1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 13, 1996
STERIS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Ohio 0-20165 34-1482024
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
5960 Heisley Road, Mentor, Ohio 44060-1868
(Address, Including Zip Code, of Principal Executive Offices)
(216) 354-2600
(Registrant's Telephone Number, Including Area Code)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 13, 1996, STERIS Corporation ("STERIS"), an Ohio corporation, and AMSCO
International, Inc. ("AMSCO"), a Delaware corporation, completed the merger of
Steris Acquisition Corporation ("STERIS Acquisition"), a newly-formed,
wholly-owned subsidiary of STERIS, with and into AMSCO, with AMSCO being the
corporation surviving the merger (the "Merger"). As a result of the Merger,
AMSCO became a wholly-owned subsidiary of STERIS. The Merger was completed
under the terms of the Restated Agreement and Plan of Merger, dated as of
December 16, 1995 and restated as of March 28, 1996 (the "Merger Agreement").
The terms of the Merger and the intentions of STERIS management with respect to
the assets acquired by STERIS in the Merger are more fully described in the
STERIS and AMSCO Joint Proxy Statement/Prospectus prepared for the Special
Meetings of Shareholders held May 1, 1996, included in STERIS's Form S-4
Registration Statement No. 333-1610 filed February 23, 1996, as amended April
1, 1996. Shareholders of STERIS and AMSCO approved the Merger in separate
meetings on May 1, 1996.
Under the terms of the Merger Agreement, each of the 33,011,829 shares of
AMSCO Common Stock outstanding on the date of the Merger were converted into
the right to receive 0.46 STERIS Common Share (the "Conversion Ratio"). In
addition, the outstanding and unexercised AMSCO Options or other rights to
acquire AMSCO Common Stock were adjusted on May 13, 1996 to permit them to
remain outstanding and become exercisable to acquire STERIS Common Shares.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, AND EXHIBITS
(a) Financial Statements of AMSCO and subsidiaries.
The following are filed as exhibits to this Form 8-K Current Report:
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1995 and December 31, 1994
Consolidated Statements of Income for the three years in the period
ended December 31, 1995
Consolidated Statements of Changes in Stockholders' Equity for the
three years in the period ended December 31, 1995
3
Consolidated Statements of Cash Flows for the three years in the period
ended December 31, 1995
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma condensed combined statements of income for
the years ended March 31, 1995 and 1994, give effect to the merger based on the
historical consolidated financial statements of STERIS and AMSCO under the
assumptions and adjustments set forth in the accompanying notes to the
unaudited pro forma condensed combined financial statements. It is
impracticable to provide the unaudited pro forma condensed combined balance
sheet as of March 31, 1996 and the unaudited pro forma condensed combined
statement of income for the year ended March 31, 1996 (the "1996 Pro Forma
Financial Statements") at this time, because the STERIS consolidated balance
sheet as of March 31, 1996 and the STERIS consolidated statement of income for
the year ended March 31, 1996 (the "1996 STERIS Financial Statements") are not
yet available. The 1996 STERIS Financial Statements will be included in the
STERIS Annual Report on Form 10-K to be filed on or prior to June 29, 1996, and
at such time as the Annual Report on Form 10-K is filed, an amendment to this
Form 8-K will be filed including the 1996 Pro Forma Financial Statements of the
combined entity.
The pro forma condensed combined financial statements have been prepared by the
managements of STERIS and AMSCO based upon their respective consolidated
financial statements, which include results of operations as if the Merger had
been consummated on April 1, 1993 at the commencement of STERIS's fiscal year
1994, including AMSCO's results of operations for the three years in the period
ended December 31, 1995. The pro forma condensed combined financial statements
may not be indicative of the results that actually would have occurred
if the Merger had been in effect during the period presented or which may be
obtained in the future. As a part of the ongoing merger integration process,
management is evaluating the accounting policies and practices of the combined
organization. This evaluation may result in certain conforming accounting
adjustments, the effects of which are not expected to be material to the
financial condition or results of operations of the combined organization. The
pro forma condensed combined financial statements should be read in conjunction
with the historical consolidated financial statements and the related
accompanying notes thereto to AMSCO, included herein, and those of STERIS.
4
STERIS CORPORATION AND AMSCO INTERNATIONAL, INC.
Unaudited Pro Forma Condensed Combined Income Statements
For the Year Ended March 31, 1995
STERIS AMSCO
YEAR ENDED YEAR ENDED PRO FORMA
MARCH 31, DECEMBER 31, ADJUSTMENTS PRO FORMA
1995 1994 (SEE NOTE 2) COMBINED
---------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales...................................... $64,272 $483,304 -- $547,576
Cost of Sales................................. 23,895 316,661 -- 340,556
------- -------- --------- --------
Gross profit................................. 40,377 166,643 -- 207,020
Selling, general and administrative........... 20,563 96,263 -- 116,826
Research and development...................... 6,588 12,533 -- 19,121
Restructuring and severance................... -- 26,996 -- 26,996
Amortization.................................. -- 8,836 -- 8,836
------- -------- --------- --------
Income from operations....................... 13,226 22,015 -- 35,241
Other (income) and expenses:
Interest expense.............................. -- 10,757 -- 10,757
Interest income, net.......................... (634) -- $(2,084)(a) (2,718)
Other net..................................... -- (751) 2,084 (a) 1,333
------- -------- --------- --------
Income from continuing operations before
income taxes, extraordinary item and
cumulative effect of changes in
accounting................................ 13,860 12,009 -- 25,869
Provision for income taxes..................... 5,124 7,758 -- 12,882
------- -------- --------- --------
Income from continuing operations before
extraordinary items and cumulative effect of
changes in accounting......................... $ 8,736 $ 4,251 -- $12,987
======= ======== ========= ========
Income from continuing operations before
extraordinary item and cumulative effect of
changes in accounting per share
Primary.................................. $0.46 $0.30(b) -- $0.39
Fully diluted............................ $0.45 $0.30(b) -- $0.39
Shares used in per share calculation
Primary.................................. 19,008 14,084(b) -- 33,092
Fully diluted............................ 19,237 14,270(b) -- 33,506
See notes to unaudited pro forma condensed combined financial statements.
5
STERIS CORPORATION AND AMSCO INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
FOR THE YEAR ENDED MARCH 31, 1994
STERIS AMSCO
YEAR ENDED YEAR ENDED PRO FORMA
MARCH 31, DECEMBER 31, ADJUSTMENTS PRO FORMA
1994 1993 (SEE NOTE 2) COMBINED
---------- ------------ ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales...................................... $45,822 $494,868 -- $540,690
Cost of sales................................ 17,896 310,618 -- 328,514
------- -------- --------- --------
Gross profit............................... 27,926 184,250 -- 212,176
Selling, general and administrative.......... 15,585 98,570 -- 114,155
Research and development..................... 4,358 17,652 -- 22,010
Restructuring and severance.................. -- 4,950 -- 4,950
Amortization................................. -- 9,342 -- 9,342
------- -------- --------- --------
Income from operations 7,983 53,736 -- 61,719
Other (income) and expenses:
Interest expense............................ -- 11,497 11,497
Interest income, net........................ (570) -- $(1,378)(a) (1,948)
Patent litigation settlement................ -- (7,000) -- (7,000)
Other net................................... -- (126) 1,378(a) 1,252
-------- --------- --------- --------
Income from continuing operations before
income taxes, extraordinary item and
cumulative effect of changes in accounting.. 8,553 49,365 -- 57,918
Provision for income taxes..................... 3,407 20,162 -- 23,569
-------- --------- --------- --------
Income from continuing operations before
extraordinary item and cumulative effect of
changes in accounting....................... $ 5,146 $ 29,203 -- $ 34,349
======== ========= ========= ========
Income from continuing operations before
extraordinary item and cumulative effect of
changes in accounting per share
Primary.................................. $0.28 $2.11(b) -- $1.06
Fully diluted............................ $0.27 $2.11(b) -- $1.05
Shares used in per share calculation
Primary.................................. 18,694 13,811(b) -- 32,505
Fully diluted............................ 18,730 13,846(b) -- 32,576
See notes to unaudited pro forma condensed combined financial statements.
6
STERIS CORPORATION AND AMSCO INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- BASIS OF PRESENTATION
For accounting purposes, the Merger will be treated as a pooling of
interests. Accordingly, the accompanying unaudited pro forma condensed combined
financial statements give retroactive effect to the Merger and include the
combined operations of STERIS and AMSCO for all periods presented. The pro
forma condensed combined income statements exclude losses from discontinued
operations, extraordinary loss on the extinguishment of debt, and cumulative
effects of changes in accounting principles. No provision has been reflected in
the unaudited pro forma condensed combined income statements for expenses
expected to be incurred in connection with the Merger. The unaudited pro forma
condensed combined income statements do not give effect to any revenue
enhancements and cost savings which may be realized following the Merger.
STERIS's annual financial reporting period ending on March 31 will be
adopted by the combined entity upon consummation of the Merger.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The adjustments to the pro forma financial statements are discussed
below:
(a) To reclassify interest income of AMSCO.
(b) Income from continuing operations before extraordinary item and
cumulative effect of changes in accounting per share was calculated by
applying the Conversion Ratio to outstanding shares of AMSCO Common
Stock and by applying the treasury stock method to potentially dilutive
securities. The AMSCO 4.5% / 6.5% Step-Up Convertible Subordinated
Debentures due October 15, 2002 were anti-dilutive in all periods
outstanding and accordingly were excluded from the calculations.
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(c) Exhibits
2.1 Restated Agreement and Plan of Merger, dated as of December 16, 1995
and restated as of March 28, 1996, by and among STERIS, STERIS
Acquisition and AMSCO filed as Appendix A to Joint Proxy Statement/
Prospectus included in Form S-4 Registration Statement No 333-1610
filed February 23, 1996, as amended April 1, 1996 and incorporated
herein by reference.
99.1 Report of Arthur Andersen LLP, Independent Public Accountants.
99.2 Financial Statements of AMSCO and its subsidiaries.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STERIS CORPORATION
Registrant
Date: May 28, 1996 By: /s/ MICHAEL A. KERESMAN, III
----------------------------
Michael A. Keresman, III
Senior Vice President,
Chief Financial Officer, and
Secretary
1
Exhibit 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
AMSCO International, Inc.:
We have audited the accompanying consolidated balance sheets of AMSCO
International, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AMSCO International, Inc. and
Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Pittsburgh, Pennsylvania, ARTHUR ANDERSEN LLP
January 31, 1996 (except with
respect to the matter discussed
in Note 18, as to which the date
is March 21, 1996.)
1
EXHIBIT 99.2
AMSCO INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
(Dollars in Thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (cost approximates market value) $ 112,944 $ 31,511
Accounts receivable, net of allowances of $3,032 and $2,872, respectively 129,802 138,414
Inventories 56,364 67,528
Current portion of deferred income taxes 6,669 15,786
Prepaid expenses and other current assets 4,174 3,665
- ---------------------------------------------------------------------------------------------------
Total current assets 309,953 256,904
- ---------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, net 76,260 79,486
- ---------------------------------------------------------------------------------------------------
OTHER ASSETS 741 467
- ---------------------------------------------------------------------------------------------------
INTANGIBLES 95,984 100,566
- ---------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 27,030 24,164
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 509,968 $ 461,587
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term indebtedness $ 127 $ 739
Accounts payable 30,256 28,742
Accrued taxes 5,568 3,700
Accrued liabilities 58,341 75,434
Accrued retirement account contribution 3,173 2,400
Net current liabilities of discontinued business 10,412 9,939
- ---------------------------------------------------------------------------------------------------
Total current liabilities 107,877 120,954
- ---------------------------------------------------------------------------------------------------
LONG-TERM INDEBTEDNESS 102,681 102,816
- ---------------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 14,214 12,901
- ---------------------------------------------------------------------------------------------------
POSTRETIREMENT BENEFIT OBLIGATION 46,301 44,459
- ---------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 17 and 18)
- ---------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, nonvoting, par value $.O1 per share-
Authorized, 25,000 shares
Outstanding, -0- shares -- --
Common stock, par value $.O1 per share-
Authorized, 100,000,000 shares
Issued, 32,449,154 and 29,895,159 shares, respectively 324 299
Capital in excess of par value 170,223 145,382
Less-Common stock, 16,253 and 100,298 shares, respectively,
in treasury, at cost (179) (1,103)
Retained earnings 73,195 41,288
Less-Deferred compensation (2,843) --
Cumulative translation adjustment (1,825) (5,409)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 238,895 180,457
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 509,968 $ 461,587
===================================================================================================
The accompanying notes are an integral part of these statements.
2
AMSCO INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
------------------------------------
(Dollars in Thousands - Except Per Share Data) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
NET SALES $ 454,076 $ 483,304 $ 494,868
OPERATING COSTS AND EXPENSES:
Cost of sales 300,933 316,661 310,618
- ----------------------------------------------------------------------------------------------------------------
Gross profit 153,143 166,643 184,250
Selling and marketing - 52,662 63,626 66,675
General and administrative 27,070 32,637 31,895
Research and development 8,383 12,533 17,652
Restructuring and severance 1,200 26,996 4,950
Amortization 8,245 8,836 9,342
- ----------------------------------------------------------------------------------------------------------------
Income from operations 55,583 22,015 53,736
- ----------------------------------------------------------------------------------------------------------------
OTHER (INCOME) AND EXPENSES:
Interest expense 6,242 10,757 11,497
Patent litigation settlement -- -- (7,000)
Other, net (5,286) (751) (126)
- ----------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 54,627 12,009 49,365
PROVISION FOR INCOME TAXES 22,720 7,758 20,162
- ----------------------------------------------------------------------------------------------------------------
Income from continuing operations 31,907 4,251 29,203
- ----------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATION:
Loss from operations of discontinued business, net of income taxes -- (6,055) (13,524)
Estimated loss on disposal of discontinued business, net of income taxes -- (49,050) --
- ----------------------------------------------------------------------------------------------------------------
Loss from discontinued operation -- (55,105) (13,524)
- ----------------------------------------------------------------------------------------------------------------
EXTRAORDINARY ITEM:
Loss on the extinguishment of debt, net of taxes -- (1,655) --
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 31,907 $ (52,509) $ 15,679
================================================================================================================
INCOME (LOSS) PER COMMON SHARE - FULLY DILUTED:
From continuing operations $ 0.97 $ 0.13 $ 0.93
From discontinued operation (1.77) (0.43)
From extinguishment of debt (0.05) --
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.97 $ (1.69) $ 0.50
================================================================================================================
Weighted average shares outstanding (in thousands) 32,965 31,079 31,522
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
3
AMSCO INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1994 and 1993
---------------------------------------------------------------------------------
Capital in
Excess of
Par Value- Cumulative
Common Common Stock Treasury Retained Deferred Translation
(Dollars in Thousands) Stock Stock Warrants Stock Earnings Compensation Adjustment
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1992 $289 $138,328 $ 15 $ (1,347) $ 78,118 $ -- ($5,660)
Net Income -- -- -- -- 15,679 -- --
Stock options exercised (166,800 shares) 1 940 -- -- -- -- --
Warrants exercised (200,000 warrants) 2 1,614 (15) -- -- -- --
Treasury stock issued
(22,110 common shares) -- 111 -- 243 -- -- --
Tax benefit resulting from the exercise
of disqualified stock options -- 957 -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- (3,391)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1993 292 141,950 -- (1,104) 93,797 -- (9,051)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- (52,509) -- --
Stock options exercised (666,800 shares) 7 2,578 -- -- -- -- --
Treasury stock issued (40 common shares) -- -- -- 1 -- -- --
Tax benefit resulting from the exercise
of disqualified stock options -- 854 -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- 3,642
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 299 145,382 -- (1,103) 41,288 -- (5,409)
- ------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- 31,907 -- --
Stock options exercised
(2,553,995 shares) 25 12,812 -- -- -- -- --
Treasury stock issued
(1,570 common shares) -- 3 -- 17 -- -- --
Restricted stock award
(82,475 common shares) -- 268 -- 907 -- (1,175) --
Issuance of nonqualified
stock options (1,500,000 shares)
-excess of fair value over exercise price -- 3,188 -- -- -- (3,188) --
Recognition of deferred compensation -- -- -- -- -- 1,520 --
Tax benefit resulting from the exercise
of disqualified stock options -- 8,570 -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- 3,584
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 $324 $170,223 $ 0 $ ( 179) $ 73,195 $ (2,843) $(1,825)
==============================================================================================================================
The accompanying notes are an integral part of these statements.
4
AMSCO INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
(Dollars in Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACIVITIES:
Net income (loss) $ 31,907 $(52,509) $ 15,679
Adjustment to reconcile net income (loss) to cash provided by operating
activities:
Extraordinary loss on the extinguishment of debt, net of income taxes -- 1,655 --
Depreciation and amortization 18,505 17,395 17,086
Postretirement benefit obligation 1,842 2,123 2,304
Deferred income taxes, net 6,250 (15,869) (1,459)
Deferred compesation 1,520 -- --
Estimated loss on disposal of discontinued business, net of income taxes -- 49,050 --
Changes in certain assets and liabilities:
Accounts receivables, net 8,767 3,775 3,638
Inventories 11,387 8,273 (7,702)
Accounts payable and accrued liabilities (14,896) 27,188 5,746
Accrued taxes 10,417 (4,616) (874)
Prepaid expenses and other current assets (533) 1,459 (1,853)
Other long-term liabilities 1,313 886 525
Receivable from patent litigation -- -- (4,000)
- --------------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 76,479 38,810 29,090
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (6,164) (14,004) (8,697)
Purchase of short-term marketable securities -- (42,327) (24,700)
Proceeds from sale of short-term marketable securities -- 58,897 48,065
Investment in other assets (1,145) (1,182) (2,781)
Change in net assets/liabilities of discontinued business 474 9,776 (17,845)
- --------------------------------------------------------------------------------------------------------------
Net cash flow (used for) provided by investing activities (6,835) 11,160 (5,958)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (510) (53,119) (2,753)
Redemption premium -- (1,340) --
Proceeds from issuance of term debt -- -- 1,529
Net proceeds from the issuance of common stock 12,837 2,585 941
Retirement of debentures -- -- (8,238)
- --------------------------------------------------------------------------------------------------------------
Net cash flow provided by (used for) financing activities 12,327 (51,874) (8,521)
- --------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (538) 4,505 (936)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 81,433 2,601 13,675
CASH AND CASH EQUIVALENTS, beginning of year 31,511 28,910 15,235
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $112,944 $ 31,511 $ 28,910
==============================================================================================================
The accompanying notes are an integral part of this statement
5
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
AMSCO International, Inc. (the "Company") develops, manufactures, distributes
and services infection control, decontamination and surgical products. The
Company's infection control and decontamination products, which include
sterilizers, washing equipment, accessories and related consumable items, are
used by hospital, research, scientific and industrial professionals to prevent
the spread of infectious diseases and biological contamination. The Company's
general surgical tables, lights and stainless steel OR products are used by the
healthcare providers in both hospitals and outpatient surgical settings. In
addition, the Company's acquisition of Finn-Aqua in 1992 added complementary
products for the pharmaceutical and biotechnology industries, including
lyophilizers (freeze-drying systems), multiple- and single-effect water stills,
GMP sterilizers and pure steam generators and condensers. The Company
complements its equipment businesses by providing repair and maintenance
services. The Company's approximately 900-member field service organization (as
of December 31, 1995) provides OEM repair and maintenance for the Company's
infection control, decontamination, and surgical equipment as well as
third-party repair, maintenance and management services for a wide variety of
types and makes of medical equipment installed primarily in hospitals. The
Company derives approximately 60.0% of its gross sales from equipment products
and 40.0% from service and consumable products. Total export sales from the
United States were less than 10.0% of consolidated net sales in recent years.
As of February 8, 1996 the Company employed 501 persons, or 16.8% of its total
workforce, who are covered by collective bargaining agreements. Approximately 24
of these employees are covered by agreements that will expire before December
31, 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany accounts and transactions have been
eliminated. The Company operates on a 52-53 week fiscal year ending on the
Sunday nearest December 31. The 1995, 1994 and 1993 fiscal periods were each
comprised of 52 weeks.
Inventories
Inventories are stated at the lower of cost, as determined principally on the
last-in, first-out (LIFO) method, or market. Inventory costs include material,
labor and overhead.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for ordinary
maintenance and repairs are charged to income, and renewals and betterments are
capitalized. Upon disposal of property items, the asset and related accumulated
depreciation accounts are relieved of the amounts recorded therein for such
items and any resulting gain or loss is reflected currently in income. The
Company provides for depreciation over the estimated useful lives of plant and
equipment, principally on the straight-line method.
6
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Product Warranty
Normal recurring warranty costs are charged to income as incurred. Product
design correction costs are recognized on the accrual basis.
Research and Development
Research and development costs are charged to expense as incurred.
Receivables - Retainage
Sales contracts for some of the Company's commercial products involve retainage
which is included in accounts receivable in the accompanying consolidated
balance sheets. Based on the Company's experience with similar contracts in
recent years, 100% of the receivable retention balances of $2,758,000 and
$2,896,000 at December 31, 1995 and 1994, respectively, is expected to be
collected during the subsequent year.
Other Long-Term Liabilities
Other long-term liabilities include amounts reserved for supplemental retirement
benefits and for deductibles under the Company's various self-insurance
programs.
Foreign Currency Translation
The accounts of the Company's foreign subsidiaries are recorded in the currency
of the country in which they operate. The Company applies Statement of Financial
Accounting Standards No. 52 relative to the translation of foreign currency
financial statements into U.S. dollars and the accounting for foreign currency
transactions. Under this statement, all balance sheet accounts except
stockholders' equity are translated at current exchange rates, and revenue and
expense items are translated at rates of exchange prevailing during the year.
Gains and losses resulting from the translation of foreign currency financial
statements are reflected in the cumulative translation adjustment component of
stockholders' equity.
Significant Group Concentrations of Credit Risk
As of December 31, 1995 and 1994, respectively, approximately $72,688,000 and
$76,100,000 or 56% and 55% of the Company's trade receivables are from
healthcare or healthcare-related institutions.
Revenue Recognition
The Company's net sales include revenues earned on product sales and on related
after-sales and third-party service contracts. The Company recognizes revenue on
product sales upon shipment directly to or a location designated by the
customer. After-sales and third-party service contract revenues are recognized
upon completion of the work. Advance billings for products or service work are
recorded as deferred revenue until earned.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
7
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Reclassifications
Certain reclassifications have been made to the Company's prior year financial
statements to agree with current year classifications.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less at acquisition to be
cash equivalents.
Supplemental disclosure of cash flow information:
December 31,
------------------------------------
(Dollars in Thousands) 1995 1994 1993
- ---------------------------------------------------------------------
Cash paid during
the year for:
Interest $ 4,807 $ 11,215 $ 9,743
---------------------------------------------------------------
Income taxes $ 14,452 $ 10,591 $ 12,857
---------------------------------------------------------------
Other:
Extinguishment of
12.5% Debentures as
consideration for
warrant exercise $ - $ - $ 1,600
====================================================================
2. PENDING MERGER:
The Company entered into an agreement to merge with a newly-formed, wholly-owned
subsidiary ("Merger Sub") of STERIS Corporation ("STERIS") in accordance with
the provisions of an Agreement and Plan of Merger (the "Merger Agreement"),
dated December 16, 1995 and restated as of February 21, 1996. Pursuant to the
provisions of the Merger Agreement, the Merger Sub will be merged with and into
the Company, with the Company being the surviving corporation (the "Merger"). As
a result of the Merger, the Company will become a wholly-owned subsidiary of
STERIS. As of December 31, 1995, STERIS had total assets of approximately $70.0
million, and STERIS's net sales for the nine months ended December 31, 1995 were
$65.6 million.
The Merger will become effective on the date and at such time as the Certificate
of Merger, in such form as is required by, and executed in accordance with, the
General Corporation Law of the State of Delaware, is filed with the Secretary of
State of the State of Delaware (the "Effective Time").
The transaction is intended to be accounted for under the pooling-of-interests
method. At the Effective Time of the Merger, among other things, each
outstanding share of the Company's common stock will be converted
8
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
into the right to receive .46 common shares of STERIS stock. The Merger is
subject to, among other things, receiving appropriate regulatory approvals and
an affirmative majority vote for the merger by the STERIS common shareholders
and the Company's common stockholders.
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after any requisite stockholder
approval, (a) by written mutual consent of STERIS and the Company by action of
each of the STERIS Board or the Company's Board, or (b) by action of either the
STERIS Board or the Company's Board under certain specified circumstances,
including if the merger has not been consummated by July 30, 1996. Each of
STERIS and the Company are entitled to receive a $20.0 million termination fee
under certain circumstances if the Merger Agreement is terminated in connection
with an acquisition proposal, as defined in the Merger Agreement, involving the
other party or the acquisition by a third party of 30% or more of the Company's
common stock or STERIS common shares, as the case may be. In connection with a
termination of the Merger Agreement under certain other circumstances, the
Company and STERIS may be entitled to reimbursement of certain fees and
expenses.
In order to induce STERIS to enter into the Merger Agreement, STERIS and the
Company entered into a Stock Option Agreement dated December 16, 1995 (the
"Stock Option Agreement") pursuant to which STERIS has an option, upon
termination of the Merger Agreement by reason of any of the events that give
rise to an obligation for the Company to pay STERIS a $20.0 million termination
fee pursuant to the Merger Agreement, to purchase 17.6% of the shares of the
Company's common stock issued and outstanding at the time of the exercise. The
purchase price for each share will be the greater of (a) the market price (as
defined therein) of the Company's common stock on the date of purchase minus the
quotient of $10.0 million divided by the number of shares subject to option, and
(b) $19.435 (the "Deal Price"); except that if the Company issues or agrees to
issue any shares of the Company's common stock (except pursuant to existing
options or rights) at a price less than the Deal Price after the date of the
Stock Option Agreement, such lesser price will be substituted for the Deal
Price.
The Company has employment and/or severance agreements with several of its key
senior executives that become operative upon a change of control event, as
defined in those agreements. In addition, the Company's incentive stock option
plan and certain restricted stock and nonqualified option agreements with
employees provide for immediate vesting of such shares or options upon a change
of control event, as defined in those plans and agreements. The charge to income
associated with these agreements would be approximately $12.0 million, including
accelerated recognition of the remaining unamortized deferred compensation under
certain of the agreements. It is anticipated that this charge will be recorded
by the Company upon the affirmative majority vote for the Merger by the STERIS
shareholders and the Company's stockholders.
The Company's management expects that the proposed Merger will have a material
effect on the Company's results of operations and liquidity and capital
resources. These include, but are not limited to, the effect of transaction
costs, plant or other asset rationalization costs, executive severance
arrangements and other related costs of combining STERIS and the Company.
Furthermore, as a result of the change in control that is contemplated by the
Merger Agreement, each holder of AMSCO's $100,000,000 4.5%-6.5% Step-Up
Convertible Subordinated Debentures (the "Debentures") due October 15, 2002 at
100% will have the right to "put" their Debentures to the Company for cash at
face value plus accrued interest through the redemption date.
9
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. INVENTORIES:
Inventories of the Company consist of the following:
December 31,
------------------------
(Dollars in Thousands) 1995 1994
- ---------------------------------------------------------
Raw materials $ 18,928 $ 21,417
Work-in-process 13,193 21,199
Finished goods 24,243 24,912
- ---------------------------------------------------------
Total $ 56,364 $ 67,528
=========================================================
If the FIFO method of inventory costing had been used by the Company,
inventories would have been $10,327,000 and $10,020,000 higher than those
reported at December 31, 1995 and 1994, respectively.
As a result of the application of purchase accounting in prior years, the book
value of inventory differs from its underlying tax basis. At December 31, 1995
and 1994, LIFO inventories for book purposes exceeded those for tax purposes by
$15,970,000 and $15,228,000, respectively.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment of the Company consists of the following:
December 31,
------------------------
(Dollars in Thousands) 1995 1994
- --------------------------------------------------------------------------
Assets (Asset Lives)
Land and land improvements (12 years) $ 1,492 $ 1,440
Buildings and leasehold
improvements (10-50 years) 44,657 43,410
Machinery and equipment (3-12 years) 84,998 83,244
- --------------------------------------------------------------------------
Total $ 131,147 $ 128,094
Less-Accumulated depreciation 54,887 48,608
- --------------------------------------------------------------------------
Property, plant and equipment, net $ 76,260 $ 79,486
==========================================================================
10
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. INTANGIBLES:
Intangible assests of the Company consist of the following:
December 31,
------------------
(Dollars in Thousands) 1995 1994
- -------------------------------------------------------------------------
Assets (Amortization Period)
Goodwill, net of accumulated amortization
of $16,696 and $13,621, respectively (35-40 years) $81,566 $ 81,419
Patents, trademarks and other intangible assets,
net of accumulated amortization of $34,961 and
$31,377, respectively (5-17 years) 13,829 17,700
Deferred organization costs, net of accumulated
amortization of $1,250 and $3,453, respectively
(3-12 years) 589 1,447
- -------------------------------------------------------------------------
Total $95,984 $100,566
=========================================================================
The Company currently amortizes intangible assets, including goodwill, over
lives ranging from 3-40 years. The Company continually evaluates whether events
and circumstances have occurred that indicate the remaining estimated useful
life of any intangible may warrant revision or that the remaining balance of the
intangible may not be recoverable. When factors indicate that the intangibles
should be evaluated for possible impairment, the Company uses an estimate of the
related business segment's undiscounted cash flow from operations over the
remaining life to determine recoverability. Based upon the Company's evaluation,
there were no impairments of intangible assets requiring recognition in the
Company's consolidated financial position or results of operations for 1995.
In March 1995, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 121. "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.". SFAS No. 121 is
required to be adopted in 1996. This statement requires review and measurement
methods to calculate impairment of long-lived assets, including certain
identifiable intangibles and goodwill, whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. Based on the
Company's evaluation, the effect of adopting this new standard will be
immaterial to the financial position and results of operations of the Company.
6. INCOME TAXES:
The Company records the effect of income taxes in accordance with the provisions
of the Financial Accounting Standards Board's Statement No. 109, "Accounting for
Income Taxes."
Income before income taxes, as shown in the accompanying consolidated statements
of income, includes the following components:
11
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31,
------------------------------------
(Dollars in Thousands) 1995 1994 1993
- ---------------------------------------------------------------------
Domestic $ 54,479 $ 19,096 $ 48,574
Foreign 148 (7,087) 791
- --------------------------------------------------------------------
Income from continuing
operations before
income taxes $ 54,627 $ 12,009 $ 49,365
====================================================================
Taxes on income, as shown in the accompanying consolidated statements of income,
include the following components:
December 31,
------------------------------------
(Dollars in Thousands) 1995 1994 1993
- ---------------------------------------------------------------------
Current provision-
Federal $ 19,617 $ 18,465 $ 17,317
State 2,331 3,988 3,314
Foreign 1,159 1,174 770
- --------------------------------------------------------------------
Total current provision 23,107 23,627 21,401
Deferred credit (387) (15,869) (1,239)
- --------------------------------------------------------------------
Total provision for income
taxes $ 22,720 $ 7,758 $ 20,162
====================================================================
The income tax rate on income before taxes differs from the federal statutory
rate for the following reasons:
December 31,
------------------------------------
(Dollars in Thousands) 1995 1994 1993
- ------------------------------------------------------------------------------
Tax provision based on the U.S.
federal statutory tax rate $ 19,119 $ 4,203 $ 17,278
State taxes, net of federal income
tax benefit 1,515 934 2,154
Foreign sales corporation tax benefit (94) (141) (61)
Amortization of excess cost
over net assets aquired 825 573 842
Valuation allowance on foreign losses 486 1,702 1,371
Difference in foreign tax rates 525 590 -
All other, net 344 (103) (1,422)
- -----------------------------------------------------------------------------
Total provision $ 22,720 $ 7,758 $ 20,162
=============================================================================
12
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The components of and changes in the deferred tax assets and liabilities
recorded in the accompanying balance sheets at December 31 1995 and 1994, were
as follows:
Deferred Deferred
December 31, Expense December 31, Expense December 31,
(Dollars in Thousands) 1995 (Credit) 1994 (Credit) 1993
- ---------------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Reserves recorded for-
Employee benefit programs $ 22,605 $ (524) $ 22,081 $ (1,508) $ 20,573
Insurance programs 3,706 (344) 3,362 (811) 2,551
Costs associated with acquisitions and other 699 (59) 640 516 1,156
Product costs and upgrades 5,501 247 5,748 (4,001) 1,747
Net operating loss carryforward of foreign subsidiaries 9,419 (968) 8,451 (1,753) 6,698
Tax benefit resulting from purchase accounting 2,051 -- 2,051 -- 2,051
Other 10,762 1,659 12,421 (11,165) 1,256
- --------------------------------------------------------------------- ------------ -------------
Total deferred tax assets 54,743 54,754 36,032
- --------------------------------------------------------------------- ------------ -------------
DEFERRED TAX LIABILITIES
Excess of book basis over tax basis of-
Plant and equipment (8,612) 45 (8,567) 427 (8,140)
Intangibles (1,161) (1,234) (2,395) (926) (3,321)
Inventory (6,548) 305 (6,243) 558 (5,685)
Other (4,726) -- (4,726) 1,092 (3,634)
- --------------------------------------------------------------------- ------------ -------------
Total deferred tax liabilities (21,047) (21,931) (20,780)
- --------------------------------------------------------------------- ------------ -------------
Gross deferred taxes 33,696 32,823 15,252
Valuation allowance (6,489) 486 (6,003) 1,702 (4,301)
- --------------------------------------------------------------------- ----------- ------------ ----------- -------------
Net deferred taxes 27,207 387 26,820 (15,869) 10,951
Reconciliation to the balance sheets-
Other deferred tax assets 6,492 13,130 --
Current portion of deferred taxes, net (6,669) (15,786) 83
- ---------------------------------------------------------------------------------------------------------------------------------
Long-term deferred taxes, net $ 27,030 $ 24,164 $ 11,034
=================================================================================================================================
The Company has generated book pretax income from continuing operations of
$54,627,000, $12,009,000 and $49,365,000 in 1995, 1994 and 1993, respectively.
Except for the effects of the reversal of net deductible temporary differences,
the Company is not aware of any factors which would cause any significant
differences between book and taxable income in future years. Although there can
be no assurances that the Company will generate any earnings or specific level
of continuing earnings in any jurisdiction, management believes that it is more
likely than not that the net deductible differences will reverse during periods
when the Company generates sufficient net taxable income, and that sufficient
taxable income will be generated in foreign jurisdictions to permit utilization
of related net operating loss carryforwards to the extent recorded at December
31, 1995. In connection therewith, the Company has established a valuation
allowance for a portion of the net operating loss carryforwards and other tax
benefits recognized in certain foreign jurisdictions. The majority of the
foreign net operating loss carryforwards have an unlimited carryforward period.
Any future reductions in foreign tax payments due to the utilization of tax
benefits resulting from purchase accounting will be recorded as a reduction to
goodwill.
13
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. LONG-TERM INDEBTEDNESS:
Long-term indebtedness of the Company consists of the following;
December 31,
-------------------------
(Dollars in Thousands) 1995 1994
- ------------------------------------------------------------------------
4.5%/6.5% Step-Up Convertible
Subordinated Debentures due 2002 $ 100,000 $ 100,000
Other term debt including capitalized
lease obligations 2,808 3,555
- ------------------------------------------------------------------------
Total 102,808 103,555
Less-Current portion 127 739
- ------------------------------------------------------------------------
Long-term indebtedness $ 102,681 $ 102,816
========================================================================
Effective October 15, 1992, the Company concluded the public offering of
$100,000,000 of 4.5%/6.5% Step-Up Convertible Subordinated Debentures due
October 15, 2002, at 100%, unless previously redeemed or converted (the
"Debentures"). As part of the public offering of the Debentures, the Company
executed an indenture with the Bank of New York, as trustee (the "Indenture").
Interest on the Debentures is paid semiannually on April 15 and October 15.
Interest on the Debentures accrued at the rate of 4.5% per annum from and
including the date of issuance to October 15, 1995, now accrues at the rate of
6.5% per annum from and including October 15, 1995, to maturity or earlier
redemption. The Company has provided interest at the effective rate of 5.78%.
The Debentures are convertible, unless previously redeemed, at any time prior to
maturity into shares of common stock, par value $.01 per share, of the Company
at a conversion price of $30.10 principal amount per share, subject to
adjustment under certain circumstances. The Debentures are redeemable at the
option of the Company in certain instances, in whole or in part, beginning
October 15, 1995, at the defined redemption prices ranging from 104.12% in 1995
to 100.69% in 2002, plus accrued and unpaid interest to the redemption date.
Holders of the Debentures have certain rights upon a change in control of the
Company, as defined in the Indenture. The proposed Merger (see Note 2) will
constitute a change in control for purposes of the Indenture. As a result, at
the Effective Time of the Merger, in accordance with the Indenture, the Company
will have 30 days to give notice of such change in control to all holders of
the Debentures. Upon notification, a Debenture holder may exercise a put option
that requires the Company to redeem such Debentures for cash at face value plus
accrued and unpaid interest to the date of redemption. The date of redemption is
defined as being 45 days after notification by the Company of a change in
control. Exercise of the put option by the holder is irrevocable, except that
the holder who submits such Debenture will retain the right to convert such
Debenture into common stock up to the close of business on the redemption date.
On July 13, 1992, American Sterilizer Company, a wholly-owned subsidiary of the
Company, entered into a Note Agreement with Prudential Insurance Company of
America and issued its 8.34% Senior Note due July 13, 2004 (the "Senior Note")
in the aggregate principal amount of $50,000,000. The Senior Note represented an
unsecured obligation and was unconditionally guaranteed by the Company.
Effective June 17, 1994, the Senior
14
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note agreement was amended to allow the discontinued operations charge and
subsequent asset sale related to the divestiture of the Company's AMSCO Sterile
Recoveries, Inc. ("ASRI") subsidiary (see Note 20). The maturity of the Senior
Note was not affected by this amendment; however, the interest rate was
increased by 45 basis points from 8.34% to 8.79%. On December 20, 1994,
utilizing cash reserves, the Company extinguished the Senior Note.
Extinguishment costs of $1,064,000 (net of income taxes of $739,500), which
included unamortized debt issuance costs and a prepayment premium, were
reflected as a component of the extraordinary charge in the accompanying
consolidated statement of income for the year ended December 31, 1994.
During December of 1994, the Company terminated its bank credit agreement
("Credit Agreement"), which included a revolving credit facility in the maximum
principal amount of $90,000,000 and was available for working capital purposes
or acquisitions. The provisions of the Credit Agreement provided for early
termination without penalty. In connection with the termination of the Credit
Agreement, unamortized debt issuance costs of $591,200 (net of income taxes of
$410,900) were reflected as a component of the extraordinary charge in the
accompanying consolidated statement of income for the year ended December 31,
1994.
Covenants pertaining to the Debentures, in addition to the typical requirements
to pay principal, interest and any premium thereon when due, include
cross-default provisions in the case of any acceleration of debt under any
agreement greater than $10,000,000; the rendering of any final uninsured
judgments against the Company in excess of amounts as defined in the agreement;
and acceleration provisions in the event of bankruptcy, insolvency or
reorganization related to the Company or any of its subsidiaries. As of December
31, 1995, retained earnings were not restricted under the Company's debt
agreement.
15
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Scheduled maturities of the Company's long-term indebtedness for each of the
next five years and thereafter are as follows:
(Dollars in Thousands) December 31,
- -------------------------------------------------------
1996 $ 127
1997 491
1998 354
1999 206
2000 185
2001 and thereafter 101,445
- ------------------------------------------------------
Total $ 102,808
======================================================
8. AMSCO EMPLOYEES' RETIREMENT ACCOUNT:
The Company administers the AMSCO Employees' Retirement Account (the "Plan"),
which is a qualified employee stock ownership plan.
The Plan enables eligible employees, including management, to receive an equity
participation in the Company. Contributions declared by the Board of Directors,
up to a maximum of 25% of eligible employee compensation, are made to the Plan.
The Plan in turn uses the funds to purchase shares of the Company's stock or
make investments in certain other securities.
Forfeitures resulting from a one-year break-in-service for an employee are used
to reduce the Company's required contribution. If any participants are rehired
within a five-year break-in-service period, the Plan requires restoration of any
amounts which were forfeited. These restorations would be the responsibility of
the Company.
The accompanying balance sheets reflect accrued contributions to the Plan in the
amount of $3,173,000 and $2,400,000 at December 31, 1995 and 1994, respectively.
Contribution expense, net of the forfeitures noted above, amounted to
$3,123,000, $2,404,000 and $2,525,000 in 1995, 1994 and 1993, respectively.
9. STOCK WARRANTS:
Warrants to purchase the Company's common stock at $8 per share, which were
originally issued in connection with a private placement offering of common
stock in June 1988, were exercised during 1993 in connection with the redemption
of the 12.5% Debentures. This redemption, which totaled $9,838,000 in face
value, was funded by utilizing $8,238,000 of the Company's current investments
and proceeds from the exercise of 200,000 of the Company's outstanding $8
warrants. The premium, which amounted to 6.75% or $492,000, has been included as
"Other, net" in the accompanying consolidated statement of income for the year
ended December 31, 1993.
16
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. STOCK OPTIONS AND RESTRICTED STOCK AWARD:
The Company sponsors a stock option plan whereby option holders may purchase the
Company's common stock at its fair market value as of the date of grant (the
"Stock Option Plan"). Options currently outstanding entitle the holders to
purchase common stock at prices ranging between $2 and $26.50 per share, subject
to adjustment. The right to exercise these options expires 10 years from the
date of grant, or earlier if an option holder ceases to be employed by the
Company for any reason.
The Stock Option Plan gives the option holders certain accelerated vesting
rights upon a change in control of the Company. Effective December 16, 1995, the
Company's Board of Directors determined that the execution of the Merger
Agreement will, or is likely to result, if the Merger is consummated, in a
change of control of the Company. As of that date, all unvested options issued
under the Stock Option Plan became 100% vested.
Effective July 11, 1995, the Company entered into an employment agreement with
its new chief executive officer ("CEO") that included the granting of 1,500,000
nonqualified stock options at a discounted exercise price of $12.125. 1,000,000
of the stock options are performance-based and vest if the Company's common
stock achieves certain market value criteria prior to July 11, 2000. During the
third quarter of 1995, 500,000 of these performance-based options vested because
the average fair market value of the Company's common stock exceeded $18.1875
over a period of 90 consecutive days. The remaining 500,000 performance-based
options will vest in their entirety if the average fair market value of the
Company's common stock exceeds $24.25 over a period of 90 consecutive days. The
stock options will vest by reason of passage of time under a vesting schedule
over varying time periods ranging from five to seven years (unless previously
vested as a result of the Company's common stock performance). The employment
arrangement referred to above also included an award of 82,475 shares of
restricted stock of the Company. Based on the terms of the award, this stock
vests to the CEO ratably and monthly during a 24-month period. A summary of the
stock option activity follows:
17
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Summary of Stock Options
$16.50- $19.875-
Year Ended December 31, $2-$9.625 $10-$12.50 $17.875 $26.50 Total
- --------------------------------------------------------------------------------------------------------
1992 3,087,500 596,000 747,875 559,000 4,990,375
Options:
Granted -- 27,500 147,800 1,500 176,800
Canceled -- (9,875) (26,375) (20,500) (56,750)
Exercised (128,475) (36,575) (1,750) -- (166,800)
- --------------------------------------------------------------------------------------------------------
1993 2,959,025 577,050 867,550 540,000 4,943,625
Options:
Granted 1,569,000 -- -- -- 1,569,000
Canceled (218,250) (51,625) (250,830) (32,100) (552,805)
Exercised (666,800) -- -- -- (666,800)
- --------------------------------------------------------------------------------------------------------
1994 3,642,975 525,425 616,720 507,900 5,293,020
Options:
Granted -- -- -- -- --
Canceled (85,295) (39,200) (22,340) (36,900) (183,735)
Exercised (2,321,080) (187,500) (45,415) -- (2,553,995)
- --------------------------------------------------------------------------------------------------------
Subtotal 1,236,600 298,725 548,965 471,000 2,555,290
Grant of nonqualified options not
pursuant to the Stock Option Plan -- 1,500,000 -- -- 1,500,000
- --------------------------------------------------------------------------------------------------------
1995 1,236,600 1,798,725 548,965 471,000 4,055,290
- --------------------------------------------------------------------------------------------------------
There were 417,865 shares reserved for future grants under the Stock Option
Plan at December 31,1995.
Upon granting the stock options and awarding the restricted stock to the CEO,
the Company recorded approximately $4,400,000 of deferred compensation expense,
which is being amortized over defined vesting schedules. In the event of an
accelerated vesting of any portion of the performance-based options, the Company
is required to record immediately any unrecognized compensation expense related
to such options. During the third quarter of 1995, the Company recorded an
approximate $1,000,000 charge to earnings because of the accelerated vesting
(during the quarter) of the 500,000 options discussed above. This charge was
reflected as general and administrative expense in the accompanying consolidated
statement of income.
The vesting of these stock options and restricted stock also accelerate, when a
change in control event (as defined in those agreements) occurs. The pending
Merger would represent a change in control event upon the consummation of the
Merger following the approval of the transaction by a majority of STERIS
shareholders and AMSCO stockholders.
18
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. INCOME PER COMMON SHARE:
Net income per share is calculated by dividing net income by the weighted
average number of common shares plus incremental common stock equivalent shares
(shares issuable upon exercise of stock options). Incremental common stock
equivalent shares are calculated for each measurement period based on the
treasury stock method, which uses the monthly average market price per share.
Fully diluted net income per share is calculated based upon the weighted average
number of common shares, plus incremental common stock shares calculated upon
the higher of the period average or period-end market value of the Company's
stock. The Company's convertible debentures were antidilutive; therefore, no
conversion of these securities was assumed.
The weighted average common shares and common share equivalents were as follows:
December 31,
--------------------------------------
1995 1994 1993
- -----------------------------------------------------
Primary 32,866,357 31,030,828 31,433,797
Fully Diluted 32,964,853 31,079,252 31,521,865
=====================================================
12. PENSION PLAN:
The Company has a defined benefit pension plan which covers substantially all
domestic union employees and provides pension benefits of stated amounts for
each year of service of the employee. The Company also has defined benefit plans
which cover substantially all union and nonunion employees of the Company's
subsidiaries in Finland and Germany, as well as certain other foreign
distribution entities. The plan provides pension benefits of stated amounts for
each year of service of the employee. The Company's funding methodologies differ
from those used to recognize pension expense in the accompanying financial
statements.
The initial net asset for the U.S. plan is being amortized and recognized as a
component of net periodic pension cost on a straight-line basis over 15 years.
19
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Net periodic pension cost includes the following components:
December 31,
----------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------------------------------------------------------------------------
(Dollars in Thousands) U.S. Foreign Total U.S. Foreign Total U.S. Foreign Total
- -----------------------------------------------------------------------------------------------------------------------------
Service cost:
benefits earned
during the period $ 456 $ 129 $ 585 $ 553 $ 135 $ 688 $ 464 $ 139 $ 603
Interest cost
on projected
benefit obligation 2,067 96 2,163 1,885 92 1,977 1,863 229 2,092
Actual (return) loss on assets (7,572) (15) (7,587) 1,733 (17) 1,716 (1,154) (14) (1,168)
Net amortization
and deferral 5,968 - 5,968 (3,571) - (3,571) (686) - (686)
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 919 $ 210 $ 1,129 $ 600 $ 210 $ 810 $ 487 $ 354 $ 841
=============================================================================================================================
For the U.S. plan, a weighted average discount rate of 7.25%, 8.5% and 7.25% was
used in determining the actuarial present value of the projected benefit
obligation at December 31, 1995, 1994 and 1993, respectively. The expected
long-term rates of return on assets at the respective measurement dates were
7.5% at December 31, 1995, 1994 and 1993. For the foreign plan, an average
discount rate of 4.25%, 6.0% and 6.0% was used in determining the actuarial
present value of the projected benefit obligation at December 31, 1995, 1994 and
1993, respectively. The expected long-term rate of return on assets at the
respective measurement date was 6.0%, 10.0% and 9.0% at December 31, 1995, 1994
and 1993, respectively. U.S. plan assets consist primarily of common stocks,
corporate bonds, U.S. government obligations, temporary investments and private
placement investments, while foreign plan assets consist of bonds.
The following table sets forth the pension plan's funded status and amounts
recognized in the accompanying consolidated balance sheets:
December 31,
-------------------------------------------------------------------
1995 1994
-------------------------------------------------------------------
(Dollars in Thousands) U.S. Foreign Total U.S. Foreign Total
- ---------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $ (28,598) $ (1,529) $ (30,127) $ (23,785) $ (1,445) $ (25,230)
Nonvested (1,110) - (1,110) (912) - (912)
- ---------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (equal to the accumulated
benefit obligation) (29,708) (1,529) (31,237) (24,697) (1,445) (26,142)
Plan assets at fair value 30,527 252 30,779 23,751 237 23,988
- ---------------------------------------------------------------------------------------------------------------------------------
Plan assets greater (less) than projected benefit obligation 819 (1,277) (458) (946) (1,208) (2,154)
Unamortized initial net asset (1,387) - (1,387) (1,435) - (1,435)
Unrecognized net (gain) loss (1,814) - (1,814) 353 - 353
Unrecognized prior service cost 2,685 - 2,685 2,113 - 2,113
- ---------------------------------------------------------------------------------------------------------------------------------
(Accrued) prepaid pension cost $ 303 $ (1,277) $ (974) $ 85 $ (1,208) $ (1,123)
=================================================================================================================================
20
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. POSTRETIREMENT BENEFITS:
The Company provides certain retiree healthcare benefits covering a majority of
all domestic employees. Employees are generally eligible for benefits upon
retirement and completion of a specified number of years of creditable service.
The Company does not pre-fund these benefits and has the right to modify or
terminate certain of these plans in the future.
Postretirement benefit expense was $4,240,000, $4,417,000 and $4,182,000 in
1995, 1994 and 1993, respectively. The components of expense in 1995, 1994 and
1993 were as follows:
December 31,
-----------------------------------
(Dollars in Thousands) 1995 1994 1993
- ----------------------------------------------------------------------------
Service costs of benefits
earned during the period $ 681 $ 1,125 $ 1,041
Interest cost on accumulated
postretirement benefit obligation 3,559 3,292 3,141
- ----------------------------------------------------------------------------
Net postretirement benefit costs $ 4,240 $ 4,417 $ 4,182
============================================================================
The accumulated postretirement benefit obligation at December 31, 1995 and 1994,
which is reflected in the accompanying consolidated balance sheets, is comprised
of the following components:
December 31,
----------------------
(Dollars in Thousands) 1995 1994
- ----------------------------------------------------------------------------
Retirees $ 28,945 $ 22,416
Fully eligible active plan participants 8,123 7,261
Other active plan participants 15,755 12,341
- ----------------------------------------------------------------------------
Total postretirement benefit obligation 52,823 42,018
Unrecognized prior service costs 1,393 -
Unrecognized net (loss) gain (5,515) 4,771
- ----------------------------------------------------------------------------
Total 48,701 46,789
Less-Current portion (2,400) (2,330)
- ----------------------------------------------------------------------------
Long-term postretirement
benefit obligation $ 46,301 $ 44,459
============================================================================
Future benefit costs were estimated assuming medical costs would increase on a
weighted average basis at approximately an 11% annual rate (9% in 1994 and
1993), decreasing to approximately a 6% (6% in 1994 and 5% in 1993) annual
growth rate ratably over the next six years (five years in 1994 and six years in
1993) and then remaining at a 4.5% (5% in 1994 and 1993) annual growth rate
thereafter. A 1% increase in this annual trend rate would have increased the
accumulated postretirement benefit obligation at December 31, 1995, by
$6,340,000 and increased the 1995 postretirement benefit expense by $490,000.
The weighted average discount rate used to estimate the accumulated
postretirement benefit obligation was 7.25% for 1995 and 8.5% for 1994.
21
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments are as follows:
December 31,
------------------------------------------------
1995 1994
------------------------------------------------
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------
Long-term debt--
4.5%/6.5% Step-Up Convertible Subordinated
Debentures due 2002 $ 100,000 $ 96,500 $ 100,000 $ 75,500
Other debt 2,808 3,051 2,897 2,765
Foreign currency contracts 3 (3) 27 57
- ------------------------------------------------------------------------------------------------------
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the estimated current rates
available to the Company for debt of the same remaining maturities. The fair
value of the foreign currency contracts (used for hedging purposes) was
estimated by obtaining a quote from a broker.
The Company enters into certain types of foreign exchange contracts in order to
manage its foreign exchange risk, as indicated in the above table. The Company
enters into the forward exchange contracts to hedge against certain intercompany
financing arrangements with its German subsidiary. The purpose of the Company's
hedging activities is to protect the Company from the risk that the eventual
dollar net cash inflows resulting from the collection of certain outstanding
intercompany loans will be adversely affected by changes in exchange rates.
The contractual amounts of the Company's forward exchange contracts represent
the U.S. dollar equivalent of commitments to sell foreign currencies
(principally the German mark). The Company's deferred gains and losses are
included on a net basis in the consolidated balance sheets as other assets or
accrued liabilities. The Company recognizes gains or losses in the cumulative
translation adjustment component of stockholders' equity due to the long-term
nature of the intercompany indebtedness with the German subsidiary. Likewise,
the German subsidiary applies Statement of Financial Accounting Standards No. 52
relative to the translation of the foreign indebtedness and records the
mark-to-market changes in the cumulative translation adjustment component of
stockholders' equity. Derivative financial instruments are utilized by the
Company, as explained in this note. The Company does not hold or issue financial
instruments for trading purposes.
15. RESTRUCTURING AND SEVERANCE:
Effective July 11, 1995, the Company granted certain severance benefits to its
departing president and chief executive officer. These benefits include the
making of severance payments and the provision of certain health, welfare and
other benefits for a period of three years. The value of these benefits is
approximately $1,200,000 and is not dependent upon the provision of future
services. In addition, during 1994 and 1993, the Company implemented
22
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
certain cost containment measures in order to continue to streamline and
reorganize certain operations commensurate with the healthcare market
environment that prevailed at that time. The cost containment measures recorded
in 1994 included work force reductions resulting in severance pay for terminated
employees, abandoned lease expense and asset write-offs associated with the
relocation and centralization of the Company's corporate headquarters to an
existing location in Pittsburgh and restructuring of certain international
distribution entities, manufacturing facilities and operations consolidations
associated with a realignment of the Company's manufacturing facilities,
computer hardware and software asset write-offs associated with the removal of
certain obsolete business systems which became obsolete as a result of the
restructuring, and costs associated with implementing programs to validate the
Company's processes for collecting, recording and submitting data to the United
States Food & Drug Administration. The cost containment measures recorded in
1993 included work force reductions resulting in severance pay for terminated
employees and lease abandonments and other related relocation costs resulting
from the planned centralization of certain field operations. As a result, the
Company incurred severance and related costs of $1,200,000, $26,996,000, and
$4,950,000 in 1995, 1994 and 1993, respectively.
16. LEASE COMMITMENTS:
Rental expense under all leases was approximately $10,051,000, $11,920,000 and
$13,247,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Operating leases relate principally to warehouse and office space, service
facilities, vehicles, equipment and communication systems.
Minimum annual rentals payable under noncancelable leases in each of the next
five years are as follows:
(Dollars in Tousands) December 31,
----------------------------------------------------
1996 $ 5,790
1997 3,598
1998 1,646
1999 1,432
2000 1,132
----------------------------------------------------
Total $13,598
====================================================
The Company has certain leases that pertain to abandoned facilities that are
subleased to third parties. This rental income, which has been used to reduce
the obligations reflected in the above table amounted to $685,000, $625,000,
$501,000, $424,000 and $360,000 in the years 1996 through 2000, respectively.
17. LITIGATION:
In connection with the Merger, as discussed in Note 2, a complaint purporting to
be a class action on behalf of the Company's stockholders was filed on December
22, 1995 in the Chancery Court of the State of Delaware, New Castle County. The
complaint names the Company, STERIS, and each of the directors of the Company,
except Richard A. Gilleland, as defendants. The complaint alleges, among other
things, that, (a) the Company's board breached its fiduciary duties in
considering and approving the Merger Agreement, (b) the STERIS board aided and
23
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
abetted the alleged breach of fiduciary duties by the Company's board, (c) the
Company's board did not negotiate a provision related to the conversion ratio
ensuring that the stockholders receive adequate consideration in the event of a
significant drop in the price of STERIS common shares or permitting the Company
to terminate the Merger without having to pay a termination fee to STERIS if the
price of STERIS common shares dropped significantly, and (d) the consideration
offered to the Company's stockholders is inadequate because, under the Merger
Agreement, STERIS could acquire Company common stock for less than its market
price prior to the announcement of the Merger due to (i) the Merger Agreement
providing for a fixed conversion ratio and (ii) a decrease in the value of
STERIS common shares following the announcement. Among other things, the
complaint seeks (a) preliminarily and permanently to enjoin the Merger and any
steps designed to facilitate the Merger, (b) to require the Company's directors
to maximize stockholder value by reconsidering the Merger and the conversion
ratio and by seeking competitive bids, (c) rescissory relief and/or to recover
damages in an unspecified amount if the Merger is consummated, and (d) costs and
disbursements of the action. Management believes that the complaint is without
merit. The Company intends to vigorously defend the action and presently
believes the ultimate outcome will not have a material adverse effect on its
consolidated financial position or results of operations.
The Company, along with approximately 50 other companies or individuals, has
been notified by the United States Environmental Protection Agency ("EPA") that
it is considered a "potentially responsible party" ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("Superfund Act") with regard to a disposal area known as the Millcreek or
Harper Drive site (the "Site"). The Site covers approximately 84.5 acres and is
located near Erie, Pennsylvania. The EPA maintains that the Company or its
predecessors formerly sent foundry sand and possibly other materials to the
Site. The Site has been placed on the Superfund Act National Priorities List of
Hazardous Waste Sites and is being remediated under the Superfund Act.
The EPA has undertaken certain Superfund Act response actions at the Site,
including the removal of certain wastes and waste containers, the erection of a
fence to restrict Site access, the construction of a groundwater collection and
treatment system and the performance of a remedial investigation and feasibility
study for the Site. EPA alleges that the cost of response actions previously
undertaken at the Site by EPA or EPA's contractors is approximately $13,000,000.
In October 1989, EPA commenced a civil action under the Superfund Act to recover
its past costs against the owners of the Site and several waste transporters who
allegedly transported waste to the Site, United States v. Ralph Riehl, Jr., et
al, Civil Action No. 89-226 (W.D. Pa. Erie Division) (the "Cost Recovery Suit").
The Company and other PRPs who allegedly generated wastes that were transported
to the Site were named as third-party defendants and then as direct defendants
in the Cost Recovery Suit. On February 16, 1993, the Company and various other
PRPs filed a third-party complaint in the Cost Recovery Suit against several
PRPs not previously named in the litigation.
In February 1993, the Company, together with nine other defendant PRPs ("Group
of 10"), reached an agreement in principle with EPA regarding a group settlement
of the Cost Recovery Suit. Negotiations with respect to the terms of the group
settlement stalled until August 1993. In August 1993, representatives of the
Group of 10, together with other PRPs, met with EPA and the United States
Department of Justice ("DOJ") officials to discuss settlement of the Cost
Recovery Suit. Following this meeting, EPA made a modified settlement offer to
the Group of 10 in the amount of $6,000,000. The terms of the modified
settlement offer included EPA's covenant not to sue with respect to operation
and maintenance ("O&M") expenses and no requirement that the Group of 10 either
24
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
reimburse EPA for O&M costs or perform O&M with respect to the site. The Group
of 10 accepted the terms of EPA's settlement offer. Throughout much of 1994, the
Group of 10 engaged in negotiations with EPA and DOJ regarding the terms of the
consent decree that evidences the Group of 10's settlement of the Cost Recovery
Suit. As described in greater detail below, Bucyrus-Erie Company ("B-E"), a
member of the Group of 10, filed for reorganization under the bankruptcy laws in
1994. As a result, the DOJ and EPA decided to execute a separate but identical
consent decree with B-E. In December 1994, the Group of 10 and DOJ reached
agreement on the terms of the consent decrees. By letter dated December 28,
1994, the Group of 10 submitted their executed signature pages to the consent
decrees to DOJ. By letter dated December 14, 1995, the DOJ lodged the executed
consent decrees with the Court pending the outcome of the required 30-day public
notice and comment period.
In addition to the response actions already performed at the Site, EPA's "Record
of Decision" ("ROD") specifies that certain response actions must be performed
at the Site, including the construction of a soil cover over the former disposal
area. The Company understands that representatives of EPA have estimated that
the cost of the additional response actions will be within the range
of $10,000,000 to $14,000,000. On April 1, 1992, EPA issued a unilateral
administrative order under Section 106 of the Superfund Act ("106 Order") to 37
PRPs, including the Company (the "Respondents"), requiring the Respondents to
perform the work specified in the ROD that has not yet been completed by EPA and
subjecting the Respondents to potentially substantial statutory fines and
statutory "punitive damages" if they willfully fail or refuse to comply with the
106 Order without sufficient cause. Following the issuance of the 106 Order, the
Company and 18 other Respondents ("Section 106 Order Group") entered into an
agreement to coordinate their efforts to respond to the 106 Order. Since the
formation of the Section 106 Order Group, one Respondent has withdrawn from the
Section 106 Order Group and one Respondent has joined. Throughout 1994, the
Section 106 Order Group's project engineer, EPA, the United States Army Corps of
Engineers and others engaged in discussions and debates concerning certain
design aspects of the remedial design specified in the 106 Order. In January
1995, EPA notified the Section 106 Order Group that significant design
disagreements had been resolved in the Section 106 Order Group's favor. To date,
the Section 106 Order Group has completed its scheduled obligations under the
106 Order in a timely manner.
In October 1993, the Commonwealth of Pennsylvania Department of Environmental
Resources, now known as the Pennsylvania Department of Environmental Protection
("PaDEP"), commenced a civil action under the Superfund Act seeking recovery of
its past costs and a declaration of liability for future costs with respect to
the Site against 32 individuals and companies, including the Company,
Commonwealth of Pennsylvania, Department of Environmental Resources v. Ralph
Riehl, Jr., et al., Civil Action No. 93-297 (W.D. Pa. Erie Division) ("PaDEP
Suit"). Many of the defendants named in the PaDEP Suit are also defendants in
the Cost Recovery Suit and are Respondents to the 106 Order. On October 3, 1994,
the Company timely filed its answer and counterclaim to the PaDEP's complaint.
Throughout 1994, the PaDEP and the Group of 10 exchanged several settlement
offers. On February 13, 1995, representatives of the Group of 10 met with
representatives of the PaDEP in an attempt to resolve the differences in their
respective settlement positions. At the meeting, the PaDEP orally offered to
settle with the Group of 10 for $1,375,878. The Group of 10 responded with a
counter-offer of $900,000. The PaDEP rejected this counter-offer. By letter
dated February 16, 1995, the PaDEP offered the Group of 10 its choice of three
settlement options: (a) lump-sum payment of $1,375,878; (b) payment of the past
costs portion of the settlement ($266,900) in a lump sum and payment of the
future costs portion of the settlement through the purchase of an annuity (with
the Commonwealth of Pennsylvania as the designated owner and beneficiary), which
will yield 20
25
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
annual payments beginning January 1, 2006 and must guarantee that (i) the first
payment in 2006 will be approximately $105,000; and (ii) each subsequent annual
payment will be 4% greater than the last payment; or (c) payment of the past
costs portion of the settlement in a lump sum and performance by the Group of 10
of all future obligations regarding groundwater collection, treatment and
monitoring. The Group of 10 offered to settle with the PaDEP under the terms of
settlement option (b) above. By letter dated March 9, 1995, the PaDEP accepted
the Group of 10's settlement offer. On April 27, 1995, the PaDEP and the Group
of 10 reached a tentative agreement regarding the terms of the consent decree
that will evidence the Group of 10's settlement of the PaDEP Suit. In early July
1995, the members of the Group of 10 and the PaDEP executed the consent decree.
By letter dated July 10, 1995, the PaDEP lodged the executed consent decree with
the Court pending the outcome of the required 30-day public notice and comment
period. By letter dated September 25, 1995, the PaDEP informed the Group of 10
that the PaDEP had received no public comments regarding the consent decree. On
or about October 17, 1995, the Court entered the fully executed consent decree
of record.
The list of PRPs in these matters includes approximately 20 other substantial
companies that would presumably be called upon to share with the Company any
ultimate liability; however, the Superfund Act has been interpreted to provide
for joint and several liability, meaning that any one liable party may be held
responsible for the entire cost of the remediation. As stated above, B-E, a
member of the Group of 10, has undergone a Chapter 11 reorganization. The
Company filed a proof of claim in In re: B-E Holdings, Inc. and Bucyrus-Erie
Company, Chapter 11, Case Nos. 94-20786-RAE and 94-20787-RAE in the United
States Bankruptcy Court for the Eastern District of Wisconsin. In its proof of
claim, the Company characterized its claim as an unliquidated, unsecured
nonpriority claim for contribution and/or indemnity with respect to the various
lawsuits filed concerning the Site. On December 14, 1994, the Bankruptcy Court
approved B-E's and B-E Holdings, Inc.'s plan of reorganization. By order dated
August 25, 1995, the Bankruptcy Court lifted the Automatic Stay applicable to
B-E and B-E Holdings, Inc. Currently, it is not possible to determine whether
all aspects of these matters can be resolved without extensive litigation or
what, if any, possible settlement amount would be attributable to the Company.
To date, the Company's insurer has assumed the cost of legal defense on behalf
of the Company. In addition, the insurer has paid $600,000, the Company's
payment obligation under the terms of the Cost Recovery Suit, into a settlement
trust pending finalization of the settlement. In the opinion of management,
after review with counsel, the ultimate outcome of these matters will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
26
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In the ordinary course of business, product liability lawsuits have been filed
from time to time against the Company, including by persons alleging exposure to
unsafe levels of EtO from the Company's sterilizers. In the EtO cases, the
Company, either alone, or along with varying numbers of other parties, has been
named as a defendant in a number of separate complaints alleging that employees
of the Company's customers suffered personal injury as a result of acute or
chronic exposure to EtO. At the end of the fiscal year, 12 EtO cases were
pending against the Company (not including one case where a complaint, naming
the Company as a co-defendant, was filed in December 1995 in state court, but
was not served on the Company until February 1996). In these cases, the
involvement of many of the defendants, including the Company, is based on
assertions that these defendants sold EtO or products utilizing EtO to the
plaintiff's employers. Damages are sought jointly and severally from all
defendants, with certain complaints seeking both compensatory and punitive
damages. Of the complaints currently pending against the Company, the majority
either do not specify the amount of compensatory damages sought or seek an
amount of compensatory damages in excess of jurisdictional limits. The remaining
cases seek varying amounts of substantial compensatory damages. The majority of
complaints alleging punitive damages do not specify any amount of such damages.
The Company has insurance in effect for all years for which damages are
presently being sought, and the Company's insurer has accepted defense of all
EtO claims on the Company's behalf. The insurance policies for 1987 through 1995
contain deductible provisions requiring the Company to self-insure a portion of
the risk for each claim in the amount of $500,000. The complaints currently
pending against the Company were assigned to policy years 1987 through 1994.
Certain of the cases assigned to these policy years with deductible provisions
are in the relatively early stages of litigation and, therefore, no estimate of
losses, if any, can be made.
The Company and its insurer are vigorously defending EtO cases and, to date, a
significant number of these cases have been either dismissed or settled without
a finding of liability. These settlements and the monetary damages in the one
case where a verdict was returned against the Company have been nominal or have
been covered by insurance. It is management's opinion, based on its evaluation
and discussions with outside legal counsel, that this litigation will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
On August 25, 1992, the Company entered into a settlement agreement with Johnson
& Johnson Medical, Inc. (JJMI) with respect to certain patent infringement
litigation between the two parties. The Company had previously instituted an
action against JJMI under its former name, Surgikos, Inc., alleging patent
infringement of several patents owned by the Company relating to the use of
hydrogen peroxide vapor as a sterilant. JJMI denied the allegations and
counterclaimed, seeking a declaratory judgment that such patents were invalid
and unenforceable.
Under the terms of the agreement, both parties agreed to dismiss this pending
litigation and JJMI agreed to pay $2,000,000 to the Company immediately, which
amount was received by the Company in August 1992. Furthermore, each party
agreed to release and discharge the other from and against all claims and
liabilities relating to infringement of such patents contingent upon the receipt
by the Company of additional payments of up to $7,000,000, conditioned upon the
receipt of JJMI of FDA approval to market a sterilizing system in the United
States and Canada utilizing hydrogen peroxide vapor in conjunction with glow
discharge plasma prior to the expiration of such patents in 1996. On October 1,
1993, FDA sent notification of approval to market such a sterilizing system to
27
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
JJMI. In connection therewith, the Company received $3,000,000 in November 1993,
$2,000,000 in July 1994 and $2,000,000 in March 1995.
There are other various pending lawsuits and claims arising out of the conduct
of the Company's business. In the opinion of management and counsel, the
ultimate outcome of these lawsuits and claims will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
18. COMMITMENTS AND CONTINGENCIES:
As of December 31, 1995 and 1994, the Company was contingently liable in the
amount of $15,870,000 and $23,779,000, respectively, under standby letters of
credit and guarantees. Approximately $13,165,000 and $16,365,000 of the totals
at December 31, 1995 and 1994, respectively, relate to letters of credit
required as security under the Company's self-insurance policies. The remaining
balance in each year relates to performance bonds on long-term contracts.
The Company has entered into a contractual agreement regarding the utilization
of certain types of telecommunication services. The contract contains provisions
that commit the Company to purchase a minimum of $2,100,000 of such services per
annum for a three-year period ending November 30, 1997. If the Company's charges
for such services during any annual period are less than $2,100,000, the Company
would be assessed a penalty equal to the difference between the minimum amount
and the actual amount of services used.
During the third quarter of 1994, the United States Food & Drug Administration
("FDA") conducted an inspection of the Company's hydrogen peroxide vapor
sterilizer pre-market notifications submitted under Section 510(k) of the
Federal Food Drug and Cosmetic Act ("510(k) notifications"). In connection with
this inspection, the Company was notified by FDA on January 20, 1995 that FDA
has applied its Application Integrity Policy to the Company. Consequently,
pre-market approval applications and 510(k) notifications submitted by the
Company will not be reviewed by FDA until the Company has completed certain
corrective actions to the satisfaction of FDA, including audits of certain
previously cleared 510(k) notifications that are being conducted by a regulatory
consultant retained by the Company. In addition to audits specified by FDA, the
Company elected to audit certain additional 510(k) notifications. The audits
finalized to date have identified certain corrective actions that the Company
has completed or will complete during 1996. The Company cannot predict how long
510(k) notifications filed by the Company will not be reviewed by FDA. The
Company believes that there are no material product introductions planned for
1996 that require pre-market clearance. The Company has entered into discussions
with FDA regarding steps necessary for FDA to resume its review of 510(k)
notifications filed by the Company. The Company recorded reserves of
approximately $3,250,000 at December 31, 1994 to cover the estimated costs of
the FDA review, including corrective actions to be completed. Charges against
these reserves amounted to $1,509,000 in 1994 and 1995, leaving residual
reserves of $1,741,000 at December 31, 1995. These residual reserves are
intended primarily to cover professional consulting, legal and other fees
expected to be incurred in connection with the completion of the corrective
actions.
28
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As a consequence of these corrective actions and given the experience of other
companies subject to the Application Integrity Policy, it is more likely than
not that FDA will refer this matter to the Department of Justice ("DOJ") and
that DOJ will pursue sanctions, including but not limited to fines and/or
criminal sanctions. The Company cannot predict, at this time, the impact on the
Company of this continuing FDA review or corrective actions resulting therefrom,
or the financial or other effect any fines or sanctions could have on the
business, the consolidated financial position or the results of operations of
the Company. In the event DOJ pursues sanctions, DOJ could apply certain
guidelines that, if strictly adhered to, could result in any such fines and/or
sanctions being material; however, the Company believes that there are
mitigating factors that, when considered, could result in any such fines and/or
sanctions not being material.
19. BUSINESS SEGMENT INFORMATION:
The Company is predominately engaged in the design, manufacture and service of
equipment used primarily in the healthcare industry. The following is
information about the Company's operations by geographic area:
December 31,
=========================================
(Dollars in Thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
Net sales-
Net sales (including intergeographic net sales of $13,755,
$9,750 and $7,042 for the years 1995, 1994 and 1993,
respectively)-- United States $ 411,429 $ 440,219 $ 450,657
Net sales (including intergeographic net sales of $37,944,
$34,598 and $30,209 for the years 1995, 1994 and 1993,
respectively)-- Foreign 94,346 87,253 81,462
Adjustments and eliminations (51,699) (44,168) (37,251)
- -----------------------------------------------------------------------------------------------------------------
Consolidated $ 454,076 $ 483,304 $ 494,868
=================================================================================================================
Income (loss) from operations--
United States $ 53,646 26,484 $ 57,878
Foreign 1,937 (4,469) (4,142)
- -----------------------------------------------------------------------------------------------------------------
Consolidated 55,583 22,015 53,736
Other expenses, including interst and general corporate expenses 956 10,006 4,371
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes and
cumulative effect of change in accounting $ 54,627 $ 12,009 $ 49,365
=================================================================================================================
Identifiable assets--
United States 298,971 346,290 409,124
Foreign 107,393 95,561 85,292
Corporate 103,604 19,736 40,001
- -----------------------------------------------------------------------------------------------------------------
Consolidated $ 509,968 $ 461,587 $ 534,417
=================================================================================================================
Transfers between geographic areas are accounted for at prices which approximate
arms'-length market prices. To reconcile geographic information with
consolidated amounts, intergeographic net sales were eliminated. Income (loss)
from operations is total revenue less costs and expenses without the effect of
interest expense and other nonoperating income.
Identifiable assets are those assets that are identified with the operations in
each geographic area. Corporate assets are principally cash and short-term
marketable securities.
29
AMSCO International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Sales to a single customer did not aggregate 10% or more of total sales. Export
sales were less than 10% of consolidated net sales in the years presented and
are included in United States net sales.
20. DISCONTINUED OPERATION:
On June 23, 1994, the Board of Directors of the Company approved a plan to
divest or wind-down the business of ASRI. The Company's decision was based on
the difficulties encountered in achieving ASRI's growth objectives in the
healthcare environment existing at that time. In connection with this action,
the Company recorded a one-time after-tax charge of $60,000,000 (net of taxes of
$32,300,000), or $1.94 per share, to its consolidated net earnings during the
second quarter of 1994. The charge reflected estimated asset write-offs and
wind-down costs associated with discontinuing the ASRI business.
In connection with this divestment plan, ASRI consummated the sale of
substantially all of its assets effective July 31, 1994. Proceeds from the
disposal consisted of a combination of cash and a note totaling approximately
$14,900,000. As a result of the sale and its subsequent impact on the resolution
of certain contingencies related to the transaction, during the fourth quarter
of 1994, the Company recorded a $16,846,000 ($10,949,900 net of taxes), or $.35
per share, favorable adjustment to the previously recorded estimated loss on the
disposal of the ASRI business.
For the first half of 1994, ASRI had net sales of $10,316,000 and pretax losses
from operations of $9,625,000. Total reserves for ASRI at December 31, 1995 and
1994, were $10,412,000 and $9,939,000, respectively, which consisted primarily
of reserves for amounts for which the discontinued business remains contingently
liable. Payment of the majority of the remaining balance of this reserve for
future cash charges is anticipated to occur beyond 1996 and the timing is
dependent upon future resolution of certain remaining contingencies related to
the transaction. The resolution of these remaining contingencies could result in
a favorable adjustment to the estimated loss on disposal of business, as well as
reduce the total amount of cash expected to be paid relating to the
discontinuance of this business. The results of operations for ASRI have been
reflected in the accompanying consolidated financial statements as a
discontinued operation.
21. ACCOUNTING FOR STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard requires disclosure in the financial statements
of the financial impact of employee stock options issued or modified during the
year based on fair value, as defined, at the date of grant. The new standard
also permits companies to adopt the fair value method of recording compensation
cost for these employee stock options.
The Company presently intends to adopt the disclosure requirements of SFAS No.
123 as of December 31, 1996. These disclosures will include the pro forma
effects of any awards granted in 1995. The Company has not completed the
necessary calculations to determine the impact this new standard will have on
the Company's disclosures regarding the value of stock-based compensation.
30
AMSCO INTERNATIONAL, INC., and SUBSIDIARIES
QUARTERLY DATA
(UNAUDITED)
First Second Third Fourth Total
(Dollars in Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter Year
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1995
Net Sales $ 102,882 $ 101,053 $ 110,674 $ 139,467 $ 454,076
Gross Profit 37,180 34,107 34,628 47,228 153,143
General Operating Expenses 21,728 20,669 23,022 22,696 88,115
Restructuring and Severance Expense - - 1,200 - 1,200
Amortization Expense 2,134 2,099 2,207 1,805 8,245
Income from Operations 13,318 11,339 8,199 22,727 55,583
Net Income 6,877 6,696 4,254 14,080 31,907
Income Per Common Share - Fully Diluted 0.21 0.21 0.13 0.41 0.97
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1994
Net Sales $ 104,706 $ 112,085 $ 116,498 $ 150,015 $ 483,304
Gross Profit 39,376 34,210 42,327 50,730 166,643
General Operating Expenses 27,142 28,373 27,135 26,146 108,796
Restructuring and Severance Expense - 3,000 - 23,996 26,996
Amortization Expense 2,320 2,300 2,318 1,898 8,836
Income (Loss) from Operations 9,914 537 12,874 (1,310) 22,015
Income (Loss) from Continuing Operations 4,129 (1,546) 5,882 (4,214) 4,251
Income (Loss) from Discontinued Operation (3,448) (62,607) - 10,950 (55,105)
Extraordinary Item - Loss on the Extinguishment
of Debt, net of income taxes - - - (1,655) (1,655)
Net Income (Loss) 681 (64,153) 5,882 5,081 (52,509)
Income (Loss) Per Common Share - Fully Diluted:
From Continuing Operations 0.13 (0.05) 0.19 (0.14) 0.13
From Discontinued Operation (0.11) (2.02) - 0.35 (1.77)
From Extinguishment of Debt - - - (0.05) (0.05)
Net Income (Loss) 0.02 (2.07) 0.19 0.16 (1.69)
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