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: September 30, 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 September 30, 1996
- -----------------------------------------------------------------
Common Stock, $.01 Par Value 177,915,164
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Page 1 of 27
Exhibit Index on Page 24
Part I
Financial Information
Item 1. Financial Statements
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
In thousands, except share data 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 59,420 $ 117,321
Marketable securities 23,699 43,832
Trade accounts receivable, net 283,017 214,232
Inventories 209,837 148,572
Prepaid expenses and other current assets 66,551 32,688
-------------------------
Total current assets 642,524 556,645
Property, plant, equipment and leaseholds, net 319,350 256,093
Intangibles, net 307,068 137,704
Deferred income taxes 4,855 46,352
Other investments and assets 83,354 103,094
-------------------------
$1,357,151 $1,099,888
=========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
In thousands, except share data 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Commercial paper $ 199,746
Bank obligations 26,237 $ 57,520
Accounts payable and accrued expenses 147,107 106,322
Accrual related to special charges 65,116 80,144
Other current liabilities 54,493 29,691
--------------------------
Total current liabilities 492,699 273,677
Long term liabilities 8,468 52,061
Commitments and contingencies
Contingent stock repurchase obligation 24,855
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 September 30, 1996 and 179,079,298
at December 31, 1995 1,791 1,791
Additional paid-in capital 386,828 386,610
Retained earnings 508,313 417,951
Foreign currency translation adjustment (31,806) (14,739)
Unrealized gain on available-for-sale securities, net 12,329 8,833
Treasury stock, at cost - 1,186,702 shares at
September 30, 1996 and 2,425,490 shares at
December 31, 1995 (46,326) (26,296)
--------------------------
Total stockholders' equity 831,129 774,150
--------------------------
$1,357,151 $1,099,888
==========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
In thousands, except per share data 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $373,744 $283,094 $1,053,315 $823,955
Cost of products sold 104,454 82,475 284,972 243,334
-------------------------------------------
Gross profit 269,290 200,619 768,343 580,621
Selling, general and administrative expenses 130,375 92,774 352,910 265,311
Research and development expenses 30,309 24,367 84,755 68,564
Royalties 3,431 5,403 11,141 20,151
Special charges - - 128,341 124,749
-------------------------------------------
164,115 122,544 577,147 478,775
-------------------------------------------
Operating income 105,175 78,075 191,196 101,846
Other income (expense):
Interest and dividend income 837 3,262 3,677 10,902
Interest expense (3,490) (1,907) (7,982) (7,288)
Other, net 1 (1,630) (3,689) 4,684
-------------------------------------------
Income before income taxes 102,523 77,800 183,202 110,144
Income taxes 34,680 28,444 92,840 75,821
-------------------------------------------
Net income $ 67,843 $ 49,356 $ 90,362 $ 34,323
===========================================
Primary net income per common share $0.37 $0.27 $0.50 $0.19
===========================================
Primary weighted average number of common shares 182,382 180,571 180,699 177,882
===========================================
Fully diluted net income per common share $0.37 $0.27 $0.49 $0.19
===========================================
Fully diluted weighted average number of common shares 183,040 181,084 183,040 180,121
===========================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholder's Equity
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996
-----------------------------------------------------------------------------------------
Foreign
Common Stock 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 income 90,362 90,362
Foreign currency translation
adjustment (17,067) (17,067)
Issuance of Common Stock under
options, warrants and stock
purchase plans 22,568 (631) 29,760 29,129
Purchase of Common Stock for
treasury (52,313) (52,313)
Contingent stock repurchase
obligation (24,855) 2,523 (22,332)
Tax benefit relating to stock
option and employee stock
purchase plans 25,704 25,704
Net change in equity investments 3,496 3,496
Balance at September 30, 1996 179,101,866 $1,791 $386,828 $508,313 ($31,806) $12,329 ($46,326) $831,129
</TABLE>
See notes to unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
In thousands 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 81,913 $ 27,801
Investing activities:
Purchases of property, plant, and equipment (86,041) (54,664)
Net maturities of marketable securities 20,133 47,316
Payment for purchase of Symbiosis Corporation,
net of cash acquired (153,907) -
Payment for purchase of Cardiovascular Imaging
Systems, Inc., net of cash acquired - (87,783)
Payment for purchase of MinTec Inc.,
net of cash acquired (71,160) -
Payment for acquisition of minority interest ownership
in a subsidiary (16,513) -
Net payments for other acquistions of certain technologies (3,229) (11,796)
Other (4,217) (1,939)
-------------------
Cash used in investing activities (314,934) (108,866)
Financing actvities:
Net increase in commercial paper 199,746 -
Net payments on notes payable and capital leases (28,100) (37,402)
Proceeds from exercise of stock options, warrants
and stock purchase plans 29,129 14,459
Acquisitions of treasury stock, net of proceeds from
put options (49,790) -
Tax benefit relating to stock option and employee
stock purchase plans 25,704 11,044
Other 400 1,429
-------------------
Cash provided by (used in) financing activities 177,089 (10,470)
Effect of foreign exchange rates on cash (1,969) (4,700)
-------------------
Net decrease in cash and cash equivalents (57,901) (96,235)
Cash and cash equivalents at beginning of period 117,321 269,282
-------------------
Cash and cash equivalents at end of period $ 59,420 $173,047
===================
Supplemental Schedule of Noncash Investing
and Financing Activities:
Payments due in connection with the purchase of technology $ 11,650 $ 10,000
</TABLE>
See notes to unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 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 and nine-month periods ended September 30, 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.
Separate results of the combining entities for the nine months ended
September 30, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Combined
Boston Boston
Scientific EPT Scientific
---------------------------------
<S> <C> <C> <C>
Net sales $807,461 $16,494 $823,955
Net income (loss) $ 35,897 $(1,574) $ 34,323
</TABLE>
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. 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. This accounting treatment
resulted in approximately $146 million of intangible assets that will be
amortized over their estimated period of benefit. Approximately $38.7
million of the acquisition cost represented purchased research and
development. 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 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:
<TABLE>
<CAPTION>
For the Nine Months
Ended September,
1996 1995
---------------------
<S> <C> <C>
Net sales $1,057,491 $841,507
Net income (loss) $ 128,849 $ (5,551)
Primary net income (loss) per common share $ .71 $ (.03)
Fully diluted net income (loss) per common share $ .72 $ (.03)
</TABLE>
On May 3, 1996, Boston Scientific acquired assets from Endotech, Ltd. and
MinTec Inc., and certain related companies (Endotech/MinTec), a privately
held company dedicated to the development of stent graft technology for the
repair of diseased blood vessels. The Company purchased Endotech/MinTec's
assets for approximately $72 million in a cash transaction. The
transaction, which was accounted for under the purchase method of
accounting, was financed from the Company's available cash and borrowings
under its financing arrangements (see Notes C and D). The purchase price
was allocated to the assets acquired based on their estimated fair values.
The treatment resulted in approximately $14 million of intangible assets
that will be amortized over their estimated period of benefit. The
acquisition did not have a material pro forma impact on the Company's
operations, other than approximately $57.3 million of the acquisition cost
representing purchased research and development.
Note C - Merger-Related Charges
In the first nine months of 1996, the Company recorded special charges of
$128.3 million ($113.7 million net of tax) which primarily related to the
merger with EPT and the acquisitions of Symbiosis and Endotech/MinTec.
Charges include $96.0 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 majority of
the remaining $15.5 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
relates primarily to the costs of unwinding various contractual obligations
and the rationalization of facilities.
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.
Note D - Credit Arrangements
At December 31, 1995, the Company had line of credit agreements with two
U.S. banks (the Credit Agreements) that provided maximum worldwide
borrowings of $71 million. On April 1, 1996, the Company increased its
maximum worldwide borrowings provided under the Credit Agreements to $121
million. The term of the increased borrowings extended through June 7,
1996, at which time, the Credit Agreements were terminated and replaced by a
new $350 million revolving line of credit with a syndicate of U.S. and
international banks (New Credit Agreement). Under the New Credit Agreement,
the Company has the option to borrow amounts at various interest rates,
payable quarterly in arrears. The term of the borrowings extends through
June 6, 2002; use of the borrowings is unrestricted and the borrowings are
unsecured. The New Credit Agreement requires the Company to maintain a
minimum consolidated tangible net worth and a ratio of consolidated funded
debt to consolidated tangible net worth. At September 30, 1996, the Company
did not have any outstanding borrowings under the New Credit Agreement.
During the second quarter of 1996, the Company initiated a commercial paper
program. The commercial paper is supported by the Company's New Credit
Agreement; outstanding commercial paper reduces available borrowings under
the New Credit Agreement. Proceeds from issuing the commercial paper were
used for repayment of a $100 million short term seller-financed loan
associated with the acquisition of Symbiosis, repayment of borrowings under
the Credit Agreements, and repurchase of the Company's common stock. The
remaining proceeds primarily were used for general operating purposes. At
September 30, 1996, the Company had approximately $199.7 million in
commercial paper outstanding with interest rates ranging from 5.50% to
5.63%.
Note E - Inventories
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------------------
<S> <C> <C>
Finished goods $111,416 $ 76,531
Work-in-process 45,485 35,179
Raw materials 52,936 36,862
------------------------
$209,837 $148,572
========================
</TABLE>
Note F - Stockholders' Equity
During the second quarter of 1996, the Company resumed its program to
repurchase stock. The Board of Directors authorized the Company to purchase
on the open market up to 15,000,000 shares of the Company's common stock in
addition to the stock repurchased during 1993. Purchases will be made at
prevailing prices as market conditions and cash availability warrant.
Repurchased stock will be used to satisfy the Company's obligations pursuant
to its employee benefit and incentive plans. During the second quarter of
1996, the Company repurchased 1,262,500 shares of its common stock at an
aggregate cost of $52.3 million. No additional shares were repurchased
during the third quarter of 1996.
As part of the stock repurchase program, the Company sold European equity
put options to an independent broker-dealer during the second quarter of
1996. Each option, if exercised, obligates the Company to purchase from the
broker-dealer a specified number of shares of the Company's common stock at
a predetermined exercise price. The put options are exercisable only on the
first anniversary of the date the options were sold. During the second
quarter of 1996, the Company sold European put options for 600,000 shares
and received proceeds of approximately $2.5 million. Proceeds are recorded
as a reduction to the cost of the Company's treasury stock. The Company did
not sell any European put options during the third quarter of 1996.
Repurchase prices relating to put options outstanding at September 30, 1996
range from $41.10 per share to $41.75 per share. The Company's contingent
obligation to repurchase shares upon exercise of the outstanding put options
approximated $24.9 million at September 30, 1996. At September 30, 1996, the
aggregate contingent repurchase obligation has been reclassified from
permanent equity and is presented as a contingent stock repurchase
obligation.
Note G - 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.
Note H - Commitments and Contingencies
Schneider (Europe) AG and Schneider (USA) Inc., subsidiaries of Pfizer,
Inc., have alleged that the Company's Synergy(TM) 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 Advanced Cardiovascular Systems, Inc. (ACS), alleging
willful infringement of two of SCIMED's U.S. patents by ACS's FLOWTRACK-40(TM)
and RX ELIPSE(R) 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. The arbitration hearing was held
in October 1996 and a final decision is expected by February 8, 1997.
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(TM) 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. The arbitration hearing was held in
October 1996 and a final decision is expected by February 8, 1997.
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(TM) and EXPRESS PLUS II(TM) 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 answered, denying the
allegations of the complaint.
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, EXPRESS PLUS II and LEAP EXPRESS PLUS PTCA catheters,
and in the other case the willful infringement of a U.S. patent by SCIMED's
BANDIT(TM) 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(R) and VENTURE II(TM) 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. On July 1, 1996, the Court of Appeals for the
Federal Circuit stayed the preliminary injunction pending a decision on
SCIMED's appeal of the District Court's order. The appeal is presently
scheduled to be heard in early 1997.
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(TM) 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 catheter or any
other infringing product, monetary damages and expenses. The Company 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(TM) 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 has answered, denying the
allegations of the complaint.
On March 7, 1996, Cook Inc. filed suit in the Regional Court, Munich,
Division for Patent Disputes in Munich Germany against Mintec, Inc.
Minimally Invasive Technologies alleging that the Cragg EndoPro(TM) System I
and Stentor(TM) endovascular devise infringes a certain Cook patent. Since the
purchase of the assets of Endotech/MinTec by the Company, the Company has
assumed control of the litigation. The defendant's answer has not been
filed.
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.
On June 12, 1995, the Trustee in Bankruptcy for SMEC, Inc. filed a complaint
in the U.S. Bankruptcy Court in Nashville, Tennessee alleging that a
transaction between Datascope Corp. and the Company constitutes a fraudulent
settlement of prior litigation among the Trustee, Datascope Corp., IABP
Corp. and the Company. The complaint further alleges violation of the
Racketeer Influenced and Corrupt Organizations Act. The Company has
answered, denying the allegations of the complaint. By order entered October
16, 1996, the case was removed to the United States District Court for the
Middle District of Tennessee Northeastern Division.
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
such product liability losses as could otherwise materially affect the
Company's financial position.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net sales in the third quarter of 1996 increased 32.0% to $373.7 million as
compared to $283.1 million in the third quarter of 1995. Net income for the
third quarter of 1996 increased 37.5% to $67.8 million as compared to $49.4
million in the third quarter of 1995.
Net sales for the nine month period ended September 30, 1996 increased 27.8%
to $1,053.3 million as compared to $824.0 million for the same period in
1995. The Company reported net income for the nine month period ended
September 30, 1996 of $90.4 million including special charges ($128.3
million or $113.7 million net-of-tax) related to recent acquisitions
compared to net income of $34.3 million including special charges ($124.7
million or $112.1 million net of tax) for the same period in 1995.
Excluding special charges related to recent acquisitions, net income for the
nine month period ended September 30, 1996 increased 39.3% to $204.1 million
from $146.5 million for the nine month period in 1995.
Revenues in the United States grew approximately 19.1% during the third
quarter compared to the same period of the prior year. International
revenues, including export sales, increased approximately 58.6% during the
third quarter compared to the same period in the prior year and were
negatively impacted by approximately $5.0 million due to changes in foreign
currency exchange rates. Revenues in the United States grew approximately
17.5% during the nine months of 1996 compared to the same period of the
prior year. International revenues, including export sales, increased
approximately 49.0% during the nine months of 1996 compared to the same
period in the prior year and were negatively impacted by approximately $15.1
million due to changes in foreign currency exchange rates. The increase in
international sales reflects results from the Company's strategy to build
its international organization.
During the third quarter of 1996, the Company accelerated its forward build
and spend programs so as to be in a position to take advantage of the
expanded market opportunities it expects in 1997 and beyond. The Company's
ability to benefit from its forward build and spend programs may be limited
by risks and uncertainties related to competitive offerings, timing and
scope of regulatory approvals, infrastructure development, continued
international expansion, rights to intellectual property, and the ability of
the Company to implement its overall business strategy.
Gross profit as a percentage of net sales improved from 70.9% in the three
months ended September 30, 1995 to 72.1% in the three months ended September
30, 1996, and improved from 70.5% in the nine months ended September 30,
1995 to 72.9% in the nine months ended September 30, 1996. 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, and certain benefits of converting from selling
through international distributors to direct sales operations. However, the
positive impact of these initiatives was partially offset by the forward
spend programs discussed above, and a slight decline in average selling
prices due to 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 affected 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 40.5% from $92.8
million in the three months ended September 30, 1995 to $130.4 million in
the three months ended September 30, 1996 and increased as a percentage of
sales from 32.8% to 34.9% during the same periods. Selling, general and
administrative expenses increased 33.0% from $265.3 million for the nine
month period ended September 30, 1995 to $352.9 million for the same period
in 1996. The increase in overall expense dollars reflects continued forward
expansion of the Company's domestic and international sales organizations
and related marketing support in anticipation of increased volume, an
increase in legal expenses incurred to strengthen and defend the Company's
patent position, and amortization of intangibles acquired during 1995 and
1996.
Research and development expenses increased 24.4% from $24.4 million in the
third quarter of 1995 to $30.3 million in the third quarter of 1996, and
23.6% from $68.6 million in the nine month period of 1995 to $84.8 million
in the nine month period of 1996. Research and development expenses
decreased slightly as a percentage of net sales (8.6% in the third quarter
of 1995 and 8.1% in the third 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
regulatory oversight in countries around the world for product clearance and
enforcement activities has generally caused or may cause medical device
manufacturers to experience more uncertainty, greater risk and higher
expenses. In addition, regulatory approval times for new products continues
to be lengthy, a concern of medical device manufacturers generally.
Royalty expenses decreased 36.5% from $5.4 million in the third quarter of
1995 to $3.4 million in the third quarter of 1996, and 44.7% from $20.2
million in the nine month period of 1995 to $11.1 million in the nine month
period of 1996. Royalty expenses decreased from approximately 1.9% of net
sales in the third quarter of 1995 to 0.9% of net sales in the third quarter
of 1996. 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 the nine month period of 1996, the Company recorded special charges of
$128.3 million ($113.7 million net of tax) which primarily related to the
merger with EPT and the acquisitions of Symbiosis and Endotech/MinTec.
Charges include $96.0 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 EPT 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. The majority of the remaining $15.5 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 relates primarily to the costs of unwinding
various contractual obligations and the rationalization of facilities. In
the nine month period of 1995, the Company recorded special charges of
$124.7 million ($112.1 million, net-of-tax) in connection with the
acquisitions of SCIMED, Cardiovascular Imaging Systems (CVIS) and Vesica
Medical, Inc. (Vesica). Charges included $32.6 million for purchased
research and development, $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 included 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
special charges are determined based on formal plans approved by Company's
management using the best information available to it at the time. The
amounts the Company may ultimately incur may change as the plans are
executed.
Interest and dividend income was $837 thousand in the third quarter of 1996
compared to $3.3 million in the third quarter of 1995, and $3.7 million for
the nine month period of 1996 compared to $10.9 million for the nine month
period of 1995. The decrease is primarily attributable to a decrease in the
Company's average cash and marketable securities balance resulting from the
use of cash to finance several of the Company's strategic acquisitions and
alliances during the second half of 1995 and the first half of 1996.
Interest expense increased from $1.9 million in the third quarter of 1995 to
$3.5 million in the third quarter of 1996 and from $7.3 million in the nine
month period of 1995 to $8.0 million in the nine month period of 1996. The
increase in interest expense is primarily attributable to interest on a $100
million short term seller-financed loan associated with the acquisition of
Symbiosis and the Company's issuance of commercial paper. Other income
(expense), net, changed from expense of $1.6 million in the third quarter of
1995 to income of $1 thousand in the third quarter of 1996. The change is
primarily attributable to net foreign exchange transaction losses recorded
in the third quarter of 1995. Other income (expense), net, changed from
income of $4.7 million for the nine month period in 1995 to expense of $3.7
million for the nine month period in 1996. The change for the nine month
period ended September 30, 1996 relates primarily to net foreign exchange
transaction losses as compared to foreign exchange transaction gains for the
nine month period ended September 30, 1995.
The Company's effective tax rate improved from approximately 36.6% in the
third quarter of 1995 to 33.8% in the third quarter of 1996. The effective
tax rate including special charges was 50.7% for the nine month period of
1996 compared to 68.8% for the same period in 1995. The Company's effective
tax rate, excluding the impact on special charges, was approximately 37.6%
in the nine month period of 1995 as compared to approximately 34.5% in the
nine month period of 1996. The reduction in the Company's effective tax
rate, excluding the impact of special charges, is primarily due to increased
business in lower tax geographies and various tax planning initiatives.
On January 22, 1996, the Company completed its merger of 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, 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. 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. This accounting treatment resulted in
approximately $146 million of intangible assets that will be amortized over
their estimated period of benefit. Approximately $38.7 million of the
acquisition cost represented purchased research and development. 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.
On May 3, 1996, Boston Scientific acquired assets from Endotech/MinTec, a
privately held company dedicated to the development of stent graft
technology for the repair of diseased blood vessels. The Company purchased
assets from Endotech/MinTec for approximately $72 million in a cash
transaction. The transaction, which was accounted for under the purchase
method of accounting, was financed from the Company's available cash and
borrowings under its financing arrangements. The purchase price was
allocated to the assets acquired based on their estimated fair values. The
treatment resulted in approximately $14 million of intangible assets which
will be amortized over their estimated period of benefit. Approximately
$57.3 million of the acquisition cost represented purchased research and
development.
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. Integration plans are expected to be substantially
completed by the end of 1997. 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.
Liquidity and Capital Resources
Cash and marketable securities totaled $83.1 million at September 30, 1996
compared to $161.2 million at December 31, 1995. Working capital decreased
from $283.0 million at December 31, 1995 to $149.8 million at September 30,
1996. The decrease in cash and marketable securities is primarily
attributable to approximately $225.1 million paid in conjunction with the
Company's acquisitions of Symbiosis and Endotech/MinTec, capital
expenditures incurred primarily to expand the Company's manufacturing and
distribution facilities in Europe, cash used to repurchase the Company's
common stock, payment of merger related costs and net payments on line of
credit borrowings. The cash expenditures were partially offset by proceeds
received in connection with the Company's initiation of a commercial paper
program. The increase in accounts receivable from December 31, 1995 to
September 30, 1996 is primarily due to the growth of international sales
which typically have longer payment periods, the shift from international
distributors to direct sales forces and the accounts receivable recorded in
connection with the acquisitions of Symbiosis and Endotech/MinTec. The
increase in inventory during the same period is primarily related to the
Company's overall increase in sales and the shift from international
distributors to direct sales forces.
In connection with the acquisitions of SCIMED, CVIS, Vesica, Meadox
Medicals, Inc., Heart Technology, Inc., EPT, Symbiosis, and Endotech/MinTec,
the Company recorded non-recurring and special charges of approximately
$237.1 million ($195.3 million net-of-tax) and $128.3 million ($113.7
million net-of tax) during 1995 and the first half of 1996, respectively.
Cash outflows to complete the balance of the Company's initiatives to
integrate the businesses are estimated to be approximately $22.0 million and
$32.0 million during the fourth quarter and thereafter, respectively.
Additionally, the Company expects to continue to invest aggressively in
building its international organization, global systems and worldwide
manufacturing and distribution capacity. The Company's international
strategy is subject to the economic and political risks inherent to
international business, including fluctuations in currency and exchange
rates, as well as risks inherent in shifting from international distributors
to a direct sales force.
The Company is involved in various lawsuits, including product liability
suits, 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. The Company has insurance coverage which management
believes is adequate to protect against such product liability losses which
could otherwise materially affect the Company's financial position.
Since early 1995, the Company has entered into several 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 expects its cash and cash equivalents, marketable
securities, cash flows from operating activities, and borrowing capacity
will be sufficient to meet its projected operating cash needs, including
integration costs, at least through the end of 1997.
Cautionary Statement for Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
This report contains forward-looking statements. The Company desires to
take advantage of the new safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of the safe harbor
with respect to all forward-looking statements. Forward-looking statements
contained in this report include, but are not limited to, statements with
respect to: a) the Company's forward build and spend programs; b) the
Company's plans to continue to invest aggressively in its global systems and
worldwide manufacturing and distribution capacity; c) the potential impacts
of continued consolidation among health care providers, trends towards
managed care, and health care cost containment; d) the Company's belief that
it is well positioned to take advantage of opportunities for growth that
exist in the markets it serves; e) 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; f) the process and plan for the integration of businesses
acquired by the Company; and, g) the ability of the Company to meet its
projected cash needs through the end of 1997. Therefore, the Company wishes
to caution each reader of this report to consider carefully the specific
factors discussed with each forward-looking statement in this report and
other factors contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 as such factors in some cases have affected,
and in the future (together with other factors) could affect, the ability of
the Company to implement its business strategy and may cause actual results
to differ materially from those contemplated by the statements expressed
herein.
OTHER INFORMATION
Item 1: Legal Proceedings
Schneider (Europe) AG and Schneider (USA) Inc., subsidiaries of Pfizer,
Inc., have alleged that the Company's Synergy(TM) 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 Advanced Cardiovascular Systems, Inc. (ACS), alleging
willful infringement of two of SCIMED's U.S. patents by ACS's FLOWTRACK-40(TM)
and RX ELIPSE(R) 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. The arbitration hearing was held
in October 1996 and a final decision is expected by February 8, 1997.
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(TM) 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. The arbitration hearing was held in
October 1996 and a final decision is expected by February 8, 1997.
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(TM) and EXPRESS PLUS II(TM) 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 answered, denying the
allegations of the complaint.
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, EXPRESS PLUS II and LEAP EXPRESS PLUS PTCA catheters,
and in the other case the willful infringement of a U.S. patent by SCIMED's
BANDIT(TM) 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(R) and VENTURE II(TM) 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. On July 1, 1996, the Court of Appeals for the
Federal Circuit stayed the preliminary injunction pending a decision on
SCIMED's appeal of the District Court's order. The appeal is presently
scheduled to be heard in early 1997.
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(TM) 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 catheter or any
other infringing product, monetary damages and expenses. The Company 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(TM) 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 has answered, denying the
allegations of the complaint.
On March 7, 1996, Cook Inc. filed suit in the Regional Court, Munich,
Division for Patent Disputes in Munich Germany against Mintec, Inc.
Minimally Invasive Technologies alleging that the Cragg EndoPro(TM) System I
and Stentor(TM) endovascular devise infringes a certain Cook patent. Since the
purchase of the assets of Endotech/MinTec by the Company, the Company has
assumed control of the litigation. The defendant's answer has not been
filed.
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.
On June 12, 1995, the Trustee in Bankruptcy for SMEC, Inc. filed a complaint
in the U.S. Bankruptcy Court in Nashville, Tennessee alleging that a
transaction between Datascope Corp. and the Company constitutes a fraudulent
settlement of prior litigation among the Trustee, Datascope Corp., IABP
Corp. and the Company. The complaint further alleges violation of the
Racketeer Influenced and Corrupt Organizations Act. The Company has
answered, denying the allegations of the complaint. By order entered
October 16, 1996, the case was removed to the United States District Court
for the Middle District of Tennessee Northeastern Division.
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
such 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 11 - Computation of Earnings Per Share
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 November 14, 1996.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
Name: Lawrence C. Best
Title: Chief Financial Officer and Senior
Vice President - Finance and Administration
Exhibit 11
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------------------------------------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 177,527 176,113 177,526 175,151
Net effect of dilutive stock options - based on
the treasury stock method using average
market price 4,855 4,458 3,173 2,731
--------------------------------------
Total 182,382 180,571 180,699 177,882
======================================
Net income $ 67,843 $ 49,356 $ 90,362 $ 34,323
======================================
Per share amount $ 0.37 $ 0.27 $ 0.50 $ 0.19
======================================
Fully Diluted:
Weighted average shares outstanding 177,527 176,113 177,526 175,151
Net effect of dilutive stock options - based on
the treasury stock method using quarter
end market price, if higher than average
market price 5,513 4,971 5,514 4,970
--------------------------------------
Total 183,040 181,084 183,040 180,121
======================================
Net income $ 67,843 $ 49,356 $ 90,362 $ 34,323
======================================
Per share amount $ 0.37 $ 0.27 $ 0.49 $ 0.19
======================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 59,420
<SECURITIES> 23,699
<RECEIVABLES> 283,017
<ALLOWANCES> 0
<INVENTORY> 209,837
<CURRENT-ASSETS> 642,524
<PP&E> 319,350
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,357,151
<CURRENT-LIABILITIES> 492,699
<BONDS> 0
0
0
<COMMON> 1,791
<OTHER-SE> 829,338
<TOTAL-LIABILITY-AND-EQUITY> 1,357,151
<SALES> 1,053,315
<TOTAL-REVENUES> 1,053,315
<CGS> 284,972
<TOTAL-COSTS> 284,972
<OTHER-EXPENSES> 577,147
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,982
<INCOME-PRETAX> 183,202
<INCOME-TAX> 92,840
<INCOME-CONTINUING> 90,362
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,362
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.49
</TABLE>
