95 million with four other banks which are short term in nature. Such borrowings under the uncommitted facilities have been categorized as long-term debt as such borrowings will be refinanced under the Company's long-term bank credit agreement. The Company is in full compliance with all of its covenants associated with its various bank and leasing agreements. The Company increased its capital spending in 1997 by 31% compared to 1996 levels as a result of investing in new and more efficient production and information processing equipment. The Company's building programs were essentially completed by 1995 which enabled the Company to reduce its capital spending by more than 28% in 1995 compared to 1994 levels. Additions to Property, plant, and equipment on the accrual method totaled $ 59 million in 1997 ($56 million on a cash basis) compared with $44 million in 1996, and $48 million in 1995, and consist primarily of additions to machinery and equipment ($39 million), molds and dies ($13 million), land and buildings ($3 million), and leasehold improvements($4 million). During 1997 the Company removed from its balance sheet, Property, plant, and equipment which had an original cost of $29 million and is now fully depreciated and out of service. The Company's North Haven facilities are leased from a trust, of which the original developer (the "Owner Participant") holds the beneficial interest. The Owner Participant has the right to require the Company or the Company's designee to purchase the Owner Participant's beneficial interest. During 1997, the Company and the Owner Participant agreed to amend the date this right could be exercised from January 1998 to no earlier than April 2000. The Company's obligation, if the right is exercised, would be to take title to the beneficial interest in the trust, or find another investor, suitable to the noteholders who financed these facilities, to take such title. In either case the Company's obligations as lessee under the lease would not change. The Company would be obligated, whether or not the right is exercised, to make payments called for under the existing lease of approximately $57 million annually through the year 2002, a payment of $28 million in January 2003 and nominal annual payments of $100,000 through 2022. In addition, the Company is obligated to make contingent rental payments based upon the consumer price index. There are presently several alternatives available to the Owner Participant and the Company relative to the additional contingent rental payments. The earliest potential payment of approximately $19 million could be due as early as July 2000 if the Owner Participant exercises the right to sell the facility to the Company, or the Owner Participant elects the one-time lump sum payment of contingent rent. If this right is not exercised, and the Owner Participant does not elect the one-time payment of contingent rent of approximately $19 million, the determination of the additional contingent rental payments will be based upon movements in the consumer price index during the period September 1997 to September 2000 with an annual cap on the consumer price index movement of 2.5% per year. If the second option is chosen, additional contingent rental payments cannot exceed approximately $39 million as stipulated in the agreement. Under the second option, the Company can elect to pay free of interest from 2004 to 2023 the additional contingent rental payments in excess of $19 million. The present value of the contingent rental payments under the second option of approximately $23 million would be a charge to rent expense during the contingent rent period, September 1997 to September 2000, in comparison to the $19 million charge during the period, September 1997 to June 2000, under the other option. Through December 31, 1997, the Company has accrued $4.5 million related to contingent rental payments. If, as described above, the Company takes title to the beneficial interest in the facilities in July 2000, it is estimated that the Company's balance sheet would be affected through an increase in Property, plant and equipment of $339 million, a decrease in Other assets of $213 million and an increase in Long-term debt of $126 million. The Company has obtained a commitment for a term loan facility of $450 million during 1997 to finance the acquisition of Valleylab. This bank facility expires the earlier of 364 days from the date of the financing or March 31, 1999. The Company intends to refinance such debt under a long-term debt instrument. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 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 risks. -21- 24 The Company routinely enters into contracts to reduce its exposure to and risk from foreign exchange rate changes and interest rate fluctuations in the regular course of the Company's global business. As of December 31, 1997 the Company's foreign currency exchange contracts have all matured and the outstanding foreign currency option contracts of $33 million will mature throughout 1998. 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 relating to the foreign exchange options and contracts were immaterial during the fourth quarter and year ended December 31, 1997 in relation to the Company's projected exposure to foreign exchange rate fluctuations. In addition, the Company routinely enters into interest rate swap agreements to reduce its exposure to interest rate fluctuations for a portion of its French franc denominated financing lease. 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 fourth quarter and year ended December 31,1997. The Company presently has a 200 million French franc denominated interest rate swap outstanding which expires in December 1999, against its 458 million French franc denominated financing lease. Historically, interest rate changes relative to this swap have had an immaterial impact on the Company's Consolidated Financial Statements and are anticipated to be immaterial in the future. The Company maintains investments in marketable equity securities. The securities are classified as available for sale and are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of shareholders' equity. The following analysis presents the hypothetical change in fair values of the public equity investments held by the Company that are sensitive to changes in the stock market. The modeling technique used measures the hypothetical change in fair values arising from selected hypothetical changes in the stock price for each security. Stock price fluctuations of plus or minus 10% and plus or minus 25% were selected for computational purposes. Estimates of fair value of these securities are as follows assuming the respective percentage change in each share price (in millions):
Current market value at December 31, 1997 $40 10% decrease $36 25% decrease $30 10% increase $44 25% increase $50
The Company operates in a global environment and, accordingly, is subject to adverse fluctuations in foreign exchange rates in relation to the U.S. Dollar. The fluctuations of foreign exchange rates may vary over time and could have a materially adverse impact on the Company's Consolidated Financial Statements. Historically, the Company's primary exposures have related to foreign currency denominated revenues and operating expenses in Japan, France, and Germany, with lesser exposures throughout the world. The Company has a limited exposure in the Asian markets. Currently, the Company enters into foreign exchange contracts and options primarily in the countries mentioned to attempt to manage its exposure. The success of these instruments depends upon forecasts of activities denominated in foreign currencies. To the extent the forecasts differ from actual results, and unanticipated foreign currency volatility occurs, the Company could experience unanticipated foreign currency gains or losses. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of potential problems with computer systems or any equipment with computer chips that use dates where the date has been stored as just two digits (e.g. 97 for 1997). On January 1, 2000, any clock or date recording mechanism including date sensitive software which uses only two digits to represent the year, may recognize a date using 00 as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruption of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar activities. The Company determined that it would be required to replace or modify significant portions of its business application software so that its computer systems would properly utilize dates beyond December 31, 1999. The Company presently believes that with conversions to new systems and modifications to existing software the Year 2000 Issue can be mitigated. However, if such modifications and conversions are not made, or are not timely, the Year 2000 Issue could have a material impact on the operations of the Company. -22- 25 During 1997, the Company initiated the implementation of Enterprise Resource Planning (ERP) software to replace the Company's core business applications which support sales and customer service, manufacturing, distribution, and finance and accounting. The ERP software was selected to add functionality and efficiency in the business processes of the Company in the normal course of upgrading its systems to address its business needs. In addition, the Company also began a project to analyze and assess the remainder of its business not addressed by the ERP software. The scope of the project covers all computer systems, computer and network hardware, production process controllers, office equipment, access control, maintenance machinery, and the products it sells. The Company is in the process of initiating formal communications with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties failure to remediate their own Year 2000 Issues. The Company can give no guarantee that the systems of other companies on which the Company's systems rely will be converted on time or that a failure to convert by another company or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company is currently and will continue to utilize internal and external resources to implement, reprogram, or replace and test software and related assets affected by the Year 2000 Issue. The Company expects to complete the majority of its efforts in this area by early 1999 leaving adequate time to assess and correct any significant issues that may materialize. The total remaining cost of the ERP system and the Year 2000 project is estimated at $30-40 million and is being funded through operating cash flows. Of the total project cost, approximately $25-30 million is attributable to the purchase and implementation of the new software which will be capitalized. The remainder will be expensed as incurred over the next two years and is not expected to have a material effect on the results of operations during any quarterly or annual reporting period. To date, the Company has incurred and expensed approximately $4 million related to the assessment of, and preliminary efforts in connection with, its Year 2000 project and the development of its remediation plan. All cost estimates provided herein are inclusive of assessment, implementation, training and education costs associated with the installation of the ERP software which would have been incurrred regardless of the Year 2000 Issue. The costs of the project and the timetable in which the Company plans to complete the Year 2000 compliance requirements are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from these plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. VALLEYLAB ACQUISITION In December of 1997, the Company entered into an agreement with Pfizer, Inc. to purchase its Valleylab division for cash consideration of $425 million payable at closing on January 30, 1998. Valleylab, based in Colorado is the world's leader in electrosurgical and ultrasonic products, with annual sales of approximately $200 million. * * * * * * The Company may, from time to time, provide estimates as to future performance, including comments on financial estimates made by the analyst community. These forward looking statements are estimates, and may or may not be realized by the Company. The Company undertakes no duty to update such forward looking statements. Many factors could cause actual results to differ from these forward looking statements, including loss of market share through competition, introduction of competing products by other firms, pressure on prices from competition or purchasers of the Company's products, regulatory obstacles to development of new products which are important to the Company's growth, lack of acceptance of new products by the health care market, slow rates of conversion by surgeons to procedures which utilize the Company's products, and interest rate and foreign exchange fluctuations. -23- 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. A. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED). The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996 (in thousands, except per share data).
FIRST SECOND THIRD FOURTH QUARTER(1) QUARTER(1)(2) QUARTER(1) QUARTER(1)(3) YEAR(1) ---------- ------------- ---------- ------------- ------- 1997 Net sales........................ $284,600 $290,000 $295,000 $302,500 $1,172,100 Cost of products sold ........... 113,900 116,500 122,200 118,600 471,200 Income before income taxes ...... 41,300 15,100 43,800 20,800 121,000 Net income ...................... 29,700 17,900 31,500 15,000 94,100 Net income per basic common share ........................ $.39 $.24 $.43 $.20 $1.24 Net income per diluted common share ........................ $.38 $.24 $.41 $.19 $1.21 1996 Net sales........................ $266,000 $283,600 $280,000 $283,100 $1,112,700 Cost of products sold ........... 112,200 116,800 116,100 115,500 460,600 Income before income taxes ...... 27,100 35,300 38,000 41,300 141,700 Net income ...................... 20,900 27,200 29,200 31,800 109,100 Net income per basic common share ........................ $.28 $.38 $.39 $.43 $1.48 Net income per diluted common share ........................ $.28 $.37 $.37 $.41 $1.43
(1) Sales were adversely effected in 1997 and the fourth quarter 1996 by changes in reimbursement to French public hospitals by France's Social Security Administration. (2) In the second quarter of 1997, the Company recorded litigation costs of $24 million($.24 per basic common share), restructuring charges of $6 million($.06 per basic common share), and the benefit resulting from an IRS examination of $7 million($.10 per basic common share). (3) In the fourth quarter of 1997, the Company recorded restructuring charges of $12 million ($.11 per basic common share), and wrote off the carrying value of two terminated license/distribution agreements of $3 million each ($.05 per basic common share). In addition, the Company expensed $4 million of certain software related costs, previously capitalized, ($.04 per basic common share) as a result of a mandated change in accounting practice. B. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE. See Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. -24- 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. A. DIRECTORS. The section entitled "Election of Directors" in the Definitive Proxy Statement for the 1998 Annual Meeting of Stockholders of the registrant (the 1998 Proxy Statement) is hereby incorporated by reference. B. OFFICERS. See Part I. C. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934. The section entitled "Executive Compensation and Transactions - Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the 1998 Proxy Statement is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION. The section entitled "Executive Compensation and Transactions" in the 1998 Proxy Statement is hereby incorporated by reference, except for those portions entitled "Performance Graph" and "Report of Compensation Committee". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The sections entitled "Outstanding Shares, Voting Rights and Principal Stockholders" and "Share Ownership of Management" in the 1998 Proxy Statement are hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The section entitled "Executive Compensation and Transactions-Certain Transactions" in the 1998 Proxy Statement is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. a. AND d. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE. See Index to Consolidated Financial Statements and Financial Statement Schedule on Page F-1 herein. b. REPORTS ON FORM 8-K. A report on Form 8-K relative to the call for redemption on April 1, 1997 of all issued and outstanding shares of Series A Convertible Preferred Stock was filed on March 13, 1997. c. EXHIBITS. (The Company will furnish a copy of any exhibit upon payment of 15 cents per page plus postage.) (3) ARTICLES OF INCORPORATION AND BY-LAWS. (a) Certificate of Incorporation filed March 14, 1990 - Exhibit 3(a) to registrant's Form 8-B declared effective August 3, 1990.* (b) Certificate of Merger filed May 1, 1990 - Exhibit 3(b) to registrant's Form 8-B declared effective August 3, 1990.* (c) Certificate of Amendment filed May 15, 1991 - Exhibit 3(c) to registrant's Form 10-K for 1991.* (d) By-laws, as amended January 30, 1996. Exhibit 3(d) to registrant's Form 10-K for 1995.* (e) Certificate of Designations relating to the issuance of the Company's Series A Convertible Preferred Stock, filed March 28, 1994. Exhibit 3(e) to registrant's Form 10-K for 1993.* -25- 28 (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. (a) Credit Agreement dated as of December 20, 1995 among registrant, signatory banks, Morgan Guaranty Trust Company of New York as Documentation Agent, NationsBank, N.A., as Administrative Agent, and The Bank of New York, as Yen Administrative Agent. Exhibit 4(a) to registrant's Form 10-K for 1995.* (b) Amendment No. 1 to Credit Agreement dated as of December 20, 1995 (4(a) above), dated September 16, 1996. Exhibit (10)(b) to registrant's Form 10-Q for the period ended September 30, 1996.* (c) $175 million credit agreement dated September 16, 1996 among registrant and signatory banks, related to acquisition financing. Exhibit (10)(a) to registrant's Form 10-Q for the period ended September 30, 1996.* (d) $450 million credit agreement dated January 30, 1998 among registrant and signatory banks related to acquisition financing. Filed herewith. (10) MATERIAL CONTRACTS. (a) 1981 Employee Stock Option Plan. Exhibit 10 (a) (1) to registrant's Form 10-K for 1987.*+ (b) 1990 Employee Stock Option Plan, as amended through February 4, 1997. Filed herewith.+ (c) 1993 Employee Stock Option Plan, as amended through December 22, 1997 incorporated by reference to the registrants Form S-8 Registration Statement (No. 33-28963) filed on June 11, 1997.+ (d) 1996 Employee Stock Option Plan. Exhibit 10 (a) to registrant's Form 10-Q for the period ended June 30, 1996.*+ (e) Installment Option Purchase Agreement with Leon C. Hirsch dated September 10, 1984, as amended through May 18, 1994. Exhibit 10 (j) to registrant's Form 10-K for 1994.+ (f) Outside Directors Stock Plan as amended through May 1, 1997. Filed herewith.+ (g) Amendment to Outside Directors Stock Plan adopted May 1, 1990 - Exhibit 10(j) to registrant's Form 10-K for 1990.*+ (h) Long-Term Incentive Plan - Exhibit 10(a)(5) to registrant's Form 10-K for 1988.*+ (i) Executive Incentive Compensation Plan. Exhibit 10 (b) to registrant's Form 10-Q for the period ended June 30, 1996.*+ (j) Lease Agreement dated as of January 14, 1993 between State Street Bank and Trust Company of Connecticut, National Association, as Lessor and the registrant, as Lessee - Exhibit 10(o) to registrant's Form 10-K for 1992.* (k) Participation Agreement dated as of January 14, 1993 among registrant, Lessee, Baker Properties Limited Partnership, Owner Participant, The Note Purchasers listed in Schedule 1 thereto, State Street Bank and Trust Company of Connecticut, National Association, Owner Trustee, and Shawmut Bank Connecticut, N.A., Indenture Trustee - Exhibit 10(p) to registrant's Form 10-K for 1992.* (l) Lease and financing agreements dated January 4, 1994 between registrant's French subsidiary, A.S.E. Partners, and (i) the Corporation for the Financing of Commercial Buildings ("FINABAIL") and (ii) the Association for the Financing of Commercial Buildings ("U.I.S.") - Exhibit 10(r) to registrant's Form 10-K for 1993.* (m) Lease and financing agreement dated December 26, 1991 between registrant's subsidiary, U.S.S.C. Puerto Rico, Inc., and The Puerto Rico Industrial Development Company ("PRIDCO") - Exhibit 10(s) to registrant's Form 10-K for 1993.* (n) Amendment to Lease Agreement dated June, 1997. Exhibit 10(a) to registrant's Form 10-Q for the period ending June 30, 1997.* -26- 29 (o) Agreement dated May, 1997 with Baker Properties Limited Partnership. Exhibit 10(b) to registrant's Form 10-Q for the period ending June 30, 1997.* (p) Form of agreement entered into by the registrant on November 25, 1997 with each of its executive officers. Filed herewith.+ (q) 1997 Key Management Equity Investment Plan. Exhibit 4 to registrant's Form S-3 (Registration Statement No. 333-39051) filed October 31, 1997.+ (r) Stock Option Purchase Agreement with Leon C. Hirsch dated May 1, 1997. Filed herewith.+ (11) Computation of Net Income Per Common Share. Filed herewith. (21) Subsidiaries of the registrant. Filed herewith. (27) Financial Data Schedule. Filed herewith. * Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC File No. 1-9776. + Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report. -27- 30 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 3rd day of February, 1998. UNITED STATES SURGICAL CORPORATION (REGISTRANT) By: /s/ RICHARD A. DOUVILLE ------------------------------------------ (RICHARD A. DOUVILLE SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Leon C. Hirsch - ---------------------------------- Chairman of the Board, February 3, 1998 (Leon C. Hirsch) and Chief Executive Officer (Principal Executive Officer) and Director /s/ Julie K. Blake - ---------------------------------- Director February 3, 1998 (Julie K. Blake) /s/ John A. Bogardus, Jr. - ---------------------------------- Director February 3, 1998 (John A. Bogardus, Jr.) /s/ Thomas R. Bremer - ---------------------------------- Director February 3, 1998 (Thomas R. Bremer) /s/ Turi Josefsen - ---------------------------------- Director February 3, 1998 (Turi Josefsen) /s/ Douglas L. King - ---------------------------------- Director February 3, 1998 (Douglas L. King) /s/ William F. May - ---------------------------------- Director February 3, 1998 (William F. May) - ---------------------------------- Director February , 1998 (James R. Mellor) /s/ Barry D. Romeril - ---------------------------------- Director February 3, 1998 (Barry D. Romeril) /s/ Howard M. Rosenkrantz - ---------------------------------- President and February 3, 1998 (Howard M. Rosenkrantz) Chief Operating Officer and Director /s/ Marianne Scipione - ---------------------------------- Director February 3, 1998 (Marianne Scipione) /s/ John R. Silber - ---------------------------------- Director February 3, 1998 (John R. Silber) /s/ Joseph C. Scherpf - ---------------------------------- Vice President and Controller February 3, 1998 (Joseph C. Scherpf) (Principal Accounting Officer)
-28- 31 UNITED STATES SURGICAL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page ---- Independent Auditors' Report and Consent ............................................................... F-2 Management Report on Responsibility for Financial Reporting ............................................ F-3 Consolidated Balance Sheets - December 31, 1997 and 1996 ............................................... F-4 Consolidated Statements of Operations - Years Ended December 31, 1997, 1996 and 1995 ....................................................................................... F-5 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995 .............................................................. F-6 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 ....................................................................................... F-7 Notes to Consolidated Financial Statements ............................................................. F-8 Schedule II - Valuation and Qualifying Accounts ........................................................ S-1
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-1 32 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders UNITED STATES SURGICAL CORPORATION We have audited the accompanying consolidated financial statements and financial statement schedule of United States Surgical Corporation and subsidiaries listed in the Index to Consolidated Financial Statements and Financial Statement Schedule of the Annual Report on Form 10-K of United States Surgical Corporation for the year ended December 31, 1997. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of United States Surgical Corporation and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Stamford, Connecticut January 20, 1998 INDEPENDENT AUDITORS' CONSENT TO INCORPORATION BY REFERENCE IN REGISTRATION STATEMENTS ON FORM S-3 AND FORM S-8 We consent to the incorporation by reference in United States Surgical Corporation's Registration Statements Nos. 33-53297, 33-59729, 333-34075, 333-23677, 333-27951 and 333-39051 on Form S-3, and Registration Statements Nos. 2-64804, 2-78663, 33-3419, 33-13997, 33-37328, 33-38710, 33-40171, 33-53827, 33-53825, 33-59278, 33-28963, 33-28961, 333-36067 and 33-61912 on Form S-8 of our report dated January 20, 1998 appearing on page F-2 of the Annual Report on Form 10-k for the year ended December 31, 1997. Deloitte & Touche LLP Stamford, Connecticut January 20, 1998 F-2 33 MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING The management of United States Surgical Corporation and its subsidiaries (the "Company") has the responsibility for preparing the accompanying consolidated financial statements and related notes. The consolidated financial statements were prepared in accordance with generally accepted accounting principles and necessarily include amounts based upon judgments and estimates by management. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. Management of the Company has established and maintains a system of internal controls that provide reasonable assurance that the accounting records may be relied upon for the preparation of the consolidated financial statements. Management continually monitors the system of internal controls for compliance. Also, the Company maintains an internal auditing function that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. The Company's consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available to Deloitte & Touche LLP all the Company's financial records and related data. In addition, in order to express an opinion on the Company's consolidated financial statements, Deloitte & Touche LLP considered the internal accounting control structure in order to determine the extent of their auditing procedures for the purpose of expressing such opinion but not to provide assurance on the internal control structure. Management believes that the Company's system of internal controls is adequate to accomplish the objectives discussed herein. The Board of Directors monitors the internal control system through its Audit Committee which consists solely of outside directors. The Audit Committee meets periodically with the independent auditors, internal auditors and senior financial management to determine that they are properly discharging their responsibilities. Leon C. Hirsch Chief Executive Officer Richard A. Douville Senior Vice President and Chief Financial Officer F-3 34 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, In thousands, except share data 1997 1996 ASSETS Current assets: Cash and cash equivalents .................................................. $ 18,300 $ 106,700 Receivables, less allowance of $10,800 (1997); $11,700 (1996) .............. 355,900 287,600 Inventories: Finished goods ........................................................... 145,500 128,300 Work in process .......................................................... 24,800 32,300 Raw materials ............................................................ 38,400 30,000 ----------- ----------- 208,700 190,600 Other current assets ....................................................... 94,100 106,700 ----------- ----------- Total Current Assets ................................................. 677,000 691,600 ----------- ----------- Property, plant, and equipment (net) .......................................... 421,200 447,700 Other assets (net) ............................................................ 627,800 375,500 ----------- ----------- Total Assets ......................................................... $ 1,726,000 $ 1,514,800 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................... $ 32,800 $ 29,400 Accrued liabilities ........................................................ 210,000 177,300 Income taxes payable ....................................................... 64,900 83,800 Current portion of long-term debt .......................................... 4,800 4,700 ----------- ----------- Total Current Liabilities ............................................ 312,500 295,200 Long-term debt ................................................................ 131,300 142,400 Deferred income taxes ......................................................... 25,300 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 issued and outstanding at December 31, 1996 (liquidation value - $200 million)... 900 Additional paid-in capital - preferred stock ............................... 190,600 Common stock $.10 par value, authorized 250,000,000 shares; issued, 82,898,473 at December 31, 1997 and 71,367,780 at December 31, 1996....... 8,300 7,100 Additional paid-in capital - common stock .................................. 973,600 623,900 Retained earnings .......................................................... 395,800 318,000 Treasury stock at cost; 7,015,207 shares at December 31, 1997 and 8,080,983 shares at December 31, 1996................................. (96,800) (86,400) Accumulated translation adjustments ........................................ (28,300) (3,100) Unrealized gain on marketable securities ................................... 4,300 2,800 ----------- ----------- Total Stockholders' Equity ........................................... 1,256,900 1,053,800 ----------- ----------- Commitments and contingencies Total Liabilities and Stockholders' Equity ........................... $ 1,726,000 $ 1,514,800 =========== ===========
See Notes to Consolidated Financial Statements. F-4 35 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, In thousands, except per share data 1997 1996 1995 Net sales ............................. $1,172,100 $1,112,700 $1,022,300 ---------- ---------- ---------- Costs and expenses: Cost of products sold .............. 471,200 460,600 451,700 Research and development ........... 71,800 58,000 43,100 Selling, general and administrative 464,800 443,400 417,000 Interest (net) ..................... 1,200 9,000 20,700 Special Items: Litigation and related costs ..... 24,300 Restructuring charges ............ 17,800 ---------- ---------- ---------- Total costs and expenses ....... 1,051,100 971,000 932,500 Income before income taxes ............ 121,000 141,700 89,800 Income taxes .......................... 26,900 32,600 10,600 ---------- ---------- ---------- Net income ............................ 94,100 109,100 79,200 Preferred stock dividends ............. 4,700 19,500 19,500 ---------- ---------- ---------- Net income applicable to common stock ....................... $ 89,400 $ 89,600 $ 59,700 ========== ========== ========== Average number of basic common shares outstanding ........................ 72,100 60,500 57,000 ========== ========== ========== Net income per basic common share ..... $ 1.24 $ 1.48 $ 1.05 ========== ========== ========== Average number of diluted common shares outstanding ........................ 73,700 62,600 57,400 ========== ========== ========== Net income per diluted common share ... $1.21 $1.43 $1.04 ===== ===== ===== Dividends paid per common share ....... $.16 $.08 $.08 ==== ==== ====
See Notes to Consolidated Financial Statements. F-5 36 United States Surgical Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity
Additional Additional Paid-in Paid-in Preferred Capital - Common Capital - Retained Years ended December 31, 1997, 1996 and 1995 Stock Preferred Stock Common Earnings -------------------------------------------- ----- --------- ----- ------ -------- In thousands, except share data BALANCE AT JANUARY 1, 1995........................ $900 $190,600 $6,500 $380,700 $178,100 Common stock issued to employees-net (329,799 shares).............................. 5,300 Income tax benefit from stock options exercised............................. 8,200 Aggregate adjustment resulting from the translation of foreign financial statements... Preferred stock dividends....................... (19,500) Common stock dividends paid ($.08 per share).............................. (4,600) Net income...................................... 79,200 ---- -------- ------ -------- -------- BALANCE AT DECEMBER 31, 1995...................... 900 190,600 6,500 394,200 233,200 Issuance of common stock, net (4,300,000 shares)........................ 400 141,400 Common stock issued to employees-net (1,780,534 shares)............................ 200 39,100 Income tax benefit from stock options exercised............................. 49,200 Aggregate adjustment resulting from the translation of foreign financial statements... Preferred stock dividends....................... (19,500) Common stock dividends paid ($.08 per share).............................. (4,800) Unrealized gain on marketable securities (net).. Net income...................................... 109,100 ---- -------- ------ -------- -------- BALANCE AT DECEMBER 31, 1996...................... 900 190,600 7,100 623,900 318,000 Conversion of Series A convertible preferred stock (8,450,491 shares)...................... (900) (190,600) 800 181,500 Common stock issued for acquisitions (2,452,726 shares)............................ 200 92,600 Common stock issued for litigation settlement (105,000 shares)................... 15,100 Common stock issued to employees from stock plans-net (2,030,895 shares)....... 200 48,100 Income tax benefit from stock options exercised..................................... 12,400 Aggregate adjustment resulting from the translation of foreign financial statements Preferred stock dividends....................... (4,700) Common stock dividends declared ($.16 per share).............................. (11,600) Unrealized gain on marketable securities (net).. Net income...................................... 94,100 ---- -------- ------ -------- -------- BALANCE AT DECEMBER 31, 1997...................... $ 0 $ 0 $8,300 $973,600 $395,800 ==== ======== ====== ======== ========
Unrealized Accumulated Gain On Treasury Translation Marketable Years ended December 31, 1997, 1996 and 1995 Stock Adjustments Securities Total -------------------------------------------- ----- ----------- ---------- ----- In thousands, except share data BALANCE AT JANUARY 1, 1995........................ $(86,700) $ (8,100) $662,000 Common stock issued to employees-net (329,799 shares).............................. 100 5,400 Income tax benefit from stock options exercised............................. 8,200 Aggregate adjustment resulting from the translation of foreign financial statements... 10,400 10,400 Preferred stock dividends....................... (19,500) Common stock dividends paid ($.08 per share).............................. (4,600) Net income...................................... 79,200 -------- -------- ------ ---------- BALANCE AT DECEMBER 31, 1995...................... (86,600) 2,300 741,100 Issuance of common stock, net (4,300,000 shares)........................ 141,800 Common stock issued to employees-net (1,780,534 shares)............................ 200 39,500 Income tax benefit from stock options exercised............................. 49,200 Aggregate adjustment resulting from the translation of foreign financial statements (5,400) (5,400) Preferred stock dividends....................... (19,500) Common stock dividends paid ($.08 per share).............................. (4,800) Unrealized gain on marketable securities (net).. $2,800 2,800 Net income...................................... 109,100 -------- -------- ------ ---------- BALANCE AT DECEMBER 31, 1996...................... (86,400) (3,100) 2,800 1,053,800 Conversion of Series A convertible preferred stock (8,450,491 shares)...................... 9,200 0 Common stock issued for acquisitions (2,452,726 shares)............................ 92,800 Common stock issued for litigation settlement (105,000 shares)................... 15,100 Common stock issued to employees from stock plans-net (2,030,895 shares)....... (19,600) 28,700 Income tax benefit from stock options exercised..................................... 12,400 Aggregate adjustment resulting from the translation of foreign financial statements... (25,200) (25,200) Preferred stock dividends....................... (4,700) Common stock dividends declared ($.16 per share).............................. (11,600) Unrealized gain on marketable securities (net) 1,500 1,500 Net income...................................... 94,100 -------- -------- ------ ---------- BALANCE AT DECEMBER 31, 1997...................... $(96,800) $(28,300) $4,300 $1,256,900 ======== ======== ====== ===========
See Notes to Consolidated Financial Statements. F-6 37 United States Surgical Corporation and Subsidiaries Consolidated Statements of Cash Flows
Years Ended December 31, In thousands 1997 1996 1995 - ------------ ---- ---- ---- Cash flows from operating activities: Cash received from customers .......................................... $ 1,083,800 $ 1,071,600 $ 1,000,000 Cash paid to vendors, suppliers, and employees ........................ (913,000) (892,400) (784,100) Interest paid (net) ................................................... (1,000) (9,500) (17,500) Income taxes paid ..................................................... (21,700) (15,500) (10,300) ----------- ----------- ----------- Net cash provided by operating activities ........................... 148,100 154,200 188,100 ----------- ----------- ----------- Cash flows from investing activities: Additions to property, plant, and equipment ........................... (55,600) (42,300) (33,600) Acquisitions .......................................................... (80,600) (15,000) (84,000) Other assets .......................................................... (117,400) (51,600) (18,100) ----------- ----------- ----------- Net cash used in investing activities ............................... (253,600) (108,900) (135,700) ----------- ----------- ----------- Cash flows from financing activities: Long-term debt borrowings under credit agreements ..................... 110,100 1,080,300 2,407,300 Long-term debt repayments under credit agreements ..................... (104,700) (1,184,900) (2,445,800) Long-term debt issuance fees .......................................... (1,700) Issuance of common stock in public offering, net ...................... 141,800 Acquisition of common stock for treasury .............................. (4,100) Common stock issued from stock plans .................................. 32,200 39,300 5,300 Dividends paid ........................................................ (16,300) (24,300) (24,100) ----------- ----------- ----------- Net cash provided by (used in) financing activities ................. 17,200 52,200 (59,000) ----------- ----------- ----------- Effect of exchange rate changes .......................................... (100) (1,300) 5,800 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents ..................... (88,400) 96,200 (800) Cash and cash equivalents, beginning of year ............................. 106,700 10,500 11,300 ----------- ----------- ----------- Cash and cash equivalents, end of year ................................... $ 18,300 $ 106,700 $ 10,500 =========== =========== =========== Reconciliation of net income to net cash provided by operating activities: Net income ............................................................... $ 94,100 $ 109,100 $ 79,200 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ........................................................ 62,200 65,400 71,000 Amortization ........................................................ 31,600 21,300 20,700 Adjustment of property, plant, and equipment reserves ............... 300 20,600 18,600 Receivables -- (increase) ........................................... (88,600) (44,300) (23,900) Inventories -- (increase) ........................................... (30,300) (40,100) (2,600) Adjustment of inventory reserves .................................... 11,300 9,700 26,600 Other current assets -- (increase) .................................. (7,600) (19,200) (26,200) Accounts payable and accrued liabilities -- increase ................ 71,000 14,000 13,500 Income taxes payable and deferred -- (decrease) increase ............ (8,400) (31,600) 3,100 Income tax benefit from stock options exercised ..................... 12,400 49,200 8,200 Other assets - net .................................................. 100 100 (100) ----------- ----------- ----------- Total adjustments ............................................... 54,000 45,100 108,900 ----------- ----------- ----------- Net cash provided by operating activities ................................ $ 148,100 $ 154,200 $ 188,100 =========== =========== ===========
See Notes to Consolidated Financial Statements. F-7 38 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES United States Surgical Corporation and Subsidiaries (the Company) is primarily engaged in developing, manufacturing and marketing a proprietary line of technologically advanced surgical products to hospitals throughout the world. The Company currently operates domestically and internationally through subsidiaries, divisions, and distributors. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONSOLIDATION. The consolidated financial statements include the accounts and transactions of United States Surgical Corporation and Subsidiaries, excluding intercompany accounts and transactions. Certain subsidiaries (including branches), operating outside the United States, are included in the consolidated financial statements on a fiscal-year basis ending November 30. CASH AND CASH EQUIVALENTS. Cash and cash equivalents includes cash on hand, interest bearing demand deposits, and interest bearing short-term investments with original maturities of one month or less. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT, AND EQUIPMENT. Depreciation and amortization is provided using the straight-line method over the following estimated useful lives:
Years ----- Buildings 40 Molds and dies 2 to 4 Machinery and equipment 3 to 10 Leasehold improvements 3 to 30
The Company capitalizes interest incurred on funds used to construct Property, plant, and equipment. Interest capitalized during 1997, 1996 and 1995 was immaterial. OTHER ASSETS. The Company capitalizes and includes in Other assets the costs of acquiring patents on its products, licenses to use purchased patents for current and future products, the costs of computer software developed and used in its information processing systems and goodwill arising from the excess of cost over the fair value of net assets of purchased businesses, including the costs associated with legal settlements resulting from business acquisitions . The Company evaluates the carrying value of its long lived assets and identifiable intangibles, including goodwill, for possible impairments which, if applicable, are recognized when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Costs of Other assets are amortized on the straight-line basis over the following estimated useful lives:
Years ----- Patents and licenses 5 to 10 Computer software costs 2 to 3 Goodwill 20 to 40
In addition, Other assets contains investments held in certain marketable securities which are recorded at fair value. F-8 39 REVENUE RECOGNITION. Revenues from sales, net of estimated returns, are recognized when products are sold directly by the Company to ultimate consumers, primarily hospitals, or to authorized distributors. FOREIGN CURRENCY TRANSLATION. For translation of the financial statements of substantially all of its international operations the Company has determined that the local currencies of its international subsidiaries are the functional currencies. Assets and liabilities of foreign operations are translated at year end exchange rates, and income statement accounts are translated at average exchange rates for the year. The resulting translation adjustments are made directly to the Accumulated Translation Adjustments component of Stockholders' Equity. Foreign currency transactions are recorded at the exchange rate prevailing at the transaction date. DERIVATIVE FINANCIAL INSTRUMENTS. The Company enters into contracts to reduce its exposure to and risk from foreign currency exchange rate changes and interest rate fluctuations in the regular course of the Company's business. Realized and unrealized foreign currency exchange 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. ADOPTION OF FAS 128. In the fourth quarter of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128 "Earnings Per Share"(FAS 128), as required and restated the previously reported earnings per share in conformity with FAS 128. The new standard specifies the computation, presentation, and disclosure requirements for earnings per share. NOTE B - ACCOUNTING CHANGE The Company is presently incurring costs relative to business process reengineering in connection with the design, training, and implementation of its new enterprise software systems. Certain of these costs had been deferred through September 30, 1997. In the fourth quarter of 1997, the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) issued EITF 97-14 "Accounting for Costs Incurred with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Transformation". Accordingly, the Company has expensed all business process reengineering costs incurred through December 31,1997 ($4 million) during the fourth quarter of 1997. NOTE C - TENDER OFFER The Company has extended the new tender offer for all of the outstanding Circon Corporation (Circon) common stock at a price of $16.50 per share until July 16, 1998. The Company previously purchased 1,973,274 shares of Circon common stock. These shares represent 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 Corporation common stock, along with other securities, are included in Other assets. These available-for-sale securities have a fair value of approximately $40 million and a cost of approximately $34 million at December 31, 1997. NOTE D - RESTRUCTURING CHARGES The Company recorded restructuring charges of $ 6 million during the second quarter of 1997 which 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 during the fourth quarter of 1997 and recorded a charge of $12 million which was related to additional employee terminations ($8 million) and facility disposals and asset writedowns ($4 million) as part of the Company's cost cutting objectives. Collectively, the 1997 restructuring charges resulted in over 450 employee terminations worldwide, which should save the Company approximately $19 million on an annual basis. F-9 40 The Company recorded restructuring charges of approximately $7 million in 1995. These restructuring charges related primarily to lease termination and employee severance costs associated with the relocation of one of the Company's largest international subsidiaries as part of the plan to centralize the distribution of the Company's products to its European customers. In addition, severance payments and other charges were incurred in 1995 in relation to the restructuring of the Company's manufacturing plants. The 1995 restructuring charges were substantially offset by the reversal of restructuring cost estimates in excess of ultimate costs which were originally recognized in the Company's 1993 consolidated statements of operations. Accrued liabilities at December 31, 1997 and 1996 included approximately $12 million and $4 million, respectively, which related primarily to severance costs associated with the Company's 1997 and 1995 restructuring charges. The majority of the 1997 accrued termination charges will be liquidated during 1998. The majority of the 1995 restructuring charge was fully liquidated by the end of 1996. NOTE E - ACQUISITIONS The Company exercised its option during the third quarter of 1997 to acquire Progressive Angioplasty Systems, Inc (PAS), a manufacturer and distributor of cardiovascular products, 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). The Company will potentially pay up to $72 million in additional purchase price consideration, also in common stock, which will increase goodwill if and when certain additional milestones and sales objectives are achieved. In addition, the Company assumed certain pre-acquisition liabilities as part of this acquisition. The Company has recorded intangible assets for patents ($18 million), with an amortization period of 10 years, and goodwill ($81 million), 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 was the date of the acquisition. The Company acquired NeoVision Corporation, a manufacturer and distributor of ultrasound breast biopsy products, during the third quarter of 1997 in a purchase transaction for approximately $43 million in cash. The Company has recorded intangible assets for patents($15 million), with an amortization period of 10 years, and goodwill ($35 million), 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 was the date of the acquisition. The Company purchased certain assets of DRS Medical Systems, a manufacturer of custom ultrasound 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 was the date of the transaction. 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, customer lists, and a non-compete agreement ($12 million), with amortization periods up to 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 was the date of the transaction. The Company acquired CeDar Surgical, Inc., a licensor of certain products sold by Surgical Dynamics, Inc., during the first quarter of 1997 in a purchase transaction for a combination of cash and the Company's common stock for approximately $13 million. The Company has allocated the entire purchase price to intangibles. These intangibles are being amortized over a period of ten years. F-10 41 The above acquisitions cost and allocations of cost may require adjustment based upon information coming to the attention of the Company which is not currently available. 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 (dollars in thousands, except per share amounts):
Year Ended December 31, 1997 1996 ---- ---- Net Income applicable to common shares $73,500 $73,100 Net Income per basic common share $1.00 $1.16 Net Income per diluted common share $.98 $1.12
The pro-forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above dates, nor are they necessarily indicative of future operating results. The Company acquired Surgical Dynamics, Inc., (a subsidiary of E-Z-EM, Inc.) a developer, manufacturer, and distributor of surgical devices for use in spinal procedures, in November 1995 for $60 million in a cash transaction. The acquisition was accounted for by the purchase method of accounting. Goodwill of approximately $58 million resulting from the acquisition is being amortized to operations over 20 years. Results of operations subsequent to acquisition are included in the Company's consolidated financial statements. The Company completed on September 29, 1995 its 6.1 billion Yen (approximately $62 million or a present value of $54 million) purchase acquisition of certain assets from the Company's former distributor in Japan. The Company and the former distributor had agreed that all of the conditions to closing the purchase had either been met or could be met as of April 1, 1995 and, accordingly, had entered into an agency agreement effective April 1, 1995 under which the Company assumed the risks and rewards of selling the Company's products to third parties in Japan and recognized, since April 1, 1995, the former distributor's revenue and selling expenses in the Company's consolidated financial statements relative to the sale of the Company's products in Japan. Approximately 2.5 billion Yen ($22 million) was recorded as goodwill and is being amortized over 25 years. In the third quarter of 1995, the Company acquired through purchase transactions certain assets of an internal stapling business and a 9.5% equity interest in a biopharmaceutical company (Alexion Pharmaceutical Company). The Company acquired additional shares in Alexion during 1997, and presently maintains approximately 9% ownership based upon current outstanding shares. In addition, the Company acquired the exclusive worldwide rights to market transgenic pig organs from Alexion. In the third quarter of 1996, the Company acquired 80% of a foreign corporation (Medolas Gesellschaft fur Medizintechnik GmbH) through a purchase transaction along with an option to purchase the remaining 20% in the future. This foreign corporation will exclusively supply the Company with certain laser products in the medical field. These acquisitions do not have a material impact on the Company's consolidated results of operations or financial position. F-11 42 The unaudited 1995 consolidated results of operations on a pro-forma basis as though the 1995 purchase business combinations of Surgical Dynamics, Inc., and the purchase of certain assets from the Company's former Japanese distributor, had collectively been completed by the Company at the beginning of 1995 is as follows (dollars in thousands, except per share amount):
Twelve Months Ended December 31, 1995 Net sales $ 1,058,100 Net income applicable to common shares $ 74,100 Net income per basic common share $ .96 Net income per diluted common share $ .95
The pro-forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above dates, nor are they necessarily indicative of future operating results. The Company records the purchase price of acquisitions based on the estimated fair values of assets and liabilities acquired. NOTE F - LITIGATION The Company established a reserve of approximately $24 million for damages and other related costs during the second quarter of 1997 relative to an award by the United States District Court for the Eastern District of Virginia in the action of 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 at December 31,1997 is expected to be liquidated from the Company's operating cash flows and cash on hand. NOTE G - ADOPTION OF FAS 128 The Company adopted the provisions of Statement of Financial Standards No. 128 "Earnings Per Share"(SFAS 128), during the fourth quarter of 1997, as required. The new standard specifies the computation, presentation, and disclosure requirements for earnings per share. The following table represents the computation of basic and diluted earnings per common share as required by SFAS 128.
Years Ended December 31, 1997 1996 1995 ------- ------- ------- (in thousands, except per share data) BASIC EARNINGS PER SHARE COMPUTATION Net Income Applicable to common shares ....................... $89,400 $89,600 $59,700 ------- ------- ------- Weighted average common shares outstanding .................. 72,100 60,500 57,000 ------- ------- ------- Basic Earnings per Common Share ............................... $ 1.24 $ 1.48 $ 1.05 ======= ======= =======
F-12 43
Years Ended December 31, 1997 1996 1995 --------------------------------------- (in thousands, except per share data) DILUTED EARNINGS PER SHARE COMPUTATION Net Income Applicable to common shares ...................... $89,400 $89,600 $59,700 ------- ------- ------- Weighted average common shares outstanding ................. 72,100 60,500 57,000 Contingent stock rights ............ 300 Common stock equivalents ........... 1,300 2,100 400 ------- ------- ------- Total weighted average shares .................. 73,700 62,600 57,400 ------- ------- ------- Diluted Earnings per Common Share .............................. $ 1.21 $ 1.43 $ 1.04 ======= ======= =======
Diluted earnings per common share excludes antidilutive stock options as follows: 1997, 10,521,039 options; 1996, 7,298,495 options; 1995, 10,802,320 options. NOTE H - PROPERTY, PLANT, AND EQUIPMENT At December 31, 1997 and 1996, Property, plant, and equipment (at cost) was comprised of the following items:
In thousands 1997 1996 - ------------------------------------------------------------------------------------- Land ........................................... $ 21,200 $ 26,700 Buildings ...................................... 154,100 164,100 Molds and dies ................................. 91,100 88,600 Machinery and equipment ........................ 292,000 289,300 Leasehold improvements ......................... 158,600 154,600 --------- --------- 717,000 723,300 Less allowance for depreciation and amortization (295,800) (275,600) --------- --------- $ 421,200 $ 447,700 ========= =========
Property, plant, and equipment includes land and buildings in Elancourt, France with a net book value at December 31, 1997 and 1996 of $68 million and $79 million, respectively. During 1997 the Company took out of service and removed from its balance sheet Property, plant, and equipment which had an original cost of $29 million and was fully depreciated. NOTE I - OTHER ASSETS At December 31, 1997 and 1996, Other assets (net of accumulated amortization of $79 million and $57 million in 1997 and 1996, respectively) was comprised of the following items:
In thousands 1997 1996 - ----------------------------------------------------------- Goodwill .................... $212,100 $ 83,700 Patents and licenses ........ 149,000 76,300 Prepaid rent ................ 110,600 71,100 Deferred tax assets ......... 29,300 59,900 Investments at fair value ... 40,100 21,000 Certificates of deposit ..... 19,000 19,000 Computer software costs ..... 25,900 12,500 Other ....................... 41,800 32,000 -------- -------- Total $627,800 $375,500 ======== ========
During 1997 the Company removed from its Balance Sheet fully amortized Other assets with a cost of $3 million. Investments at fair value consist of available-for-sale securities which have an original cost of $34 million and $17 million at December 31, 1997 and 1996, respectively. F-13 44 NOTE J - INCOME TAXES A summary of the source of income (loss) before income taxes follows:
In thousands 1997 1996 1995 --------- -------- ------- Domestic (a) .... $ 124,600 $131,500 $71,600 Foreign ......... (3,600) 10,200 18,200 --------- -------- ------- $ 121,000 $141,700 $89,800 ========= ======== =======
(a) Includes Puerto Rico and U.S. branches in foreign locations. A summary of the provision for income taxes follows:
In thousands 1997 1996 1995 - ---------------------------------------------------------------------------- Current: Federal (b) ............ $ (7,600) $ 7,900 Foreign ................ 7,200 9,100 $ 9,700 State and local (a) .... 7,000 7,100 3,900 Deferred: Federal (b) ............ 25,900 500 (5,700) Foreign ................ (7,000) 900 2,300 State and local (a) .... 1,400 7,100 400 -------- ------- -------- $ 26,900 $32,600 $ 10,600 ======== ======= ========
(a) Includes local tax provision of Puerto Rico subsidiary. (b) Includes federal tax provision of Puerto Rico subsidiary. A reconciliation between income taxes based on the application of the statutory federal income tax rate (35%) to income before income taxes and the provision for income taxes as set forth in the Consolidated Statements of Operations follows:
In thousands 1997 1996 1995 - ------------------------------------------------------------------------------------------- Provision for taxes at statutory rates ................. $ 42,400 $ 49,600 $ 31,400 Benefit of operating loss carryforward recognized for U.S. federal or foreign taxes ...................... (1,600) (17,300) (16,100) Benefit of operating loss and credit carryforwards incident to IRS tax examination ........................ (7,000) -- (10,000) Tax savings from operations in Puerto Rico ........................ (8,100) (7,000) (6,600) State and local income taxes, net of federal income tax benefit .. 3,900 4,000 2,800 Foreign income taxed at rates different than U.S. statutory rate ..................... 3,000 2,700 8,200 Tax benefits derived from Foreign Sales Corporation .................. (6,400) Other ................................ 700 600 900 -------- -------- -------- $ 26,900 $ 32,600 $ 10,600 ======== ======== ========
The Company has provided for taxes on the income of its subsidiary's operations in Puerto Rico at an effective rate that is lower than the U.S. federal income tax statutory rate. This rate reflects the fact that approximately 90% of income is exempt from local taxes in Puerto Rico as well as the availability of a tax credit under Section 936 of the Internal Revenue Code. Withholding taxes at a rate of 7% for 1997 (the Company is currently negotiating with the Puerto Rico government to reduce its withholding tax rate to 5% for 1996 and 1995) has been provided on the expected repatriation of the income of this subsidiary. F-14 45 At December 31, 1997 and 1996 deferred tax liabilities and assets under SFAS 109 were comprised of the following:
In thousands 1997 1996 - ----------------------------------------------------------------------- Patent amortization ............. $ (30,700) $ (16,800) Depreciation .................... (46,200) (50,100) Other amortization .............. (2,800) (1,900) Operating lease ................. (40,700) (18,800) Accrued interest ................ (4,400) (2,500) Withholding taxes ............... (12,300) (12,000) Other ........................... (6,600) (6,700) --------- --------- Gross deferred tax liabilities (143,700) (108,800) --------- --------- Restructuring reserves .......... 20,200 21,700 Inventory reserves .............. 38,800 40,400 Fixed asset reserves ............ 38,800 40,600 Accrued expenses ................ 14,700 8,500 Other ........................... 10,300 13,600 Tax loss and credit carryforwards 126,600 122,300 --------- --------- Gross deferred tax assets ..... 249,400 247,100 Less: Valuation allowance ...... (58,200) (58,100) --------- --------- 191,200 189,000 --------- --------- Net deferred tax assets ......... $ 47,500 $ 80,200 ========= =========
Deferred taxes resulted from temporary differences in the recognition of revenue and expense for tax and financial statement purposes. The source of the temporary differences are: recognition of certain lease expenses for tax purposes on an accelerated basis compared to those recognized for financial reporting purposes, the use of accelerated methods of computing depreciation for income tax purposes and the straight-line method for financial reporting purposes expensing certain patent costs as incurred for income tax purposes and capitalizing and amortizing them over their estimated useful lives for financial reporting purposes and other temporary differences applicable to assets and liabilities. At December 31, 1997 and 1996 net current deferred tax assets of $44 million and $45 million, respectively, and net non-current deferred tax assets of $29 million and $60 million, respectively, were included in the Consolidated Balance Sheet captions Other current assets and Other assets, respectively. Current deferred tax liabilities of $1 million in 1997 and 1996 and non-current deferred tax liabilities of $25 million in 1997 and $23 million in 1996 were included in the Consolidated Balance Sheet captions Income taxes payable and Deferred income taxes, respectively. The Company's loss carryforwards prior to 1993 are primarily attributable to compensation expense deductions on its income tax return which were not recognized for financial accounting purposes. A valuation allowance in the amount of $58 million has been recorded as of December 31, 1997 because of the uncertainty of the Company over the future utilization of the tax benefit of its gross deferred tax assets. As of January 1, 1997 and 1996, the valuation allowance was $58 million and $129 million, respectively. At December 31, 1997 the Company's consolidated subsidiaries have unremitted earnings of $101 million on which the Company has not accrued a provision for income taxes since these earnings are considered to be permanently invested. The amount of the unrecognized deferred tax liability relating to unremitted earnings was approximately $39 million at December 31, 1997. F-15 46 The Company has available for U.S. Federal income tax return purposes the following net operating loss and tax credit carryforwards:
NET INVESTMENT RESEARCH OPERATING TAX AND OTHER IN THOUSANDS LOSSES CREDITS CREDITS - ---------------------------------------------------------------------------------- YEAR SCHEDULED TO EXPIRE: 1998 ..................... $ 1,400 1999 ..................... $ 600 1,100 $ 100 2000 ..................... 100 1,000 300 2001 ..................... 600 500 500 2002 ..................... 700 2003 ..................... 800 2004 ..................... 100 1,000 2005 ..................... 1,800 2006 ..................... 400 3,000 2007 ..................... 60,100 6,500 2008 ..................... 43,000 2,800 2009 ..................... 14,000 100 2010 ..................... 400 100 2011 ..................... 2,500 700 2012 ..................... 3,200 2,000 -------- ------- ------- $125,000 $ 4,000 $20,400 ======== ======= =======
The Company has available for state and foreign income tax return purposes net operating loss carryforwards of $94.1 million and $109 million, respectively, and tax credits of $7 million, which expire at various dates. In addition, the Company has federal tax credits related to the payment of alternative minimum taxes in prior years in the amount of $4.4 million which have an unlimited carryforward period. The exercise of stock options which have been granted under the Company's various stock option plans and the vesting of restricted stock give rise to compensation which is includable in the taxable income of the applicable employees and deductible by the Company for federal and state income tax purposes. Such compensation results from increases in the fair market value of the Company's Common Stock subsequent to the date of grant of the applicable exercised stock options and restricted stock and, accordingly, in accordance with Accounting Principles Board Opinion No. 25, such compensation is not recognized as an expense for financial accounting purposes and the related tax benefits are taken directly to Additional Paid-in Capital. In the years ended December 31, 1990 through 1992 such deductions resulted in significant federal and state deductions which may be carried forward. Utilization of such deductions will increase Additional Paid-In Capital. The tax benefit recognized from compensation deductions arising from the exercise of stock options was approximately $12.4 million in 1997, $49 million in 1996 and $8 million in 1995. All of the $12.4 million tax benefit recognized in 1997 relates to stock options exercised in 1997. With respect to the U.S. federal net operating loss and credit carryforwards set forth above, the Company estimates that if such carryforwards are ultimately recognizable, the remainder of such tax assets would result in increases to Additional Paid-In Capital of up to approximately $16 million. F-16 47 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 survey, during the second quarter of 1997 the IRS documented its intention to accept certain of 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 basic 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 recognition of 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. In August 1995, the Company reached agreement with respect to settlement of all issues raised by the IRS in its examination of the Company's income tax returns for the years 1984 through 1990. Prior to this resolution, a significant portion of deferred tax assets related to available net operating loss and tax credit carryforwards had been fully reserved by the Company because of uncertainty over the future utilization of the tax benefits. Based upon circumstances relative to the IRS audit and the Company's estimate of future domestic taxable income, it is more likely than not that a significant portion of such fully reserved assets will be realized in the future. As a result, in the third quarter of 1995 the Company reduced the valuation allowances related to a significant portion of these deferred tax assets by $54.3 million (change in valuation allowances in 1995 was a reduction of $75.6 million), increased its current tax liabilities by $28.6 million for the remaining estimated tax liabilities relating to years subsequent to 1990, decreased tax assets by $7.4 million, recognized a net credit to the tax provision of $10.0 million ($.18 per basic common share) and recorded a credit to Additional paid-in capital (for windfall tax benefits related to net operating losses generated from stock compensation deductions in prior years) of $8.3 million. NOTE K - ACCRUED LIABILITIES Included in Accrued liabilities at December 31, 1997 are accrued rent for the Company's North Haven facilities $33 million (1996 - $34 million), accrued litigation reserve for alleged patent infringement and other matters $42 million (1996 - $3 million), accrued payroll, property and sales taxes $23 million (1996 - - $19 million), accrued commissions $17 million (1996 - $16 million) and accrued restructuring charges $12 million (1996 - $4 million). NOTE L - LONG-TERM DEBT At December 31, 1997, the scheduled principal repayments under loan agreements and future minimum payments under a financing lease and note payable were as follows:
BANK CREDIT FINANCING NOTE IN THOUSANDS FACILITIES LEASE PAYABLE TOTAL - ---------------------------------------------------------------------------------------- 1998 .............. -- $ 5,500 $ 3,300 $ 8,800 1999 .............. -- 6,700 3,900 10,600 2000 .............. -- 7,400 4,500 11,900 2001 .............. $ 28,800 7,800 5,200 41,800 2002 .............. -- 8,400 12,700 21,100 After 2002 ........ -- 71,900 71,900 -------- --------- --------- --------- 28,800 107,700 29,600 166,100 Current portion of long-term debt and note payable ...... -- (1,500) (3,300) (4,800) Amount representing interest .......... -- (30,000) -- (30,000) -------- --------- --------- --------- Long-term debt .... $ 28,800 $ 76,200 $ 26,300 $ 131,300 ======== ========= ========= =========
F-17 48 At December 31, 1997 the Company's long term debt consisted of $29 million in Yen denominated bank borrowings, $76 million in French Franc denominated financing lease obligations outstanding relating to its European headquarters office building and distribution center complex in Elancourt, France, and $26 million in Yen denominated notes payable outstanding to its former Japanese distributor which arose as part of the Company's acquisition of certain assets from the former Japanese distributor. In the second quarter of 1996 the Company sold 4.3 million shares of its common stock in a public offering for approximately $141.8 million of proceeds net of issuance costs. A portion of the proceeds were used to repay certain domestic bank debt and the balance of the proceeds was used for general corporate purposes, including financing the Company's 1997 various acquisitions. The Company entered into a five year, $325 million syndicated credit agreement in December 1995, which replaced its previous $350 million revolving credit facility. The new syndicated credit facility provides the Company with a choice of interest rates based upon the banks' CD rate, prime rate or the London Interbank Offered Rate (LIBOR) for US dollar borrowings and Tokyo Interbank Offered Rate (TIBOR) for yen borrowings. The actual interest charges paid by the Company are determined by a pricing schedule which considers the ratio of consolidated debt at each calendar quarter end to consolidated earnings before interest, taxes, depreciation and amortization for the trailing twelve months. The effective interest rate on long-term bank debt outstanding as of December 31, 1997 and 1996 was 1.04% and 5.3%, respectively. The interest expense in 1997, 1996 and 1995 was $9 million, $14 million and $23 million, respectively. Such interest expense has been reduced, as reflected on the Consolidated Statement of Operations by interest income of $8 million, $5 million and $2 million in 1997, 1996 and 1995, respectively. The Company entered into an additional conditional committed bank term loan facility of $175 million during the third quarter of 1996 to exclusively finance its Circon tender offer. This conditional term loan facility has similar terms and conditions to the Company's present syndicated bank credit facility. The Company has obtained a commitment for 364-day bank term loan facility of $450 million during the fourth quarter of 1997 with its four lead banks to exclusively finance its acquisition of Valleylab (see Note T of Notes to Consolidated Financial Statements). The loan, funded on January 30, 1998 , contains terms and conditions similar to the Company's two other committed bank loan facilities. The interest rate was initially set at LIBOR plus 60 basis points, or 6.26%. The loan may be repaid without any penalty prior to its anniversary. It is currently intended that the loan will be refinanced with a combination of the Company's existing $325 million syndicated credit facility and other long term debt instruments. There were no borrowings outstanding under this facility at December 31, 1997. The credit agreements, conditional term loan facility, and the Company's operating lease for its primary domestic manufacturing, distribution and warehousing complex in North Haven, Connecticut, provide for certain restrictions including sales of assets, capital expenditures, dividends and subsidiary debt. The most restrictive covenants of the Company's financing agreements require the maintenance of certain minimum levels of tangible net worth, fixed charges coverage and a maximum ratio of total debt to total capitalization, as defined. The Company is prohibited from declaring dividends on its common stock in excess of 20% of net income, subject to changes in the number of common shares outstanding, until it achieves investment grade status, as defined. Additionally, during 1997 and 1996, the Company entered into uncommitted facilities for 6 billion Japanese Yen (approximately $50 million) with three Japanese banks and $95 million with four other banks. The uncommitted credit agreements are short term in nature. Borrowings under these agreements were approximately $29 million at December 31, 1997. Such borrowings have been categorized as long-term debt as such borrowings will be refinanced under the Company's five-year bank credit agreement. The Company is in full compliance with all of the covenants associated with its various financing agreements. F-18 49 The Company's French franc denominated financing lease requires principal amortization in varying amounts over the remaining eleven year term of the lease with a balloon payment of approximately 42 million French franc ($7 million) at the end of the lease. Interest is payable at a rate approximately 1.4% above Paris Interbank Offered Rate (PIBOR). After considering the effects of an interest rate swap agreement, the effective interest rate on the financing lease debt was approximately 4.9% and 6.8% at December 31, 1997 and 1996, respectively. The Company's yen-denominated note payable is non-interest bearing and repayable annually in amounts based upon the higher of 350 million yen or 8% of the landed value of products shipped to the Company's subsidiary in Japan. In any event, any notes payable still outstanding on December 31, 2001 must be repaid on that date. The Company has calculated the present value of these notes using a discount rate of 4% and the estimated value of products expected to be shipped to its subsidiary over the next four years. Based upon these assumptions, the Company estimates that the present value of the final payment on December 31, 2001 will be approximately $15 million. NOTE M - STOCKHOLDERS' EQUITY During the first quarter of 1997, the Company called for redemption on April 1, 1997 all of 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 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 increased by approximately 8.5 million shares. The Company had 75,883,266 and 63,286,797 shares of its $.10 par value Common Stock outstanding as of December 31, 1997 and 1996, respectively. In the past, the Company announced programs to repurchase up to a total of 9,200,000 shares of its outstanding Common Stock. As of December 31, 1997, a total of 8,799,780 shares had been acquired at a total cost of $93.4 million, with 87,243 shares received for withholding taxes on the exercise of stock options in 1997 at a cost of $4.1 million. No treasury shares had been acquired in 1996 and 1995. Acquired shares are being held as treasury shares, and will be used for general corporate purposes. Shares of Common Stock reserved for future issuance in connection with restricted stock awards, stock option plans and employee stock purchase plans amounted to 25,268,549 and 18,015,704 at December 31, 1997 and 1996, respectively. The Compensation/Option Committee (the "Committee") of the Board of Directors is responsible for administering the Company's stock plans. Stock option grants made under the Company's stock option plans vest for periods up to five years from the date of grant. The 1990 Employee Stock Option Plan (the "1990 Option Plan") provides for grants to key employees and certain key consultants of options and stock appreciation rights for up to 13,000,000 shares of the Company's Common Stock at the per share market price at the date of grant unless the Committee determines otherwise. As of December 31, 1997, no stock appreciation rights have been granted. Subject to a maximum exercise period of fifteen years, the exercise period of awards under the 1990 Option Plan will be as determined by the Committee. The 1993 Employee Stock Option Plan (the "1993 Option Plan") provides for grants to key employees (excluding executive officers) of options and stock appreciation rights for up to 6,500,000 shares of the Company's Common Stock at the per share market price at the date of grant unless the Committee deems otherwise. As of December 31, 1997 no stock appreciation rights have been granted. Subject to a maximum exercise period of fifteen years, the exercise period of awards under the 1993 Option Plan will be as determined by the Committee. F-19 50 The 1996 Employee Stock Option Plan (the "1996 Option Plan") provides for grants to Officers of the Company of options and stock appreciation rights for up to 2,500,000 shares of the Company's Common Stock at no less than the per share market price at the date of grant. As of December 31, 1997 no stock appreciation rights have been granted. Subject to a maximum exercise period of fifteen years, the exercise period of awards under the 1996 Option Plan will be as determined by the Committee. The 1997 Key Management Equity Investment Plan (the "1997 Option Plan") provides for grants to selected employees of the Company of options, in lieu of cash bonus payments, for up to 3,000,000 shares of the Company's Common Stock at no less than the per share market price at the date of grant. Subject to a maximum exercise period of four years, the exercise period of awards under the 1997 Option Plan will be as determined by the Committee. The PAS Employee Stock Option Plans (the "PAS Option Plans") provided for grants to key employees of PAS, prior to the acquisition of PAS by the Company. There are no future grants available and all current grants expire two years from the date of merger, which was September, 1997. The 1997 Stock Option Purchase Agreement provides for a purchase of 2,000,000 shares of the Company's stock by the Company's Chairman of the Board and Chief Executive Officer with an exercise price of $47.875 per share. The option was purchased by the Company's Chairman of the Board and Chief Executive Officer at fair market value. The Service-Based Stock Option Plan (the "Service Option Plan") provides for grants of options for up to 1,144,132 shares of the Company's Common Stock at the per share market price at the date of grant to individuals employed by the Company who are within an eligible category. Options under the Service Option Plan are awarded for a fixed number of shares of Common Stock based solely upon the eligible recipient's years of service within the eligible category, and are exercisable for a period of up to ten years. The Outside Directors Stock Plan provides for an aggregate maximum of up to 260,000 shares of Common Stock to be issued under restricted stock awards and option grants to certain non-employee members of the Board of Directors which are exercisable for a period up to ten years. At December 31, 1997 and 1996, restricted stock awards and option grants for 186,000 shares and 154,000 shares, respectively, had been granted under the Outside Directors Stock Plan. As of December 31, 1997 and 1996, 74,000 and 6,000 shares, respectively, are reserved for future issuance under the Outside Directors Stock Plan. A summary of stock option transactions under the employee option plans and the Outside Directors Stock Plan for each of the three years in the period ended December 31, 1997 follows:
WEIGHTED NUMBER AVERAGE OF SHARES EXERCISE PRICE - --------------------------------------------------------------------- OUTSTANDING JANUARY 1, 1995 ... 12,732,616 $49.56 Granted .................... 1,570,525 23.71 Exercised .................. (157,195) 13.98 Canceled or lapsed ......... (433,049) 31.86 ---------- OUTSTANDING DECEMBER 31, 1995 . 13,712,897 47.57 Granted .................... 3,718,975 27.42 Exercised .................. (1,649,755) 21.73 Canceled or lapsed ......... (226,450) 35.21 ---------- OUTSTANDING DECEMBER 31, 1996 . 15,555,667 45.67 Granted .................... 10,676,262 37.32 Acquired from PAS .......... 115,435 15.49 Exercised .................. (1,839,724) 22.47 Canceled or lapsed ......... (3,013,846) 51.59 ---------- OUTSTANDING DECEMBER 31, 1997 . 21,493,794 42.52 ---------- At December 31, 1997: Exercisable ................ 10,670,674 50.36 ==========
F-20 51 The following tables summarize information about stock options outstanding at December 31, 1997:
WEIGHTED AVERAGE RANGE OF REMAINING WEIGHTED EXERCISE NUMBER CONTRACTUAL AVERAGE PRICES OUTSTANDING LIFE EXERCISE PRICE - -------------------------------------------------------------------------- $ 1.84 - $ 24.56 4,417,974 6.2 Years $ 21.11 25.31 - 47.88 14,248,099 6.8 Years 38.61 53.69 - 73.00 233,572 3.6 Years 60.35 75.13 - 98.69 2,321,417 3.9 Years 98.17 103.50 - 111.94 272,732 4.1 Years 104.04 -------------------------------------------- 21,493,794 6.3 Years $ 42.52 ============================================
RANGE OF WEIGHTED EXERCISE NUMBER AVERAGE PRICES EXERCISABLE EXERCISE PRICE - ---------------------------------------------------------- $ 1.84 - $ 24.56 3,415,846 $ 20.92 25.31 - 47.88 4,444,607 44.26 53.69 - 73.00 216,072 59.69 75.13 - 98.69 2,321,417 98.17 103.50 - 111.94 272,732 104.04 ---------------------------- 10,670,674 $ 50.36 ============================
Under the USSC Employees 1979 Stock Purchase Plan (the "1979 Purchase Plan") and the 1994 Employees Stock Purchase Plan (the "1994 Purchase Plan"), all eligible employees may authorize payroll deductions of up to 10% of their base earnings, as defined, to purchase shares of the Company's Common Stock at 85% of the market price when such deductions are made. There are no charges or credits to income in connection with the Purchase Plan. The plans will continue in effect as long as shares authorized under the Purchase Plan remain available for issuance thereunder. The Company has reserved 2,400,000 shares of its Common Stock for issuance under the 1979 Purchase Plan, of which 133,172 shares are available for future issuance, and it has reserved 650,000 shares of its Common Stock for issuance under the 1994 Purchase Plan, of which 161,756 are available for future issuance, at December 31, 1997. The estimated fair value of options granted during 1997 and 1996 were $8.71 per share and $8.91 per share, respectively. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock option and purchase plans. No compensation cost has been recognized for its fixed stock option plans and its stock purchase plans. Had compensation cost for the Company's stock option plans and its stock purchase plans been determined based on the fair value at the option grant dates for awards in accordance with the accounting provisions of FAS 123, the Company's net income and earnings per share for the years ended December 31, 1997 and 1996 would have been reduced to the pro forma amounts indicated below:
1997 1996 ---- ---- Net income applicable to common shareholders As reported $ 89,400 $ 89,600 Pro forma $ 56,000 $ 77,200 Net income per basic common share As reported $ 1.24 $ 1.48 Pro forma $ .71 $ 1.26 Net income per diluted common share As reported $ 1.21 $ 1.43 Pro forma $ .70 $ 1.21
F-21 52 The fair value of options granted under the Company's fixed stock option plans during 1997 and 1996 was estimated on the dates of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used: dividend yield of approximately .5% for 1997 and .3% for 1996, respectively, expected volatility of approximately 34% for 1997 and 32% for 1996, respectively, risk free interest rate of approximately 6% and expected lives of option grants of approximately four years for 1997 and 1996, respectively. Pro forma compensation cost related to shares purchased under the Employee Stock Purchase Plan is measured based on the discount from market value. The effects of applying FAS 123 in this pro forma disclosure are not indicative of future pro forma effects. FAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. NOTE N - SEGMENT AND GEOGRAPHIC AREA INFORMATION The Company develops, manufactures and markets wound management products which constitute a single business segment. The Company had one customer whose sales represented 11.5% of its 1997 total sales. There were no customers who exceeded 10% of total sales in 1996 and 1995, respectively. The following information sets forth geographic information with respect to the Company's net sales, operating profits and identifiable assets. Intercompany transactions are made at established transfer prices.
In thousands 1997 1996 1995 - --------------------------------------------------------------------------------------------- NET SALES: United States ................. $ 982,200 $ 955,600 $ 828,500 International (1) Europe ..................... 350,700 366,300 365,300 Japan/Korea ................ 107,300 99,900 63,900 Other ...................... 38,400 33,200 30,500 Inter-area transfers eliminated (306,500) (342,300) (265,900) ----------- ----------- ----------- $ 1,172,100 $ 1,112,700 $ 1,022,300 =========== =========== =========== OPERATING PROFIT: United States ................. $ 160,500 $ 176,200 $ 121,100 International (1) Europe ..................... 77,200 103,000 87,500 Japan/Korea ................ 28,800 32,900 6,800 Other ...................... 7,400 6,800 5,400 Profit on inter-area transfers eliminated ................. (151,700) (168,200) (110,300) ----------- ----------- ----------- $ 122,200 $ 150,700 $ 110,500 =========== =========== =========== IDENTIFIABLE ASSETS AT DECEMBER 31: United States ................. $ 1,331,600 $ 1,099,100 $ 867,900 International (1) Europe ..................... 308,600 351,500 349,400 Japan/Korea ................ 91,400 77,500 64,300 Other ...................... 13,300 12,000 10,400 Inter-area assets eliminated .. (18,900) (25,300) (26,500) ----------- ----------- ----------- $ 1,726,000 $ 1,514,800 $ 1,265,500 =========== =========== ===========
(1) Does not include sales made primarily to international distributors (1997 - $57,100, 1996 - $53,800 and 1995 - $50,200) from a location in the United States. The combination of sales to international distributors and international sales above approximate 47% in 1997, 50% in 1996 and 49% in 1995 of consolidated sales, respectively. F-22 53 NOTE O - COMMITMENTS AND CONTINGENCIES The Company is engaged in litigation as a defendant in cases involving alleged patent infringement and product liability claims (see Item 3). In the opinion of management, based upon advice of counsel, the ultimate outcome of these lawsuits should not have a material adverse effect on the Company's consolidated financial statements. In November, 1996 the Company entered into an agreement in settlement of the shareholder class action suits filed against the Company and certain individually named defendants. In May of 1997, an order and final judgment was signed and entered by the United States District Court for the District of Connecticut approving and directing the implementation of the settlement. The principal terms of the settlement are as follows: issuance and payment to the members of the class of 315,000 shares of the Company's common stock (fair value $12.2 million), $3.5 million in cash, and issuance of contingent stock rights (fair value $2.9 million) with respect to each of the 315,000 shares of common stock issued in the settlement. If the Company's common stock reaches a price of $70 per share for either forty five consecutive trading days or one hundred trading days in total during the two year period from the date of issuance of the 315,000 shares of common stock to the members of the class, the contingent stock rights will extinguish. The cash payment and issuance of 105,000 shares of the Company's common stock for legal fees took place on final court approval of the settlement in 1997. The Company provided for the cost of the settlement in its 1996 consolidated financial statements, the substantial portion of which has been funded by the Company's insurance carriers. The Company is committed to certain undertakings, including the maintenance of specified levels of employment and capitalization for its Puerto Rican subsidiary. The future minimum rental commitments for building space, leasehold improvements, data processing and automotive equipment for all operating leases as of December 31, 1997, were as follows: 1998 $79 million; 1999 $76 million; 2000 $91 million; 2001 $71 million; 2002 $67 million; after 2002 $89 million. Rent expense was $40 million in 1997 and 1996, and $33 million in 1995. The Company's North Haven lease agreement includes contingent rent provisions based on formulas utilizing the consumer price index. The Company's North Haven facilities are leased from a trust, of which the original developer (the "Owner Participant") holds the beneficial interest. The Owner Participant has the right to require the Company or the Company's designee to purchase the Owner Participant's beneficial interest. During 1997, the Company and the Owner Participant agreed to amend the date that this right could be exercised from January 1998 to no earlier than April 2000. This right would then continue for approximately two years from April 2000. The Company's obligation, if the right is exercised, would be to take title to the beneficial interest in the trust, or find another investor, suitable to the noteholders who financed these facilities, to take such title. In either case the Company's obligations as lessee under the lease would not change. The Company would be obligated, whether or not the right is exercised, to make payments called for under the existing lease of approximately $57 million annually through the year 2002, a payment of $28 million in January 2003 and nominal annual payments of $100,000 through 2022. In addition, the Company is obligated to make additional contingent rental payments based upon the consumer price index. There are presently several alternatives available to the Owner Participant and the Company relative to the additional contingent rental payments. The earliest potential payment of contingent rent of approximately $19 million could be due no earlier than July 2000 if the Owner Participant exercises the right to sell the facility to the Company, or the Owner Participant elects the one-time lump sum payment of contingent rent. If F-23 54 this right is not exercised, and the Owner Participant does not elect the one-time payment of contingent rent of approximately $19 million, the determination of the additional contingent rental payments will be based upon movements in the consumer price index during the period September 1997 to September 2000, subject to the annual cap on the consumer price index movement of 2.5% per year. If the second option is chosen, additional contingent rental payments cannot exceed approximately $39 million as stipulated in the agreement. Under the second option, the Company can elect to pay free of interest from 2004 to 2023 the additional contingent rental payments in excess of $19 million. The present value of the contingent rental payments under the second option of approximately $23 million would be a charge to rent expense during the contingent rent period, September 1997 to September 2000, in comparison to the $19 million charge during the period, September 1997 to June 2000, under the other option. Through December 31, 1997, the Company has accrued $4.5 million related to contingent rental payments. NOTE P - FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK DERIVATIVES The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and foreign exchange rate risks. As of December 31, 1997, the Company had approximately $33 million of foreign currency exchange contracts outstanding that will mature at various dates through February 1998. Realized and unrealized foreign currency gains and losses with respect to such contracts which were immaterial in 1997, 1996 and 1995. The Company swapped with certain banks its exposure to floating interest rates on 200 million ($34 million) of variable rate French franc debt. The French franc debt swap agreements expired in December 1997, and were renewed through December 1999. The Company made interest payments at rates of approximately 8.1% for the expired French franc swap, and 4.0% for the new French franc swap and received payments based on the floating three-month PIBOR on both French franc swaps. The net gain or loss from the exchange of interest rate payments, which is immaterial, is included in interest expense. Based upon the fair value of the Company's French franc interest rate swap agreement at December 31, 1997, termination would require a payment by the Company of approximately $.4 million dollars. The Company does not currently intend to terminate the interest rate swap agreement prior to the expiration date. CONCENTRATION OF CREDIT RISK The Company invests its excess cash in both deposits with major banks throughout the world and other high quality short-term liquid money market instruments (commercial paper, bank CDs, government and government agency notes and bills, etc.). The Company has a policy of making investments only with institutions that have at least an "A" (or equivalent) credit rating from a national rating agency. The investments generally mature within six months but certain investments in bank CDs mature from two to five years. The Company has not incurred losses related to these investments. The Company sells products in the surgical wound management field in most countries of the world. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. Ongoing credit evaluations of customers' financial condition are performed and, generally, no collateral is required. In certain European countries the Company's receivables are not paid until the customers receive governmental reimbursement for their purchases. The Company has not encountered difficulty in ultimately collecting accounts receivable in these countries. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's estimates. F-24 55 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. The fair value of certificates of deposit, long-term debt and foreign interest rate swap agreements were estimated based on quotes obtained from brokers for those or similar instruments. The fair value of interest rate swap contracts were estimated based on quoted market prices at year-end. The estimated fair value of the Company's financial instruments are as follows:
December 31 1997 1996 ------------------------- ------------------------ Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value ------ ----- ------ ----- Cash, cash equivalents and certificates of deposit $ 18,300 $ 18,300 $133,100 $133,500 Long-term debt 131,300 131,300 142,400 142,400 Interest rate swaps payable-net 300 700 400 2,200
The Company believes that the other parties to the above related financial instruments have the ability to perform under such agreements. NOTE Q - SUPPLEMENTAL CASH FLOW INFORMATION The Company purchased certain assets from its former Japanese distributor for approximately 6.1 billion Yen ($62 million or a present value of $53.5 million at date of purchase in 1995). In conjunction with this purchase a long-term payable was recorded in 1995 as follows: Fair Value of net assets acquired $53.5 Cash paid through December 31, 1995 (11.2) ----- Present value of non-interest bearing notes Payable to former distributor over six years From acquisition $42.3 =====
NOTE R-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 disclosure of certain information about operating segments and about products and services, 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. F-25 56 NOTE S - RELATED PARTY TRANSACTION 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 December 31, 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 81% of the voting stock of Seragen at December 31, 1997. The foregoing ownership percentages were calculated in accordance with SEC rules for Proxy Statement disclosure purposes. NOTE T - SUBSEQUENT EVENT In December of 1997, the Company entered into an agreement with Pfizer, Inc. to purchase its Valleylab division, for cash consideration of $425 million payable at closing on January 30, 1998. Valleylab, based in Colorado is the world's leader in electrosurgical and ultrasonic products, with annual sales of approximately $200 million. The Company has obtained a commitment for a term loan facility of $450 million during 1997 to finance the acquisition of Valleylab. This bank facility expires the earlier of 364 days from the date of the financing or March 31, 1999. This acquisition will be accounted for under the purchase method of accounting and the results of operations will be included with the Company's results of operations subsequent to the date of closing. F-26 57 SCHEDULE II UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD ----------- --------- -------- ---------- ------ In thousands Year ended December 31, 1997: Allowance for doubtful accounts $11,700 $ 300 $ 1,200(A) $10,800 Reserve for inventory valuation 67,000 11,300 21,500(B) 56,800 Reserve for fixed assets valuation 91,300 300 3,200(C) 88,400 Year ended December 31, 1996: Allowance for doubtful accounts $ 8,200 $ 4,800 $ 1,300(A) $11,700 Reserve for inventory valuation 74,100 9,700 16,800(B) 67,000 Reserve for fixed assets valuation 74,800 20,600 4,100(C) 91,300 Year ended December 31, 1995: Allowance for doubtful accounts $ 7,300 $ 1,300 $ 400(A) $ 8,200 Reserve for inventory valuation 60,900 26,600 13,400(B) 74,100 Reserve for fixed assets valuation 59,300 18,600 3,100(C) 74,800
(A) Represents amounts written off. Normal recurring credits and returns are charged against sales. (B) Represents disposition of inventory which has been superseded by a new generation of products. (C) Represents disposition of fixed assets. S-1 58 EXHIBIT INDEX (The Company will furnish a copy of any exhibit upon payment of 15 cents per page plus postage.) (3) ARTICLES OF INCORPORATION AND BY-LAWS. (a) Certificate of Incorporation filed March 14, 1990 - Exhibit 3(a) to registrant's Form 8-B declared effective August 3, 1990.* (b) Certificate of Merger filed May 1, 1990 - Exhibit 3(b) to registrant's Form 8-B declared effective August 3, 1990.* (c) Certificate of Amendment filed May 15, 1991 - Exhibit 3(c) to registrant's Form 10-K for 1991.* (d) By-laws, as amended January 30, 1996. Exhibit 3(d) to registrant's Form 10-K for 1995.* (e) Certificate of Designations relating to the issuance of the Company's Series A Convertible Preferred Stock, filed March 28, 1994. Exhibit 3(e) to registrant's Form 10-K for 1993.* (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. (a) Credit Agreement dated as of December 20, 1995 among registrant, signatory banks, Morgan Guaranty Trust Company of New York as Documentation Agent, NationsBank, N.A., as Administrative Agent, and The Bank of New York, as Yen Administrative Agent. Exhibit 4(a) to registrant's Form 10-K for 1995.* (b) Amendment No. 1 to Credit Agreement dated as of December 20, 1995 (4(a) above), dated September 16, 1996. Exhibit (10)(b) to registrant's Form 10-Q for the period ended September 30, 1996.* (c) $175 million credit agreement dated September 16, 1996 among registrant and signatory banks, related to acquisition financing. Exhibit (10)(a) to registrant's Form 10-Q for the period ended September 30, 1996.* (d) $450 million credit agreement dated January 30, 1998 among registrant and signatory banks related to acquisition financing. Filed herewith. 59 EXHIBIT INDEX (CONTINUED) (10) MATERIAL CONTRACTS. (a) 1981 Employee Stock Option Plan. Exhibit 10 (a) (1) to registrant's Form 10-K for 1987.*+ (b) 1990 Employee Stock Option Plan, as amended through February 4, 1997. Filed herewith.+ (c) 1993 Employee Stock Option Plan, as amended through December 22, 1997 incorporated by reference to the registrants Form S-8 Registration Statement (No. 33-28963) filed on June 11, 1997.+ (d) 1996 Employee Stock Option Plan. Exhibit 10 (a) to registrant's Form 10-Q for the period ended June 30, 1996.*+ (e) Installment Option Purchase Agreement with Leon C. Hirsch dated September 10, 1984, as amended through May 18, 1994. Exhibit 10 (j) to registrant's Form 10-K for 1994.+ (f) Outside Directors Stock Plan as amended through May 1, 1997. Filed herewith.+ (g) Amendment to Outside Directors Stock Plan adopted May 1, 1990 - Exhibit 10(j) to registrant's Form 10-K for 1990.*+ (h) Long-Term Incentive Plan - Exhibit 10(a)(5) to registrant's Form 10-K for 1988.*+ (i) Executive Incentive Compensation Plan. Exhibit 10 (b) to registrant's Form 10-Q for the period ended June 30, 1996.*+ (j) Lease Agreement dated as of January 14, 1993 between State Street Bank and Trust Company of Connecticut, National Association, as Lessor and the registrant, as Lessee - Exhibit 10(o) to registrant's Form 10-K for 1992.* (k) Participation Agreement dated as of January 14, 1993 among registrant, Lessee, Baker Properties Limited Partnership, Owner Participant, The Note Purchasers listed in Schedule 1 thereto, State Street Bank and Trust Company of Connecticut, National Association, Owner Trustee, and Shawmut Bank Connecticut, N.A., Indenture Trustee - Exhibit 10(p) to registrant's Form 10-K for 1992.* (l) Lease and financing agreements dated January 4, 1994 between registrant's French subsidiary, A.S.E. Partners, and (i) the Corporation for the Financing of Commercial Buildings ("FINABAIL") and (ii) the Association for the Financing of Commercial Buildings ("U.I.S.") - Exhibit 10(r) to registrant's Form 10-K for 1993.* (m) Lease and financing agreement dated December 26, 1991 between registrant's subsidiary, U.S.S.C. Puerto Rico, Inc., and The Puerto Rico Industrial Development Company ("PRIDCO") - Exhibit 10(s) to registrant's Form 10-K for 1993.* (n) Amendment to Lease Agreement dated June, 1997. Exhibit 10(a) to registrant's Form 10-Q for the period ending June 30, 1997.* (o) Agreement dated May, 1997 with Baker Properties Limited Partnership. Exhibit 10(b) to registrant's Form 10-Q for the period ending June 30, 1997.* (p) Form of agreement entered into by the registrant on November 25, 1997 with each of its executive officers. Filed herewith.+ (q) 1997 Key Management Equity Investment Plan. Exhibit 4 to registrant's Form S-3 (Registration Statement No. 333-39051) filed October 31, 1997.+ (r) Stock Option Purchase Agreement with Leon C. Hirsch dated May 1, 1997. Filed herewith.+ 60 EXHIBIT INDEX (CONTINUED) (11) Computation of Net Income Per Common Share. Filed herewith. (21) Subsidiaries of the registrant. Filed herewith. (27) Financial Data Schedule. Filed herewith. * Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC File No. 1-9776. + Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report. EX-4.D 2 $450 MILLION CREDIT AGREEMENT 1 EXHIBIT 4.D $450,000,000 CREDIT AGREEMENT dated as of JANUARY 30, 1998 among UNITED STATES SURGICAL CORPORATION THE LENDERS PARTY HERETO BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION AS SYNDICATION AGENT THE BANK OF NEW YORK AS ADMINISTRATIVE AGENT and MORGAN GUARANTY TRUST COMPANY OF NEW YORK AS DOCUMENTATION AGENT Arranged by: BancAmerica Robertson Stephens BNY Capital Markets, Inc. J.P. Morgan Securities, Inc. and NationsBanc Montgomery Securities LLC as Arrangers 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions................................................................... 1 SECTION 1.02. Accounting Terms and Determinations........................................... 19 ARTICLE 2 THE CREDITS SECTION 2.01. Commitments to Lend........................................................... 20 SECTION 2.02. Method of Borrowing........................................................... 20 SECTION 2.03. Notes......................................................................... 21 SECTION 2.04. Maturity of Loans............................................................. 22 SECTION 2.05. Interest Rates................................................................ 22 SECTION 2.06. Method of Electing Interest Rates............................................. 25 SECTION 2.07. Facility Fee.................................................................. 26 SECTION 2.08. Optional Termination or Reduction of Commitments.............................. 26 SECTION 2.09. Optional Prepayments.......................................................... 26 SECTION 2.10. Mandatory Prepayments......................................................... 27 SECTION 2.11. General Provisions as to Payments............................................. 27 SECTION 2.12. Funding Losses................................................................ 29 SECTION 2.13. Computation of Interest and Fees.............................................. 29 ARTICLE 3 CONDITIONS SECTION 3.01. Closing and First Borrowing................................................... 29 SECTION 3.02. Second Borrowing.............................................................. 32 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence and Power................................................. 33 SECTION 4.02. Corporate and Governmental Authorization; No Contravention....................................................................... 33 SECTION 4.03. Binding Effect................................................................ 33 SECTION 4.04. Financial Information......................................................... 33 SECTION 4.05. Litigation.................................................................... 34 SECTION 4.06. Compliance with ERISA......................................................... 34
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PAGE ---- SECTION 4.07. Environmental Matters......................................................... 35 SECTION 4.08. Taxes......................................................................... 35 SECTION 4.09. Subsidiaries.................................................................. 35 SECTION 4.10. No Regulatory Restrictions on Borrowing....................................... 35 SECTION 4.11. Full Disclosure............................................................... 36 SECTION 4.12. Transaction Documents......................................................... 36 SECTION 4.13. Other Existing Debt Documents................................................. 36 SECTION 4.14. No Default under Other Agreements............................................. 36 SECTION 4.15. Compliance with Laws.......................................................... 37 ARTICLE 5 COVENANTS SECTION 5.01. Information................................................................... 37 SECTION 5.02. Payment of Obligations........................................................ 40 SECTION 5.03. Maintenance of Property; Insurance............................................ 41 SECTION 5.04. Conduct of Business and Maintenance of Existence.............................. 41 SECTION 5.05. Compliance with Laws.......................................................... 42 SECTION 5.06. Inspection of Property, Books and Records..................................... 42 SECTION 5.07. Minimum Consolidated Net Worth................................................ 42 SECTION 5.08. Leverage Ratio................................................................ 42 SECTION 5.09. Fixed Charge Coverage......................................................... 42 SECTION 5.10. Negative Pledge............................................................... 43 SECTION 5.11. Investments................................................................... 44 SECTION 5.12. Dividends and Common Stock Payments........................................... 45 SECTION 5.13. Limitation on Subsidiary Debt................................................. 46 SECTION 5.14. Asset Sales................................................................... 46 SECTION 5.15. Consolidation and Mergers..................................................... 47 SECTION 5.16. Transactions with Affiliates.................................................. 47 SECTION 5.17. Prepayment of Other Debt...................................................... 48 SECTION 5.18. Other Existing Debt Documents................................................. 48 SECTION 5.19. Use of Proceeds............................................................... 49 ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default............................................................. 49 SECTION 6.02. Notice of Default............................................................. 52
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PAGE ---- ARTICLE 7 THE AGENTS AND ARRANGERS SECTION 7.01. Appointment and Authorization................................................. 52 SECTION 7.02. Agents and Affiliates......................................................... 52 SECTION 7.03. Action by Agents.............................................................. 53 SECTION 7.04. Consultation with Experts; Attorneys in Fact.................................. 53 SECTION 7.05. Liability of Agents........................................................... 53 SECTION 7.06. Indemnification............................................................... 54 SECTION 7.07. Credit Decision............................................................... 54 SECTION 7.08. Successor Operating Agents.................................................... 54 SECTION 7.09. Fees Payable.................................................................. 55 SECTION 7.10. Syndication Agent and Arrangers............................................... 55 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair...................... 55 SECTION 8.02. Illegality.................................................................... 56 SECTION 8.03. Increased Cost and Reduced Return............................................. 56 SECTION 8.04. Taxes......................................................................... 57 SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans..................... 60 SECTION 8.06. Substitution of Lender........................................................ 60 ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices....................................................................... 61 SECTION 9.02. No Waivers.................................................................... 61 SECTION 9.03. Expenses; Indemnification..................................................... 61 SECTION 9.04. Sharing of Set-offs........................................................... 62 SECTION 9.05. Amendments and Waivers........................................................ 62 SECTION 9.06. Successors and Assigns........................................................ 63 SECTION 9.07. Confidentiality............................................................... 65 SECTION 9.08. No Reliance on Margin Stock................................................... 66 SECTION 9.09. Governing Law; Submission to Jurisdiction..................................... 66 SECTION 9.10. Counterparts; Integration; Effectiveness...................................... 66 SECTION 9.11. WAIVER OF JURY TRIAL.......................................................... 67 SECTION 9.12. COMMERCIAL TRANSACTION; WAIVER OF RIGHTS.............................................................................. 67
iii 5 Commitment Schedule Pricing Schedule EXHIBIT A - Note EXHIBIT B - Opinion of Counsel for the Company EXHIBIT C - Opinion of Special Counsel for the Documentation Agent EXHIBIT D - Assignment and Assumption Agreement EXHIBIT E - Calculation of Funding Losses EXHIBIT F - List of Company's Active Subsidiaries EXHIBIT G - List of Disclosure Documents EXHIBIT H - List of Existing Liens Securing Debt iv 6 CREDIT AGREEMENT dated as of January 30, 1998 among UNITED STATES SURGICAL CORPORATION, the LENDERS party hereto, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Syndication Agent, THE BANK OF NEW YORK, as Administrative Agent and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Documentation Agent. WHEREAS, the Company is party to (i) a revolving credit agreement under which it may borrow and/or obtain letters of credit in an aggregate outstanding principal and/or face amount not to exceed $325,000,000 and (ii) a term loan agreement under which it may borrow up to $175,000,000 to finance its acquisition of Circon Corporation if and when such acquisition is consummated; WHEREAS, the Company wishes to obtain additional term loan financing up to $450,000,000 to finance its acquisition of (i) the capital stock of Valleylab and Vesta and (ii) the assets of certain other subsidiaries of Pfizer used in connection with Valleylab's international operations, all pursuant to the Acquisition Agreement; and WHEREAS, the Lenders party hereto are willing to provide such additional financing on the terms and conditions set forth herein; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "ACQUISITION" means (i) the acquisition by the Company of all the outstanding capital stock of Valleylab and Vesta, (ii) the acquisition by the Company of the assets of certain other subsidiaries of Pfizer used in connection with Valleylab's international operations (iii) the assumption by the Company of certain related liabilities and (iv) the execution and delivery of certain related agreements, including a transitional services agreement and a transitional intellectual property licensing agreement, all substantially as provided in the Acquisition Agreement. 7 "ACQUISITION AGREEMENT" means the Stock and Asset Purchase Agreement dated as of December 8, 1997 among Pfizer, the Asset Selling Corporations named therein and the Company. "ADJUSTED CONSOLIDATED NET INCOME" means, for any period, the consolidated net income of the Company and its Consolidated Subsidiaries for such period minus dividends on the Company's outstanding preferred stock accrued or paid with respect to such period. "ADJUSTED LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.05(b). "ADMINISTRATIVE AGENT" means BNY, in its capacity as administrative agent for the Lenders hereunder, and its successors in such capacity. "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Lender, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Company) duly completed by such Lender. "AFFILIATE" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Company (a "CONTROLLING PERSON") or (ii) any Person which is controlled by or is under common control with a Controlling Person; provided that the term "AFFILIATE" shall not include (i) the Company, (ii) any Subsidiary or (iii) any Person in which the Company or a Subsidiary owns an equity interest if none of the other equity interests in such Person are owned directly or indirectly by an Affiliate. As used herein, the term "CONTROL" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "AGENT" means the Administrative Agent, the Documentation Agent or the Syndication Agent, as the context may require, and "AGENTS" means all of the foregoing. "APPLICABLE LENDING OFFICE" means, with respect to any Lender, (i) in the case of its Base Rate Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "ARRANGERS" means BancAmerica Robertson Stephens, BNY Capital Markets, Inc., J.P. Morgan Securities, Inc. and NationsBanc Montgomery Securities LLC, in their respective capacities as Arrangers of the credit facility provided hereunder. 2 8 "ASSET SALE" means any sale of any asset by the Company or any Subsidiary, excluding (i) sales of inventory and used, surplus or worn out equipment in the ordinary course of business, (ii) sales of used, surplus or worn out operating assets in the ordinary course of business, to the extent that amounts equal to the proceeds thereof are used within 90 days of such sale to purchase similar operating assets (iii) sales of accounts and notes receivable pursuant to a Permitted Asset Securitization, (iv) sales of Temporary Cash Investments and (v) sales of assets to the Company or any Subsidiary. "ASSIGNEE" has the meaning set forth in Section 9.06(c). "AVAILABILITY PERIOD" means a period of 60 days beginning on and including the Closing Date. "BOFA" means Bank of America National Trust and Savings Association. "BASE RATE" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "BASE RATE LOAN" means a Loan which bears interest at the Base Rate pursuant to the Notice of Borrowing or an applicable Notice of Interest Rate Election or the provisions of 2.06(c) or Article 8. "BORROWING DATES" has the meaning set forth in Section 2.01. "BNY" means The Bank of New York. "CIRCON" means Circon Corporation, a Delaware corporation. "CIRCON CREDIT AGREEMENT" means the Credit Agreement dated as of September 16, 1996 among the Company, the various financial institutions party thereto and the agents party thereto, as such agreement may be amended from time to time. "CIRCON MERGER" means a merger of Circon into USS Acquisition Corp. or of USS Acquisition Corp. into Circon as contemplated by the Circon Tender Offer Documents. "CIRCON TENDER OFFER DOCUMENTS" means the Offer to Purchase for Cash All Outstanding Shares of Common Stock of Circon Corp. by USS Acquisition Corp., a wholly owned subsidiary of the Company, dated August 2, 1996, as well as the Letter of Transmittal and other tender offer materials relating thereto, as 3 9 such documents may be amended, supplemented or otherwise changed from time to time. "CLOSING" means the closing hereunder on the Closing Date. "CLOSING DATE" means the date on or after the Effective Date on which all the conditions specified in or pursuant to Section 3.01 shall have been satisfied. "COMMITMENT" means, with respect to each Lender, the amount set forth opposite the name of such Lender on the Commitment Schedule (or, in the case of an Assignee, the portion of the transferor Lender's Commitment assigned to such Assignee pursuant to Section 9.06(c)), as such amount may be reduced from time to time pursuant to Section 2.08 or changed as a result of an assignment. "COMMITMENT EXPIRATION DATE" means June 9, 1998 and is the date on which the Commitments will terminate if the Closing has not occurred on or before such date. "COMMITMENT SCHEDULE" means the Commitment Schedule attached hereto. "COMMON STOCK DIVIDEND" means any dividend or other distribution on any shares of the Company's common stock (except dividends payable solely in shares of its common stock and dividends consisting solely of rights to acquire shares of its common stock). "COMMON STOCK PAYMENT" means any payment on account of the purchase, redemption, retirement or acquisition of (i) any shares of the Company's common stock or (ii) any option, warrant or other right to acquire shares of the Company's common stock; provided that if, pursuant to the Company's stock option plans, an optionee surrenders shares of the Company's common stock in payment of the exercise price of options then being exercised by such optionee, the acquisition by the Company of the shares so surrendered shall not constitute a "COMMON STOCK PAYMENT". "COMPANY" means United States Surgical Corporation, a Delaware corporation, and its successors. "COMPANY'S LATEST FORM 10-Q" means the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1997, as filed with the SEC pursuant to the Exchange Act. 4 10 "COMPANY'S 1996 FORM 10-K" means the Company's annual report on Form 10-K for 1996, as filed with the SEC pursuant to the Exchange Act. "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the gross amount of all additions to property, plant and equipment of the Company and its Consolidated Subsidiaries for such period; provided that, if the Company acquires a going concern business, "CONSOLIDATED CAPITAL EXPENDITURES" shall not include (i) the book value of the property, plant and equipment of such business immediately before such acquisition or (ii) the amount by which such property, plant and equipment are written up in connection with such acquisition, except to the extent (if any) that the amounts referred to in the foregoing clauses (i) and (ii) are attributable to expenditures made in contemplation of such acquisition. "CONSOLIDATED DEBT" means at any date the sum of all Debt of the Company and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "CONSOLIDATED EBITDA" means, for any period, the sum of (i) the consolidated net income of the Company and its Consolidated Subsidiaries for such period (excluding any extraordinary income or extraordinary charges) plus (ii) to the extent deducted in determining such consolidated net income, the sum of: (A) Consolidated Net Interest Expense; (B) income taxes; (C) depreciation, amortization and write-offs of assets theretofore being depreciated or amortized (or the creation or increase of reserves against such assets); (D) the cost of settling lawsuits, provided that the aggregate amount added pursuant to this clause (D) with respect to all Fiscal Quarters ending after September 30, 1997 shall not exceed $25,000,000; (E) non-cash charges related to real estate subject to the U.I.S. Financing Documents, provided that the aggregate amount added pursuant to this clause (E) with respect to all Fiscal Quarters ending after September 30, 1997 shall not exceed $35,000,000; (F) the amount of purchased research and development expensed and the reduction in gross profits attributable to the write-up of inventory, 5 11 in each case as recognized in connection with purchase accounting for the Acquisition and/or the Circon Merger; and (G) the amount of purchased research and development expensed and the reduction in gross profits attributable to the write-up of inventory, in each case as recognized in connection with purchase accounting for one or more acquisitions of a going-concern business (other than the Acquisition and the Circon Merger); provided that the aggregate amount added pursuant to this clause (G) with respect to all Fiscal Quarters ending after September 30, 1997 shall not exceed $30,000,000. "CONSOLIDATED NET INTEREST EXPENSE" means, for any period, the interest expense (net of interest income) of the Company and its Consolidated Subsidiaries determined on a consolidated basis for such period. "CONSOLIDATED NET RENT EXPENSE" means, for any period, the rent expense of the Company and its Consolidated Subsidiaries under operating leases for such period, net of rental income for such period, determined on a consolidated basis. "CONSOLIDATED NET WORTH" means at any date the consolidated stockholders' equity of the Company and its Consolidated Subsidiaries at such date minus, to the extent reflected therein, all Intangible Assets (other than patents, patent applications pending and patent licenses) acquired after September 30, 1992; provided that only 50% of the increase in Intangible Assets (other than patents, patent applications pending and patent licenses) resulting from the Acquisition shall be deducted as an Intangible Asset in determining Consolidated Net Worth. "CONSOLIDATED SUBSIDIARY" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Company in its consolidated financial statements if such statements were prepared as of such date. "CONSOLIDATED TOTAL CAPITAL" means at any date Consolidated Debt plus Consolidated Net Worth at such date. "CREDIT EXPOSURE" means, with respect to any Lender, (i) at any time prior to the Closing, the amount of its Commitment and (ii) at any time after the Closing, the aggregate outstanding principal amount of all Loans held by it (including any portion thereof in which Participants have participating interests). 6 12 "DEBT" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person as lessee which are (or are required to be) capitalized in accordance with generally accepted accounting principles, (iv) all guarantees and endorsements (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) by such Person of the Debt of other Persons and all letters of credit issued on the responsibility of such Person to support the Debt of other Persons, (v) in the case of the Company, the obligations evidenced by the North Haven Notes and (vi) with respect to obligations of such Person as lessee under any operating lease (except the North Haven Lease) under which the aggregate rental payments over the term of such lease exceed $15,000,000, the lesser of (x) the remaining unpaid rental payments due during the term of such lease or (y) six times the rental payments due under such lease during the next year. In calculating the amount of any Person's Debt for purposes hereof, the amount of any guarantee, endorsement or letter of credit referred to in clause (iv) of this definition shall be deemed to be the amount of the Debt of another Person guaranteed, endorsed or otherwise supported thereby. "DEFAULT" means any condition or event which constitutes an Event of Default or which with the giving of notice (under this Agreement or under one or more agreements relating to Material Debt), lapse of time and/or the making of a determination by the Required Lenders would, unless cured or waived, become an Event of Default. "DERIVATIVES OBLIGATIONS" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "DOCUMENTATION AGENT" means Morgan, in its capacity as Documentation Agent hereunder, and its successors in such capacity. "DOLLAR" and the sign "$" mean lawful money of the United States of America. "DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. 7 13 "DOMESTIC LENDING OFFICE" means, as to each Lender, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Lender may hereafter designate as its Domestic Lending Office by notice to the Company and the Administrative Agent. "EASTERN TIME" means eastern standard time or eastern daylight time, as appropriate. "EFFECTIVE DATE" means the date this Agreement becomes effective in accordance with Section 9.10. "ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA GROUP" means the Company, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "EURO-DOLLAR LENDING OFFICE" means, as to each Lender, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Lender as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Company and the Administrative Agent. 8 14 "EURO-DOLLAR LOAN" means a Loan which bears interest at a Euro-Dollar Rate pursuant to the Notice of Borrowing or an applicable Notice of Interest Rate Election. "EURO-DOLLAR MARGIN" means a rate per annum determined in accordance with the Pricing Schedule. "EURO-DOLLAR RATE" means a rate of interest determined pursuant to Section 2.05(b) on the basis of an Adjusted London Interbank Offered Rate. "EURO-DOLLAR REFERENCE BANKS" means the principal London offices of BofA, BNY, Morgan and NationsBank. "EURO-DOLLAR RESERVE PERCENTAGE" has the meaning set forth in Section 2.05(b). "EVENTS OF DEFAULT" has the meaning set forth in Section 6.01. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time. "EXISTING REVOLVING CREDIT AGREEMENT" means the Credit Agreement dated as of December 20, 1995 among the Company, the Eligible Subsidiaries referred to therein, the various financial institutions parties thereto and the various agents parties thereto, as such agreement may be amended from time to time. "FACILITY FEE RATE" means a rate per annum determined in accordance with the Pricing Schedule. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to BNY on such day on such transactions as determined by the Administrative Agent. "FISCAL QUARTER" means a fiscal quarter of the Company. 9 15 "FISCAL YEAR" means a fiscal year of the Company. "GAAP" means at any time generally accepted accounting principles as then in effect in the United States, applied on a basis consistent (except for changes with which the Company's independent public accountants have concurred) with the most recent audited consolidated financial statements of the Company and its Consolidated Subsidiaries theretofore delivered to the Lenders. "GROUP OF LOANS" or "GROUP" means at any time a group of Loans consisting of (i) all Loans which are Base Rate Loans at such time or (ii) all Euro-Dollar Loans having the same Interest Period at such time, provided that, if a Loan of any particular Lender is converted to or made as a Base Rate Loan pursuant to Article 8, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "GUARANTEE" by any Person means, for purposes of Sections 5.16 and 5.18 only, any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include the North Haven Lease. The term "GUARANTEE" used as a verb has a corresponding meaning. "HAZARDOUS SUBSTANCES" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "INDEMNITEE" has the meaning set forth in Section 9.03(b). "INFORMATION MEMORANDUM" means the information memorandum dated January, 1998 furnished to the Lenders in connection with the financing hereunder. "INITIAL LENDER" means BNY, Morgan, BofA or NationsBank and "INITIAL LENDERS" means all of the foregoing. 10 16 "INTANGIBLE ASSETS" means goodwill, patents, patent applications pending, patent licenses, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, deferred assets (other than prepaid insurance, prepaid rent in respect of the North Haven Lease and prepaid or deferred taxes), the excess of cost of shares acquired over book value of related assets and such other assets as are properly classified as "INTANGIBLE ASSETS" in accordance with GAAP. "INTERCOMPANY DEBT" means (i) Debt owed by the Company to any Subsidiary or (ii) Debt owed by any Subsidiary to the Company or to another Subsidiary. "INTEREST PERIOD" means, with respect to each Euro-Dollar Loan, a period commencing on the date of borrowing specified in the Notice of Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Company may elect in the applicable notice; provided that: (a) any Interest Period that begins prior to the Syndication Termination Date shall (i) be for a period of one or two weeks (a "WEEKLY PERIOD") and (ii) end on or before the Syndication Termination Date; (b) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless (except in the case of a Weekly Period) such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (c) any Interest Period (other than a Weekly Period) which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (d) below, end on the last Euro-Dollar Business Day of a calendar month; and (d) any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. "INVESTMENT" means any investment in any Person, whether made by means of share purchase, capital contribution, loan, time deposit, contribution of 11 17 assets, assumption of liabilities or otherwise; provided that the term "Investment" shall not include any acquisition of assets or assumption of liabilities by the Company as part of the Acquisition. "INVESTMENT GRADE STATUS" exists at any date if the Company's outstanding senior unsecured long-term debt securities (without any third-party credit enhancement) are rated BBB- or higher by S&P and Baa3 or higher by Moody's on such date; provided that, if the Company has no senior unsecured long-term debt securities outstanding at such date, such ratings may be established by letters from each of S&P and Moody's until either (i) the Company shall have received notice from either S&P or Moody's that its letter rating has been lowered below BBB- or Baa3, as the case may be, or withdrawn or (ii) either S&P or Moody's shall have refused to affirm its letter rating when asked to do so by the Administrative Agent (at the request of any Lender). "LENDER" means each bank or other financial institution listed on the Commitment Schedule, each Assignee which becomes a Lender pursuant to Section 9.06(c), and their respective successors. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Company or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "LOAN" means a loan made by a Bank to the Company pursuant to Section 2.01; provided that if any loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "LOAN" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.05(b). "MANDATORY PREPAYMENT EVENT" means (i) the incurrence of any Debt by the Company or any of its Subsidiaries (other than Debt which (x) constitutes a permitted refinancing of Debt hereunder, (y) is secured by a Lien permitted by Section 5.10 or (z) is incurred under the Existing Revolving Credit Agreement or the Circon Credit Agreement) or (ii) the issuance of any equity securities by the 12 18 Company or any of its Subsidiaries (other than equity securities issued (x) to the Company or any of its Subsidiaries, (y) upon the exercise of employee stock options or (z) as consideration for (A) the acquisition of any Person that is not an Affiliate or (B) assets (other than cash or cash equivalents) of any Person that is not an Affiliate. The description of any transaction as falling within this definition does not affect any limitation on such transaction imposed by Article 5. "MATERIAL ADVERSE EFFECT" means any material adverse effect upon (i) the business, financial position, operations or properties of the Company and its Subsidiaries, taken as a whole, (ii) the rights and remedies of the Lenders or the Administrative Agent under this Agreement and the Notes, (iii) the ability of the Company to perform its obligations under this Agreement and the Notes or (iv) the benefit to the Company (as described or contemplated by the Pre-Commitment Information) of the Acquisition (taken as a whole). "MATERIAL DEBT" means (i) the North Haven Notes or (ii) any other Debt (except the Loans) of the Company and/or one or more Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate outstanding principal amount exceeding $10,000,000 (it being understood that no reference to Material Debt in any provision hereof shall apply to Debt described in the foregoing clause (ii) unless the relevant conditions or events described in such provision apply to Debt having an aggregate outstanding principal amount exceeding $10,000,000). "MATERIAL FINANCIAL OBLIGATIONS" means a principal or face amount of Debt and/or payment obligations in respect of Derivatives Obligations of the Company and/or one or more Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $10,000,000. "MATERIAL PLAN" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $10,000,000. "MATURITY DATE" means the earlier of (i) the date that is 364 days after the Closing Date (or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day) and (ii) March 31, 1999. "MOODY'S" means Moody's Investors Service, Inc. "MORGAN" means Morgan Guaranty Trust Company of New York. "MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions 13 19 or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NATIONSBANK" means NationsBank, N.A. "NET CASH PROCEEDS" means, with respect to any Mandatory Prepayment Event, an amount equal to the cash proceeds received by the Company or any of its Subsidiaries from or in respect of such Mandatory Prepayment Event, less (x) any expenses reasonably incurred by such Person in respect of such Mandatory Prepayment Event and (y) if such Mandatory Prepayment Event is an Asset Sale, (i) the principal amount of any Debt secured by a Lien on any asset disposed of in such Asset Sale and paid or to be paid in connection with such Asset Sale and (ii) any taxes paid or to be paid by such Person (as estimated by a senior financial or accounting officer of the Company, giving effect to the overall tax position of the Company) in respect of such Asset Sale within 24 months after such Net Cash Proceeds are received. "NORTH HAVEN FINANCING DOCUMENTS" means (i) the Participation Agreement dated as of January 14, 1993 among the Company (as lessee), Baker Properties Limited Partnership (as owner participant), the note purchasers listed therein, State Street Bank and Trust Company of Connecticut, National Association (Owner Trustee) and Norwest Bank Minnesota, National Association (successor Indenture Trustee) and (ii) each of the "OPERATIVE DOCUMENTS" referred to therein, in each case as in effect from time to time. "NORTH HAVEN LEASE" means the Lease Agreement dated as of January 14, 1993 between State Street Bank and Trust Company of Connecticut, National Association (Owner Trustee), as lessor, and the Company, as lessee, as in effect from time to time. "NORTH HAVEN NOTES" means the notes outstanding from time to time under the Trust Indenture, Assignment of Leases, Open-End Mortgage and Security Agreement dated as of January 14, 1993 between State Street Bank and Trust Company of Connecticut, National Association (Owner Trustee) and Norwest Bank Minnesota, National Association (successor Indenture Trustee), as in effect from time to time. "NOTES" means promissory notes of the Company, substantially in the form of Exhibit A hereto, evidencing the obligation of the Company to repay the Loans, and "NOTE" means any one of such promissory notes issued hereunder. "NOTICE OF BORROWING" has the meaning set forth in Section 2.02. 14 20 "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section 2.06. "OPERATING AGENT" means the Administrative Agent or the Documentation Agent and "OPERATING AGENTS" means both of the foregoing. "OTHER EXISTING DEBT DOCUMENTS" means the North Haven Financing Documents and the U.I.S. Financing Documents. "OTHER SCHEDULED DEBT PAYMENTS" means, for any period, the aggregate amount (without duplication) of (a) all scheduled repayments of principal (including the principal component of scheduled payments of rent under capital leases) required to be made by the Company and its Consolidated Subsidiaries during such period with respect to Debt of the types described in clauses (i), (ii) and (iii) of the definition of "DEBT" and (b) all scheduled payments of principal and interest required to be made in cash with respect to the North Haven Notes during such period (but only to the extent that such scheduled payments exceed the amount included in Consolidated Net Rent Expense for such period in respect thereof), but excluding payments in respect of the North Haven Notes that result from payments of contingent rent under the North Haven Lease. "PARENT" means, with respect to any Lender, any Person controlling such Lender. "PARTICIPANT" has the meaning set forth in Section 9.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED ASSET SECURITIZATION" means a sale or other disposition by the Company of its accounts and notes receivable in a transaction permitted by Section 5.14(c). "PERMITTED TEMPORARY CASH INVESTMENT" means any Investment in: (i) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, (ii) direct obligations of the Commonwealth of Puerto Rico or any agency thereof or any authority organized under the laws thereof, provided in each case that such obligation is, at the time of acquisition thereof, rated BBB+ or better by S&P or Baa1 or better by Moody's, 15 21 (iii) commercial paper rated, at the time of acquisition thereof, A-1 or better by S&P and P-1 or better by Moody's, (iv) time deposits with, including certificates of deposit issued by, any office located in the United States of any Eligible Bank, (v) repurchase agreements with respect to investments described in clauses (i), (iii) and (iv) above, entered into with an office located in the United States of any Eligible Bank or any financial institution whose short term obligations are at the time rated A-2 or better by S&P and P-2 or better by Moody's, (vi) time deposits with, including certificates of deposit issued by, any office located in Puerto Rico of Banco Popular de Puerto Rico, Banco Santander Puerto Rico or any Eligible Bank, or (vii) shares of an investment company with an aggregate net asset value of not less than $500,000,000, the investments of which are limited to short-term direct obligations of the United States or obligations backed by short-term direct obligations of the United States, provided that (x) each such Investment (other than an Investment permitted by clause (ii) or (vi) above) matures within one year from the date of acquisition thereof and (y) each Investment permitted by clause (ii) or (vi) above matures within five years from the date of acquisition thereof. As used in this definition, the term "ELIGIBLE BANK" means any bank or trust company which shall have a combined capital, surplus and undivided profits of not less than $100,000,000 and whose long-term certificates of deposit are, at the time of acquisition thereof, rated A or better by S&P and A or better by Moody's. "PERSON" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PFIZER" means Pfizer Inc., a Delaware corporation. "PLAN" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was 16 22 at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "PRE-COMMITMENT INFORMATION" means (i) the information contained in the documents listed on Exhibit G hereto, (ii) statements made by Responsible Officers on behalf of the Company as part of the formal presentation (including the question and answer period) to potential lenders hereunder at a meeting held in New York City on January 20, 1998, and (iii) any other written information in respect of the Company, its Subsidiaries or the Acquisition provided to any Agent or Lender by a Responsible Officer on behalf of the Company during the period from November 1, 1997 to January 30, 1998. "PREFERRED DIVIDENDS" means, for any period, all dividends declared by the Company during such period with respect to its preferred stock. "PRICING LEVEL" has the meaning set forth in the Pricing Schedule. "PRICING PERIOD" has the meaning set forth in the Pricing Schedule. "PRICING RATIO" has the meaning set forth in the Pricing Schedule. "PRICING SCHEDULE" means the Pricing Schedule attached hereto. "PRIME RATE" means the rate of interest publicly announced by BNY in New York City from time to time as its prime commercial lending rate. The Prime Rate is not necessarily the best or lowest rate of interest offered by BNY. "QUARTERLY PAYMENT DATE" means the last Euro-Dollar Business Day of each March, June, September and December during the period from the Effective Date to the Maturity Date. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REQUIRED LENDERS" means at any time Lenders having at least 60% of the aggregate amount of the Credit Exposures at such time. "RESPONSIBLE OFFICER" means the president, the chief executive officer, the chief operating officer, the chief financial officer, the treasurer, the general counsel or any other officer of the Company whose responsibilities include the administration of the transactions contemplated by this Agreement. 17 23 "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies. "SEC" means the Securities and Exchange Commission. "SUBSIDIARY" means, at any time, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company. "SUBSTANTIALLY WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means any Consolidated Subsidiary at least 98% of the shares of capital stock or other ownership interests of which are at the time directly or indirectly owned by the Company. "SYNDICATION AGENT" means Bank of America National Trust and Savings Association, in its capacity as syndication agent for this credit facility. "SYNDICATION TERMINATION DATE" means the date on which the Arrangers shall have informed the Company that the syndication contemplated by the four page letter dated as of November 21, 1997 signed by the Company, the Initial Lenders and the Arrangers has been completed. "TRADENAME AND TRADEMARK LICENSE AGREEMENT" means the Tradename and Trademark License Agreement dated as of December 8, 1997 between Pfizer and the Company. "TRANSACTION DOCUMENTS" means the Acquisition Agreement, the Tradename and Trademark License Agreement and the Transitional Services Agreement. "TRANSITIONAL SERVICES AGREEMENT" means the Transitional Services Agreement dated as of December 8, 1997 between Pfizer and the Company. "U.I.S. FINANCING DOCUMENTS" means (i) the financing lease among Union pour le Financement d'Immeubles de Societes (Association for the Financing of Commercial Buildings or "U.I.S.") and Societe pour le Financement des Immeubles d'Entreprise FINABAIL (Corporation for the Financing of Commercial Buildings or "FINABAIL") together, as Lessor, A.S.E. PARTNERS ("ASE"), as Lessee, and the Company, as Guarantor, governed by the favorable regime applicable to SICOMIs (Societe Immobilieres pour le Commerce et l'Industrie), with respect to the DC Building (as defined therein) dated January 4, 1994; (ii) the financing lease among U.I.S. and FINABAIL together, as Lessor, 18 24 ASE, as Lessee, and the Company, as Guarantor, governed by the common-law regime, with respect to the H.Q. Building (as defined therein) dated January 4, 1994; and (iii) the side agreement dated January 4, 1994 between FINABAIL, U.I.S., ASE and the Company, as Guarantor. "UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "UNITED STATES" means the United States of America, including the States thereof and the District of Columbia, but excluding its territories and possessions. "VALLEYLAB" means Valleylab, Inc., a Colorado corporation. "VESTA" means Vesta Medical Inc., a California corporation. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with GAAP; provided that, if the Company notifies the Documentation Agent that the Company wishes to amend any provision of the Pricing Schedule and/or any covenant in Article 5 to eliminate the effect of any change in GAAP on the calculation of the Pricing Ratio and/or on the operation of such covenant (or if the Documentation Agent notifies the Company that the Required Lenders wish to amend any such provision and/or any such covenant for such purpose), then the Pricing Ratios shall be calculated and/or the Company's compliance with such covenant shall be determined on the basis of GAAP as in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such provision and/or covenant is amended in a manner satisfactory to the Company and the Required Lenders. Subject to the foregoing proviso, the amounts used to determine the Company's compliance with the financial covenants contained herein shall be the amounts that are (or will be) set forth or otherwise reflected in the Company's consolidated financial statements prepared in accordance with GAAP. 19 25 ARTICLE 2 THE CREDITS SECTION 2.01. Commitments to Lend. Each Lender severally agrees, on the terms and conditions set forth in this Agreement, to lend to the Company, on the Closing Date and, if the Company so elects, one other date during the Availability Period (the "Borrowing Dates"), an aggregate amount not to exceed the amount of such Lender's Commitment. The aggregate amount lent by all the Lenders hereunder on either Borrowing Date may, at the Company's election, comprise a single Group of Loans or be subdivided into two or more Groups of Loans. Each such Group of Loans shall (i) be in an aggregate principal amount of $5,000,000 or any larger multiple of $1,000,000 and (ii) be borrowed from the several Lenders ratably in proportion to their respective Commitments. No new Loans shall be made hereunder after the end of the Availability Period. The Commitments are not revolving in nature, and amounts repaid or prepaid may not be reborrowed. SECTION 2.02. Method of Borrowing. (a) The Company shall give the Administrative Agent notice (a "NOTICE OF BORROWING") not later than 10:00 a.m. (Eastern Time) on (x) the applicable Borrowing Date, if all the Loans to be made on such Borrowing Date are to be made initially as Base Rate Loans, or (y) the third Euro-Dollar Business Day before the applicable Borrowing Date, if any of the Loans to be made on such Borrowing Date are to be made initially as Euro-Dollar Loans, in either case specifying: (i) the Borrowing Date, which shall be a Domestic Business Day if all the Loans are to be made initially as Base Rate Loans or a Euro-Dollar Business Day if any of the Loans to be made on such Borrowing Date are to be made initially as Euro-Dollar Loans; (ii) the aggregate amount to be borrowed on such Borrowing Date and, if the Loans are to be subdivided initially into two or more Groups of Loans, the aggregate amount of each such Group of Loans; (iii) whether each such Group of Loans is to bear interest initially at the Base Rate or a Euro-Dollar Rate; and (iv) with respect to each such Group of Euro-Dollar Loans, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. 20 26 (b) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Lender of the contents thereof and of such Lender's ratable share of each Group of Loans specified therein, and such Notice of Borrowing shall not thereafter be revocable by the Company. If all the Loans to be made on a Borrowing Date are to be made initially as Base Rate Loans, the Administrative Agent shall give such notice to each Lender as promptly as practicable and in any event not later than 11:00 A.M. (Eastern Time) on such Borrowing Date. (c) Not later than 12:00 Noon (Eastern Time) on each Borrowing Date, each Lender shall make available its ratable share of the aggregate amount to be borrowed on such Borrowing Date, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Lenders available to the Company at the Administrative Agent's aforesaid address. (d) Unless the Administrative Agent shall have received notice from a Lender prior to a Borrowing Date that such Lender will not make available to the Administrative Agent such Lender's share of the aggregate amount to be borrowed on such Borrowing Date, the Administrative Agent may assume that such Lender has made such share available to the Administrative Agent on such Borrowing Date in accordance with subsection (c) of this Section and the Administrative Agent may, in reliance upon such assumption, make a corresponding amount available to the Company on such Borrowing Date. If and to the extent that such Lender shall not have so made such share available to the Administrative Agent, such Lender and the Company severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from such Borrowing Date to the date such amount is repaid to the Administrative Agent, at (i) in the case of the Company, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.05 and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Loans for purposes of this Agreement. SECTION 2.03. Notes. (a) The Loans of each Lender shall be evidenced by a single Note payable to the order of such Lender for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Lender's Loans. 21 27 (b) Each Lender may, by notice to the Company and the Administrative Agent, request two separate Notes to evidence its Base Rate Loans and its Euro-Dollar Loans, respectively. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "NOTE" of such Lender shall be deemed to refer to and include either or both of such Notes, as the context may require. (c) Upon receipt of each Lender's Note pursuant to Section 3.01(a), the Documentation Agent shall forward such Note to such Lender. Each Lender shall record the date, amount and type of each Loan made by it and the date and amount of each payment of principal made by the Company with respect thereto, and may, if such Lender so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Lender to make any such recordation or endorsement shall not affect the obligations of the Company hereunder or under the Notes. Each Lender is hereby irrevocably authorized by the Company so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.04. Maturity of Loans. Each Loan shall mature, and the principal amount thereof and any unpaid interest accrued thereon shall be due and payable, on the Maturity Date. SECTION 2.05. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made (or converted to a Base Rate Loan) until it becomes due (or is converted to a Euro-Dollar Loan), at a rate per annum equal to the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Payment Date and, with respect to the principal amount of any Base Rate Loan converted to a Euro-Dollar Loan, on the date such principal amount is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. 22 28 The "ADJUSTED LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in Dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. "EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion Dollars in respect of "EUROCURRENCY LIABILITIES" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Lender to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. (c) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid, at a rate per annum equal to the sum of 2% plus the Euro-Dollar Margin for such day plus the higher of (i) the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in Dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage and (ii) the Adjusted London Interbank Offered 23 29 Rate applicable to such Euro-Dollar Loan immediately before such payment was due; provided that, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, the rate per annum applicable to such overdue amount for each such day shall be equal to the sum of 2% plus the Base Rate for such day. (d) Within 45 days after the end of each Fiscal Quarter, the Company will notify the Administrative Agent and each Lender of the Pricing Ratio determined as of the end of such Fiscal Quarter and the Pricing Level to be applicable during the Pricing Period that begins 46 days after the end of such Fiscal Quarter. The Administrative Agent will rely on such notification in determining interest rates and fees hereunder for such Pricing Period, unless and until the Administrative Agent determines (on the basis of financial statements of the Company subsequently delivered or otherwise) that a different Pricing Level (the "CORRECTED PRICING LEVEL") is applicable during such Pricing Period, in which event the Administrative Agent shall thereafter determine interest rates and fees for such Pricing Period based on the Corrected Pricing Level. If any interest or fees accrue during such Pricing Period and are paid before the Administrative Agent determines that the Pricing Level should be corrected as aforesaid, the Administrative Agent shall notify the Company and the Lenders of the amount of any resulting underpayment or overpayment. In the case of an underpayment, the Company shall, within three Domestic Business Days after receiving such notice thereof, pay the amount thereof to the Administrative Agent for the account of the relevant Lenders. In the case of an overpayment, the amount thereof shall be credited against subsequent payments of interest and fees payable hereunder for the account of the relevant Lenders, all as determined by the Administrative Agent. (e) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Company and the Lenders of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (f) Each Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.06. Method of Electing Interest Rates. (a) Each Group of Loans specified in a Notice of Borrowing shall bear interest initially at the type of rate specified by the Company for such Group of Loans in the such Notice of 24 30 Borrowing. Thereafter, the Company may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Company may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; or (ii) if such Loans are Euro-Dollar Loans, the Company may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "NOTICE OF INTEREST RATE ELECTION") to the Administrative Agent at least three Euro-Dollar Business Days before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such notice applies, and the remaining portion to which it does not apply, are each at least $5,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted to Euro-Dollar Loans, the duration of the next succeeding Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. 25 31 (c) Upon receipt of a Notice of Interest Rate Election from the Company pursuant to subsection (a) above, the Administrative Agent shall promptly notify each Lender of the contents thereof and such notice shall not thereafter be revocable by the Company. If the Company fails to deliver a timely Notice of Interest Rate Election to the Administrative Agent for any Group of Euro-Dollar Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. SECTION 2.07. Facility Fee. The Company shall pay to the Administrative Agent for the account of the Lenders ratably a facility fee at the Facility Fee Rate. Such facility fee shall accrue (i) for each day from and including the Effective Date to the last day of the Availability Period, on the aggregate amount of the Commitments on such day and (ii) for each day from and including the last day of the Availability Period to but excluding the date the Loans shall be repaid in their entirety, on the aggregate outstanding principal amount of the Loans on such day. Such facility fee shall be payable quarterly in arrears on each Quarterly Payment Date and on the date the Loans shall be repaid in their entirety (or, if the Commitments terminate before any Loans are made, on the date of such termination). SECTION 2.08. Optional Termination or Reduction of Commitments. At any time before the end of the Availability Period, the Company may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the unused portions of the Commitments or (ii) ratably reduce the unused portions of the Commitments by an aggregate amount of $5,000,000 or a larger multiple of $1,000,000. Upon any such termination or reduction, the Administrative Agent shall promptly notify each Lender thereof. Any unpaid facility fees which have theretofore accrued on such terminated or reduced portions of Commitments shall be due and payable on the date of such termination or reduction, as the case may be. SECTION 2.09. Optional Prepayments. (a) The Company may, upon at least (i) one Domestic Business Day's notice to the Administrative Agent, in the case of the Group of Base Rate Loans, or (ii) three Euro-Dollar Business Days' notice to the Administrative Agent, in the case of any Group of Euro-Dollar Loans, prepay the Loans comprising such Group of Loans, in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with interest and facility fees accrued thereon to the date of prepayment. Each such prepayment shall be applied to prepay ratably the Loans of the several Lenders included in such Group of Loans. In connection with any such prepayment of Euro-Dollar Loans, the Company shall comply with the provisions of Section 2.12, if applicable. 26 32 (b) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Lender of the contents thereof and of such Lender's ratable share of such prepayment and such notice shall not thereafter be revocable by the Company. SECTION 2.10. Mandatory Prepayments. (a) If, at any time after the date hereof, the Company or any of its Subsidiaries shall receive any Net Cash Proceeds of a Mandatory Prepayment Event, the Company shall forthwith prepay the Loans in an aggregate principal amount equal to 100% of such Net Cash Proceeds; provided that (i) if the aggregate principal amount of the Loans required to be prepaid on any date pursuant to this Section is less than $1,000,000, such prepayment shall be deferred until the aggregate principal amount of the Loans required to be prepaid pursuant to this Section (including such deferred amount) is not less than $1,000,000 and (ii) if any such prepayment requires Euro-Dollar Loans or portions thereof to be prepaid before the last day of the related Interest Period, the Company shall comply with Section 2.12, in connection therewith. (b) If (i) the aggregate amount borrowed hereunder during the Availability Period exceeds the aggregate amount actually paid by the Company in cash within 120 days after the Closing Date to finance the Acquisition and to pay fees and expenses incurred in connection therewith and (ii) the amount of such excess is greater than $5,000,000, the Company shall, on the last day of the first Interest Period ending at least 10 days after the end of such 120-day period, prepay Loans in an aggregate principal amount equal to the amount of such excess (rounded to the nearest $100,000). (c) The Company shall give the Administrative Agent at least five Euro-Dollar Business Days' notice of each prepayment required pursuant to this Section. SECTION 2.11. General Provisions as to Payments. (a) The Company shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (Eastern Time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.01. The Administrative Agent will promptly distribute to each Lender its ratable share (if any) of each such payment received by the Administrative Agent for the account of the Lenders. Whenever any payment of principal of, or interest on, the Base 27 33 Rate Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Company prior to the date on which any payment is due to the Lenders hereunder that the Company will not make such payment in full, the Administrative Agent may assume that the Company has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Company shall not have so made such payment, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate for such day. (c) If the Administrative Agent receives any payment for the account of one or more Lenders before 12:00 Noon (Eastern Time) on any Domestic Business Day and fails to distribute such payment to such Lenders before the end of such Domestic Business Day, the Administrative Agent shall pay to each such Lender interest on its share of such payment, for each day from and including such Domestic Business Day to but excluding the Domestic Business Day on which the Administrative Agent distributes such payment, at the Federal Funds Rate for such day. If the Administrative Agent receives any payment for the benefit of one or more Lenders at or after 12:00 Noon (Eastern Time) on any Domestic Business Day and fails to distribute such payment to such Lenders before the end of the next succeeding Domestic Business Day, the Administrative Agent shall pay to each such Lender interest on its share of such payment, for each day from and including such next succeeding Domestic Business Day to but excluding the Domestic Business Day on which the Administrative Agent distributes such payment, at the Federal Funds Rate for such day. (d) If the Company makes any payment to the Administrative Agent for the account of one or more Lenders at or after 12:00 Noon (Eastern Time) on any Domestic Business Day and the Administrative Agent fails to distribute such 28 34 payment to such Lenders before the end of such Domestic Business Day, the Company shall be deemed to have made such payment on the next succeeding Domestic Business Day. SECTION 2.12. Funding Losses. If the Company makes any payment of principal with respect to any Euro-Dollar Loan or any Euro-Dollar Loan is converted to a Base Rate Loan (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.05(c), or if the Company fails to borrow, prepay, convert into or continue any Euro-Dollar Loans after notice has been given to any Lender in accordance with Section 2.02(b), 2.06(c) or 2.09(b), the Company shall pay to each Lender within 15 days after demand an amount calculated as provided in Exhibit E hereto to compensate such Lender for any loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties; provided that such Lender shall have delivered to the Company a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. SECTION 2.13. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). ARTICLE 3 CONDITIONS SECTION 3.01. Closing and First Borrowing. The obligation of any Lender to make any Loan hereunder on the Closing Date is subject to the satisfaction of the following conditions precedent on or before the Commitment Expiration Date: (a) the Documentation Agent shall have received a duly executed Note for the account of each Lender dated on or before the Closing Date and complying with the provisions of Section 2.03; (b) the Existing Revolving Credit Agreement shall have been amended by an amendment substantially in the form distributed to the Lenders on January 28, 1998; 29 35 (c) the Circon Credit Agreement shall have been amended by an amendment substantially in the form distributed to the Lenders on January 28, 1998; (d) the Administrative Agent shall have received all fees and expenses due and payable on or before the Closing Date under this Agreement; (e) the Administrative Agent shall have received a Notice of Borrowing as required by Section 2.02; (f) the Documentation Agent shall have received a certificate dated the Closing Date and signed by a Responsible Officer to the effect that: (i) all conditions specified in the Transaction Documents to the Company's obligation to consummate the Acquisition (except conditions relating to the purchase of assets located in France, Belgium, Germany or Japan) have been met (without any amendment, waiver or other modification thereof unless the Initial Lenders shall have consented to such waiver or modification) and the Acquisition is being consummated concurrently with the Closing hereunder; (ii) all necessary licenses, permits and governmental and third party filings, consents and approvals for the Acquisition (except those required in connection with the purchase of assets located in France, Germany or Japan) have been obtained and remain in full force and effect; (iii) no development or change shall have occurred in any matter described in the Pre-Commitment Information that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect; (iv) the Acquisition and the financing thereof comply in all material respects with all applicable laws and regulations (including, without limitation, all applicable margin and other regulations promulgated by the Board of Governors of the Federal Reserve System); (v) the aggregate amount of the Loans does not exceed (A) the aggregate amount payable in cash by the Company on the 30 36 Closing Date to consummate the Acquisition plus (B) the aggregate amount (as reasonably estimated by the Company) of all fees and transaction expenses to be paid by the Company in connection with the Acquisition; (vi) immediately before and after the Closing no Default shall have occurred and be continuing; and (vii) the representations and warranties of the Company contained in this Agreement are true on and as of the Closing Date, both immediately before and immediately after the Closing; provided that (x) such certification is made only to the best of the Company's knowledge insofar as it relates to Valleylab or Vesta or the businesses to be acquired in the Acquisition and (y) any representation or warranty contained in the first and fourth sentences of Section 4.13 shall be true only in all material respects; (g) the Documentation Agent shall not have received notice from any Lender stating that such Lender has determined in good faith that: (i) any action, suit, investigation, litigation or proceeding is pending or threatened in any court or before any arbitrator or governmental authority or regulatory agency or authority that could reasonably be expected to have a Material Adverse Effect; (ii) any law or regulation applies to any aspect of the Acquisition that restrains, prevents or imposes one or more materially adverse conditions on any aspect of the Acquisition or the operation of the businesses to be acquired pursuant thereto; or (iii) any statement made in the certificate of a Responsible Officer referred to in clause (f) above is not correct; or any such notice received by the Documentation Agent shall have been withdrawn; (h) the Documentation Agent shall have received an opinion of Thomas Bremer, Esq., counsel for the Company, dated the Closing Date and substantially in the form of Exhibit B hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Lenders may reasonably request; 31 37 (i) the Documentation Agent shall have received an opinion of Davis Polk & Wardwell, special counsel for the Operating Agents, dated the Closing Date and substantially in the form of Exhibit C hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Lenders may reasonably request; and (j) the Documentation Agent shall have received all other documents that the Documentation Agent may reasonably request relating to the existence of the Company, the corporate authority for and the validity of the Transaction Documents, this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Documentation Agent. Promptly after the Closing occurs, the Documentation Agent shall notify the Company and the Lenders of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. If the Closing does not occur on or before the Commitment Expiration Date, the Commitments shall terminate at the close of business on such date and all unpaid facility fees accrued to such date shall be due and payable on such date. SECTION 3.02. Second Borrowing. The obligation of any Lender to make a Loan on the second Borrowing Date (if any) is subject to the satisfaction of the following conditions: (a) the Closing Date shall have occurred; (b) such Borrowing Date is the first day of an Interest Period for Loans outstanding on such date; (c) the Administrative Agent shall have received a Notice of Borrowing as required by Section 2.02; and (d) the Documentation Agent shall have received a certificate dated such Borrowing Date and signed by a Responsible Officer to the effect that: (i) immediately before and after the making of such Loan, no Default shall have occurred and be continuing; and (ii) the representations and warranties of the Company contained in this Agreement are true on and as of such Borrowing Date, both immediately before and immediately after the making of such Loan, except to the extent that any such representation or 32 38 warranty is limited to a particular date or dates, in which case such representation or warranty was true on and as of such date or dates; provided that (x) such certification is made only to the best of the Company's knowledge insofar as it relates to Valleylab or Vesta or the businesses to be acquired in the Acquisition and (y) any representation or warranty contained in the first and fourth sentences of Section 4.13 shall be true only in all material respects. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Company represents and warrants that: SECTION 4.01. Corporate Existence and Power. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution and delivery by the Company of the Transaction Documents, this Agreement and the Notes and the consummation by the Company of the transactions contemplated thereby are within the Company's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing (except filings under the Exchange Act) with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of the Company and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Company, in each case enforceable in accordance with its terms subject to applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity. 33 39 SECTION 4.04. Financial Information. (a) The consolidated balance sheet of the Company and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of operations, cash flows and changes in stockholders' equity for the Fiscal Year then ended, reported on by Deloitte & Touche LLP and set forth in the Company's 1996 Form 10-K, a copy of which has been delivered to each of the Lenders, fairly present, in conformity with GAAP, the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such Fiscal Year. (b) The unaudited consolidated balance sheet of the Company and its Consolidated Subsidiaries as of September 30, 1997 and the related unaudited consolidated statements of operations, cash flows and changes in stockholders' equity for the nine months then ended, set forth in the Company's Latest Form 10-Q, a copy of which has been delivered to each of the Lenders, fairly present, on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine-month period (subject to normal year-end adjustments). (c) Since September 30, 1997 there has been no material adverse change in the business, financial position, operations or properties of the Company and its Consolidated Subsidiaries, considered as a whole. SECTION 4.05. Litigation. Except as disclosed in the Company's 1996 Form 10-K or the Company's Latest Form 10-Q, there is no action, suit or proceeding pending against, or to the knowledge of the Company threatened against or affecting, the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to result in an adverse decision that would have a Material Adverse Effect or which in any manner draws into question the validity or enforceability of this Agreement or any of the Notes. SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan, or made any amendment to any Plan, which has resulted or could result in the imposition 34 40 of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA after January 1, 1988 other than a liability to the PBGC for premiums under Section 4007 of ERISA. SECTION 4.07. Environmental Matters. In the ordinary course of its business, the Company conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Company and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, the Company has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a material adverse effect on the business, financial position, operations or properties of the Company and its Subsidiaries, considered as a whole. SECTION 4.08. Taxes. The Company and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any Subsidiary, except any such assessment that is being contested in good faith by appropriate proceedings. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Company, adequate. SECTION 4.09. Subsidiaries. Each of the Company's corporate Subsidiaries (except inactive Subsidiaries) is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. All of the Company's active Subsidiaries are listed on Exhibit F hereto (which may be amended from time to time by notice from the Company to each of the Lenders). 35 41 SECTION 4.10. No Regulatory Restrictions on Borrowing. The Company is not subject to any provision of the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1955, as amended, the Interstate Commerce Act, as amended, or any other law or regulation that limits the incurrence of debt by companies engaged in a specific type of business or having other specific characteristics. SECTION 4.11. Full Disclosure. The Pre-Commitment Information (other than financial forecasts and projections) is, and all information (other than financial forecasts and projections) hereafter furnished by a Responsible Officer in writing to any of the Agents for purposes of or in connection with this Agreement or the Acquisition will be, true and accurate in all material respects on the date as of which such information is stated or certified. All financial forecasts and projections contained in the Pre-Commitment Information were, and all financial forecasts and projections hereafter furnished by a Responsible Officer in writing to any of the Agents for purposes of or in connection with this Agreement or the Acquisition will be, prepared by the Company in good faith based on assumptions believed by the Company, at the time such financial forecasts and/or projections were or hereafter are prepared, to be reasonable. The Company has disclosed to the Lenders in writing any and all facts (other than facts affecting the health care business generally) which materially and adversely affect, or are reasonably likely to materially and adversely affect (to the extent the Company can now reasonably foresee), the business, financial position, operations or properties of the Company and its Subsidiaries, taken as a whole, or the ability of the Company to perform its obligations under this Agreement and the Notes. SECTION 4.12. Transaction Documents. The Agents and the Initial Lenders have received a true and correct copy of each Transaction Document as in effect on the Closing Date. Each of the Transaction Documents is a valid and binding agreement of the parties thereto (except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity) and is in full force and effect. The Company is not in default in any material respect under any of the provisions of any of the Transaction Documents. SECTION 4.13. Other Existing Debt Documents. Each copy of an Other Existing Debt Document heretofore delivered by the Company to any of the Agents or the Lenders is a complete and correct copy of such Other Existing Debt Document as in effect on the Closing Date. Each of the Other Existing Debt Documents is a valid and binding agreement of the parties thereto (except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity) and is in full force and effect. No condition or event has occurred and is continuing which constitutes an 36 42 event of default under any of the Other Existing Debt Documents. No condition or event has occurred and is continuing which with the giving of notice or lapse of time would, unless cured or waived, become an event of default under any of the Other Existing Debt Documents. SECTION 4.14. No Default under Other Agreements. Neither the Company nor any Subsidiary is a party to any indenture, loan agreement, credit agreement, lease or other agreement or instrument (excluding this Agreement, the Transaction Documents, the Circon Tender Offer Documents and the Other Existing Debt Documents) or subject to any charter or corporate restriction, in each case which could reasonably be expected to have a material adverse effect on the business, financial position, operations or properties of the Company and its Subsidiaries, considered as a whole, or the ability of the Company to perform its obligations under this Agreement and the Notes. Neither the Company nor any Subsidiary is in default under any of the provisions of any indenture, loan agreement, credit agreement, lease or other agreement or instrument to which it is party which default could reasonably be expected to have a material adverse effect on the business, financial position, operations or properties of the Company and its Subsidiaries, considered as a whole. SECTION 4.15. Compliance with Laws. The Company and each Subsidiary is in compliance in all material respects with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities (including, without limitation, Environmental Laws and the rules and regulations thereunder), except where (i) the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) failures to comply therewith, in the aggregate, could not reasonably be expected to have a material adverse effect on the business, financial position, operations or properties of the Company and its Subsidiaries, considered as a whole. ARTICLE 5 COVENANTS The Company agrees that, so long as any Lender has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. Information. The Company will deliver to each of the Lenders: 37 43 (a) as soon as available and in any event within 90 days after the end of each Fiscal Year, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of operations, cash flows and changes in stockholders' equity for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all audited by Deloitte & Touche LLP or other independent public accountants of nationally recognized standing and accompanied by an opinion of such auditors (without any qualification that would not be acceptable to the SEC for purposes of filings under the Exchange Act); (b) as soon as available and in any event within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such Fiscal Quarter and the related consolidated statements of operations, cash flows and changes in stockholders' equity for such Fiscal Quarter and for the portion of the Fiscal Year ended at the end of such Fiscal Quarter, setting forth in the case of such consolidated statements of operations, cash flows and changes in stockholders' equity in comparative form the figures for the corresponding Fiscal Quarter and the corresponding portion of the previous Fiscal Year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer, the treasurer or the principal accounting officer of the Company; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the Company, signed by its chief financial officer, treasurer or principal accounting officer, (i) setting forth in reasonable detail the calculations required to establish whether the Company was in compliance with the requirements of Sections 5.07 to 5.14, inclusive, on the date of such financial statements; (ii) setting forth in reasonable detail the calculation of the Pricing Ratio to be determined as of the date of such financial statements and (iii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (d) as soon as available and in any event within 45 days after the end of each Fiscal Quarter, the notice required by Section 2.05(d) with respect to the Pricing Ratio determined as of the end of such Fiscal Quarter and the Pricing Level to be applicable for the next Pricing Period; 38 44 (e) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which audited and reported on such statements (i) whether anything has come to their attention to cause them to believe that any Default existed under Sections 5.07 to 5.14, inclusive, on the date of such statements and (ii) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; (f) within five Domestic Business Days after any Responsible Officer obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer, the treasurer or the principal accounting officer of the Company setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (g) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (h) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto (unless requested by any Lender) and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Company shall have filed with the SEC; (i) unless Investment Grade Status exists at the time, as soon as available and in any event on or before March 31 of each Fiscal Year, a budget for such Fiscal Year, approved by the Company's board of directors, setting forth anticipated income, expense and capital expenditure items for each Fiscal Quarter during such Fiscal Year, and concurrently with the delivery of financial statements for each such Fiscal Quarter pursuant to clauses (a) and (b) above, a report setting forth a detailed comparison to such budget; provided that, if such a budget has not been prepared and approved by the Company's board of directors before January 31 of such Fiscal Year, projections of such items for such Fiscal Year shall be delivered pursuant to this clause (i) no later than January 31 of such Fiscal Year (to be replaced by the approved budget when delivered); (j) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "REPORTABLE EVENT" (as defined 39 45 in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer, any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or makes any amendment to any Plan which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer, the treasurer or the principal accounting officer of the Company setting forth the details as to such occurrence and the action, if any, which the Company or applicable member of the ERISA Group is required or proposes to take; (k) as soon as reasonably practicable after any Responsible Officer obtains knowledge of the commencement of, or of a threat (with respect to which there is a reasonable likelihood of assertion) of the commencement of, an action, suit or proceeding against the Company or any Subsidiary before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could reasonably be expected to materially adversely affect the business, financial position, operations or properties of the Company and its Subsidiaries considered as a whole, or which in any manner questions the validity or enforceability of this Agreement or any of the Notes, information as to the nature of such pending or threatened action, suit or proceeding and any material developments from time to time with respect thereto; (l) upon execution thereof, a copy of each amendment, waiver or other document modifying the Existing Revolving Credit Agreement, the Circon Credit Agreement or any Other Existing Debt Document; and 40 46 (m) from time to time such additional information regarding the financial position or business of the Company and its Subsidiaries as the Documentation Agent, at the request of any Lender, may reasonably request. SECTION 5.02. Payment of Obligations. The Company will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same are contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with GAAP, appropriate reserves for the accrual of any of the same. SECTION 5.03. Maintenance of Property; Insurance. (a) The Company will keep, and will cause each Subsidiary to keep, all of its property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Company will maintain, and will cause each Subsidiary to maintain, to the extent commercially available, with financially sound and reputable insurers, (i) physical damage insurance on all of its real and personal property on an all risks basis (including the perils of flood and earthquake, if such insurance is available on reasonable terms), covering the repair and replacement cost of all such property and consequential loss coverage for business interruption and extra expense, (ii) general public liability insurance (including product liability coverage) in an amount not less than $50,000,000 and (iii) such other insurance coverage in such amounts and with respect to such risks as the Required Lenders may reasonably request; provided that the Company and its Subsidiaries may self-insure against, and/or such insurance may provide for deductibles with regard to, hazards and risks with respect to which, and in such amounts as, the Company in good faith determines to be prudent, but only so long as the aggregate of all such deductibles and self-insurance applicable with respect to any Fiscal Year under all such insurance required under clauses (i) and (ii) above does not exceed 4% of Consolidated Net Worth at the end of the immediately preceding Fiscal Year. SECTION 5.04. Conduct of Business and Maintenance of Existence. The Company will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Company and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect, their respective existences and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in 41 47 this Section shall prohibit (i) the merger of a Subsidiary into the Company, if immediately after such merger no Default shall have occurred and be continuing, (ii) the merger or consolidation of a Subsidiary with or into a Person other than the Company, if the corporation surviving such consolidation or merger is a Subsidiary and, immediately after giving effect thereto, no Default shall have occurred and be continuing or (iii) the termination of the existence of any Subsidiary or any of the rights, privileges and franchises of the Company or any Subsidiary if, in each case, the Company in good faith determines that such termination is in the best interest of the Company and is not materially disadvantageous to the Lenders. SECTION 5.05. Compliance with Laws. The Company will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder), except where (i) the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) failures to comply therewith, in the aggregate, could not reasonably be expected to have a material adverse effect on the business, financial position, operations or properties of the Company and its Subsidiaries, considered as a whole. SECTION 5.06. Inspection of Property, Books and Records. The Company will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities. Subject to the Company's normal security procedures, the Company will permit, and will cause each Subsidiary to permit, representatives of any Lender at such Lender's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times (after reasonable notice to the Company's chief financial officer) and as often as may reasonably be desired, but only for the purpose of determining the condition of the assets of the Company or such Subsidiary, as the case may be, and the Company's compliance with the terms and conditions of this Agreement; provided that, so long as no Event of Default shall have occurred and be continuing, one or more persons designated by the Company's chief financial officer shall be entitled to attend any such visit or discussion. SECTION 5.07. Minimum Consolidated Net Worth. Consolidated Net Worth will not at any time be less than the sum of (i) $609,400,000 and (ii) 50% of the consolidated net income (if positive) of the Company and its Consolidated 42 48 Subsidiaries for each Fiscal Quarter ending prior to such time, commencing with the Fiscal Quarter ending December 31, 1997. SECTION 5.08. Leverage Ratio. Consolidated Debt will at no time be greater than 60% of Consolidated Total Capital. SECTION 5.09. Fixed Charge Coverage. At the end of each Fiscal Quarter commencing with the Fiscal Quarter ending March 31, 1998, the ratio of (i) the sum of Consolidated EBITDA plus Consolidated Net Rent Expense less Consolidated Capital Expenditures to (ii) the sum of Consolidated Net Interest Expense plus Consolidated Net Rent Expense (excluding amounts attributable to Contingent CPI Rent (as defined in the North Haven Lease), as expensed) plus Preferred Dividends (excluding any one-time additional preferred dividend declared but not paid in connection with a call for redemption of the Company's Series A Convertible Preferred Stock) plus Other Scheduled Debt Payments, in each case for the period of four consecutive Fiscal Quarters then ended, will not be less than 1.5:1. SECTION 5.10. Negative Pledge. Neither the Company nor any Subsidiary will create, assume or suffer to exist any Lien on any asset (including, without limitation, the capital stock of any of its Subsidiaries) now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement, provided that such Liens and the principal amounts secured thereby on the date of this Agreement are listed on Exhibit H hereto; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Company or a Subsidiary and not created in contemplation of such event; (d) any Lien existing on any asset prior to the acquisition thereof by the Company or a Subsidiary and not created in contemplation of such acquisition; (e) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, 43 49 provided that such Lien attaches to such asset within 12 months after the acquisition thereof; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not secured by any additional assets; (g) any Lien created for the direct or indirect benefit of the purchasers or lenders in connection with any Permitted Asset Securitization; (h) Liens arising by operation of law in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any single obligation or series of related obligations in an amount exceeding $50,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (i) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $25,000,000; and (j) Liens not otherwise permitted by the foregoing clauses of this Section securing an aggregate amount at any time outstanding not to exceed $15,000,000. Nothing in clause (h) or (j) of this Section shall permit any Lien securing any obligation arising under the Other Existing Debt Documents. Whenever this Section permits a Lien to exist on any asset owned or leased by the Company or any Subsidiary, it shall be construed to permit the same Lien to exist with respect to any improvements to such asset. SECTION 5.11. Investments. Neither the Company nor any Subsidiary will make or acquire any Investment in any Person, other than: (i) Permitted Temporary Cash Investments; (ii) any Investment in a Person which is a Consolidated Subsidiary immediately after such Investment is made; (iii) any Debt of a buyer received as all or part of the consideration for an Asset Sale permitted by Section 5.14; 44 50 (iv) any investment in a trust or other entity created for purposes of any Permitted Asset Securitization; and (v) any other Investment if, immediately after such Investment is made, the aggregate original cost of all Investments made by the Company and its Subsidiaries after September 30, 1995 pursuant to this clause (v) does not exceed 10% of Consolidated Net Worth as of the end of the most recently ended Fiscal Quarter. Prior to the Closing Date (as defined in the Circon Credit Agreement), purchases of shares of common stock of Circon shall constitute Investments for purposes of clause (v) above; thereafter such purchases shall be deemed to be permitted by clause (ii) above and shall not be included in Investments made pursuant to clause (v) above. SECTION 5.12. Dividends and Common Stock Payments. (a) The Company will not declare any Common Stock Dividend and neither the Company nor any Subsidiary will make any Common Stock Payment unless, after giving effect to such declaration or Common Stock Payment, no Default shall have occurred and be continuing and either: (i) the aggregate amount of all Common Stock Dividends declared and Common Stock Payments made in the then current Fiscal Quarter will not exceed $1,657,848, as such amount may be adjusted from time to time pursuant to subsection (c) of this Section, or (ii) the aggregate amount of all Common Stock Dividends declared and all Common Stock Payments made in the then current Fiscal Quarter and the three immediately preceding Fiscal Quarters will not exceed 20% of the Adjusted Consolidated Net Income of the Company and its Consolidated Subsidiaries for the immediately preceding four Fiscal Quarters; provided that the Company may declare Common Stock Dividends and the Company and its Subsidiaries may make Common Stock Payments at any time when Investment Grade Status exists without regard to the limitation in this subsection (a); but, if Investment Grade Status subsequently ceases to exist, Common Stock Dividends declared and Common Stock Payments made when Investment Grade Status existed shall be taken into account in determining whether other Common Stock Dividends may be declared or other Common Stock Payments may be made under this Section. 45 51 (b) The Company will not declare any Common Stock Dividend more than 50 days before such Common Stock Dividend is payable. (c) If the number of outstanding shares of the Company's common stock changes during any Fiscal Quarter ending after September 30, 1997 (by reason of a conversion of outstanding preferred stock, a new issuance of common stock or otherwise), the amount specified in subsection (a)(i) of this Section (as such amount may theretofore have been adjusted pursuant to this subsection (c)) shall be adjusted for purposes of all subsequent Fiscal Quarters by multiplying such amount by a fraction of which the numerator is the number of shares of the Company's common stock outstanding at the end of such Fiscal Quarter and the denominator is the number of shares of the Company's common stock outstanding at the beginning of such Fiscal Quarter (adjusted to eliminate the effect of any stock split, stock dividend or reverse stock split during such Fiscal Quarter). SECTION 5.13. Limitation on Subsidiary Debt. The aggregate principal amount of all Debt of all Consolidated Subsidiaries (excluding (i) Debt existing under the U.I.S. Financing Documents on the Closing Date in an aggregate principal amount not greater than FF 457,000,000 and (ii) Intercompany Debt owed to the Company or to a Substantially Wholly-Owned Consolidated Subsidiary) will at no time exceed $100,000,000 (or its equivalent in foreign currencies). For purposes of this Section any preferred stock of a Consolidated Subsidiary held by a Person other than the Company or a Substantially Wholly-Owned Consolidated Subsidiary shall be included, at the higher of its voluntary or involuntary liquidation value, in the "DEBT" of such Consolidated Subsidiary. SECTION 5.14. Asset Sales. (a) The Company will not, and will not permit any Subsidiary to, make any Asset Sale unless, after giving effect thereto, the aggregate consideration received or to be received for all Asset Sales during the then current Fiscal Year would not exceed $50,000,000; provided that, without regard to the limitation in this subsection (a), the Company or any Subsidiary may (x) make or become legally obligated to make Asset Sales at any time when Investment Grade Status exists and (y) make any Asset Sale that it has become legally obligated to make at a time when Investment Grade Status existed, even if Investment Grade Status subsequently ceases to exist; but, if Investment Grade Status subsequently ceases to exist, all Asset Sales made as permitted by the foregoing clauses (x) and (y) shall be taken into account in determining whether other Asset Sales are permitted by this Section. (b) Whether or not Investment Grade Status exists, (i) the Company and its Subsidiaries will not sell, lease, transfer or otherwise dispose of all or any substantial part of the assets of the Company and its Subsidiaries, taken as a 46 52 whole, to any Person other than the Company and its Subsidiaries and (ii) the Company will not sell, lease, transfer or otherwise dispose of all or any substantial part of its assets to any other Person; provided that this subsection (b) shall not apply to (i) sales of inventory and used, surplus or worn-out equipment in the ordinary course of business or (ii) sales of accounts and notes receivable pursuant to Permitted Asset Securitizations. (c) Notwithstanding the restrictions in subsection (b) of this Section, the Company may sell or otherwise dispose of (whether in one or a series of transactions) any of its accounts and notes receivable; provided that (i) the Required Lenders shall have consented in writing to the terms and conditions of such transactions (including, without limitation, any Liens to be created in connection therewith) and (ii) the cash purchase price paid by the purchasers of such accounts and notes receivable shall not exceed $75,000,000 in aggregate unrecovered amount at any time. SECTION 5.15. Consolidation and Mergers. The Company will not consolidate or merge with or into any other Person; provided that the Company may merge with another Person if (A) the Company is the corporation surviving such merger and (B) immediately after giving effect to such merger, no Default shall have occurred and be continuing. SECTION 5.16. Transactions with Affiliates. The Company will not, and will not permit any Subsidiary to, directly or indirectly, pay any funds to or for the account of, make any Investment in, Guarantee any Debt of, lease, sell, transfer or otherwise dispose of any assets (tangible or intangible) to, or participate in, or effect any transaction in connection with any joint enterprise or other joint arrangement with, any Affiliate; provided that the foregoing provisions of this Section shall not prohibit: (a) the Company from declaring or paying any lawful dividend permitted by Section 5.12; (b) the Company or any Subsidiary from paying compensation or providing benefits to any of its officers or directors in the ordinary course of business; (c) the Company or any Subsidiary from making sales to or purchases from any Affiliate and, in connection therewith, extending credit or making payments, or from making payments for services rendered by any Affiliate, if such sales or purchases are made or such services are rendered in the ordinary course of business and on terms and 47 53 conditions comparable to the terms and conditions which would apply in a similar transaction with a Person not an Affiliate; (d) the Company or any Subsidiary from making payments of principal, interest and premium on any Debt of the Company or such Subsidiary held by an Affiliate if the terms of such Debt are substantially as favorable to the Company or such Subsidiary as the terms which could have been obtained at the time of the creation of such Debt from a lender which was not an Affiliate; or (e) the Company or any Subsidiary from participating in, or effecting any transaction in connection with, any joint enterprise or other joint arrangement with any Affiliate if the Company or such Subsidiary participates in the ordinary course of its business and on a basis no less advantageous than the basis on which such Affiliate participates. SECTION 5.17. Prepayment of Other Debt. (a) The Company will not, and will not permit any Subsidiary to, directly or indirectly, redeem, retire, purchase, acquire or otherwise make any payment in respect of any Debt (other than (v) the Notes, (w) Debt of Circon outstanding prior to the Circon Merger in an aggregate principal amount not exceeding $75,000,000, (x) Debt outstanding under the Existing Revolving Credit Agreement from time to time, (y) Debt outstanding under the Circon Credit Agreement from time to time and (z) Intercompany Debt) of the Company or any Subsidiary more than 21 days before the stated due date thereof, unless such payment is made with the net cash proceeds of (i) Debt specifically incurred for such purpose and containing terms and conditions substantially similar to or more favorable to the Company and the Lenders than the Debt with respect to which such payment is made, (ii) common stock of the Company sold after September 30, 1997 or (iii) preferred stock of the Company sold after September 30, 1997 which is not subject to redemption, repurchase or other acquisition by the Company or any Subsidiary (except redemption or repurchase at the option of the Company) under any circumstances prior to February 5, 2001. (b) The Company will not, and will not permit any Subsidiary to, pay any amount under the North Haven Financing Documents more than 21 days before such payment is due; provided that the rent payable under the North Haven Lease on January 14, 2001 shall not be prepaid. (c) The Company will not, and will not permit any Subsidiary to, consent to or enter into any amendment, supplement, waiver or other modification of any agreement or instrument evidencing or governing any such Debt if the result of such modification would be, directly or indirectly, to permit a payment 48 54 that would have been prohibited pursuant to this Section prior to such modification. SECTION 5.18. Other Existing Debt Documents. The Company will not, and will not permit any Subsidiary to, (i) consent or enter into any amendment, supplement, waiver or other modification of any of the Other Existing Debt Documents which would increase the amount of the payments to be made by the Company or any Subsidiary in connection therewith (except for reasonable and customary fees and expenses paid, currently or periodically, in connection with any such amendment, supplement, waiver or other modification) or would otherwise be materially adverse to the Company or any Subsidiary or to the Lenders or (ii) directly or indirectly Guarantee the obligations of any Person under the North Haven Financing Documents. SECTION 5.19. Use of Proceeds. The proceeds of the Loans will be used by the Company to finance the Acquisition and to pay fees and expenses incurred in connection therewith. None of such proceeds will be used in violation of any applicable law or regulation (including without limitation Regulation U). ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("EVENTS OF DEFAULT") shall have occurred and be continuing: (a) the Company shall fail to pay (i) any principal of any Loan when due or (ii) any interest, any fees or any other amount payable hereunder within two Domestic Business Days after the due date thereof; (b) the Company shall fail to observe or perform any covenant contained in Sections 5.17 to 5.19, inclusive, and such failure shall continue for two Domestic Business Days after the Required Lenders shall have determined that such failure, if not cured within two Domestic Business Days, should be an Event of Default under this clause (b) and the Administrative Agent shall have given the Company written notice of such determination; (c) the Company shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Company by the Administrative Agent at the request of any Lender; 49 55 (d) any representation, warranty, certification or statement made by the Company or by a Responsible Officer in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made; (e) the Company or any Subsidiary shall fail to make any payment in respect of Material Financial Obligations when due or within any applicable grace period; (f) any event or condition shall occur which results in the acceleration of the maturity of Material Debt or enables the holders of Material Debt or any Person acting on such holders' behalf to accelerate the maturity thereof or permits the holders of Material Debt or any Person acting on such holders' behalf to terminate their commitments (if any) to renew, extend or refund such Material Debt or, in the case of the Existing Revolving Credit Agreement, to lend additional amounts to the Company (unless, in the case of the Existing Revolving Credit Agreement, the commitments thereunder are concurrently replaced by comparable commitments under one or more other credit facilities); (g) any event or condition shall occur which, with the giving of notice or lapse of time or both, would enable the holders of Material Debt or any Person acting on such holders' behalf to accelerate the maturity thereof or would permit the holders of Material Debt or any Person acting on such holders' behalf to terminate their commitments to renew, extend, refund or lend additional amounts of such Material Debt, and the Company shall fail to cure such event or condition for two Domestic Business Days after the Required Lenders shall have determined that such event or condition, if not cured within two Domestic Business Days, should be an Event of Default under this clause (g) and the Administrative Agent shall have given the Company written notice of such determination; (h) the Company or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its 50 56 debts as they become due, or shall take any corporate action to authorize any of the foregoing; (i) an involuntary case or other proceeding shall be commenced against the Company or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Company or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (j) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $10,000,000 which it shall have become liable to pay under Section 4041(c) of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer, any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $10,000,000; (k) a judgment or order for the payment of money in excess of $10,000,000 shall be rendered against the Company or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 10 days; or (l) any person or group of persons (within the meaning of Section 13 or 14 of the Exchange Act) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the SEC under the Exchange Act) of 25% or more of the outstanding shares of common stock of the Company; or, during any period of twelve consecutive calendar months, individuals who were directors of the Company on the first day of such period (or were nominated or appointed 51 57 by such directors in the ordinary course, and not in connection with an actual or threatened election contest relative to the election of directors of the Company), shall cease to constitute a majority of the board of directors of the Company; provided that such beneficial ownership or change in the Company's directors, as the case may be, shall continue for two Domestic Business Days after the Required Lenders shall have determined that it should be an Event of Default under this clause (l) and the Administrative Agent shall have given the Company written notice of such determination; then, and in every such event, the Administrative Agent shall (i) if requested by Lenders having more than 60% in aggregate amount of the Commitments, by notice to the Company terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Lenders holding Notes evidencing more than 60% of the aggregate outstanding principal amount of the Loans, by notice to the Company declare the Notes (together with accrued interest thereon and all accrued fees and other amounts payable by the Company hereunder) to be, and the same shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company; provided that if any of the Events of Default specified in clause (h) or (i) above occurs with respect to the Company, then without any notice to the Company or any other act by the Administrative Agent or the Lenders, the Notes (together with all accrued interest thereon and all accrued fees and other amounts payable by the Company hereunder) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company. SECTION 6.02. Notice of Default. The Administrative Agent shall give notice to the Company under Section 6.01(c) promptly upon being requested to do so by any Lender, and shall thereupon notify all the Lenders thereof. The Administrative Agent shall give notice to the Company under clause (b), (g) or (l) of Section 6.01 promptly upon being requested to do so by the Required Lenders and shall thereupon notify all the Lenders thereof. ARTICLE 7 THE AGENTS AND ARRANGERS SECTION 7.01. Appointment and Authorization. Each Lender irrevocably appoints and authorizes each Operating Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are 52 58 delegated to such Operating Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agents and Affiliates. Each of Morgan and BNY shall have the same rights and powers under this Agreement as any other Lender and may exercise or refrain from exercising the same as though it were not an Operating Agent hereunder. Each of BofA, Morgan and BNY (and their respective affiliates) may accept deposits from, lend money to, and generally engage in any kind of business with the Company or any Subsidiary or affiliate of the Company as if it were not an Agent hereunder. SECTION 7.03. Action by Agents. None of the Agents shall have any duties or responsibilities hereunder, except those expressly set forth herein, or any fiduciary relationship with any of the Lenders, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into or inferred from this Agreement or otherwise exist against any of the Agents. Without limiting the generality of the foregoing, none of the Agents shall (i) be required to take any action with respect to any Default, except in the case of the Administrative Agent as expressly provided in Article 6, or (ii) except for notices, reports and other documents expressly required to be furnished to the Lenders by an Operating Agent hereunder, have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries which may come into the possession of such Agent or any of its affiliates. SECTION 7.04. Consultation with Experts; Attorneys in Fact. Either of the Operating Agents may consult with legal counsel (who may be counsel for the Company), independent public accountants and other experts selected by it and neither of the Operating Agents shall be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Either of the Operating Agents may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Neither of the Operating Agents shall be responsible to the Lenders for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. SECTION 7.05. Liability of Agents. None of the Agents, their respective affiliates and their respective directors, officers, agents or employees shall be liable for any action taken or not taken in connection herewith (i) with the consent or at the request of the Required Lenders or (ii) in the absence of its own gross negligence or willful misconduct. None of the Agents, their respective affiliates and their respective directors, officers, agents or employees shall be responsible 53 59 for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Company or the properties, books or records of the Company or its Subsidiaries; (iii) the satisfaction of any condition specified in Article 3, except, in the case of the Documentation Agent, receipt of items required to be delivered to it; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes, or any other instrument or writing furnished in connection herewith. None of the Agents shall incur any liability by acting in reliance upon any notice, consent, certificate, statement or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. Each Lender shall, ratably in accordance with its Credit Exposure, indemnify each of the Agents, their respective affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Company and without limiting any obligation of the Company to do so) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability that such indemnitee may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitee hereunder (but, in the case of each Agent, only actions taken or omitted in its capacity as such Agent hereunder); provided that the Lenders shall not be obligated to indemnify any Agent or affiliate (or their respective directors, officers, agents and employees) under this Section for (i) such Agent's or affiliate's own gross negligence or willful misconduct or (ii) such Agent's breach of its contractual obligations to the Lenders (or any of them) under this Agreement. SECTION 7.07. Credit Decision. Each Lender acknowledges that none of the Agents, the Arrangers or their respective affiliates has made any representations or warranties to such Lender and that no act by any Agent or Arranger hereafter taken, including any review of the affairs of the Company, shall be deemed to constitute any representation or warranty by such Agent or Arranger to such Lender. Each Lender acknowledges that it has, independently and without reliance upon any of the Agents, any of the Arrangers or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon any of the Agents, any of the Arrangers or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. 54 60 SECTION 7.08. Successor Operating Agents. Either of the Operating Agents may resign at any time by giving notice thereof to the Lenders and the Company. Upon any such resignation, the Required Lenders shall have the right to appoint a successor to such Operating Agent. If no successor Agent shall have been so appointed and shall have accepted such appointment, within 30 days after the retiring Operating Agent gives notice of resignation, then the retiring Operating Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as an Operating Agent hereunder by a successor Operating Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Operating Agent, and the retiring Operating Agent shall be discharged from its duties and obligations hereunder. After any retiring Operating Agent's resignation hereunder as an Operating Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was an Operating Agent hereunder. SECTION 7.09. Fees Payable. The Company shall pay to the Administrative Agent and to the Arrangers for their own account fees and expenses in the amounts and at the times previously agreed upon between the Company and such Agent or the Arrangers, as the case may be. SECTION 7.10. Syndication Agent and Arrangers. Neither the Syndication Agent nor any of the Arrangers shall have any responsibility, obligation or liability under this Agreement. ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Euro-Dollar Loan: (a) the Administrative Agent is advised by the Reference Banks that deposits in Dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) Lenders having 50% or more of the aggregate principal amount of the affected Loans advise the Administrative Agent that the Adjusted London Interbank Offered Rate as determined by the 55 61 Administrative Agent will not adequately and fairly reflect the cost to such Lenders of funding their Euro-Dollar Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Company and the Lenders, whereupon until the Administrative Agent notifies the Company that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Lenders to make Euro-Dollar Loans or to continue or convert outstanding Loans as or into Euro-Dollar Loans shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, shall make it unlawful or impossible for any Lender (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Lender shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Lenders and the Company, whereupon until such Lender notifies the Company and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Lender to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Lender shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. If such notice is given, each Euro-Dollar Loan of such Lender then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Lender may lawfully continue to maintain and fund such Loan to such day or (b) immediately if such Lender shall determine that it may not lawfully continue to maintain and fund such Loan to such day. SECTION 8.03. Increased Cost and Reduced Return. (a) If, on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or 56 62 comparable agency, shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any such requirement included in an applicable Euro-Dollar Reserve Percentage), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (or its Applicable Lending Office) or shall impose on any Lender (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Euro-Dollar Loans, its Note or its obligation to make Euro-Dollar Loans and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by such Lender (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Lender to be material, then, within 15 days after demand by such Lender (with a copy to the Administrative Agent), the Company shall pay to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction. (b) If any Lender shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Lender (or its Parent) as a consequence of such Lender's obligations hereunder to a level below that which such Lender (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, within 15 days after demand by such Lender (with a copy to the Administrative Agent), the Company shall pay to such Lender such additional amount or amounts as will compensate such Lender (or its Parent) for such reduction. (c) Each Lender will promptly notify the Company and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. A certificate of any Lender claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be 57 63 conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. SECTION 8.04. Taxes. (a) For purposes of this Section 8.04, the following terms have the following meanings: "TAXES" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Company pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Lender and each Agent, taxes imposed on its net income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Lender or Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Lender, in which its Applicable Lending Office is located and (ii) in the case of each Lender, any United States withholding tax imposed on any such payments that, for United States federal income tax purposes, are from United States sources, but only to the extent that such Lender would have been subject to United States withholding tax on such payments under the applicable laws and treaties in effect when such Lender first becomes a party to this Agreement. "OTHER TAXES" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. (b) Any and all payments by the Company to or for the account of any Lender or Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Company shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04), such Lender or Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions, (iii) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Company shall furnish to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (c) The Company agrees to indemnify each Lender and Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under 58 64 this Section 8.04) paid by such Lender or Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. In addition, the Company agrees to indemnify each Lender and Agent for all income taxes otherwise expressly excluded from the definition of "TAXES" (calculated at the maximum marginal rate applicable to corporations) to the extent such taxes result from Taxes or Other Taxes that are payable pursuant to this Section 8.04. Indemnification payments pursuant to this Section 8.04(c) shall be made within 15 days after such Lender or Agent makes written demand therefor. (d) Each Lender organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Lender listed on the signature pages hereof and on or prior to the date on which it becomes a Lender in the case of each other Lender, and from time to time thereafter if requested in writing by the Company (but only so long as such Lender remains lawfully able to do so), shall provide the Company with Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is entitled to benefits under an income tax treaty to which the United States is a party which exempts such Lender from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Lender or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Lender required to do so has failed to provide the Company with the appropriate form as required by Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 8.04(b) or 8.04(c) with respect to Taxes imposed by the United States on payments made by the Company; provided that if a Lender that is otherwise exempt from or subject to a reduced rate of withholding tax becomes subject to Taxes because of its failure to deliver a form required hereunder, the Company shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes. (f) If the Company is required to pay additional amounts to or for the account of any Lender pursuant to this Section, then such Lender will change the jurisdiction of its Applicable Lending Office if, in the judgment of such Lender, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Lender. 59 65 (g) If any Lender or Agent (i) receives a refund of any indemnified Tax or Other Tax from the jurisdiction imposing such tax, or (ii) claims any credit or other credit or other tax benefit with respect to any such Tax which refund, credit or other tax benefit in the sole judgment of such Lender or Agent is directly attributable to any such indemnified Tax or Other Tax, such Lender or Agent shall pay over to the Company the amount of such refund, credit or other tax benefit (together with any interest received thereon), net of all out-of-pocket or other expenses (including any taxes on a refund or on interest received or credited) which such Lender or Agent certifies that it has reasonably determined to have been incurred in connection with obtaining such refund, credit or other tax benefit provided that (i) such Lender or Agent shall have no obligation to cooperate with respect to any contest (or continue to cooperate with respect to any contest), or seek or claim any refund, credit or other tax benefit if such Lender or Agent determines that its interest would be materially adversely affected by so cooperating (or continuing to cooperate) or by seeking or claiming any such refund, credit or other tax benefit and (ii) the Company shall have no right to examine the tax returns or other records of such Lender or Agent or to obtain any information with respect thereto by reason of the provisions of this Section or any judgment or determination made by such Lender or Agent pursuant to this Section. SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Lender to make, or continue or convert outstanding Loans as or into, Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Lender has demanded compensation under Section 8.03 or 8.04 with respect to its Euro-Dollar Loans and the Company shall, by at least five Euro-Dollar Business Days' prior notice to such Lender through the Administrative Agent, have elected that the provisions of this Section shall apply to such Lender, then, unless and until such Lender notifies the Company that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Lender as (or continued as or converted into) Euro-Dollar Loans shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Lenders); and (b) after each of its Euro-Dollar Loans has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. 60 66 If such Lender notifies the Company that the circumstances giving rise to such notice no longer apply, the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Lenders. SECTION 8.06. Substitution of Lender. If (i) the obligation of any Lender to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Lender has demanded compensation under Section 8.03 or 8.04, the Company shall have the right, with the assistance of the Administrative Agent, to seek a mutually satisfactory substitute Lender or Lenders (which may be one or more of the Lenders) to purchase the Loans and assume the Commitment (if still in effect) of such Lender. ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Company, the Administrative Agent or the Documentation Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Lender, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, at such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Company. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 shall not be effective until received. SECTION 9.02. No Waivers. No failure or delay by the Administrative Agent or the Documentation Agent or any Lender in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 61 67 SECTION 9.03. Expenses; Indemnification. (a) The Company shall pay (i) the fees and disbursements of special counsel for the Operating Agents incurred on or prior to the Effective Date in connection with the preparation of this Agreement, (ii) all out-of-pocket expenses incurred by the Operating Agents after the Effective Date, including fees and disbursements of their special counsel, in connection with the closing hereunder, post-closing distribution of documents and any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (iii) if an Event of Default occurs, all out-of-pocket expenses incurred by either Operating Agent (including fees and disbursements of their respective special counsel) in connection with such Event of Default and by each Operating Agent and each Lender, including (without duplication) the fees and disbursements of counsel (including allocated costs of internal counsel), in connection with collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Company agrees to indemnify each Agent, each Arranger and each Lender, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "INDEMNITEE") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Acquisition, this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 9.04. Sharing of Set-offs. Each Lender agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest then due with respect to any Note held by it which is greater than the proportion received by any other Lender in respect of the aggregate amount of principal and interest then due with respect to any Note held by such other Lender, the Lender receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Lenders, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Lenders shall be shared by the Lenders pro rata; provided that nothing in this Section shall impair the right of any Lender to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Company other than its indebtedness hereunder. The Company agrees, to the fullest extent it may 62 68 effectively do so under applicable law, that any holder of a participation in a Loan, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Company in the amount of such participation. SECTION 9.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Company and the Required Lenders (and, if the rights or duties of any Agent are affected thereby, by such Agent); provided that: (a) no such amendment or waiver shall, unless signed by all the Lenders, (i) increase or decrease the Commitment of any Lender (except for a ratable decrease in the Commitments of all Lenders) or subject any Lender to any additional obligation, (ii) forgive all or any portion of the principal of or interest on, or reduce the rate of interest on, any Loan or any facility fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any facility fees hereunder or for the termination of the Commitments, (iv) change any provision of this Section 9.05, (v) change any provision of Section 5.19, (vi) change the percentage of the Commitments or of any other amount or the number of Lenders which shall be required for the Lenders, or any of them, to take any action under this Section or any other provision of this Agreement or (vii) permit the Company to assign or otherwise transfer any of its rights hereunder; (b) Exhibit F hereto may be amended as provided in Section 4.09; and (c) subclause (a)(ii) of this Section shall not apply to any amendment pursuant to Section 1.02 for the purpose of eliminating the effect of any change in GAAP. SECTION 9.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Lenders. (b) Any Lender may at any time grant to one or more banks or other institutions (each a "PARTICIPANT") participating interests in its Commitment or any or all of its Loans; provided that no Lender may grant any such participating 63 69 interest to a business competitor of the Company. In the event of any such grant by a Lender of a participating interest to a Participant, such Lender shall notify the Company and the Administrative Agent thereof, but such Lender shall remain responsible for the performance of its obligations hereunder, and the Company and the Agents shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the obligations of the Company hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Lender will not agree to any modification, amendment or waiver of this Agreement described in subclause (i), (ii) or (iii) of clause (a) of Section 9.05 without the consent of the Participant. The Company agrees that each Participant shall, to the extent provided in its participation agreement, but subject to Section 9.06(e), be entitled to the benefits of Article 8 with respect to its participating interest. If a Participant is not incorporated under the laws of the United States or a state thereof, the Lender that granted a participating interest to such Participant shall request that such Participant deliver to the Company and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04; provided that the provisions of Section 8.04(e) shall apply to such Participant as if it were a Lender hereunder. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Lender may at any time assign to one or more banks or other institutions (each an "ASSIGNEE") all, or a proportionate part (equivalent to an initial Commitment of not less than $10,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit D hereto executed by such Assignee and such transferor Lender, with (and subject to) the subscribed consent of the Company and the Administrative Agent, which shall not be unreasonably withheld or delayed; provided that (i) no such consent shall be required if (A) the Assignor is an Initial Lender hereunder and such assignment is made on or prior to the date on which the Arrangers shall have advised the Company that the syndication contemplated by the letters dated November 21, 1997 signed by the Company, the Arrangers and the Initial Lenders has been completed or (B) an Assignee is an affiliate of such transferor Lender or was a Lender immediately prior to such assignment and (ii) no Lender shall make any assignment to a business competitor of the Company. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Lender of an amount 64 70 equal to the purchase price agreed between such transferor Lender and such Assignee, such Assignee shall be a Lender party to this Agreement and shall have all the rights and obligations of a Lender with a Credit Exposure as set forth in such instrument of assumption, and the transferor Lender shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Lender, the Administrative Agent and the Company shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment (except assignments by the Initial Lenders prior to completion of the syndication described above), the transferor Lender shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States or a state thereof, it shall deliver to the Company and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. (d) Any Lender may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Lender from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Lender's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Lender would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Company's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Lender to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 9.07. Confidentiality. Each Lender agrees to use its reasonable efforts (consistent with its established procedures, if reasonable) to (i) keep confidential all non-public information received by it from the Company which has been identified (or may from time to time be identified) as "CONFIDENTIAL" by the Company in writing (herein called "CONFIDENTIAL INFORMATION") and (ii) not disclose, or cause to be disclosed, such Confidential Information to third parties or use such Confidential Information competitively against the Company or in violation of federal securities laws; provided that the provisions of this Section shall not apply to any Confidential Information that becomes generally available to the public other than as a result of a disclosure or other action or omission by any of the Lenders or any of their respective affiliates. Any Lender may disclose Confidential Information to any prospective permitted transferee of any of its interests hereunder if such permitted transferee shall, prior to such disclosure, agree in writing for the benefit of the Company to hold such Confidential 65 71 Information confidential subject to the terms of this Section. Each Lender may disclose Confidential Information as required by any applicable law, governmental rule or governmental regulation or by court order or by any governmental authority or as such Lender may reasonably deem necessary or desirable in its dealings with any governmental authority. Each Lender may disclose Confidential Information (x) to its Parent, its affiliates, its legal counsel or its independent auditors who agree to hold such Confidential Information confidential subject to the terms set forth in this Section (and each Lender agrees to use its reasonable efforts (consistent with its established procedures, if reasonable) to ensure that each Person to whom it makes disclosure pursuant to this sentence shall keep such Confidential Information confidential on such terms) or (y) in the course of any litigation relating to this Agreement if such Lender is a party to such litigation. Each Lender may also disclose Confidential Information to its directors, trustees, employees, agents, attorneys and accountants who would ordinarily have access to such data and information in the normal course of the performance of their duties. Notwithstanding anything in the foregoing to the contrary, no Lender shall be liable to the Company or any other Person for damages arising from the disclosure of Confidential Information despite compliance by such Lender with this Section. SECTION 9.08. No Reliance on Margin Stock. Each of the Lenders represents to the Agents and each of the other Lenders that it in good faith is not relying upon any "MARGIN STOCK" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.09. Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of law rules of such State. The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement, the Notes or the transactions contemplated hereby. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 9.10. Counterparts; Integration; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and 66 72 understandings, oral or written, relating to the subject matter hereof; provided that, in the case of the letters dated November 21, 1997 signed by the Company, the Arrangers and the Initial Lenders, the term sheet referred to therein is superseded in its entirety and the provisions of such letters are superseded to the extent that they relate to the terms and conditions of this Agreement and the conditions on which the Agents and Initial Lenders were willing to become parties hereto and act hereunder. This Agreement shall become effective upon receipt by the Documentation Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Documentation Agent in a form satisfactory to it of telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party); provided that the proviso to the definition of Consolidated Net Worth in Section 1.01 shall not become effective unless there is then in effect an amendment to the definition of Consolidated Net Worth in the North Haven Financing Documents and the Documentation Agent shall have received evidence satisfactory to it that such amendment has become effective or will become effective concurrently with the effectiveness of such proviso providing that only a specified percentage (the "Specified Percentage") of the increase in Intangible Assets (as defined therein) resulting from the Acquisition shall be deducted as an Intangible Asset (as defined therein) in determining Consolidated Net Worth (as defined therein), and if such Specified Percentage is greater than 50%, then the percentage set forth in such proviso shall be changed to such Specified Percentage. SECTION 9.11. WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE AGENTS AND THE LENDERS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 9.12. COMMERCIAL TRANSACTION; WAIVER OF RIGHTS. THE COMPANY ACKNOWLEDGES THAT THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY CONSTITUTE COMMERCIAL TRANSACTIONS WITHIN THE MEANING OF SECTION 52-278A OF THE CONNECTICUT GENERAL STATUTES. THE COMPANY EXPRESSLY WAIVES ANY AND ALL RIGHTS TO PRIOR NOTICE AND A PRIOR HEARING IN CONNECTION WITH ANY PREJUDGMENT REMEDY AVAILABLE TO THE LENDERS OR THE AGENTS UNDER SECTIONS 52-278A TO 52-278G, INCLUSIVE, OF THE CONNECTICUT GENERAL STATUTES AND ANY AND ALL CONSTITUTIONAL RIGHTS WITH RESPECT TO SUCH PRIOR NOTICE AND HEARING. THE FOREGOING WAIVER 67 73 DOES NOT AFFECT THE COMPANY'S RIGHTS TO A SUBSEQUENT NOTICE AND HEARING. 68 74 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. UNITED STATES SURGICAL CORPORATION By: -------------------------------------- Title: 150 Glover Avenue Norwalk, Connecticut 06856 Attn: Treasurer Facsimile number: (203) 845-0315 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Lender and as Syndication Agent By: -------------------------------------- Title: THE BANK OF NEW YORK By: -------------------------------------- Title: MORGAN GUARANTY TRUST COMPANY NEW YORK By: -------------------------------------- Title: 69 75 NATIONSBANK, N.A. By: -------------------------------------- Title: THE BANK OF NEW YORK, as Administrative Agent By: -------------------------------------- Title: Address: 1 Wall Street, 22nd Floor New York, NY 10286 Attention: Facsimile number: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Documentation Agent By: -------------------------------------- Title: Address: 60 Wall Street New York, New York 10260 Attention: Facsimile number: 70 76 COMMITMENT SCHEDULE
BANK COMMITMENT - ---- ---------- Bank of America National Trust and Savings Association $112,500,000 The Bank of New York 112,500,000 Morgan Guaranty Trust Company of New York 112,500,000 NationsBank, N.A. 112,500,000 ------------ Total $450,000,000
77 PRICING SCHEDULE Subject to the last sentence of this Pricing Schedule, the "EURO-DOLLAR MARGIN" and "FACILITY FEE RATE", for any day, are the respective rates per annum set forth below in the applicable row under the column corresponding to the Pricing Level that applies on such day:
- --------------------------------------------------------------------------------------------------- LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V LEVEL VI - --------------------------------------------------------------------------------------------------- Euro-Dollar Margin .225% .325% .425% .525% .600% .650% - --------------------------------------------------------------------------------------------------- Facility Fee .150% .175% .200% .225% .275% .350% Rate - ---------------------------------------------------------------------------------------------------
Subject to the last sentence of this Pricing Schedule, the following terms have the following meanings: "LEVEL I PRICING" applies on any day during any Pricing Period if the Pricing Ratio for such Pricing Period is less than or equal to 1.5 to 1. "LEVEL II PRICING" applies on any day during any Pricing Period if the Pricing Ratio for such Pricing Period is greater than 1.5 to 1 but less than or equal to 2.0 to 1. "LEVEL III PRICING" applies on any day during any Pricing Period if the Pricing Ratio for such Pricing Period is greater than 2.0 to 1 but less than or equal to 2.5 to 1. "LEVEL IV PRICING" applies on any day during any Pricing Period if the Pricing Ratio for such Pricing Period is greater than 2.5 to 1 but less than or equal to 3.0 to 1. "LEVEL V PRICING" applies on any day during any Pricing Period if the Pricing Ratio for such Pricing Period is greater than 3.0 to 1 but less than or equal to 3.5 to 1. "LEVEL VI PRICING" applies on any day if no other Pricing Level applies on such day. 78 "PRICING LEVEL" refers to the determination of which of Level I Pricing, Level II Pricing, Level III Pricing, Level IV Pricing, Level V Pricing or Level VI Pricing applies on any day. "PRICING PERIOD" means a period from and including the 46th day after the end of any Fiscal Quarter to and including the 45th day after the end of the next succeeding Fiscal Quarter. "PRICING RATIO" for any Pricing Period means the ratio of (i) Consolidated Debt at the end of the Prior Fiscal Quarter to (ii) Consolidated EBITDA for the period of four consecutive Fiscal Quarters then ended. "PRIOR FISCAL QUARTER" for any Pricing Period means the Fiscal Quarter that ended 46 days before such Pricing Period begins. Notwithstanding the foregoing, Pricing Level V shall apply for the Effective Date and for each day thereafter until the beginning of the first Pricing Period for which the Prior Fiscal Quarter ends after the Closing Date. 79 EXHIBIT A NOTE New York, New York ___________ __, 199_ For value received, United States Surgical Corporation, a Delaware corporation (the "COMPANY"), promises to pay to the order of ______________________ (the "LENDER"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Lender to the Company pursuant to the Credit Agreement referred to below on the maturity date provided for in the Credit Agreement. The Company promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the principal office of The Bank of New York in New York City. All Loans made by the Lender, the respective types thereof and all repayments of the principal thereof shall be recorded by the Lender and, if the Lender so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Lender on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Company hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Credit Agreement dated as of January __, 1998 among United States Surgical Corporation, the Lenders party thereto, Bank of America National Trust and Savings Association, as Syndication Agent, The Bank of New York, as Administrative Agent, and Morgan Guaranty Trust Company of New York, as Documentation Agent (as the same may be 80 amended from time to time, the "CREDIT AGREEMENT"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. UNITED STATES SURGICAL CORPORATION By ______________________________________ Name: Title: 2 81 LOANS AND PAYMENTS OF PRINCIPAL
Amount Type Amount of of of Principal Notation Date Loan Loan Repaid Made By - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
1 82 EXHIBIT B OPINION OF COUNSEL FOR THE COMPANY ________________, 199_ To the Lenders and the Agents Referred to Below c/o Morgan Guaranty Trust Company of New York, as Documentation Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: I have acted as counsel for United States Surgical Corporation (the "COMPANY") in connection with the Credit Agreement (the "CREDIT AGREEMENT") dated as of January 30, 1998 among the Company, the Lenders party thereto, Bank of America National Trust and Savings Association, as Syndication Agent, The Bank of New York, as Administrative Agent, and Morgan Guaranty Trust Company of New York, as Documentation Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of my client pursuant to Section 3.01(h) of the Credit Agreement. I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 1 83 2. The execution and delivery by the Company of the Transaction Documents, this Agreement and the Notes and the consummation by the Company of the transactions contemplated thereby have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with (excepting such filings as may be required for reporting purposes under the federal securities laws), any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Company. The execution, delivery and performance by the Company of the Transaction Documents, the Credit Agreement and the Notes do not contravene or constitute a default under any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. 3. The Credit Agreement constitutes a valid and binding agreement of the Company and each Note constitutes a valid and binding obligation of the Company, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. Except as disclosed in the Company's 1996 Form 10-K or the Company's Latest Form 10-Q, there is no action, suit or proceeding pending against, or to the best of my knowledge threatened against or affecting, the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to result in an adverse decision that would have a Material Adverse Effect or which in any manner draws into question the validity or enforceability of the Credit Agreement or the Notes. 5. Each of the Company's active corporate Subsidiaries is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Very truly yours, 2 84 EXHIBIT C OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE OPERATING AGENTS ________________, 199_ To the Lenders and the Agents Referred to Below c/o Morgan Guaranty Trust Company of New York, as Documentation Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: We have participated in the preparation of the Credit Agreement (the "CREDIT AGREEMENT") dated as of January 30, 1998 among United States Surgical Corporation, a Delaware corporation (the "COMPANY"), the Lenders party thereto, Bank of America National Trust and Savings Association, as Syndication Agent, The Bank of New York, as Administrative Agent and Morgan Guaranty Trust Company of New York, as Documentation Agent, and have acted as special counsel for the Operating Agents for the purpose of rendering this opinion pursuant to Section 3.01(i) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that the Credit Agreement and each Note constitutes a valid and binding obligation of the Company, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 85 We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York and the General Corporation Law of the State of Delaware. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Lender is located which limits the rate of interest that such Lender may charge or collect. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 2 86 EXHIBIT D ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 19__ among [NAME OF ASSIGNOR] (the "ASSIGNOR"), [NAME OF ASSIGNEE] (the "ASSIGNEE"), UNITED STATES SURGICAL CORPORATION (the "COMPANY") and THE BANK OF NEW YORK, as Administrative Agent (the "ADMINISTRATIVE AGENT"). WHEREAS, this Assignment and Assumption Agreement (the "AGREEMENT") relates to the Credit Agreement dated as of January 30, 1998 among the Company, the Assignor and the other Lenders party thereto, Bank of America National Trust and Savings Association, as Syndication Agent, the Administrative Agent and Morgan Guaranty Trust Company of New York, as Documentation Agent (as amended from time to time, the "CREDIT AGREEMENT"); [WHEREAS, as provided under the Credit Agreement, the Assignor has an unused Commitment to make Loans to the Company in an aggregate principal amount not to exceed $__________;] [WHEREAS, Loans made to the Company by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof;] and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Credit Exposure thereunder in an amount equal to $__________ (the "ASSIGNED AMOUNT") and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment 87 from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, [the Company and the Administrative Agent] and the payment of the amounts specified in Section 3 required to be paid on the date hereof, (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Lender under the Credit Agreement with a Credit Exposure in an amount equal to the Assigned Amount, and (ii) the Credit Exposure of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor shall be released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2, the Assignee shall pay to the Assignor on the date hereof in immediately available funds the amount heretofore agreed between them.* It is understood that facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof in respect of the Assigned Amount are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. [SECTION 4. Consent of the Company and the Administrative Agent. This Agreement is conditioned upon the consent of the Company and the Administrative Agent pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Company and the Administrative Agent is evidence of this consent. Pursuant to Section 9.06(c), the Company agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein.] SECTION 5. Non-reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Company, or the validity and enforceability of the obligations of the Company under the Credit Agreement or any Note. The Assignee acknowledges that it has, - ------------------ * Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee. 2 88 independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Company. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [NAME OF ASSIGNOR] By________________________________ Name: Title: [NAME OF ASSIGNEE] By________________________________ Name: Title: [UNITED STATES SURGICAL CORPORATION By________________________________ Name: Title: 3 89 THE BANK OF NEW YORK, as Administrative Agent By________________________________ Name: Title:] 4 90 EXHIBIT E CALCULATION OF FUNDING LOSSES The following formula shall be used to calculate compensation for a funding loss (a "FUNDING LOSS") due to a Lender under Section 2.12 in the event of a prepayment or conversion or a failure to borrow or to prepay a Euro-Dollar Loan of such Lender: (CR - RR) x PA x DR FL = -------------------- + AF 360 FL = Funding Loss CR = Contract Rate RR = Reinvestment Rate PA = Principal Amount DR = Days Remaining AF = Administrative Fee "ADMINISTRATIVE FEE" means the administrative fee usually charged by such Lender, not to exceed $250. "CONTRACT RATE" means, with respect to any such Euro-Dollar Loan, the London Interbank Offered Rate applicable thereto expressed as a decimal. "DAYS REMAINING" means, with respect to any such Euro-Dollar Loan, (i) if prepaid or converted, the number of days in the period from and including the date of such prepayment or conversion to but excluding the last day of the applicable Interest Period and (ii) if not borrowed, not continued, not converted or not prepaid (as applicable), the number of days in the applicable Interest Period. "PRINCIPAL AMOUNT" means, with respect to any such Euro-Dollar Loan, the principal amount thereof being prepaid or converted or not borrowed, not continued, not converted or not prepaid, as applicable. "REINVESTMENT RATE" means, with respect to any such Euro-Dollar Loan, a rate per annum (expressed as a decimal) reasonably determined by such Lender to be the rate at which an amount approximately equal to the Principal Amount thereof could be reinvested in the relevant interbank market on the date prepaid or 91 converted or not borrowed, not continued, not converted or not prepaid, as applicable, for a period of time comparable to the applicable Days Remaining. 2 92 EXHIBIT F ACTIVE SUBSIDIARIES ARR, Inc. (Delaware) ASE Continuing Education Center S.A. (France) ASE Partners S.A. (France) Auto Suture Austria GmbH (Austria) Auto Suture Belgium B.V. (Holland) Auto Suture Company, Australia (Conn.) Auto Suture Company, Canada (Conn.) Auto Suture Company, Netherlands (Conn.) Auto Suture Company, U.K. (Conn.) Auto Suture Deutschland GmbH (Germany) Auto Suture Do Brasil Ltda. (Brazil) Auto Suture Eastern Europe, Inc. (Delaware) Auto Suture Espana, S.A. (Spain) Auto Suture Europe Holdings, Inc. (Conn.) Auto Suture Europe S.A. (France) Auto Suture European Services Center, S.A. (France) Auto Suture France S.A. (France) Auto Suture FSC Ltd. (U.S. Virgin Islands) Auto Suture International, Inc. (Conn.) Auto Suture Italia, S.p.A. (Italy) Auto Suture Japan, Inc. (Japan) Auto Suture Norden Co. (Conn.) Auto Suture Poland, Limited Liability Company (Poland) Auto Suture Puerto Rico, Inc. (Conn.) Auto Suture Russia, Inc. (Delaware) Auto Suture (Schweiz) AG (Switzerland) Auto Suture Surgical Instruments (Russia) EndoTherapeutics (Calif.) United States Surgical Corporation (Ireland) Limited (Ireland) USSC AG (Switzerland) USSC (Deutschland) GmbH (Germany) USSC Financial Services, Inc. (Conn.) USSC Japan Kabushiki Kaisha (Japan) USSC Medical GmbH (Germany) U.S.S.C. Puerto Rico, Inc. (NY) Columbus Farming Corporation (Delaware) Hirsch Industries, Inc. (Virginia) Medolas Gesellschaft fur Medizintechnik mbH (Germany) 93 USSC AG Switzerland USSC (Deutschland) GmbH (Germany) USSC Financial Services, Inc. (Connecticut) USSC Medical GmbH (Germany) USSC Puerto Rico, Inc. (New York) Surgical Dynamics Europe, S.A.S (France) Surgical Dynamics, Inc. (Delaware) Surgical Dynamics Japan K.K. (Japan) 2 94 EXHIBIT G DISCLOSURE DOCUMENTS 1. Company's 1996 Form 10-K 2. Company's Form 10-Q for quarter ended September 30, 1997 3. Transaction Documents (with schedules and exhibits) 4. Information Memorandum 3 95 EXHIBIT H EXISTING LIENS SECURING DEBT 1. A lien on improved real property in Elancourt, France, securing payment of an aggregate principal amount, at January 30, 1998, of FF 457,000,000, owing under the U.I.S. Financing Documents. 2. North Haven Notes in the aggregate principal amount of $230,000,000, at January 30, 1998 are secured by a Lien on the facility (including improvements thereto) leased by the Company under the North Haven Lease. 3. A lien on the Company's Japanese patents securing a note of Auto Suture Japan Inc. in favor of Century Medical Inc. in the principal amount of (YEN) 500,000,000 (approximately $5,000,000), issued as part of the consideration for the acquisition by the Company of the assets of its Japanese distributor. 4. Other Liens which may exist on miscellaneous property of the Company and its Subsidiaries securing obligations which, in the aggregate, do not exceed $5,000,000. 4 EX-10.B 3 1990 EMPLOYEE STOCK OPTION PLAN 1 EXHIBIT 10.13 UNITED STATES SURGICAL CORPORATION 1990 EMPLOYEE STOCK OPTION PLAN (Restated to reflect amendments and adjustments through February 4, 1997) 1. Purpose of the Plan. The purpose of the 1990 Employee Stock Option Plan (the "Plan") is to secure for United States Surgical Corporation (the "Company") and its stockholders the benefits of the incentive inherent in Common Stock ownership by permitting selected employees of the Company and its subsidiaries to obtain suitable recognition for services which have contributed or will contribute materially to the success of the Company. It is intended that the Plan will aid in retaining, encouraging and attracting employees of exceptional ability because of the opportunity offered to them to acquire a proprietary interest, or increase their proprietary interest, in the business of the Company. 2. Definitions. (a) "Appreciation Right" means a right granted under the Plan to receive an amount representing appreciation in the Fair Market Value of a share of Common Stock between the date of grant and the date of exercise of such right, payable in cash or Common Stock. (b) "Board" means the Board of Directors of the Company. (c) "Committee" means the Compensation/Option Committee of the Board or any successor committee appointed by the Board to administer the Plan. (d) "Common Stock" means the authorized common stock of the Company. (e) "Company" means United States Surgical Corporation. (f) "Eligible Employees" means any person who is, at the time of the grant of an Incentive Award, (i) an officer or other key employee of the Company or any Subsidiary, including a person who is also a member of the Board, or (ii) a consultant performing services for the Company or any Subsidiary which are equivalent or similar to services performed by key employees of the Company and its Subsidiaries. (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute. (h) "Fair Market Value" means, at any date, the value of a share of Common Stock on such date as determined by the Committee by any fair and reasonable means, provided, however, that in the absence of a specific Committee determination to the 2 contrary in a particular circumstance, "Fair Market Value" means the average of the high and low quoted sales prices of a share of Common Stock on the New York Stock Exchange on such date or, if no such sales were made on such date, the closing price of such shares on the New York Stock Exchange on the next preceding date on which there were such sales. (i) "Incentive Award" means an Option or Appreciation Right. (j) "Incentive Stock Option" means an option to purchase Common Stock which has been granted under the Plan and which is intended to qualify under Section 422A of the Internal Revenue Code and regulations thereunder. (k) "Nonqualified Stock Option" means an option to purchase Common Stock which has been granted under the Plan and which is not an Incentive Stock Option. (l) "Option" means an Incentive Stock Option or a Nonqualified Stock Option. (m) "Participant" means any Eligible Employee selected to receive an Incentive Award pursuant to Section 5. (n) "Plan" means the 1990 Employee Stock Option Plan as set forth herein and as amended from time to time. (o) "Subsidiary" means any subsidiary corporation, as defined in Section 425 of the Internal Revenue Code, of the Company. 3. Shares of Common Stock Subject to the Plan. (a) Subject to the provisions of Section 3(c) and Section 8 of the Plan, the aggregate number of shares of Common Stock that may be issued or transferred pursuant to Incentive Awards under the Plan shall not exceed 13,000,000. Payment of cash in lieu of shares shall be deemed to be an issuance of the shares, and payment pursuant to an Appreciation Right shall be deemed to be an issuance of the shares covered thereby. (b) The shares of Common Stock to be delivered under the Plan will be made available, at the discretion of the Company, either from authorized but unissued shares of Common Stock or from previously issued shares of Common Stock reacquired by the Company, including shares purchased on the open market. (c) If shares covered by any Incentive Award cease to be issuable or transferable for any reason, such number of shares will no longer be charged against the limitations provided for in Section 3(a) and may again be made subject to Incentive Awards. 2 3 However, shares subject to an Option which has been surrendered in connection with the exercise of a related Appreciation Right will not become available for the grant of any additional Incentive Awards, and shares subject to that portion of an Incentive Award which has been cancelled pursuant to Section 9(h) will not become available for the grant of any additional Incentive Awards. 4. Administration of the Plan (a) The Plan will be administered by the Committee, which will consist of three or more persons (i) who are not eligible to receive Incentive Awards under the Plan and (ii) who qualify as "non-employee directors" under Rule 16b-3, or any successor rule, under the Exchange Act. (b) The Committee has and may exercise such powers and authority of the Board as may be necessary or appropriate for the Committee to carry out its functions as described in the Plan. The Committee has authority in its discretion to determine the Eligible Employees to whom, and the time or times at which, Incentive Awards may be granted and the number of shares subject to each Incentive Award. The Committee also has authority to (i) interpret the Plan, (ii) determine the terms and provisions of the Incentive Award instruments and (iii) make all other determinations necessary or advisable for Plan administration. The Committee has authority to prescribe, amend, and rescind rules and regulations relating to the Plan. All interpretations, determinations, and actions by the Committee will be final, conclusive, and binding upon all parties. (c) No member of the Board or the Committee will be liable for any action taken or determination made in good faith by the Board or the Committee with respect to the Plan or any Incentive Award made under the Plan. 5. Grants. (a) The Committee has authority, in its discretion, to determine and designate from time to time those Eligible Employees who are to be granted Incentive Awards. The Committee shall determine the type of each Incentive Award to be granted and the number of shares covered thereby or issuable upon exercise thereof. Each Incentive Award will be evidenced by a written instrument briefly describing the material terms and conditions of the Incentive Award, including such terms and conditions, consistent with the Plan, as the Committee may deem advisable. (b) No person will be eligible for the grant of an incentive Stock Option who owns or would own immediately before the grant of such Option, directly or indirectly, stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or of any parent corporation or Subsidiary. This limitation will 3 4 not apply if, at the time such Incentive Stock Option is granted, the Incentive Stock Option exercise price is at least 110% of the Fair Market Value of the Common Stock. In this event, the Incentive Stock Option by its terms will not be exercisable after the expiration of five years from the date of grant. 6. Terms and Conditions of Options (a) Unless otherwise determined by the Committee, the price at which Common Stock may be purchased by a Participant under an Option shall be the Fair Market Value of the Common Stock on the date of grant; provided, however, that in no event shall the purchase price under an Incentive Stock Option be less than the Fair Market Value of the Common Stock on the date of grant. (b) The Committee shall determine the option exercise period of each Option. The period shall not exceed 15 years from the date of grant. (c) Upon the exercise of an Option, the purchase price will be payable in full in cash; or, in the discretion of the Committee, by the assignment and delivery to the Company of shares of Common Stock owned by the Participant; or, in the discretion of the Committee, by installment payments or by a promissory note, in each case secured by shares of Common Stock and bearing interest at a rate determined by the Committee, but not less than the minimum rate permitted by the Internal Revenue Service; or by a combination of any of the above. Any shares assigned and delivered to the Company upon exercise of an Option in payment or partial payment of the purchase price will be valued at the Fair Market Value of the Common Stock on the exercise date. The Committee may permit installment payments or promissory note payments to be made by the assignment and delivery to the Company of shares of Common Stock owned by the Participant, in which case such shares will be valued at the Fair Market Value of the Common Stock on the date of payment. (d) With respect to Incentive Stock Options granted under the Plan, the aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the number of shares with respect to which Incentive Stock Options are exercisable for the first time by a Participant in any calendar year (under all stock option plans of the Company and Subsidiaries) shall not exceed $100,000 or such other limit as may be required by the Internal Revenue Code. (e) No fractional shares will be issued pursuant to the exercise of an Option nor will any cash payment be made in lieu of fractional shares. 7. Terms and Conditions of Appreciation Rights 4 5 (a) An Appreciation Right may be granted in connection with an Option, either at the time of grant or at any time thereafter during the term of the Option. (b) An Appreciation Right will entitle the Participant, upon exercise, to surrender such Option or any portion thereof to the extent unexercised, with respect to the number of shares as to which such Appreciation Right is exercised, and to receive payment of an amount computed pursuant to Section 7(d). Such Option will, to the extent surrendered, cease to be exercisable. (c) Subject to Section 7(i), an Appreciation Right granted in connection with an Option hereunder will be exercisable at such time or times, and only to the extent, that the related Option is exercisable, and will not be transferable except to the extent that the related Option may be transferable. (d) Upon the exercise of an Appreciation Right related to an Option, the Participant will be entitled to receive payment of an amount determined by multiplying: (i) The difference obtained by subtracting the purchase price of a share of Common Stock specified in the related Option from the Fair Market Value of a share of Common Stock on the date of exercise of such Appreciation Right, by (ii) The number of shares as to which such Appreciation Right has been exercised. (e) The Committee may also grant to Eligible Employees Appreciation Rights that are not related to Options. An Appreciation Right granted without relationship to an Option will be exercisable as determined by the Committee but in no event after 15 years from the date of grant. (f) An Appreciation Right granted without relationship to an Option will entitle the Participant, upon exercise of the Appreciation Right, to receive payment of an amount determined by multiplying: (i) The difference obtained by subtracting the Fair Market Value of a share of Common Stock on the date the Appreciation Right is granted (the "Base Price") from the Fair Market Value of a share of Common Stock on the date of exercise of such Appreciation Right, by (ii) The number of shares as to which such Appreciation Right has been exercised. 5 6 (g) At the time of grant of an Appreciation Right, the Committee may determine a maximum amount that could be payable with respect to such Appreciation Right. (h) Payment of the amount determined under Section 7(d) or (f) may be made in whole shares of Common Stock valued at their Fair Market Value on the date of exercise of the Appreciation Right, in cash, or by a combination of the two, as the Committee determines in its sole discretion. If the Committee decides that payment may be made in shares of Common Stock and the amount payable results in a fractional share, payment for the fractional share will be made in cash. (i) No Appreciation Right granted to an officer of the Company may be exercised before six months after the date of grant except in the event that death or disability of the officer occurs before the expiration of the six-month period. 8. Adjustment Provisions (a) Subject to Section 8(b), if the outstanding shares of Common Stock of the Company are increased, decreased, or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to such shares of Common Stock, through merger, consolidation, sale of all or substantially all the property of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other distribution with respect to such shares of Common Stock, an appropriate and proportionate adjustment may be made in (i) the maximum number and kind of shares provided in Section 3, (ii) the number and kind of shares or other securities subject to the then-outstanding Incentive Awards, and (iii) the purchase price or Base Price for each share or other unit of any other securities subject to then-outstanding Incentive Awards without change in the aggregate purchase price and Base Price as to which such Incentive Awards remain exercisable. (b) Subject to Section 8(c), upon dissolution or liquidation of the Company or upon a reorganization, merger, or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of all or substantially all the property of the Company, all Incentive Awards then outstanding under the Plan and held by Participants who have been employed or engaged as a consultant by the Company for at least one year at such time will be fully vested and exercisable, and the Committee may provide in connection with such transaction for the continuance of the Plan and the assumption of such Incentive Awards or the substitution for such Incentive Awards of new incentive awards covering the stock of a successor employer corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices. 6 7 (c) In the event a Change of Control of the Company occurs, all Incentive Awards then outstanding under the Plan and held by Participants who have been employed or engaged as a consultant by the Company for at least one year at such time under the Plan will be fully vested and exercisable, effective upon the occurrence of such Change of Control. In the event that any Person makes a filing under Section 14(d) of the Exchange Act with respect to the Company, the exercise dates of any outstanding Incentive Awards held by Participants who have been employed or engaged as a consultant by the Company for at least one year at such time shall be without further action by the Committee accelerated to make them fully vested and exercisable. In addition, in the event a Change of Control of the Company occurs, or in the event that any Person makes a filing under Section 14(d) of the Exchange Act with respect to the Company, the Committee may, in its sole discretion, without obtaining stockholder approval, and subject to the limitations imposed by Section 16 of the Securities Exchange Act of 1934, as amended, take any one or more of the following actions or any other action permitted under this Plan, subject in all cases to the limitations of Section 3(a): (i) Grant Appreciation Rights to holders of outstanding Options as permitted under Section 7(a); (ii) Pay cash to Participants in exchange for the cancellation of their outstanding Incentive Awards in accordance with Section 9(h); and (iii) Make any other appropriate adjustments or amendments to the Plan and outstanding Incentive Awards or substitute new Incentive Awards for outstanding Incentive Awards. For purposes of this Section 8(c), the following definitions shall apply: (A) A "Change in Control" of the Company shall have occurred when a Person, alone or together with its Affiliates and Associates, becomes the beneficial owner of 20% or more of the general voting power of the Company. (B) "Affiliate and Associates" shall have the respective meanings ascribed to such terms in Rule 12b-2, or any successor rule, of the General Rules and Regulations under the Exchange Act. (C) "Person" shall mean an individual, firm, corporation or other entity or any successor to such entity, but "Person" shall not include the Company, any Subsidiary, any employee benefit plan or employee stock plan of the Company or any Subsidiary, or any Person organized, appointed, established or holding Voting Stock by, for or pursuant to the terms of such a plan. 7 8 (D) "Voting Stock" shall mean shares of the Company's capital stock having general voting power, with "voting power" meaning the power under ordinary circumstances (and not merely upon the happening of a contingency) to vote in the election of directors. (d) Adjustments under Sections 8(a), (b) and (c) will be made by the Committee, whose determination as to what adjustments will be made and the extent thereof will be final, binding, and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments. 9. General Provisions (a) Nothing in the Plan or in any instrument executed pursuant to the Plan will confer upon any Participant any right to continue in the employ of the Company or any of its Subsidiaries or affect the right of the Company or any Subsidiary to terminate the employment of any Participant at any time with or without cause. (b) No shares of Common Stock will be issued or transferred pursuant to an Incentive Award unless and until all then-applicable requirements imposed by Federal and state securities and other laws, rules and regulations and by any regulatory agencies having jurisdiction, and by any stock exchanges upon which the Common Stock may be listed, have been fully met. As a condition precedent to the issuance of shares pursuant to the grant or exercise of an Incentive Award, the Company may require the Participant to take any reasonable action to meet such requirements. (c) No Participant and no beneficiary or other person claiming under or through such Participant will have any right, title or interest in or to any shares of Common Stock allocated or reserved under the Plan or subject to any Incentive Award except as to such shares of Common Stock, if any, that have been issued or transferred to such Participant. (d) The Committee shall adopt rules regarding the withholding of federal, state or local taxes of any kind required by law to be withheld with respect to payments and delivery of shares to Participants under the Plan. With respect to any Incentive Award, the Committee may, in its discretion, permit the Participant to satisfy, in whole or in part, any tax withholding obligation which may arise in connection with the exercise of the Incentive Award by electing to have the Company withhold shares of Common Stock having a Fair Market Value equal to the amount of the tax withholding. (e) No Incentive Award and no right under the Plan, contingent or otherwise, will be transferable or assignable or subject to any encumbrance, pledge or charge of any nature except that, under such rules and regulations as the Committee may establish pursuant to the terms of the Plan, a beneficiary may be designated with 8 9 respect to an Incentive Award in the event of death of a participant. If such beneficiary is the executor or administrator of the estate of the Participant, any rights with respect to such Incentive Award may be transferred to the person or persons or entity (including a trust) entitled thereto under the will of the holder of such Incentive Award. (f) The Company may make a loan to a Participant in connection with the exercise of an Option in an amount not to exceed the aggregate exercise price of the Option being exercised for the purpose of assisting such Participant to exercise such Option. The Company may additionally permit payment of all or any portion of the exercise price of an Option in installment payments. Any such loan or installment payment arrangement shall be secured by shares of Common Stock and shall comply in all respects with all applicable laws and regulations. The Committee may adopt policies regarding eligibility for such arrangements, the maximum amounts thereof and any terms and conditions not specified in the Plan upon which such arrangements will be made. In no event will the interest rate be less than the minimum rate established by the Internal Revenue Service for the purpose of the purchase and sale of property pursuant to Section 483 of the Internal Revenue Code. (g) The Committee may cancel, with the consent of the Participant, all or a portion of any Option or Appreciation Right granted under the Plan to be conditioned upon the granting to the Participant of a new Option or Appreciation Right for the same or a different number of shares as the Option or Appreciation Right surrendered, or may require such voluntary surrender as a condition to a grant of a new Option or Appreciation Right to such Participant. Subject to the provisions of Section 6(d), such new Option or Appreciation Right shall be exercisable at the price, during the period and in accordance with any other terms or conditions specified by the Committee at the time the new Option or Appreciation Right is granted, all determined in accordance with the provisions of the Plan without regard to the price, period of exercise, or any other terms or conditions of the Option or Appreciation Right surrendered. (h) If authorized by the Committee, the Company may, with the consent of the Participant and at any time or from time to time, cancel all or a portion of any Incentive Award granted under the Plan then subject to exercise and discharge its obligation with respect to the cancelled portion of such Incentive Award either by payment to the Participant of an amount of cash equal to the excess, if any, of the Fair Market Value, at such time, of the shares subject to the portion of the Incentive Award so cancelled over the aggregate purchase price or Base Price specified in the Incentive Award covering such shares, or by issuance or transfer to the Participant of shares of Common Stock with a Fair Market Value, at such time, equal to any such excess, or by a combination of cash and shares. Upon any such payment of cash or issuance of shares, there shall be charged against the aggregate limitations set forth in Section 3(a) a number of shares 9 10 equal to the number of shares subject to the portion of the Incentive Award so cancelled. (i) The Committee may, in its sole discretion, cancel any Incentive Award if the employment of the Participant holding such Incentive Award is terminated and such Participant has engaged in activities which are, in the judgment of the Committee, competitive with, prejudicial to or in conflict with the interests of the Company or a Subsidiary or has breached the terms of any agreement with the Company or a Subsidiary with respect to confidentiality and non-use of information or with respect to disclosure and assignment of inventions and ideas. Such actions by a Participant prior to, or during six months after, exercise of an Incentive Award shall constitute a rescission of the exercise, requiring the payment to the Company of, in the case of an Option, the difference between the purchase price of the Common Stock as to which the Option was exercised and the Fair Market Value on the date of exercise of such Common Stock or, in the case of an Appreciation Right, the amount paid to the Participant upon exercise of the Appreciation Right, in each case within ten days after notice of such rescission has been given to the terminated employee by the Company. 10. Amendment and Termination (a) The Board shall have the power, in its discretion, to amend, suspend or terminate the Plan at any time, subject to approval of the stockholders of the Company to the extent necessary for the continued qualification of compensation pursuant to Incentive Awards under the plan as "performance based" of the Internal Revenue code and regulations promulgated thereunder, compensation under Section 162(m), or as may otherwise be required. (b) The Committee may, with the consent of a Participant, make such modifications in the terms and conditions of an Incentive Award as it deems advisable. (c) No amendment, suspension or termination of the Plan will, without the consent of the Participant, impair or adversely affect any right or obligation under any Incentive Award previously granted under the Plan. 11. Effective Date of Plan and Duration of Plan The Plan shall become effective upon its adoption by the Board and by the Company's stockholders. Unless previously terminated, the Plan will terminate when no more shares of Common Stock are available for issuance or transfer pursuant to Incentive Awards under the limitations of Section 3(a). 10 EX-10.F 4 OUTSIDE DIRECTORS STOCK PLAN 1 Exhibit 10.F UNITED STATES SURGICAL CORPORATION OUTSIDE DIRECTORS STOCK PLAN (Restated to reflect amendments and adjustments through May 1, 1997) 1. Purpose. The purpose of the Plan is to advance the interests of the Company and its stockholders by encouraging increased Common Stock ownership by members of the Board who are not significant stockholders of the Company or employees of the Company or any of its subsidiaries, in order to promote long-term stockholder value through directors' continuing ownership of the Common Stock. 2. Definitions. Unless the context clearly indicates otherwise, the following terms, when used in the Plan, shall have the meanings set forth below. "Beneficial owner" shall have the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934. "Board" shall mean the Board of Directors of the Company, as it may from time to time be constituted. "Change in Control" shall mean (i) the stockholders of the Company approve any plan for the liquidation or dissolution of the Company or for a consolidation or merger of the Company (A) in which the Company would not be the continuing or surviving corporation, and pursuant to which shares of the Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock of the surviving corporation immediately after the merger, or (B) in which the Company is the surviving corporation but the holders of the Common Stock prior to the merger or consolidation will not own 50% or more of the outstanding voting stock of the surviving corporation immediately after such merger or consolidation, (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, (iii) any person, as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, becomes the beneficial owner of 30% or more of the Common Stock, or (iv) during any period of two consecutive years or less, individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "Committee" shall mean the Compensation/Option Committee of the Board, as it may from time to time be constituted, or any other committee of the Board appointed by the Board to administer the Plan. "Common Stock" shall mean the Common Stock, par value $.10 per share, of the Company, and shall include the Common Stock as it may be changed from time to time as described in Paragraph 8 of the Plan. "Company" shall mean United States Surgical Corporation and any successor by merger or consolidation. 2 "Eligible Director" shall mean a member of the Board who is not, and has not been during the preceding 12 months, an employee of the Company or any of its subsidiaries and who is not the beneficial owner of five percent or more of the outstanding Common Stock. "Fair Market Value" shall mean the last sale price of the Common Stock on the date in question, as reported on the New York Stock Exchange or, if the New York Stock Exchange is closed on that date, on the last preceding date on which the New York Stock Exchange was open for trading. "Grantee" shall mean an Eligible Director who has been awarded a Stock Award or granted an Option. "Option" shall mean a Nonqualified option to purchase authorized but unissued Common Stock or Common Stock held in the treasury granted by the Company pursuant to the terms of the Plan. "Plan" shall mean the United States Surgical Corporation Outside Directors Stock Plan, as set forth herein and as amended from time to time. "Stock Award" shall mean an award of restricted Common Stock from authorized but unissued Common Stock or Common Stock held in the treasury made by the Company pursuant to the terms of the Plan. "Subsidiary" shall mean any corporation at least 50% of whose outstanding voting stock is owned, directly or indirectly, by the Company. 3. Administration. The Plan shall be administered by the Committee. The Committee shall have all the powers vested in it by the terms of the Plan, such powers to include authority (within the limitations described herein) to prescribe the form of the agreements embodying Stock Awards and Options. The Committee shall, subject to the provisions of the Plan, grant Stock Awards and Options pursuant to the Plan and shall have the power to construe the Plan, to determine all questions arising thereunder and to adopt and amend such rules and regulations for the administration of the Plan as it may deem desirable. Any decision of the Committee in the administration of the Plan, as described herein, shall be final and conclusive. The Committee may act only by a majority of its members in office, except that the members thereof may authorize any one or more of their members or the Corporate Secretary or any other officer of the Company to execute and deliver documents on behalf of the Committee. No member of the Committee shall be liable for anything done or omitted to be done by him or by any other member of the Committee in connection with the Plan, except for his own willful misconduct or as expressly provided by statute. 4. Participation. Each Eligible Director shall be eligible to receive Stock Awards and Option grants in accordance with Paragraphs 5, 6 and 7 below. 2 3 5. Awards and Grants Under the Plan. (a) Awards and grants under the Plan shall include only Stock Awards and Option Grants, subject to the terms, conditions and restrictions specified in Paragraphs 6 and 7 below. There may be issued under the Plan pursuant to Stock Awards and the exercise of Options an aggregate of not more than 260,000 shares of Common Stock, subject to adjustment as provided in Paragraph 8 below. Shares of Common Stock that are the subject of a Stock Award but are forfeited, or are the subject of an Option but not purchased prior to the expiration of the Option, shall thereafter be considered unissued for purposes of the maximum number of shares that may be issued under the Plan, and may again be the subject of Stock Awards or Option grants under the Plan. If at any time, the shares remaining available for Stock Awards and Option Grants are not sufficient to make all Stock Awards and Option Grants then required to be made under the Plan, no stock Awards or Option Grants shall be made. (b) An Eligible Director to whom a Stock Award is provided to be made under the Plan, or to whom an Option is provided to be granted or is granted under the Plan (and any person succeeding to such an Eligible Director's right pursuant to the Plan), shall have no rights as a stockholder with respect to any shares of Common Stock issuable pursuant to any such Stock Awards or Option until such Stock Award is made or such Option is exercised. Except as provided in Paragraph 8 below, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities or other property) for which the record date is prior to the date a Stock Award is made or an Option is exercised. Except as expressly provided for in the Plan, no Eligible Director or other person shall have any claim or right to be granted a Stock Award or an Option. Neither the Plan nor any action taken hereunder shall be construed as giving any Eligible Director any right to be retained in the service of the Company. 6. Stock Awards. Each Eligible Director shall be granted one Stock Award consisting of 4,000 shares of Common Stock (subject to adjustment as provided in Paragraph 8) effective the later of (i) one year following the date such Eligible Director is first elected to the Board, and (ii) the date of the initial approval of the Plan by the stockholders of the Company. Each Stock Award shall be evidenced by an Agreement in such form as the Committee shall prescribe from time to time in accordance with the Plan and shall comply with the following terms and conditions, and such additional terms and conditions not inconsistent with the Plan as from time to time may be prescribed by the Committee. (a) Shares of Common Stock awarded as a Stock Award shall be issued in the name of the Grantee and a certificate therefor shall be delivered to the Grantee as soon as practicable after the award is made. (b) Shares of Common Stock that are the subject of a Stock Award shall be issued without any payment of cash consideration by the Grantee to the Company. Shares that are the subject of a Stock Award shall be fully paid from the date of the award. (c) No Eligible Director shall be awarded more than one Stock Award. 3 4 (d) The shares that are the subject of each Stock Award shall not be sold, transferred, pledged, hypothecated or otherwise disposed of until the Vesting Period applicable to such shares has terminated. The Vesting Periods for each Stock Award shall be one year from the date of the Stock Award for 25% of the shares awarded, two years from the date of the Stock Award for 25% of the shares awarded, three years from the date of the Stock Award for 25% of the shares awarded and four years from the date of the Stock Award for the remaining 25% of the shares awarded, subject to paragraph 6(f). (e) Subject to paragraph 6(f), upon the termination of the Grantee's service on the Board of Directors of the Company for any reason during a Vesting Period, all the shares that are then subject to a Vesting Period that has not yet terminated shall thereupon be forfeited and the shares and all rights attaching thereto shall be automatically transferred and reacquired by the Company at no cost to the Company. (f) Notwithstanding any other terms of the Plan, if the Grantee has been in continuous service on the Board since the date of the Stock Award to him and while so serving shall die or become permanently disabled, then all Vesting Periods shall terminate upon such event. Notwithstanding any other terms of the Plan, if the Grantee has been in continuous service on the Board since the date of the Stock Award to him and while so serving shall die or become permanently disabled or his service on the Board shall be terminated after a Change in Control occurs, then no shares that remain subject to a Vesting Period at the date of such event shall be forfeited due to such event. (g) Each certificate issued in respect of a Stock Award shall bear the following or a similar legend: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions, including forfeiture, contained in the United States Surgical Corporation Outside Directors Stock Plan and an Award Agreement entered into between the registered owner and such corporation. A copy of such Plan and Agreement is on file in the offices of the corporation." (h) Subject to the restrictions herein contained, a Grantee, as owner of shares that are the subject of a Stock Award, shall have all of the rights of a stockholder including the right to vote such shares and to receive all dividends, cash or stock, paid or delivered thereon, from the date of the Stock Award. (i) Upon the termination of the Vesting Periods prior to forfeitures such number of shares as to which such termination applies shall be vested in the Grantee, and at the request of the Grantee the legend on the shares for which Vesting Periods have terminated shall be removed and an unlegended certificate issued in exchange therefor. (j) Each Eligible Director granted a Stock Award shall, no later than the date of the termination of each Vesting Period, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any federal, state or local taxes of any kind required by law to be withheld with respect of the shares of Common Stock as to which the Vesting Period has terminated. Each Grantee agrees that the Company shall, to the extent permitted by law, have the 4 5 right to deduct from any payments of any kind otherwise due to the Grantee any federal, state or local taxes of any kind required by law to be withheld with respect to shares of Common Stock subject to a Stock Award. (k) A Grantee of a Stock Award may elect, within 30 days of the date of award, and upon written notice of election mailed to the Committee, care of the Company's principal office, to realize income for federal income tax purposes equal to excess of the Fair Market Value of the shares of Common Stock awarded over the amount paid for such shares on the date of the Stock Award. In such event the Grantee shall make arrangements satisfactory to the Committee to pay in the year of such Stock Award any federal, state or local taxes required to be withheld with respect to such shares. If the Grantee shall fail to make such payments, the Company shall, to the extent permitted by law, have the right to deduct from any payments of any kind otherwise due to the Grantee in the year of such Stock Award any federal, state or local taxes of any kind required by law to be withheld with respect to such shares of Common Stock. 7. Option Grants. Each Eligible Director shall be automatically granted an Option to purchase 4,000 shares of Common Stock (subject to adjustment as provided in Paragraph 8) each year, commencing in 1989, effective upon his reelection to the Board by the stockholders of the Company. Each Option shall be evidenced by an agreement in such form as the Committee shall prescribe from time to time in accordance with the Plan and shall comply with the following terms and conditions and such additional terms and conditions not inconsistent with the Plan as may from time to time be prescribed by the Committee. (a) The Option exercise price per share shall be the Fair Market Value of a share of Common Stock on the date the Option is granted. (b) The Option shall not be transferable by the Grantee otherwise than by will or the laws of descent and distribution, and shall be exercisable during his lifetime only by him. (c) The Option shall not be exercisable before the expiration of one year from the date it is granted and after the expiration of up to ten years from the date it is granted, and may be exercised during such period as follows: the Option shall become exercisable with respect to one-half (50%) of the Common Stock covered by it beginning with the first anniversary of the date it is granted and shall become exercisable with respect to the remaining one-half (50%) of the Common Stock covered by it beginning with the second anniversary of the date it is granted; provided that an Option shall automatically become immediately exercisable in full if the Grantee ceases to be an Eligible Director due to his death or permanent disability. (d) Payment of the Option price shall be made at the time the Option is exercised and shall be made in United States dollars by cash, bank cashier's check or wire transfer. (e) An Option shall not be exercisable unless the person exercising the Option has been, at all times during the period beginning with the date of grant of the Option and ending on the date of such exercise, in continuous service on the Board, except that 5 6 (i) if any Grantee of an Option shall die or become permanently disabled or shall retire with the consent of the Board, holding an Option that has not expired and has not been fully exercised, he or his executor, administrators, heirs or distributees as the case may be, may, at any time within one year after the date of such event (but in no event after the Option has expired under the provisions of subparagraph 7(c)(i) above), exercise the Option with respect to any shares as to which the Grantee could have exercised the Option at the time of his death or disability; or (ii) if any Grantee shall cease to be a director of the Company due to a Change in Control, holding an Option that has not expired and has not been fully exercised, he may exercise the Option in accordance with the terms of the original option agreement notwithstanding the termination of his service on the Board. (iii) if a Grantee shall cease to serve as a director of the Company for any reason other than those set forth in 7(e)(i) or 7(e)(ii) above, while holding an Option that has not expired and has not been fully exercised, the Grantee, at any time within three months of the date he ceased to be such an Eligible Director (but in no event after the Option has expired under the provisions of subparagraph 7(c)(i) above), may exercise the Option with respect to any shares of Common Stock as to which he could have exercised the Option on the date he ceased to be such an Eligible Director. (f) Each Grantee of an Option shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state or local taxes of any kind required by law to be withheld with respect to the shares of Common Stock as to which an Option is being exercised. 8. Dilution and Other Adjustments. In the event of any change in the outstanding Common Stock by reason of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other similar event, the number or kind of shares that may be issued under the Plan pursuant to subparagraphs 5(a), 6 and 7 above, the number or kind of shares subject to any outstanding Option, and the Option price per share under any outstanding Option, shall be automatically adjusted so that the proportionate interest of the Eligible Directors or of the Grantee shall be maintained as before the occurrence of such event. Any adjustment in outstanding Options shall be made without change in the total Option exercise price applicable to the unexercised portion of such Options and with a corresponding adjustment in the Option exercise price per share. Any adjustment permitted by this Paragraph shall be conclusive and binding for all purposes of the Plan. 9. Miscellaneous Provisions. (a) An Eligible Director's rights and interests under the Plan may not be assigned or transferred in whole or in part either directly or by operation of law or otherwise (except in the event of a participant's death, by will or the laws of descent and distribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no such right or interest of any Eligible Director in the Plan shall be subject to any obligation or liability of such Eligible Director. 6 7 (b) If the shares of Common Stock that are the subject of a Stock Award or Option are not registered under the Securities Act of 1933, as amended, pursuant to an effective registration statement, the Grantee, if the Committee shall deem it advisable, may be required to represent and agree in writing (i) that any shares of Common Stock acquired by such Grantee pursuant to the Stock Award or the Plan will not be sold except pursuant to an exemption from registration under said Act and (ii) that such Grantee is acquiring such shares of Common Stock for his own account and not with a view to the distribution thereof. No shares of Common Stock shall be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state and other securities laws. (c) A Grantee, with the consent of the Committee, may designate a person or persons to receive, in the event of his death, any Common Stock or rights to which he would then be entitled under the Plan. Such designation shall be made upon forms supplied by the Company and may be revoked in writing. If a Grantee fails to so designate a beneficiary, then his estate shall be deemed to be his beneficiary. (d) The expenses of the Plan shall be borne by the Company. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the making of Stock Awards or the issuance of shares upon exercise of any Option, and the issuance of shares upon the making of Stock Awards and upon exercise of Options shall be subordinate to the claims of the Company's general creditors. (e) By accepting any Stock Awards, Options or other benefits under the Plan, each Grantee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of and consent to, the terms and conditions of the Plan and any action taken under the Plan by the Company or the Board. (f) The appropriate officers of the Company shall cause to be filed any reports, returns or other information regarding Stock Awards and Options or any Common Stock issued pursuant thereto as may be required by the Securities Exchange Act of 1934, as amended, or any other applicable statute, rule or regulation. 10. Amendment. The Plan may be amended at any time from time to time by the Board as the Board shall deem advisable, provided, however, that except as provided in Paragraph 8 above, the Board may not, without further approval by the stockholders of the Company, increase the maximum number of shares of Common Stock as to which Stock Awards and Options may be granted, increase the number of shares to be awarded pursuant to each Stock Award or granted under each Option, reduce the Vesting Period for Stock Awards, reduce the minimum Option exercise price, extend the period during which Stock Awards or Options may be granted or Options may be exercised or change the definition of an Eligible Director. No amendment of the Plan shall materially and adversely affect any right of any Grantee with respect to any Stock Award or Option therefore granted without such Grantee's written consent. 11. Termination. This Plan shall terminate upon the earlier of the following dates or events to occur: 7 8 (a) upon the adoption of a resolution of the Board terminating the Plan; or (b) upon the award and vesting pursuant to Stock Awards or the purchase upon exercise of Options of all the shares of Common Stock provided to be awarded or the subject of Options under Paragraph 5(a), as adjusted pursuant to Paragraph 8. No termination of the Plan shall materially and adversely affect any of the rights or obligations of any Grantee, without his consent, under any Stock Award or Option theretofore granted under the Plan. 12. Stockholder Approval and Other Conditions. The Plan shall be submitted to the stockholders of the Company for their approval and adoption at the 1988 Annual Meeting of Stockholders of the Company in accordance with the laws of the State of New York. The Plan shall not be effective and no Stock Awards or Options shall be granted unless and until the Plan has been so approved and adopted. The Plan shall also not be put into effect and no Stock Awards or Options shall be granted unless and until the Company shall have received the concurrence of the staff of the Securities and Exchange Commission that notwithstanding the terms of the Plan, Eligible Directors will continue to be deemed to be "disinterested persons" under Rule 16b-3 of the Commission under the Securities Exchange Act of 1934 ("Rule 16b-3") for purposes of their service on any committee charged with administering other employee stock plans of the Company and that the Plan, assuming stockholder approval is obtained, will satisfy the requirements of Rule 16b-3. 8 EX-10.P 5 AGREEMENT WITH REGISTRANT 1 Exhibit 10.1 AGREEMENT This AGREEMENT, made as of the 25th day of November, 1997, by and among United States Surgical Corporation, a Delaware corporation (the "Company"), and _________ (the "Executive"). WHEREAS, the Executive is presently employed as an executive officer of the Company; and WHEREAS, the Board of Directors of the Company (the "Board") considers it essential to the best interests of the Company and its stockholders to foster the Company's ability to retain key management personnel; and WHEREAS, the Board recognizes that, as is generally the case with publicly-held corporations, the possibility of a Change in Control (as hereinafter defined) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board intends this Agreement to provide protection for its executive officers in general, for so long as such officers remain in the employment of the Company, against the exigencies of a Change in Control, but not to otherwise provide assurance of or rights to continued employment; and WHEREAS, the Board believes it to be in the best interests of the Company and its stockholders that the Company and the Board be able to rely upon the Executive to continue in his/her position, and that the Company be able to receive and rely upon the Executive's advice as to the best interests of the Company, without concern that he or she might be distracted by the personal uncertainties and risks created by the possibility of a Change in Control; and WHEREAS, should the possibility of a Change in Control arise, in addition to the Executive's regular duties, the Executive may be called upon to assist in the assessment of such possible Change in Control, to advise management and the Board as to whether such Change in Control would be in the best interests of the Company and to take such other actions as the Board might determine to be appropriate; and WHEREAS, this Agreement is not intended to alter the rights of the Executive in the absence of a Change in Control of the Company with respect to his/her employment by the Company or his/her compensation and benefits in connection with such 2 employment and, accordingly, this Agreement, although taking effect as provided below, will be operative only upon a Change in Control of the Company. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Term. This Agreement shall be effective as of November 25, 1997 and shall continue to be effective for the period ending on the "Expiration Date"; provided, that the Executive's right to indemnification and insurance coverage shall continue beyond the Expiration Date for the duration of all applicable statutes of limitations. The "Expiration Date" shall initially be November 25, 2002, and thereafter shall automatically be extended for successive two-year periods unless, not later than six months prior to any such Expiration Date, the Company shall have given notice to the Executive that it does not wish the Expiration Date to be so extended. Notwithstanding the foregoing, (i) the Expiration Date shall be any earlier date on which the Executive's employment with the Company terminates for any reason, in the event such termination occurs prior to the commencement of the "Protection Period" (as hereinafter defined), and (ii) in the event of a "Change in Control" of the Company (as hereinafter defined), this Agreement shall continue in effect, and the Expiration Date shall not occur, until the expiration of the "Protection Period" and the satisfaction of the Company's obligations to provide all severance payments and benefits to which the Executive is or may become entitled hereunder. 2. Definition of "Change in Control". For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred upon: (a) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of either (i) the then outstanding shares of common stock of the Company ("Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, and (3) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company; (b) A change in the composition of the Board such that the individuals who, as of the date hereof, constitute the Board (the Board as of the date hereof shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this subsection, any individual who becomes a member of the Board subsequent to the date hereof 3 whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a three-quarters majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; provided, further, however, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; (c) The approval by the stockholders of the Company of a merger, consolidation, reorganization or similar corporate transaction, whether or not the Company is the surviving corporation in such transaction, in which outstanding shares of Common Stock are converted into (i) shares of stock of another company, other than a conversion into shares of voting common stock of the successor corporation (or a holding company thereof) representing eighty percent (80%) of the voting power of all capital stock thereof outstanding immediately after the merger or consolidation, or (ii) other securities (of either the Company or another company) or cash or other property; (d) The approval by the stockholders of the Company of (i) the sale or other disposition of all or substantially all of the assets of the Company or (ii) a complete liquidation or dissolution of the Company; (e) Either (i) the Company shall have entered into a definitive agreement with any Person, which, if consummated, would result in a Change in Control as specified in paragraphs (a) through (d) of this Section 2, or (ii) any Person initiates a tender offer to acquire shares of the Common Stock which, if consummated, would result in a Change in Control as specified in paragraphs (a) through (d) of this Section 2; provided, however, that the occurrence of any such event specified in (e)(i) or (ii) above shall cease to constitute a Change in Control if, prior to the occurrence of a Covered Termination (as hereinafter defined), such definitive agreement or tender offer shall be terminated or abandoned without having been consummated and the Board of Directors shall make a final determination that a Change in Control as contemplated by this Section 2(e) had not occurred as a result of such definitive agreement or tender offer; or (f) The Board adopts a resolution to the effect that any Person has (i) acquired effective control of the business and affairs of the Company, or (ii) taken actions which, if consummated, would result in its having acquired effective control of the business and affairs of the Company. 3. Covered Termination. The termination benefits described in Section 4 hereof shall be provided to the Executive in the event that he/she suffers a "Covered Termination" of his/her employment with the Company during the "Protection Period" 4 or, to the extent provided in paragraph (c) of such Section 4, shall be provided upon the earlier of a Change in Control or a Covered Termination. For purposes hereof, the "Protection Period" shall be the three (3) year period that commences on the date of the Change in Control, and, with respect to a Change in Control under paragraphs (e) and (f) of Section 2 hereof, that recommences (for the full three-year period) on the date of consummation of the underlying actions. For purposes hereof, "Covered Termination" shall mean (i) termination of employment by the Company other than for "Cause" as described below or (ii) termination of employment by the Executive for "Good Reason" as described below; provided, however, that in the event of a Change in Control under paragraphs (e) and (f) of Section 2 hereof, the time period within which a Covered Termination for "Good Reason" may occur shall begin only upon the consummation of the underlying actions (and not upon any earlier date). The Executive shall not be treated as having suffered a Covered Termination in the event of his/her death or disability, his/her involuntary termination by the Company for "Cause," his/her voluntary termination from the Company other than by "Good Reason," or his/her termination of employment for any reason prior to the commencement of, or following the expiration of the Protection Period. Further, the Executive's employment shall be deemed to have been terminated during the Protection Period by the Company without cause or by the Executive with Good Reason if (i) the Executive's employment is terminated prior to a Change in Control without cause at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control, or (ii) if the Executive terminates his employment with Good Reason prior to a Change in Control (determined by treating a potential Change in Control as a Change in Control in applying the definition of Good Reason, if the circumstance or event which constitutes Good Reason occurs at the direction of such Person). (a) Termination For Cause. For purposes hereof, the Company shall have "Cause" to terminate the Executive's employment during the Protection Period if: (i) the Executive engages in willful misconduct in the performance of his/her material duties to the Company, which resulted in a demonstrable material adverse effect on the Company's consolidated results of operations; or (ii) the Executive is convicted by a court of competent jurisdiction of any crime (or enters a plea of guilty of nolo contendere to a charge of any crime) constituting a felony under the laws of the United States or one of its political subdivisions. Notwithstanding the foregoing, the Executive's employment shall be considered to have been terminated for Cause only if, prior to such termination, (1) the Company shall have given to the Executive written notice, which notice must include a copy of a resolution duly adopted by the affirmative vote of the board of directors of the Company at a meeting called and held for the purpose of considering such termination 5 and finding, objectively supported by extrinsic evidence, that, in the good faith belief of such board, the Executive was guilty of the conduct specified in (a)(i) or (ii) above, and stating with specificity the reason for the Executive's termination and (2) if such reason for termination is susceptible of cure or remedy, a period of thirty (30) days from and after the giving of such notice shall have elapsed without the Executive's having cured or remedied such reason for termination during such 30-day period, unless such reason for termination cannot be cured or remedied within thirty (30) days, in which case the period for remedy or cure shall be extended for a reasonable time (not to exceed 30 days) provided the Executive has made and continues to make a diligent effort to effect such remedy or cure. (b) Compensation During Dispute. If a dispute arises as to a Purported Termination for Cause, and the Executive institutes a proceeding for a determination as to rights under this Agreement, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until final judicial determination as to whether Cause existed. Amounts paid under this Section 3(b) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. (c) Termination for Good Reason. For purposes of this Agreement, the Executive shall have "Good Reason" to terminate his/her employment with the Company during the Protection Period if: (i) unless the Executive gives his/her advance written consent: (A) the Executive is not, within seven (7) days following the Change in Control, employed in the "Same Capacity" (as hereinafter defined) by the ultimate parent entity (the "Parent Company") of the entity which, following the Change in Control, (1) is the successor in interest of the Company, (2) is the owner of at least twenty percent (20%) of the Outstanding Company Voting Securities, and is the owner of the single largest percentage of such securities or (3) represents a substantial continuation of the Company's business, assets or liabilities, as in existence prior to the Change in Control; for purposes hereof, "Same Capacity" shall mean in the same position, with the same title and carrying the same duties and responsibilities as in effect immediately prior to the Change in Control; (B) any assignment to the Executive of any duties inconsistent with or inappropriate to his/her status and office with the Company or the Parent Company, whichever shall employ the Executive following the Change in Control (such entity, as applicable following the Change in Control, being referred to in this Agreement as the "Company"); 6 (C) a diminution in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control of the Company; (D) an adverse change in the Executive's direct or indirect reporting relationships from those in effect immediately prior to the Change in Control; or (ii) the Executive suffers a decrease in his/her level of compensation because of one or more of the following: (A) the Executive's "Base Salary" is reduced; for purposes of this Agreement, the Executive's "Base Salary" shall mean the annual rate of salary payable to the Executive in accordance with the Company's normal payroll practices at the annual rate then existing prior to the Change in Control, and prior to any deductions required by law and determined without regard to any salary reduction election made by the Executive under any employee benefit plan of the Company; (B) the Company fails to pay to the Executive for each fiscal year that ends after a Change in Control annual incentive bonus amounts representing a percentage of Base Salary at least as great as the percentage represented by the maximum bonus opportunity percentage of Base Salary in effect for the Executive immediately prior to the Change in Control as set forth in Exhibit A. (C) the Executive suffers any reduction in the employee benefits (including all insurance, pension, welfare, fringe benefits and perquisites) that are provided to the Executive from the benefit levels in effect immediately prior to the Change in Control, unless the Company provides substitute employee benefits of a comparable nature that are at least as valuable to the Executive on an after-tax basis; or (D) the Company fails to grant to the Executive stock options or similar equity incentive rights during each twelve (12) month period following the Change in Control on the basis of the total value of shares or units and all other material terms (including vesting requirements) at least as favorable to the Executive as those rights granted to him on an annualized average basis for the 12 month period immediately prior to the Change in Control; (iii) the principal business offices of the Company are not located within thirty (30) miles from the Company's existing location in Norwalk, Connecticut, provided that such relocation increases the distance from the Executive's principal residence to such offices; 7 (iv) if the Executive is a member of the Board at the time of a Change in Control, there occurs either (A) a termination or forced resignation of the Executive's service on the Board; or (B) a failure to re-nominate the Executive (at the earliest practicable date) for membership on the Board following expiration of his/her term as a member thereof; or (v) the common stock of neither the Company nor the Parent Company is registered pursuant to Section 12 of the Exchange Act. 4. Consequences of Covered Termination. In the event that the Executive's employment with the Company shall have been terminated during the Protection Period in a manner that shall constitute a Covered Termination, the Company shall provide the following severance payments and benefits (based on the compensation levels as set forth in Exhibit A appended hereto from time to time during the pendency of this Agreement) to the Executive: (a) Base Salary. Within 15 days following the Covered Termination, the Executive shall receive a lump-sum cash payment equal to 2.99 times the Executive's Base Salary in effect at the time of the Covered Termination (such resulting amount being referred to herein as the "Base Salary Payment"). For purposes of this Section 4, the Executive's Base Salary shall be determined immediately prior to any reduction in such salary rate that constitutes Good Reason under Section 3 hereof. (b) Incentive Bonus. Within 15 days following the Covered Termination, the Executive shall receive a lump-sum cash payment equal to 2.99 times the annual incentive bonus amount which is equal to the maximum bonus opportunity annual amount which was in effect prior to the Change in Control; In addition, in the event that the Executive is participating in one or more cycles of any annual or long-term incentive bonus program of the Company at the time of Covered Termination, he/she shall also receive a lump-sum payment hereunder in lieu of his/her continued participation in such program, equal to 2.99 times the long term incentive bonus level set forth in Exhibit A appended hereto from time to time during the pendency of this Agreement. (c) Equity Incentives. Immediately upon the earlier of a Change in Control or Covered Termination, (i) any stock options or similar equity incentive rights previously granted to the Executive that are not then fully vested and exercisable pursuant to their terms shall become fully vested and immediately exercisable. As to any other types of equity-based incentive awards previously granted to the Executive under any equity-based incentive compensation plan or arrangement of the Company prior to the date of Covered Termination, any restrictions on exercise, payment or transfer shall immediately lapse, and the Executive shall be paid any cash or property underlying such award upon such termination, in all respects as though any vesting requirements 8 or any corporate or individual performance goals associated with such awards had been met as of the date of Covered Termination. Additionally, if the Executive has entered an agreement to purchase shares or options from the Company more than 30 days prior to said Change in Control such debt shall be forgiven and said stock or options shall be immediately vested in and fully exercisable by the Executive. Notwithstanding the foregoing or anything elsewhere in this Agreement to the contrary, this Agreement shall not replace, restrict or impair the rights of the Executive under the terms of any equity-based incentive compensation plan or arrangement of the Company. (d) Welfare Benefits. The Executive shall be entitled to coverage and benefits, at the Company's sole expense, for a period of three years following his/her Covered Termination (the "Continuation Period"), under all welfare benefit plans of the Company (including, without limitation, medical, dental, group life, dependent life, supplemental life, split dollar life, accidental death and dismemberment, travel accident, short-term disability and long-term disability plans) for which he/she was eligible at the time of a Covered Termination as though his/her termination of employment had not occurred (without regard to any change in such plans that constitutes Good Reason under Section 3 hereof). (The benefit Coverages to be provided hereunder are hereinafter referred to as "Welfare Continuation Coverages".) All Welfare Continuation Coverages shall apply to the Executive and any of his/her dependents who would have been eligible for coverage if the Executive had continued to be employed by the Company for the Continuation Period. The Company may provide the Executive with the Welfare Continuation Coverages under arrangements other than the generally applicable welfare benefit plans of the Company, provided that the benefit Coverages so provided are at least as favorable to the Executive as coverage under the otherwise applicable Welfare Continuation Coverages, on a coverage by coverage basis, and taking into account all tax consequences to the Executive. At the expiration of the Continuation Period, the Executive shall be treated as a then terminating employee of the Company with respect to the right to elect continued medical and dental Coverages in accordance with section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision thereto and with respect to any similar welfare benefit continuation rights. (e) Car Allowance. Within 15 days following the Covered Termination, the Executive shall receive a lump-sum cash payment equal to 2.99 times the annual amount of his/her automobile allowance most recently in effect prior to the date of Covered Terminations. (f) Outplacement. During the twelve-month period commencing on the date of Covered Termination, the Company shall provide to the Executive, at the Company's sole expense, executive outplacement services (commensurate with the Executive's position), office space and secretarial support services. 9 (g) Personal Property. The Executive shall be entitled to retain all company property used by the Executive at his house or other dwelling in the course of his employment as long as the fair market value of said property is less than $10,000. Further, any and all private club memberships utilized by the Executive during his/her employment shall be transferred to the Executive with transference fees (if any) being borne by the Company. After such transference the Executive shall bear all future costs with the Company having no further responsibility therefor. (h) Tax Return Preparation. The Executive shall be entitled to receive, at the Company's sole expense (but limited to $15,000 per year), for a period of one year following his or her Covered Termination, annual tax advice and/or tax return preparation services as provided by a third-party professional selected by the Executive. 5. Excise Tax Gross-Up Payment. In the event it shall be determined that any payment or distribution by the Company or any other person or entity to or for the benefit of the Executive is a "parachute payment" (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his/her employment with the Company or a change in ownership or effective control of the Company or a substantial portion of its assets (a "Payment"), and would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), concurrent with the making of such Payment, the Company shall pay to the Executive an additional payment (the "Gross-Up Payment") in an amount such that the net amount retained by the Executive, after deduction of any Excise Tax on such Payment and any federal, state or local income tax and Excise Tax on the Gross-Up Payment shall equal the amount of such Payment. All determinations concerning the application of the foregoing shall be made by a nationally recognized firm of independent accountants (together with legal counsel of its choosing), selected by the Executive and satisfactory to the Company, whose determination shall be conclusive and binding on all parties. The fees and expenses of such accountants and counsel shall be borne by the Company. In the event the Internal Revenue Service assesses the Executive an amount of Excise Tax in excess of that determined in accordance with the foregoing, the Company shall pay to the Executive an additional Gross-Up Payment, calculated as described above in respect of such excess Excise Tax, including a Gross-Up Payment in respect of any interest or penalties imposed by the Internal Revenue Service with respect to such excess Excise Tax. 6. Late Payments: Tax Withholding. Any payment required to be made to the Executive under this Agreement that is not made at the time required hereunder shall bear interest at a rate equal to 120% of the monthly compounded applicable federal rate, as in effect under Section 1274(d) of the Code for the month in which the payment is required to be made. All payments required to be made to the Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, 10 excise tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 7. Indemnification. Following the occurrence of a Covered Termination, the Company shall indemnify the Executive to the fullest extent permitted by the Delaware General Corporation Law, with respect to all judgments, fines, amounts paid in settlement, costs, charges and expenses whatsoever (including payment of expenses in advance of the final disposition of a proceeding) incurred or sustained by the Executive in connection with any threatened, pending or completed action, suit or proceeding to which he/she may be made a party or is threatened to be made a party by reason of his/her being or having been a director, officer, employee or agent of the Company or his/her serving or having served any corporation, partnership, joint venture, trust or other enterprise as a director, officer, employee or agent at the request of the Company, including, without limitation, any such action, suit or proceeding relating in any way to the Change in Control. The Company shall maintain in full force and effect for the benefit of the Executive, for the duration of all applicable statute of limitations periods, liability insurance policies at least as favorable to the Executive as those maintained by the Company for the benefit of its directors and officers at the time of the Change in Control, provided that such policies are provided to its directors and officers generally or are reasonably obtainable by the Company. 8. No Obligation to Mitigate. The Executive shall be under no obligation to minimize or mitigate damages by seeking other employment, and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligation to make the payments and provide the benefit Coverages required under this Agreement. In addition, the Company's obligation to make the payments and provide the benefits required under this Agreement shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other rights which the Company may have against the Executive. 9. Successors and Assigns. This Agreement and all rights hereunder are personal to the Executive and shall not be assignable; provided, however, all of the Executive's rights following his/her death shall inure to the benefit of his/her surviving spouse, personal representatives or designees or other legal representatives, as the case may be. The Company shall require any person, firm or corporation succeeding to the business of the Company by merger, purchase, consolidation or otherwise to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it, had no such succession had taken place. Notwithstanding any such assumption or assignment, the Company shall remain liable and responsible for the fulfillment of its obligations under this Agreement. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid and which succeeds to any and all obligations and rights of the Company hereunder. 11 10. Severability. The invalidity or unenforceability of any provision of this Agreement shall in no way affect the validity or enforceability of any other provision. 11. Entire Agreement. This Agreement constitutes the entire agreement among the parties respecting the subject matter hereof and supersedes any prior agreements respecting the subject matter hereof. No amendment to this Agreement shall be deemed valid unless in writing and signed by the parties, and no discharge of the terms of this Agreement shall be deemed valid unless by full performance by the parties or by a writing signed by the parties. No waiver by a party of any provisions or conditions of this Agreement shall be deemed a waiver of similar or dissimilar provisions and conditions at the same time or any prior or subsequent time. 12. Notice. Any notice required or permitted to be given by this Agreement shall be effective only if in writing, delivered personally against receipt therefor or mailed by certified or registered mail, return receipt requested, to the parties at the addresses hereinafter set forth, or at such other places that either party may designate by notice to the other. Notice to the Company shall be addressed to: United States Surgical Corporation 150 Glover Avenue Norwalk, Connecticut 06856 Attn: Thomas R. Bremer Senior Vice President and General Counsel Notice to the Executive shall be addressed to him/her at the executive offices of the Company, with a copy to him at his/her home address as shown on Exhibit A. All such notices shall be deemed effectively given five (5) days after the same has been deposited in a post box under the exclusive control of the United States Postal Service. 13. Governing Law. This Agreement shall be construed and interpreted according to the laws of the State of Connecticut and the parties submit to the jurisdiction of the courts of the State of Connecticut for the purpose of any actions or proceedings which may be required to enforce the terms hereof. 14. Legal Expenses. The Company shall pay directly or reimburse the Executive (at the Executive's option) for any and all legal fees and expenses incurred by the Executive relating to the enforcement or the attempted enforcement, of any obligation of the Company hereunder, regardless of outcome, provided that the Executive's claims in such regard are not determined by a trier of fact to be frivolous. 12 15. Captions and Headings. Captions and paragraph headings are for convenience only, are not a part of this Agreement and shall not be used to construe any provision of this Agreement. 16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one Agreement. It shall not be necessary that any counterpart be signed by the parties hereto so long as each such party shall have executed a counterpart. IN WITNESS WHEREOF, the parties have executed these presents as of the day and year first above written. UNITED STATES SURGICAL CORPORATION Howard M. Rosenkrantz President and Chief Operating Officer EXECUTIVE EX-10.R 6 STOCK OPTION PURCHASE AGREEMENT 1 Exhibit 10.R To: Leon C. Hirsch Date: May 1, 1997 Subj: Purchase Agreement On April 17, 1997, the Compensation/Option Committee of the Board of Directors authorized your purchase from the Company, at fair market value, of options (the "Options") for the purchase of two million (2,000,000) shares of Common Stock with an exercise price of $47.875 per share, exercisable as of April 17, 1998, and with an expiration date of March 5, 2001. The purchase price for the Options, which is payable upon your receipt of and acknowledgment of the terms hereof, is $1.33 per share, or $2,660,000 in the aggregate. The Options will otherwise be exercisable on the same terms as provided at present with respect to options granted to corporate officers under the Company's stock option plans (excluding rights in connection with a change in control of the Company up until April 17, 1998), and such terms are incorporated by reference herein, except that the Options shall expire on your death, permanent disability which prevents you from performing a significant portion of your employment responsibilities, or termination of employment by the Company for proveable cause. In addition, such Options, and any shares of Common Stock purchased by you pursuant to the exercise of such Options, are being offered and will be sold to you without registration under the Securities Act of 1933, as amended (the "Act"), in reliance on the exemption from registration requirements in Section 4(2) of the Act. Accordingly, you may only sell shares acquired pursuant to exercise of the Options (i) by means of a secondary registration statement filed by the Company with and declared effective by the Securities and Exchange Commission, (ii) in accordance with the provisions of Rule 144 of the Securities and Exchange Commission, or (iii) in reliance on another exemption from the registration requirements under the Act which, in the opinion of the General Counsel of the Company, is available. 2 Leon C. Hirsch May 1, 1997 Page 2 This Purchase Agreement is made in reliance upon your representation to the Company that the Options and the Common Stock to be received by you upon exercise of the Options will be acquired for investment for your own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that you have no present intention of selling, granting any participation in, or otherwise distributing the same. You understand and acknowledge that certificates representing shares of the Common Stock delivered on exercise of the Options, or certificates delivered in substitution therefor, shall bear a legend reflecting the above restrictions. Please acknowledge receipt of this Purchase Agreement and acknowledgment of and agreement with its terms by signing below. United States Surgical Corporation Leon C. Hirsch By: /s/ Thomas R. Bremer /s/ Leon C. Hirsch -------------------------------- ------------------------------- (title) SRVP and General Counsel (At the direction of the Compensation/ Option Committee of the Board of Directors) EX-11 7 COMPUTATION OF NET INCOME PER COMMON SHARE 1 EXHIBIT 11 UNITED STATES SURGICAL CORPORATION AND SUBSIDIARIES EXHIBIT TO FORM 10-K ANNUAL REPORT For the Year Ended December 31, 1997 COMPUTATION OF NET INCOME PER COMMON SHARE
Years Ended December 31, 1997 1996 1995 -------------------------------------- (in thousands, except per share data) BASIC EARNINGS PER SHARE COMPUTATION Net Income ........................... $94,100 $109,100 $79,200 Preferred Stock Dividends ............ 4,700 19,500 19,500 ------- -------- ------- Net Income Applicable to common shares ..................... 89,400 89,600 59,700 ------- -------- ------- Weighted average common shares outstanding ................ 72,100 60,500 57,000 ------- -------- ------- Basic earnings per common share ...... $ 1.24 $ 1.48 $ 1.05 ======= ======== =======
Years Ended December 31, 1997 1996 1995 -------------------------------------- (in thousands, except per share data) DILUTED EARNINGS PER SHARE COMPUTATION Net Income .......................... $94,100 $109,100 $79,200 Preferred Stock Dividends ........... 4,700 19,500 19,500 ------- -------- ------- Net Income Applicable to common shares .................... 89,400 89,600 59,700 ------- -------- ------- Weighted Average common shares outstanding ............... 72,100 60,500 57,000 Contingent stock rights ............. 300 -- -- Common stock equivalents ............ 1,300 2,100 400 ------- -------- ------- Total weighted average shares ................ 73,700 62,600 57,400 ------- -------- ------- Diluted earnings per share .......... $ 1.21 $ 1.43 $ 1.04 ======= ======== =======
The computations for 1996 and 1995 does not assume conversion of the Company's preferred stock into common since the result would be antidilutive. The preferred stock was redeemed in 1997. EX-21 8 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 UNITED STATES SURGICAL CORPORATION FORM 10-K ANNUAL REPORT For the Year Ended December 31, 1997 SUBSIDIARIES OF REGISTRANT
JURISDICTION NAME OF INCORPORATION - --------------------------------------------------------------------------------- ARR, Inc....................................................... Delaware ASE Continuing Education Center S.A ........................... France ASE Partners S.A. ............................................. France Auto Suture Austria GmbH ...................................... Austria Auto Suture Belgium B.V. ...................................... Holland Auto Suture Company, Australia ................................ Connecticut Auto Suture Company, Canada ................................... Connecticut Auto Suture Company, Netherlands .............................. Connecticut Auto Suture Company, U.K. ..................................... Connecticut Auto Suture Deutschland GmbH .................................. Germany Auto Suture Do Brasil Ltda..................................... Brazil Auto Suture Eastern Europe, Inc. .............................. Delaware Auto Suture Espana, S.A. ...................................... Spain Auto Suture Europe Holdings, Inc. ............................. Connecticut Auto Suture Europe S.A......................................... France Auto Suture Europe Service Center, S.A......................... France Auto Suture France, S.A........................................ France Auto Suture FSC Ltd............................................ U.S.Virgin Islands Auto Suture International, Inc. ............................... Connecticut Auto Suture Italia, S.p.A. .................................... Italy Auto Suture Japan, Inc......................................... Japan Auto Suture Korea, Inc......................................... Korea Auto Suture Norden Co. ........................................ Connecticut Auto Suture Poland, Limited Liability Company ................. Poland Auto Suture Puerto Rico, Inc. ................................. Connecticut Auto Suture Russia, Inc. ...................................... Delaware Auto Suture (Schweiz) AG ...................................... Switzerland Auto Suture Surgical Instruments .............................. Russia Columbus Farming Corporation................................... Delaware
2 Hirsch Industries, Inc......................................... Virginia Medolas Gesellschaft fur Medizintechnikg mbH................... Germany Surgical Dynamics Europe, S.A.S................................ France Surgical Dynamics, Inc. ....................................... Delaware Surgical Dynamics Japan, Inc. ................................. Japan USSC AG ....................................................... Switzerland USSC (Deutschland) GmbH ....................................... Germany USSC Financial Services, Inc. ................................. Connecticut USSC Medical GmbH ............................................. Germany USSC Puerto Rico, Inc. ........................................ New York
None of the registrant's subsidiaries does business under any name other than its corporate name. EX-27 9 FINANCIAL DATA SCHEDULE
5 United States Surgical Corporation Financial Data Schedule Article 5 of Regulation S-X 1000 12-MOS DEC-31-1997 DEC-31-1997 18,300 0 366,700 10,800 208,700 677,000 717,000 295,800 1,726,000 312,500 0 8,300 0 0 1,248,600 1,726,000 1,172,100 1,172,100 471,200 471,200 578,400 300 1,200 121,000 26,900 94,100 0 0 0 94,100 1.24 1.21
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