<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the quarterly period ended: March 31, 1996
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Boston Scientific Place, Natick, Massachusetts 01760-1537
- - -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
--------------
- - --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Shares Outstanding
Class as of March 31, 1996
----- --------------------
Common Stock, $.01 Par Value 177,649,968
- - --------------------------------------------------------------------------------
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Balance Sheets
(Unaudited)
<CAPTION>
March 31, December 31,
In thousands 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 104,068 $ 117,321
Short-term investments 40,357 43,832
Trade accounts receivable, net 229,034 214,232
Inventories 169,391 148,572
Prepaid expenses and other current assets 31,227 32,688
-------------------------
Total current assets 574,077 556,645
Property, plant, equipment and leaseholds, net 269,554 256,093
Intangibles, net 280,191 137,704
Deferred income taxes 4,721 46,352
Other investments and assets 113,056 103,094
-------------------------
$1,241,599 $1,099,888
=========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
<CAPTION>
March 31, December 31,
In thousands 1996 1995
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings due within one year $ 156,334 $ 57,520
Accounts payable and accrued expenses 109,718 106,322
Accrual related to special charges 101,695 80,144
Other current liabilities 45,072 29,691
--------------------------
Total current liabilities 412,819 273,677
Other long term liabilities 33,278 52,061
Stockholders' equity:
Preferred stock, $ .01 par value - authorized 25,000,000 shares,
none issued and outstanding
Common stock, $.01 par value - authorized 300,000,000 shares,
179,101,866 shares issued at March 31, 1996
and 179,079,298 at December 31, 1995 1,791 1,791
Additional paid-in capital 398,798 386,610
Retained earnings 416,960 417,951
Foreign currency translation adjustment (17,768) (14,739)
Unrealized gain on available-for-sale securities, net 12,102 8,833
Treasury stock, at cost - 1,451,898 shares at March 31, 1996
and 2,425,490 shares at December 31, 1995 (16,381) (26,296)
--------------------------
Total stockholders' equity 795,502 774,150
--------------------------
$1,241,599 $1,099,888
==========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 4
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three months ended
March 31,
In thousands, except share and per share data 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 322,383 $ 262,909
Cost of products sold 85,634 78,782
------------------------------
Gross profit 236,749 184,127
Selling, general and administrative expenses 104,040 80,899
Royalties 3,882 7,746
Research and development expenses 25,753 21,514
Purchased research and development 38,700 32,646
Special charges 29,975 92,103
------------------------------
202,350 234,908
------------------------------
Operating income (loss) 34,399 (50,781)
Other income (expense):
Interest and dividend income 1,769 4,519
Interest expense (1,290) (2,721)
Other, net (2,020) 3,598
------------------------------
Income (loss) before income taxes 32,858 (45,385)
Income taxes 33,849 18,677
------------------------------
Net loss $ (991) $ (64,062)
==============================
Net loss per common share $ (0.01) $ (0.37)
==============================
Weighted average number of common shares 177,052,000 173,913,000
==============================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Stockholder's Equity
(Unaudited)
<CAPTION>
Three Months Ended March 31, 1996
--------------------------------------------------------------------------------------------
Common Stock
------------------------
Foreign
Additional Currency
Paid-In Retained Translation Unrealized Treasury
Shares Issued Par Value Capital Earnings Adjustment Gain Stock Total
--------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 179,079,298 $1,791 $386,610 $417,951 $(14,739) $ 8,833 $ (26,296) $774,150
Net loss (991) (991)
Foreign currency translation
adjustment (3,029) (3,029)
Issuance of common stock under
option, warrant and stock purchase
plans 22,568 (606) 9,915 9,309
Tax benefit relating to stock option and
employee stock purchase plans 12,794 12,794
Net change in equity investments 3,269 3,269
--------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1996 179,101,866 $1,791 $398,798 $416,960 $(17,768) $12,102 $(16,381) $795,502
============================================================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 6
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
In thousands 1996 1995
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 36,324 $ 29,852
Investing activities:
Purchases of property, plant, and equipment (17,090) (13,175)
Net maturities of short-term investments 3,475 22,768
Payment for purchase of Symbiosis Corporation,
net of cash acquired (53,907)
Payment for purchase of Cardiovascular Imaging
Systems, Inc., net of cash acquired (87,783)
Net payments for other acquistions of certain technologies (9,009)
Other (5,683) (675)
----------------------
Cash used in investing activities (73,205) (87,874)
Financing actvities:
Net payments from notes payable
and capital leases (114) (6,382)
Proceeds from exercise of stock options 9,309 5,948
Tax benefit relating to stock option and employee
stock purchase plans 12,794
Other 1,954 16
----------------------
Cash provided by (used for) financing activities 23,943 (418)
Effect of foreign exchange rates on cash (315) (475)
----------------------
Net decrease in cash and cash equivalents (13,253) (58,915)
Cash and cash equivalents at beginning of period 117,321 269,282
----------------------
Cash and cash equivalents at end of period $104,068 $210,367
======================
Supplemental Schedule of Noncash Investing
and Financing Activities:
Additional borrowings incurred in connection with the
acquisition of Symbiosis Corporation $100,000
Payments due in connection with purchase of technology $ 10,000
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto incorporated by
reference in the Boston Scientific Corporation's Annual Report on Form 10-K for
the year ended December 31, 1995.
Certain prior year's amounts have been reclassified to conform to the current
year presentation.
NOTE B - ACQUISITIONS
On January 22, 1996, Boston Scientific Corporation (the Company) completed its
merger of EP Technologies, Inc. (EPT) in a stock-for-stock transaction. The
transaction which was accounted for as a pooling-of-interests, was effected
through the exchange of 0.297 shares of the Company's common stock for each EPT
share held. Approximately 3.4 million shares of the Company's common stock were
issued in conjunction with the EPT merger. The accompanying unaudited condensed
consolidated financial statements have been restated to include the accounts and
operations of EPT for all prior periods.
<TABLE>
Separate results of the combining entities for the three months ended March 31,
1995 are as follows (in thousands):
<CAPTION>
Combined
Boston Boston
Scientific EPT Scientific
---------------------------------------
<S> <C> <C> <C>
Net sales $257,589 $5,320 $262,909
Net loss $(63,430) $ (632) $(64,062)
</TABLE>
<PAGE> 8
NOTE B - ACQUISITIONS (CONTINUED)
On March 14, 1996, the Company acquired Symbiosis Corporation (Symbiosis),
formerly a wholly-owned subsidiary of American Home Products Corporation. Boston
Scientific purchased Symbiosis, a developer and manufacturer of specialty
medical devices, for approximately $153 million in a cash transaction, of which
$100 million was financed on an interim basis by the seller. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the assets acquired based on their estimated fair values.
The treatment resulted in approximately $146 million of intangible assets that
will be amortized over their estimated period of benefit. The Company also
recorded a deferred tax liability of approximately $38.7 million representing
the tax effect of timing differences recorded as part of the acquisition.
<TABLE>
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Symbiosis as if the acquisition had
occurred at the beginning of 1995, with pro forma adjustments to give effect to
purchased research and development, amortization of intangibles, reduction in
interest income on acquisition financing and certain other adjustments, together
with the related tax effects:
<CAPTION>
For the three months
ended March 31,
(in thousands, except per share data) 1996 1995
----------------------------------------------------------------------
<S> <C> <C>
Net sales $326,559 $ 268,454
Net income (loss) 36,669 (102,510)
Net income (loss) per share $0.20 $(0.59)
----------------------------------------------------------------------
</TABLE>
On May 3, 1996, Boston Scientific announced the acquisition of MinTec Inc.
(MinTec), a privately held company dedicated to the development of stent graph
technology for the repair of diseased vessels and arteries. The Company
purchased MinTec for approximately $70 million in a cash transaction. The
transaction, which will be accounted for under the purchase method of
accounting, was financed from the Company's available cash and borrowings under
the Company's line of credit agreement with a United States (U.S.) bank. (See
Notes C and D.)
NOTE C - MERGER-RELATED CHARGES
In connection with the acquisitions of EPT and Symbiosis, the Company recorded
non-recurring and special charges of $68.7 million ($66.5 million net-of tax) in
the first quarter of 1996. Charges include $38.7 million for purchased research
and development, $4.6 million in direct transaction costs, and $12.2 million of
estimated costs to be incurred in merging the separate operating businesses of
EPT with subsidiaries of the Company. Estimated costs include those typical in a
merging of operations and relate to, among other things, rationalization of
facilities, workforce reductions, unwinding of various contractual commitments,
asset writedowns and other integration costs. The remaining $13.2 million, which
is primarily non-deductible for tax purposes, represents a change in
management's estimates of the merger-related charges recorded in 1995. The
change to prior year estimates relate primarily to the costs of unwinding
various contractual obligations and the rationalization of facilities.
<PAGE> 9
NOTE C - MERGER-RELATED CHARGES (CONTINUED)
The special charges are determined based on formal plans approved by Company's
management using the best information available to it at the time. The
workforce-related initiatives involve substantially all of the Company's
employee groups. The amounts the Company may ultimately incur may change as the
plans are executed.
During the second quarter of 1996, the Company expects to record a non-recurring
special charge (primarily purchased research and development) in connection with
the MinTec acquisition. The amount of the charge cannot be determined until an
evaluation of the fair market value of MinTec's assets and liabilities is
performed and purchased research and development is determined (see Note B).
NOTE D - CREDIT ARRANGEMENTS
At December 31, 1995, the Company had a line of credit agreement with a U.S.
bank (the Credit Agreement) that provided maximum worldwide borrowings of $60
million through 1998. On April 1, 1996, the Company increased its maximum
worldwide borrowings provided under the Credit Agreement to $110 million. The
term of the increased borrowings extends through June 17, 1996, at which time,
the maximum worldwide borrowings provided under the Credit Agreement will revert
back to $60 million. At March 31, 1996, the Company had outstanding borrowings
of $18.4 million under the Credit Agreement. In April 1996, the Company borrowed
an additional $31 million under the Credit Agreement in connection with the
MinTec acquisition (see Note B).
NOTE E - INVENTORIES
<TABLE>
The components of inventory consist of the following (in thousands):
<CAPTION>
March 31, December 31,
1996 1995
---------------------------
<S> <C> <C>
Finished goods $ 87,934 $ 76,531
Work-in-process 38,407 35,179
Raw materials 43,050 36,862
-------------------------
$169,391 $148,572
=========================
</TABLE>
NOTE F - ACCOUNTING PRONOUNCEMENT
As of January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of", which establishes criteria for the
recognition and measurement of impairment loss associated with long-lived
assets. Adoption of this standard had no material impact on the Company's
financial position or results of operations.
<PAGE> 10
NOTE G - COMMITMENTS AND CONTINGENCIES
Schneider (Europe) AG and Schneider (USA) Inc., subsidiaries of Pfizer, Inc.,
have alleged that the Company's Synergy[Trademark] products infringe one of
their patents. On May 13, 1994, the Company filed a lawsuit against them in the
United States Federal District Court for the District of Massachusetts seeking a
declaratory judgment that this patent is invalid and that the Company's Synergy
products do not infringe the patent. The Schneider companies filed counterclaims
against the Company, alleging the Company's willful infringement of the patent
and seeking monetary and injunctive relief. The parties have made cross motions
for summary judgment on various aspects of the case.
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED) filed a suit for patent
infringement against ACS, alleging willful infringement of two of SCIMED's U.S.
patents by ACS's FLOWTRACK-40[Trademark] and RX ELIPSE[Registered Trademark]
PTCA catheters. Suit was filed in the U.S. District Court for the Northern
District of California and seeks monetary and injunctive relief. The case has
been sent to arbitration for a threshold determination of one issue covered by
the November 27, 1991 Settlement Agreement (the "Settlement Agreement") between
the parties. That arbitration is scheduled for hearing in October 1996.
On November 17, 1995, SCIMED filed a suit for patent infringement against ACS,
alleging willful infringement of three of SCIMED's U.S. patents by the ACS RX
LIFESTREAM[Trademark] PTCA catheter. Suit was filed in the U.S. District Court
for the Northern District of California and seeks monetary and injunctive
relief. The case has also been sent to arbitration under the terms of the
Settlement Agreement, and an arbitration hearing is scheduled to be held in
October 1996.
On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,
alleging willful infringement of four U.S. patents licensed to ACS by SCIMED's
EXPRESS PLUS[Trademark] and EXPRESS PLUS II[Trademark] PTCA catheters. Suit was
filed in the U.S. District Court for the Northern District of California and
seeks monetary and injunctive relief. SCIMED has moved to dismiss the suit for
failure to join an essential party.
On December 15, 1995, the Company and SCIMED filed a suit for restraint of
trade, unfair competition and conspiracy to monopolize against ACS and the
Schneider companies, alleging certain violations of state and federal antitrust
laws arising from the improper prosecution, enforcement and cross-licensing of
U.S. patents relating to rapid exchange balloon dilatation angioplasty
catheters. Suit was filed in the U.S. District Court for the District of
Massachusetts and seeks monetary, declaratory and injunctive relief. The
defendants have moved for dismissal.
On March 12, 1996, ACS filed two suits for patent infringement against SCIMED,
alleging in one case the willful infringement of a U.S. patent by SCIMED's
EXPRESS PLUS[Trademark], EXPRESS PLUS II[Trademark] and LEAP EXPRESS
PLUS[Trademark] PTCA catheters, and in the other case the willful infringement
of a U.S. patent by SCIMED's BANDIT[Trademark] PTCA catheter. The suits were
filed in the U.S. District Court for the Northern District of California and
seek monetary and injunctive relief. SCIMED has answered, denying the
allegations of the complaint.
<PAGE> 11
On November 9, 1994, Target Therapeutics, Inc. ("Target") filed a lawsuit in the
U.S. District Court for the Northern District of California alleging that
SCIMED's Venture[Trademark] and Venture II[Trademark] microcatheters infringe a
patent assigned to Target. On May 2, 1996, the District Court entered an order
granting a preliminary injunction prohibiting SCIMED from marketing or selling
the accused product. SCIMED intends to appeal the entry of the injunction.
On April 5, 1995, C.R. Bard, Inc. ("Bard") filed a lawsuit in the U.S. District
Court for the District of Delaware alleging that certain Company products,
including the Company's Max Force TTS[Trademark] catheter, infringes a patent
assigned to Bard. The lawsuit seeks a declaratory judgment that the Company has
infringed the Bard patent, preliminary and permanent injunctions enjoining the
manufacture, use or sale of the Max Force TTS or any other infringing product,
monetary damages and expenses. SCIMED has answered, denying the allegations of
the complaint.
On March 25, 1996, Cordis Corporation, a subsidiary of Johnson & Johnson
Company, filed a suit for patent infringement against SCIMED, alleging the
infringement of five U.S. patents by SCIMED's LEAP[Trademark] balloon material,
used in certain models of SCIMED's BANDIT[Trademark] and EXPRESS
PLUS[Trademark] products. The suit was filed in the U.S. District Court for the
District of Minnesota and seeks monetary and injunctive relief. SCIMED's answer
is not yet due.
On September 1, 1995, a purported class action lawsuit was filed in the Court of
Chancery in the State of Delaware in and for New Castle County captioned Kinder
v. Auth, et al., alleging breaches of fiduciary duty by the Board of Directors
of Heart Technology, Heart Technology and the Company in connection with the
Agreement and Plan of Merger entered into between the Company and Heart
Technology. In January 1996, the parties agreed to settle the suit for an amount
the Company does not deem to be material.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the Company
will prevail in any particular case. An adverse outcome in one or more cases in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against product
liability losses as could otherwise materially affect the Company's financial
position.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- - ---------------------
Net sales in the first quarter of 1996 increased 22.6% to $322.4 million, as
compared to $262.9 million in the first quarter of 1995. The Company reported a
combined net loss for the quarter of $991,000 (or $.01 per share) that included
non-recurring and special charges of $68.7 million ($66.5 million net-of tax).
This compares to a combined net loss of $64.1 million (or $.37 per share) in the
first quarter of 1995, including non-recurring and special charges of $124.7
million ($112.1 million net-of-tax).
Revenues in the U.S. grew approximately 14.5% during the first quarter compared
to the same period of the prior year. International revenues, including export
sales, increased approximately 39.3% and were negatively impacted by
approximately $1.7 million caused primarily by the strengthening of the U.S.
dollar versus the Japanese yen. The increase in international sales reflects
results from the Company's strategy to build its international organization.
Gross profit as a percentage of net sales was approximately 73.4% in the first
quarter of 1996 as compared to 70.0% in the first quarter of 1995. The
improvement in the Company's gross margins is primarily due to the Company's
U.S. cost containment programs, an increase in the percentage of international
sales compared to U.S. sales, the benefits of converting from selling through
international distributors to direct sales operations, and a shift in the
Company's product sales mix. However, the positive impact of these initiatives
was partially offset by a slight decline in average selling prices due to the
market's continuing efforts to contain healthcare costs and increased
competition. Uncertainty remains with regard to future changes within the health
care industry. Continued consolidation among U.S. health care providers and the
trend towards managed care in the United States may result in continued pressure
on selling prices of certain products and resulting compression on gross
margins. In addition, international markets are also being effected by economic
pressure to contain health care costs. Although these factors will continue to
impact the rate at which Boston Scientific can grow, the Company believes that
it is well positioned to take advantage of opportunities for growth that exist
in the markets it serves.
Selling, general and administrative expenses increased 28.6% from $80.9 million
in the three months ended March 31, 1995 to $104.0 million in the three months
ended March 31, 1996. The increase in overall expense dollars reflects continued
expansion of the Company's domestic and international sales organizations and
related marketing support.
<PAGE> 13
Research and development expenses increased 19.7% from $21.5 million in the
first quarter of 1995 to $25.8 million in the first quarter of 1996 and remained
relatively constant as a percentage of sales (8.2% in the first quarter of 1995
and 8.0% in the first quarter of 1996). The increase in dollars reflects
increased spending in regulatory, clinical research and various other product
development programs, and reflects the Company's continued commitment to refine
existing products and procedures and to develop new technologies that provide
simpler, less traumatic, less costly and more efficient diagnosis and treatment.
The trend toward more stringent U.S. Food and Drug Administration (FDA)
oversight in product clearance and enforcement activities has generally caused
medical device manufacturers to experience more uncertainty, greater risk and
higher expenses. In addition, FDA approval times for new products continue to be
lengthy, a concern of medical device manufacturers generally.
Royalty expenses decreased 49.9% from $7.7 million in the first quarter of 1995
to $3.9 million in the first quarter of 1996 and decreased from approximately
2.9% of net sales to 1.2% of net sales. The decrease in royalties is primarily
attributable to a reduction in sales of certain of the Company's PTCA products
that are subject to royalties.
In connection with the acquisitions of EPT and Symbiosis, the Company recorded
non-recurring and special charges of $68.7 million ($66.5 million net-of tax) in
the first quarter of 1996. Charges include $38.7 million for purchased research
and development, $4.6 million in direct transaction costs, and $12.2 million of
estimated costs to be incurred in merging the separate operating businesses of
EPT with subsidiaries of the Company. Estimated costs include those typical in a
merging of operations and relate to, among other things, rationalization of
facilities, workforce reductions, unwinding of various contractual commitments,
asset writedowns and other integration costs. The remaining $13.2 million, which
is primarily non-deductible for tax purposes, represents a change in
management's estimates of the merger-related charges recorded in 1995. The
change to prior year estimates relate primarily to the costs of unwinding
various contractual obligations and the rationalization of facilities. In the
first quarter of 1995, the Company recorded non-recurring and special charges of
$124.7 million ($112.1 million, net-of-tax) in connection with the acquisitions
of SCIMED, Cardiovascular Imaging Systems, Inc. (CVIS) and Vesica Medical, Inc.
(Vesica). Charges included $32.6 million for purchased research and development
projects, $21.1 million in direct transaction costs, and $71.0 million of
estimated costs to be incurred in merging the SCIMED business with subsidiaries
of the Company. Estimated costs include those typical in a merging of operations
and relate to, among other things, rationalization of facilities, workforce
reductions, unwinding of various contractual commitments, asset writedowns and
other integration costs.
<PAGE> 14
Interest and dividend income was $1.8 million in the first quarter of 1996
compared to $4.5 million in the first quarter of 1995. The decrease is primarily
attributable to a decrease in the Company's average cash and short-term
investments resulting from the use of cash to finance several of the Company's
strategic acquisitions and alliances during 1995 and the first quarter of 1996.
Interest expense decreased from $2.7 million in the first quarter of 1995 to
$1.3 million in the first quarter of 1996. The decrease in interest expense is
primarily attributable to a decrease in foreign borrowings. Other income
(expense), net, decreased from $3.6 million in the first quarter of 1995 to
($2.0 million) in the first quarter of 1996. The decrease is primarily
attributable to approximately $3.2 million of net foreign exchange transaction
gains recorded in the first quarter of 1995, as compared to approximately $1.4
million net foreign exchange transaction losses recorded in the first quarter of
1996.
The Company's effective tax rate, excluding the impact of non-recurring and
special charges, was approximately 39.4% in the first quarter of 1995 as
compared to 35.5% in the first quarter of 1996. The reduction in the Company's
effective tax rate, excluding the impact of non-recurring and special charges,
is due to increased business in lower tax geographies and other tax initiatives.
On January 22, 1996, the Company completed its merger of EP Technologies, Inc.
(EPT) in a stock-for-stock transaction. The transaction, which was accounted for
as a pooling-of-interests, was effected through the exchange of 0.297 shares of
the Company's common stock for each EPT share held. Approximately 3.4 million
shares of the Company's common stock were issued in conjunction with the EPT
merger.
On March 14, 1996, the Company acquired Symbiosis Corporation (Symbiosis),
formerly a wholly-owned subsidiary of American Home Products Corporation. Boston
Scientific purchased Symbiosis, a developer and manufacturer of specialty
medical devices, for approximately $153 million in a cash transaction, of which
$100 million was financed on an interim basis by the seller. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the assets acquired based on their estimated fair values.
The treatment resulted in approximately $146 million of intangible assets that
will be amortized over their estimated period of benefit. The Company also
recorded a deferred tax liability of approximately $38.7 million representing
the tax effect of timing differences recorded as part of the acquisition.
The Company has substantially completed the integration of the businesses
acquired early in 1995, and is in the process of integrating the businesses
acquired more recently. Management believes it has developed a sound plan for
continuing and concluding the integration process, and that it will achieve that
plan. However, in view of the number of major transactions undertaken by the
Company, the dramatic changes in the size of the Company and the complexity of
its organization resulting from these transactions, management also believes
that the successful implementation of its plan presents a significant degree of
difficulty. The failure to integrate these businesses effectively could
adversely affect the Company's ability to realize the strategic and financial
objectives of these transactions.
<PAGE> 15
Liquidity and Capital Resources
- - -------------------------------
Cash flow from operating activities continued to be strong during the quarter
contributing to a strong balance sheet at March 31, 1996. Cash flows from
operating activities during the first quarter of 1996 was positively impacted by
the timing of tax payments. In this regard, tax payments made during the second
quarter of 1996 are expected to be greater than paid during the second quarter
of 1995. Cash and short-term investments totaled $144.4 million at March 31,
1996 compared to $161.2 million at December 31, 1995. The decrease in cash and
short-term investments is primarily attributable to approximately $53.0 million
paid in conjunction with the Company's acquisition of Symbiosis and capital
expenditures, partially offset by cash provided by operating activities and net
proceeds received from the exercise of stock options. The increases in accounts
receivable and inventories are primarily due to the growth of international
sales and the shift from international distributors to direct sales forces.
Working capital decreased from $283.0 million at December 31, 1995 to $161.3
million at March 31, 1996. The decrease in working capital is due primarily to
the Company's acquisition of Symbiosis.
In connection with the acquisitions of SCIMED, CVIS, Vesica, Meadox Medicals,
Inc., Heart Technology, Inc., EPT and Symbiosis, the Company recorded
non-recurring and special charges of approximately $237.1 million ($195.3
million net-of-tax) and $67.8 million ($66.5 million net-of tax) during 1995 and
the first quarter of 1996, respectively. Integration plans are expected to be
substantially completed by the end of 1997. Cash outflows to complete the
balance of the Company's initiatives to integrate the businesses acquired are
estimated to be approximately $75.1 million and $44.9 million for the remaining
of 1996 and thereafter, respectively.
On May 3, 1996, Boston Scientific announced the acquisition MinTec, a privately
held company dedicated to the development of stent graph technology for the
repair of diseased vessels and arteries. The Company purchased MinTec for
approximately $70 million in a cash transaction. The transaction, which will be
accounted for under the purchase method of accounting, was financed by the
Company's available cash and borrowings under the Company's line of credit
agreement with a U.S. bank. The Company expects to record a non-recurring
special charge (primarily purchased research and development) in connection with
the MinTec acquisition. The amount of the charge cannot be determined until an
evaluation of the fair market value of MinTec's assets and liabilities is
performed and purchased research and development is determined.
The Company is involved in various lawsuits from time to time in the normal
course of business. In management's opinion, the Company is not currently
involved in any legal proceeding other than those specifically identified in the
notes to the unaudited condensed consolidated financial statements which,
individually or in the aggregate, could have a material effect on the financial
condition, operations and cash flows of the Company. Further, product liability
claims may be asserted in the future relative to events not known to management
at the present time. The Company has insurance coverage which management
believes is adequate to protect against such product liability losses as could
otherwise materially affect the Company's financial position.
<PAGE> 16
Over the past fifteen months, the Company has entered into several other
transactions involving acquisitions and alliances, certain of which have
involved equity investments. As the health care environment continues to undergo
rapid change, management expects that it will continue focusing on strategic
initiatives. The Company is pursuing additional financing facilities of
approximately $350 million, although there are no assurances that the financing
can be obtained. The Company expects its cash and cash equivalents, short-term
investments, cash flows from operating activities, and projected borrowing
capacity, will be sufficient to meet its projected operating cash needs,
including integration costs at least through the end of 1996.
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Schneider (Europe) AG and Schneider (USA) Inc., subsidiaries of Pfizer,
Inc., have alleged that the Company's Synergy[Trademark] products infringe one
of their patents. On May 13, 1994, the Company filed a lawsuit against them in
the United States Federal District Court for the District of Massachusetts
seeking a declaratory judgment that this patent is invalid and that the
Company's Synergy products do not infringe the patent. The Schneider companies
filed counterclaims against the Company, alleging the Company's willful
infringement of the patent and seeking monetary and injunctive relief. The
parties have made cross motions for summary judgment on various aspects of the
case.
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED) filed a suit for patent
infringement against ACS, alleging willful infringement of two of SCIMED's U.S.
patents by ACS's FLOWTRACK-40[Trademark] and RX ELIPSE[Registered Trademark]
PTCA catheters. Suit was filed in the U.S. District Court for the Northern
District of California and seeks monetary and injunctive relief. The case has
been sent to arbitration for a threshold determination of one issue covered by
the November 27, 1991 Settlement Agreement (the "Settlement Agreement") between
the parties. That arbitration is scheduled for hearing in October 1996.
On November 17, 1995, SCIMED filed a suit for patent infringement against
ACS, alleging willful infringement of three of SCIMED's U.S. patents by the ACS
RX LIFESTREAM[Trademark] PTCA catheter. Suit was filed in the U.S. District
Court for the Northern District of California and seeks monetary and injunctive
relief. The case has also been sent to arbitration under the terms of the
Settlement Agreement, and an arbitration hearing is scheduled to be held in
October 1996.
On October 10, 1995, ACS filed a suit for patent infringement against
SCIMED, alleging willful infringement of four U.S. patents licensed to ACS by
SCIMED's EXPRESS PLUS[Trademark] and EXPRESS PLUS II[Trademark] PTCA catheters.
Suit was filed in the U.S. District Court for the Northern District of
California and seeks monetary and injunctive relief. SCIMED has moved to
dismiss the suit for failure to join an essential party.
On December 15, 1995, the Company and SCIMED filed a suit for restraint of
trade, unfair competition and conspiracy to monopolize against ACS and the
Schneider companies, alleging certain violations of state and federal antitrust
laws arising from the improper prosecution, enforcement and cross-licensing of
U.S. patents relating to rapid exchange balloon dilatation angioplasty
catheters. Suit was filed in the U.S. District Court for the District of
Massachusetts and seeks monetary, declaratory and injunctive relief. The
defendants have moved for dismissal.
<PAGE> 18
On March 12, 1996, ACS filed two suits for patent infringement against
SCIMED, alleging in one case the willful infringement of a U.S. patent by
SCIMED's EXPRESS PLUS[Trademark], EXPRESS PLUS II[Trademark] and LEAP EXPRESS
PLUS[Trademark] PTCA catheters, and in the other case the willful infringement
of a U.S. patent by SCIMED's BANDIT[Trademark] PTCA catheter. The suits were
filed in the U.S. District Court for the Northern District of California and
seek monetary and injunctive relief. SCIMED has answered, denying the
allegations of the complaint.
On November 9, 1994, Target Therapeutics, Inc. ("Target") filed a lawsuit in
the U.S. District Court for the Northern District of California alleging that
SCIMED's Venture[Trademark] and Venture II[Trademark] microcatheters infringe a
patent assigned to Target. On May 2, 1996, the District Court entered an order
granting a preliminary injunction prohibiting SCIMED from marketing or selling
the accused product. SCIMED intends to appeal the entry of the injunction.
On April 5, 1995, C.R. Bard, Inc. ("Bard") filed a lawsuit in the U. S.
District Court for the District of Delaware alleging that certain Company
products, including the Company's Max Force TTS[Trademark] catheter, infringes
a patent assigned to Bard. The lawsuit seeks a declaratory judgment that the
Company has infringed the Bard patent, preliminary and permanent injunctions
enjoining the manufacture, use or sale of the Max Force TTS or any other
infringing product, monetary damages and expenses. SCIMED has answered denying
the allegations of the complaint.
On March 25, 1996, Cordis Corporation, a subsidiary of Johnson & Johnson
Company, filed a suit for patent infringement against SCIMED, alleging the
infringement of five U.S. patents by SCIMED's LEAP[Trademark] balloon material,
used in certain models of SCIMED's BANDIT and EXPRESS PLUS products. The suit
was filed in the U.S. District Court for the District of Minnesota and seeks
monetary and injunctive relief. SCIMED's answer is not yet due.
On September 1, 1995, a purported class action lawsuit was filed in the
Court of Chancery in the State of Delaware in and for New Castle County
captioned Kinder v. Auth, et al., alleging breaches of fiduciary duty by the
Board of Directors of Heart Technology, Heart Technology and the Company in
connection with the Agreement and Plan of Merger entered into between the
Company and Heart Technology. In January 1996, the parties agreed to settle the
suit for an amount the Company does not deem to be material.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company.
The Company believes that it has meritorious defenses against claims that it
has infringed patents of others. However, there can be no assurance that the
Company will prevail in any particular case. An adverse outcome in one or more
cases in which the Company's products are accused of patent infringement could
have a material adverse effect on the Company.
<PAGE> 19
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against product
liability losses as could otherwise materially affect the Company's financial
position.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 - Fourth Amendment dated April 1, 1996 to Second
Amended and Restated Loan Agreement between The
First National Bank of Boston and the Company
Exhibit 11 - Computation of Earnings Per Share
<TABLE>
(b) The following reports on Form 8-K were filed during the quarter
ended March 31, 1996 and through the date hereof:
<CAPTION>
Item Date of Event Description
---- ------------- -----------
<S> <C> <C>
Item 2 December 29, 1995 Completion of the Company's merger with Heart
Technology, Inc.
Item 2 January 22, 1996 Completion of the Company's merger with EP
Technologies, Inc.
Item 5 January 25, 1996 Execution of Purchase Agreement with American
Home Products Corporation to purchase a
wholly-owned subsidiary, Symbiosis Corp.
Item 2 March 14, 1996 Completion of the Company's acquisition of
Symbiosis, Corp., formerly a wholly owned
subsidiary of American Home Products
Corporation
</TABLE>
<PAGE> 20
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 15, 1996.
BOSTON SCIENTIFIC CORPORATION
By: /S/ Lawrence C. Best
--------------------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and Senior Vice
President - Finance and Administration
<PAGE> 1
EXHIBIT 10
FOURTH AMENDMENT TO CREDIT AGREEMENT
This FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made as
of April 1, 1996 between BOSTON SCIENTIFIC CORPORATION (the "Borrower"), a
Delaware corporation having its principal place of business and chief executive
office at One Boston Scientific Place, Natick, Massachusetts 01760-1537 and THE
FIRST NATIONAL BANK OF BOSTON (the "Lender"), a national bank with its head
office at 100 Federal Street, Boston, Massachusetts 02110.
WITNESSETH:
WHEREAS, the Borrower and the Lender have heretofore entered into the
Second Amended and Restated Loan Agreement dated as of May 7, 1993, (as amended
by a First Amendment to the Credit Agreement dated as of November 1, 1993, a
Second Amendment to the Credit Agreement dated as of February 7, 1995 and a
Third Amendment to the Credit Agreement dated August 18, 1995, the "Credit
Agreement");
WHEREAS, subject to the terms of the Credit Agreement, the Lender has
made available to the Borrower a revolving credit facility (the "Line") in the
principal amount of $60,000,000;
WHEREAS, the Borrower has requested that the Lender temporarily increase
the maximum availability under the Line to $110,000,000; and
WHEREAS, the Lender is willing to agree to such temporary increase
subject to the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the premises and for good and
valuable consideration, the receipt and sufficiency of which are hereby mutually
acknowledged, the parties hereto agree as follows:
Section 1. DEFINITIONS. All capitalized terms used herein which are
defined in the Credit Agreement shall have the same meanings herein as therein,
except as otherwise specifically provided herein.
Section 2. AMENDMENTS TO THE CREDIT AGREEMENT. From and after the date
hereof, the Credit Agreement is hereby amended as follows:
2.1. The definition "Maximum Amount" set forth in Section I of the
Credit Agreement is hereby deleted in its entirety, and the following
substituted therefor:
"Maximum Amount", unless otherwise reduced by the Borrower
pursuant to Section 2.7 hereof, shall mean (i) $110,000,000 for the period from
April 1, 1996 to June 17, 1996, and (ii) $60,000,000 for all other times."
<PAGE> 2
2.2. The second sentence of Section 2.1 of the Credit Agreement is
hereby deleted in its entirety, and the following substituted therefor:
"The Borrower agrees that if at any time the debit balance of the Loan
Account plus the aggregate face amount of Letters of Credit outstanding
at any time shall exceed the Maximum Amount, the Borrower shall
immediately pay cash to the Lender to be credited to the Loan Account
in such amount as may be necessary to eliminate the excess."
Section 3. GENERAL.
3.1. The Borrower represents and warrants that no event has occurred and
is continuing and no condition exists which constitutes or, with the passage of
time or the giving of notice, or both, would constitute an Event of Default
under the Credit Agreement, as amended hereby, except to the extent previously
waived by the Lender in writing.
3.2. This Amendment may be executed in any number of counterparts, each
of which when executed and delivered shall be deemed an original, but all of
which together shall constitute one instrument. In making proof of this
Amendment, it shall not be necessary to produce or account for more than one
counterpart hereof signed by each of the parties hereto. This Amendment is
expressly made supplemental to and a part of the Credit Agreement and, except to
the extent specifically amended hereby, all of the terms, conditions and
provisions of the Credit Agreement shall remain unmodified, and the Credit
Agreement as amended hereby is confirmed as being in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
under seal as of the day first written by their respective officers hereunto
duly authorized.
BOSTON SCIENTIFIC CORPORATION
By: /S/ Lawrence C. Best
----------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer
THE FIRST NATIONAL BANK OF BOSTON
By: /S/ Timothy G. Clifford
----------------------------------
Name: Timothy G. Clifford
Title: Vice President
<PAGE> 1
EXHIBIT 11
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<TABLE>
Computation of Earnings Per Share
(In thousands, except share and per share information)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
----------- -----------
<S> <C> <C>
Primary:
Weighted average shares outstanding 177,052,342 173,912,993
Net effect of dilutive stock options - based
on the treasurystock method using average
market price
----------- -----------
Total 177,052,342 173,912,993
=========== ===========
Net loss ($991) ($64,062)
=========== ===========
Per share amount ($0.01) ($0.37)
=========== ===========
Fully Diluted:
Weighted average shares outstanding 177,052,342 173,912,993
Net effect of dilutive stock options - based on
the treasury stock method using quarter
end market price, if higher than average
market price
----------- -----------
Total 177,052,342 173,912,993
=========== ===========
Net loss ($991) ($64,062)
=========== ===========
Per share amount ($0.01) ($0.37)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 104,068
<SECURITIES> 40,357
<RECEIVABLES> 229,034
<ALLOWANCES> 0
<INVENTORY> 169,391
<CURRENT-ASSETS> 574,077
<PP&E> 269,554
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,241,599
<CURRENT-LIABILITIES> 412,819
<BONDS> 0
0
0
<COMMON> 1,791
<OTHER-SE> 793,711
<TOTAL-LIABILITY-AND-EQUITY> 1,241,599
<SALES> 322,383
<TOTAL-REVENUES> 322,383
<CGS> 85,634
<TOTAL-COSTS> 85,634
<OTHER-EXPENSES> 202,350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,290
<INCOME-PRETAX> 32,858
<INCOME-TAX> 33,849
<INCOME-CONTINUING> (991)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (991)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
