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, 1997
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
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- ----------------------------------------------------------------------------
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, 1997
----- --------------------
Common Stock, $.01 Par Value 178,807,076
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Page 1 of 23
Exhibit Index on Page 20
Part I
Financial Information
Item 1. Financial Statements
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
In thousands 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 71,554 $ 58,497
Short-term investments 7,327 22,051
Trade accounts receivable, net 302,009 298,886
Inventories 253,654 226,213
Deferred income taxes 101,675 101,064
Prepaid expenses and other current assets 28,216 42,167
------------------------
Total current assets 764,435 748,878
Property, plant, equipment and leaseholds, net 381,673 347,186
Intangibles, net 308,230 308,408
Investments and other assets 105,248 107,656
------------------------
$1,559,586 $1,512,128
========================
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings due within one year $ 222,806 $ 240,556
Accounts payable and accrued expenses 147,020 148,260
Income taxes payable 51,746 24,934
Accrual related to special charges 32,223 48,144
Other current liabilities 3,201 1,929
------------------------
Total current liabilities 456,996 463,823
Deferred income taxes 59,975 59,975
Other long-term liabilities 47,193 47,204
Contingent stock repurchase obligation 24,855 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 March 31, 1997 and at December 31, 1996 1,791 1,791
Additional paid-in capital 377,783 380,967
Retained earnings 657,666 585,057
Foreign currency translation adjustment (64,339) (37,994)
Unrealized gain on available-for-sale securities, net 7,172 10,193
Treasury stock, at cost - 294,790 shares at March
31, 1997 and 643,991 shares at December 31, 1996 (9,506) (23,743)
------------------------
Total stockholders' equity 970,567 916,271
------------------------
$1,559,586 $1,512,128
========================
</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
March 31,
In thousands, except per share data 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Net sales $399,176 $322,383
Cost of products sold 113,207 85,634
--------------------
Gross profit 285,969 236,749
Selling, general and administrative expenses 139,413 104,040
Royalties 4,974 3,882
Research and development expenses 33,731 25,753
Purchased research and development 38,700
Special charges 29,975
--------------------
178,118 202,350
--------------------
Operating income 107,851 34,399
Other income (expense):
Interest and dividend income 648 1,769
Interest expense (3,282) (1,290)
Other, net 3,155 (2,020)
--------------------
Income before income taxes 108,372 32,858
Income taxes 35,763 33,849
--------------------
Net income (loss) $ 72,609 $ (991)
====================
Net income (loss) per common share $ 0.40 $ (0.01)
====================
Primary weighted average number of common shares 183,663 177,052
====================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholder's Equity
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
-------------------------------------------------------------------------------------------
Net
Unrealized
Common Stock Foreign Gain On
------------------- Additional Currency Available-for-
Shares Par Paid-In Retained Translation Sale Treasury
Issued Value Capital Earnings Adjustment Securities Stock Total
-------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 179,101,866 $1,791 $380,967 $585,057 $(37,994) $10,193 $(23,743) $916,271
Net income 72,609 72,609
Foreign currency translation
adjustment (26,345) (26,345)
Issuance of common stock under
options, warrants and stock
purchase plans (9,116) 14,237 5,121
Tax benefit relating to incentive
stock option and employee stock
purchase plans 5,932 5,932
Net change in equity investments (3,021) (3,021)
-------------------------------------------------------------------------------------------
Balance at March 31, 1997 179,101,866 $1,791 $377,783 $657,666 $(64,339) $ 7,172 $ (9,506) $970,567
===========================================================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
In thousands 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 56,957 $ 36,324
Investing activities:
Purchases of property, plant, and equipment, net (53,121) (17,090)
Net maturities of held-to-maturity short-term investments 14,724 3,475
Acquisition of a business, net of cash acquired (53,907)
Other 2,297 (5,683)
---------------------
Cash used in investing activities (36,100) (73,205)
Financing activities:
Net decrease in commercial paper (16,000)
Net payments from notes payable, long-term borrowings
and capital leases (306) (114)
Proceeds from issuances of shares of common stock 5,121 9,309
Tax benefit relating to incentive stock option and employee
stock purchase plans 5,932 12,794
Other 88 1,954
---------------------
Cash provided by (used for) financing activities (5,165) 23,943
Effect of foreign exchange rates on cash (2,635) (315)
---------------------
Net increase (decrease) in cash and cash equivalents 13,057 (13,253)
Cash and cash equivalents at beginning of period 58,497 117,321
---------------------
Cash and cash equivalents at end of period $ 71,554 $ 104,068
=====================
Supplemental Schedule of Noncash Investing
and Financing Activities:
Additional borrowings incurred in connection with the
acquisition of a business $ 100,000
</TABLE>
See notes to unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1997
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, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997.
For further information, refer to the consolidated financial statements and
footnotes thereto incorporated by reference in Boston Scientific
Corporation's Annual Report on Form 10-K for the year ended December 31,
1997.
Certain prior year's amounts have been reclassified to conform to the
current year presentation.
Note B - Accrual Related to Special Charges
At December 31, 1996, the Company had an accrual related to special charges
of $66 million with respect to 1995 and 1996 business combinations. The
accrual includes those remaining costs typical in merging operations and
relates to, among other things, rationalization of facilities, workforce
reductions, unwinding of various contractual commitments, asset writedowns
and other integration costs. The special charges were determined based on
formal plans approved by the 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 balance of the Company's initiative
to integrate the businesses related to 1995 and 1996 business combinations
is executed.
The activity impacting the accrual related to special charges during the
first quarter of 1997, net of reclassifications made by management based on
available information, is summarized in the following table:
<TABLE>
<CAPTION>
Balance at Balance at
December 31, Charges March 31,
(in thousands) 1996 Utilized 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Facilities $18,897 $ 407 $18,490
Workforce reductions 25,897 8,923 16,974
Contractual commitments 8,156 5,148 3,008
Asset writedowns 6,248 4,372 1,876
Direct transaction and other costs 6,359 882 5,477
----------------------------------
$65,557 $19,732 $45,825
==================================
</TABLE>
The plans are expected to be substantially completed by the end of 1997.
Cash outlays to complete the balance of the Company's initiative to
integrate the businesses related to 1995 and 1996 business combinations are
estimated to be approximately $31 million.
The March 31, 1997 balance of the accrual for special charges is classified
within the balance sheet as follows:
<TABLE>
<CAPTION>
(in thousands)
- ---------------------------------------------------------
<S> <C>
Accrual related to special charges $32,223
Property, plant, equipment and leaseholds, net 10,762
Inventories 2,699
Other 141
-------
$45,825
=======
</TABLE>
Note C - Credit Arrangements
The Company has a $350 million revolving line of credit with a syndicate of
U.S. and international banks (the Credit Agreement). Under the 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, 2001; use of the borrowings is unrestricted and the
borrowings are unsecured. The 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 March 31,
1997, the Company did not have any outstanding borrowings under the Credit
Agreement.
The Company maintains a commercial paper program which is supported by the
Company's Credit Agreement; outstanding commercial paper reduces available
borrowings under the Credit Agreement. At March 31, 1997, the Company had
approximately $197 million in commercial paper outstanding with interest
rates ranging from 5.52% to 7.00%.
Note D - Inventories
The components of inventory consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1997 1996
- -------------------------------------------------
<S> <C> <C>
Finished goods $146,068 $125,778
Work-in-process 45,303 42,632
Raw materials 62,283 57,803
-----------------------
$253,654 $226,213
=======================
</TABLE>
Note E - Stockholders' Equity
The Company is authorized to purchase on the open market up to approximately
20 million shares of the Company's common stock. Purchases will be made at
prevailing prices as market conditions and cash availability warrant. Stock
repurchased under the Company's systematic plan will be used to satisfy the
Company's obligations pursuant to its employee benefit and incentive plans.
The Company did not repurchase any shares of the Company's stock during the
first quarter of 1997 due to the pending acquisition of Target Therapeutics,
Inc. (Target) (See Note H).
As part of the stock repurchase program, the Company sold European equity
put options to an independent broker-dealer during prior years. 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. Proceeds are recorded as a
reduction to the cost of the Company's treasury stock. Repurchase prices
relating to put options outstanding at March 31, 1997 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
$25 million at March 31, 1997. At March 31, 1997, the aggregate contingent
repurchase obligation has been reclassified from permanent equity and is
presented as a contingent stock repurchase obligation.
Note F - Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", which
establishes new methods to compute earnings per share. The Company is
required to adopt this statement beginning in the fourth quarter of 1997.
The adoption of this standard would not have a material impact on the
Company's earnings per share for the first quarters of 1997 and 1996.
Note G - 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 U.S. 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(TM) PTCA catheters. 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.
Both suits were filed in the U.S. District Court for the Northern District
of California seeking monetary and injunctive relief. The cases were sent
to consolidated arbitration for a threshold determination of one issue
covered by the November 27, 1991 settlement agreement between the parties.
On March 14, 1997, the arbitration panel reached a final determination in
the consolidated arbitration. Pursuant to this determination, the Company
is continuing its action as to the ELIPSE product and has dismissed the
actions as to the FLOWTRACK and LIFESTREAM products.
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 and CORDIS
Corporation's (Cordis) TRANSIT(R) and RAPIDTRANSIT(TM) microcatheters
infringe a patent assigned to Target. On May 2, 1996, the District Court
entered an order granting a preliminary injunction to Target prohibiting
SCIMED and CORDIS from marketing or selling the accused products. 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. Upon the recent merger between the Company and Target, the lawsuit
has been dismissed as to the Company. Subsequently, the Court of Appeals
vacated the preliminary injunction. The lawsuit against Cordis will proceed
in the District Court.
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, infringe 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, 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
SCIMED catheter products, including SCIMED's BANDIT and EXPRESS PLUS
catheters. 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 device infringe a certain Cook patent. Since
the purchase of the assets of the Endotech/MinTec companies by the Company,
the Company has assumed control of the litigation. The defendant answered,
denying the allegations. Supplemental hearings are scheduled for July 1997.
On October 3, 1995, Cordis Endovascular, Inc. and Cordis filed a suit
alleging patent infringement against Target Therapeutics, Inc. ("Target")
alleging that Target's DASHER(R) guidewires, FASGUIDE(R) catheters and
TRACKER(R) and FASTRACKER(R) guide microcatheters infringe three patents
owned by Cordis. Target has answered, denying the allegations of the
complaint.
On February 28, 1997, C.R. Bard, Inc. ("Bard") filed a suit for patent
infringement against SCIMED alleging that SCIMED's WAVE(TM) and SURPASS(TM)
catheters are infringing a patent assigned to Bard. The suit was filed in
the U.S. District Court for the District of New Jersey seeking monetary and
injunctive relief. The Company has answered, denying the allegations of the
complaint.
On March 13, 1997, the Company (through its subsidiaries) filed suits
against Johnson & Johnson (through its subsidiaries) in The Netherlands,
United Kingdom and Belgium, and on March 17, 1997 filed suit in France,
seeking a declaration of noninfringement for the NIR(TM) stent relative to
two European patents licensed to Ethicon, Inc. ("Ethicon"), a Johnson &
Johnson subsidiary, as well as a declaration of invalidity with respect to
those patents. On March 18, 1997, the Company (through its subsidiary) filed
a similar suit in Germany, but seeking only a declaration of noninfringement
for the NIR stent relative to the two patents. Most recently, on March 20,
21 and 22, 1997, the Company (through its subsidiaries) filed additional
suits against Johnson & Johnson (through its subsidiaries) in Sweden, Italy
and Spain, respectively, seeking a declaration of noninfringement for the
NIR stent relative to one of the European patents licensed to Ethicon and a
declaration of invalidity in relation to that patent (in Italy and Spain
only). Ethicon and other Johnson & Johnson subsidiaries filed a cross-border
suit in The Netherlands on March 17, 1997, alleging that the NIR stent
infringes one of the European patents licensed to Ethicon. In this action,
they requested relief covering Austria, Belgium, France, Greece, Italy, The
Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom.
Johnson & Johnson has filed a similar cross-border proceeding in The
Netherlands with respect to the second European patent licensed to Ethicon.
On March 13, 1997, the Company (through its subsidiaries) also filed suits
in The Netherlands and the United Kingdom, and on March 17, 1997 filed suit
in France, seeking a declaration of noninfringement for the Company's
LEAP(TM) balloon in relation to a European patent owned by Cordis.
On March 13, 1997, the Company filed a Motion to Intervene in Johnson &
Johnson Interventional Systems Co. et al. v. Cook, Incorporated et al., an
action in the U.S. District Court for the Southern District of Indiana. The
motion seeks intervention for the purpose of modifying the present
protective order to direct the Clerk of Court to retain, and the parties and
their counsel not to destroy, materials and testimony assembled in that
action. In addition, the Company seeks access to such materials and
testimony, and access to materials filed by the parties in that action under
seal. On March 17, 1997, the court temporarily stayed the return of
documents from the court to the parties and ordered the parties to retain
documents relating to the proceeding. A final decision is expected later in
1997.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis
alleging willful infringement of four of SCIMED's U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in U.S.
District Court for the District of Minnesota, Fourth District seeking
monetary and injunctive relief.
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.
Note H - Subsequent Event
On April 8, 1997, the Company announced the completion of its merger with
Target in a tax-free stock-for-stock transaction accounted for as a pooling-
of-interests. Target designs, develops, manufactures and markets catheter-
based disposable and implantable medical devices used in minimally invasive
procedures to treat neurovascular diseases and disorders. As a result of
this merger, Target's stockholders received 1.07 shares of the Company's
common stock in exchange for each share of Target common stock.
Approximately 16.5 million shares of common stock were issued in connection
with the Target acquisition.
Unaudited consolidated results of operations of the Company and Target for
the three months ended March 31, 1997, as if the merger had been consummated
as of January 1, 1997, are as follows: Net sales - approximately $424
million; Net income - approximately $76 million, and net income per share -
approximately $0.38 per share. These results are prior to the effect of any
adjustments that may be recorded in conjunction with merging the operations.
The restated financial data is not necessarily indicative of the operating
results or financial position that would have occurred if the Target merger
had been consummated during the period presented, nor is it necessarily
indicative of future operating results or financial position. The effect of
any changes in accounting policies is expected to be immaterial.
The Company expects to record non-recurring and special charges during the
second quarter of 1997 in connection with the acquisition of Target. The
amount of such charges cannot be determined until management evaluates the
needs of the combined operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net sales for the first quarter increased 24% to $399 million as compared to
$322 million in the first quarter of 1996. International revenues for the
quarter were impacted by changes in foreign currency exchange rates.
Without the impact of changes in exchange rates, net sales for the first
quarter increased 27%.
Net income for the first quarter of 1997 was $73 million, or $.40 per share.
This compares to net income of $65 million, exclusive of non-recurring and
special charges of $69 million ($66 million, net-of-tax) reported in the
first quarter of 1996. The Company reported a net loss of $1 million, or
$.01 per share, in the first quarter of 1996, inclusive of non-recurring and
special charges.
During the first quarter, United States (U.S.) revenues increased
approximately 19.4%, while international revenues, including export sales,
increased approximately 31.3% compared to the same period in the prior year.
International sales as a percentage of worldwide sales increased from 37.3%
in the first quarter of 1996 to 39.5% in the first quarter of 1997. The
increase in international sales reflects results from the Company's strategy
to build its international organization. International sales during the
first quarter were negatively impacted compared to the first quarter of 1996
by approximately $11 million of unfavorable exchange rate movements caused
primarily by the strengthening of the U.S. dollar versus major European
currencies and the Japanese yen.
Gross profit as a percentage of net sales decreased from 73.4% in the first
quarter of 1996 to 71.6% in the first quarter of 1997. The decrease in the
Company's gross margins is primarily due to a shift in the Company's product
sales mix, a decline in average selling prices due to continuing pressure on
healthcare costs and increased competition, and the negative impact of
unfavorable foreign exchange rate movements discussed above. In addition,
since the second half of 1996, the Company's gross margins reflect the
impact of increased reserves for inventory build resulting principally from
the opening of a new distribution center in Europe, new product launches,
and transferring international manufacturing from several sites in Europe to
Ireland. However, the negative impact of the above conditions was partially
offset by the Company's U.S. cost containment programs and an increase in
the percentage of international sales compared to U.S. sales. The Company's
future gross margins may be impacted by its ability to effectively manage
its inventory levels and mix. The Company has also initiated a number of cost
savings programs which may offset, in part, other declines in gross margin that
may occur.
Uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers
in the U.S. may result in continued pressure on selling prices of certain
products and resulting compression on gross margins. The U.S. marketplace
is increasingly characterized by consolidation among healthcare providers
and purchasers of medical devices who prefer to limit the number of
suppliers from whom they purchase medical products. There can be no
assurance that these entities will continue to purchase products from the
Company. 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 34.0% from $104
million in the first quarter of 1996 to $139 million in the first quarter of
1997 and increased as a percentage of sales from 32.3% to 34.9%,
respectively. The increase reflects continued expansion of the Company's
domestic and international sales organizations and related marketing
support.
Royalty expenses increased from $4 million in the first quarter of 1996 to
$5 million in the first quarter of 1997 and remained approximately 1.2% of
net sales. The increase in overall expense dollars is due primarily to
royalties due under several strategic alliances the Company initiated in the
first quarter of 1997 and in prior years.
Research and development expenses increased 31.0% from $26 million in the
first quarter of 1996 to $34 million in the first quarter of 1997 and
increased as a percentage of sales from 8.0% to 8.5%, respectively. 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 in countries
around the world toward more stringent regulatory requirements for product
clearance and more vigorous 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 continue to be lengthy, a concern of medical device
manufacturers generally.
During 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 programs impacted the
Company's manufacturing, selling, general and administrative costs. During
the first quarter of 1997, the Company's operating income, excluding special
charges and purchased research and development, increased 4.6% from the
first quarter of 1996 compared to a 24% increase in sales. These results
were in line with internal expectations and reflect an expense
infrastructure that has not yet been absorbed by revenue growth. Management
believes that it will take a number of quarters to earn off the elevated
cost structure. 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.
Interest and dividend income was $648 thousand in the first quarter of 1997
compared to $2 million in the first quarter of 1996. 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 recent acquisitions and alliances. Interest
expense increased from $1 million in the first quarter of 1996 to $3 million
in the first quarter of 1997. The increase in interest expense is primarily
attributable to the Company's issuance of commercial paper. Other income
(expense), net, changed from expense of $2 million in the first quarter of
1996 to income of $3 million in the first quarter of 1997. The change is
primarily attributable to a net gain of approximately $4 million recognized
on sales of equity investments in the first quarter of 1997.
As Boston Scientific has expanded its international operations, its sales
and expenses denominated in foreign currencies have expanded and that trend
is expected to continue. Thus, certain sales and expenses have been, and
are expected to be, subject to the effect of foreign currency fluctuations.
In addition, because the percentage of sales denominated in foreign
currencies has been and is expected to continue to be somewhat greater than
the percentage of expenses denominated in foreign currencies, foreign
currency fluctuations in the first quarter of 1997, have had, and may continue
to have, an impact on margins.
The Company enters into forward foreign exchange contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with
commitments. The Company does not engage in speculation. The Company's
foreign exchange contracts, which totaled approximately $120 million at
March 31, 1997, should not subject the Company to material risk due to
exchange rate movements because gains and losses on these contracts offset
losses and gains on the assets and liabilities being hedged. Although the
Company engages in hedging transactions that may offset the effect of
fluctuations in foreign currency exchange rates on foreign currency
denominated assets and liabilities, financial exposure may nonetheless
result, primarily from the timing of transactions and the movement of
exchange rates. Further, any significant changes in the political,
regulatory or economic environments where the Company conducts international
operations may have a material impact on revenues and profits.
The Company's effective tax rate, excluding the impact of non-recurring and
special charges, improved from approximately 35.5% in the first quarter of
1996 to 33.0% in the first quarter of 1997. 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 other tax
initiatives.
Liquidity and Capital Resources
Cash and marketable securities totaled $79 million at March 31, 1997
compared to $81 million at December 31, 1996. Cash flows from operating
activities during the first quarter of 1997 were positively impacted by the
timing of tax payments. In this regard, tax payments made during the second
quarter of 1997 are expected to be significantly greater than paid during
the first quarter of 1997. Working capital improved from $285 million at
December 31, 1996 to $307 million at March 31, 1997. The decrease in cash
and short-term investments is primarily attributable to capital expenditures
incurred to expand the Company's manufacturing and distribution facilities,
payment of merger related costs and net payments on the Company's
outstanding balance under its commercial paper program. Cash expenditures
during the first quarter of 1997 were almost entirely offset by proceeds
from normal operating activities. The slight increase in accounts
receivable from December 31, 1996 to March 31, 1997 is primarily due to the
shift from international distributors to direct sales forces.
During the second quarter of 1997, in order to satisfy the Company's
systematic stock repurchase plan, the Company expects to repurchase
approximately 1.7 million shares of its common stock to be used to satisfy
obligations pursuant to its employee benefit and incentive plans.
In connection with the 1995 and 1996 acquisitions, the Company recorded non-
recurring and special charges. Cash outflows to complete the balance of the
Company's initiative to integrate the businesses are estimated to be
substantially completed by the end of 1997 and to be approximately $31
million. Additionally, the Company expects to record non-recurring and
special charges during the second quarter of 1997 in connection with the
acquisition of Target. The amount of such charges cannot be determined
until management evaluates the needs of the combined operations.
Since early 1995, the Company has entered into several transactions
involving acquisitions and alliances, certain of which have involved equity
investments. As the healthcare environment continues to undergo rapid
change, management expects that it will continue focusing on strategic
initiatives and/or make additional investments in existing relationships.
In early April 1997, the Company invested an additional $23 million in
Medinol Ltd. which will be recorded using the equity method of accounting.
In addition, the Company expects to incur capital expenditures of
approximately $250 million to $300 million in 1997, including construction
of additional manufacturing and distribution space and development of a
global information system. The Company is pursuing additional financing
facilities of approximately $200 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 1997.
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 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.
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 ability to effectively manage its inventory
levels and mix; b) the potential impact of continued consolidation among
healthcare providers, trends towards managed care, and healthcare cost
containment; c) the Company's belief that it is well positioned to take
advantage of opportunities for growth that exist in the markets it serves;
d) 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; e) the
Company's ability to absorb its forward build and spend programs over
a number of quarters; f) the Company's ability to realize benefits from its
cost savings programs; g) the potential effect of foreign currency
fluctuations on revenues, expenses and margins; h) the purchase of shares
pursuant to the Company's systematic stock repurchase plan; i) the process and
plans for the integration of businesses acquired by the Company; j) the
Company's continued focus on strategic inititatives; k) the Company's plans to
continue to invest aggressively in its global systems and worldwide
manufacturing and distribution capacity; and, l) 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 filings with the
Securities and Exchange Commission 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.
Part II
Other Information
Item 1: Legal Proceedings
Note G - Commitments and Contingencies to the Company's unaudited
condensed consolidated financial statements contained elsewhere in
this Quarterly Report is incorporated herein by reference.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) The following reports were filed during the quarter ended
March 31, 1997:
Form 8-K Date of Event Description
-------- ------------- -----------
Item 7 January 20, 1997 Execution of Agreement and Plan of
Merger with Target Therapeutics, Inc.
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, 1997.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
--------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and
Senior Vice President - Finance
and Administration
Boston Scientific Corporation
-----------------------------
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1997 1996
---- ----
(in thousands, except
per share information)
<S> <C> <C>
Primary
Average shares outstanding................................... 178,626 177,052
Net effect of dilutive stock options and warrants--based
on the treasury stock method using average market
price....................................................... 5,037
---------------------
Total........................................................ 183,663 177,052
=====================
Net income................................................... $ 72,609 $ (991)
=====================
Per share amount............................................. $ 0.40 $ (0.01)
=====================
Fully Diluted
Average shares outstanding................................... 178,626 177,052
Net effect of dilutive stock options and warrants--based
on the treasury stock method using quarter-end market
price, if higher than average market price.................. 5,037
=====================
Total........................................................ 183,663 177,052
=====================
Net income................................................... $ 72,609 $ (991)
=====================
Per share amount............................................. $ 0.40 $ (0.01)
=====================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 71,554
<SECURITIES> 7,327
<RECEIVABLES> 302,009
<ALLOWANCES> 0
<INVENTORY> 253,654
<CURRENT-ASSETS> 764,435
<PP&E> 381,673
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,559,586
<CURRENT-LIABILITIES> 456,996
<BONDS> 0
0
0
<COMMON> 1,791
<OTHER-SE> 968,776
<TOTAL-LIABILITY-AND-EQUITY> 1,559,586
<SALES> 399,176
<TOTAL-REVENUES> 399,176
<CGS> 113,207
<TOTAL-COSTS> 113,207
<OTHER-EXPENSES> 178,118
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,282
<INCOME-PRETAX> 108,372
<INCOME-TAX> 35,763
<INCOME-CONTINUING> 72,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,609
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
