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, 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
--------------
- ----------------------------------------------------------------------------
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, 1997
----- ------------------------
Common Stock, $.01 Par Value 194,616,695
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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 and per share data 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 54,269 $ 72,175
Short-term investments 42,670 45,606
Trade accounts receivable, net 385,555 321,025
Inventories 362,964 236,670
Deferred income taxes 94,044 97,364
Prepaid expenses and other current assets 61,081 43,977
-------------------------
Total current assets 1,000,583 816,817
Property, plant, equipment and leaseholds 652,398 529,933
Less: accumulated depreciation and amortization 196,315 167,631
-------------------------
456,083 362,302
Intangibles, net 319,388 319,762
Investments and other assets 81,777 86,164
-------------------------
$1,857,831 $1,585,045
=========================
</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 and per share data 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings due within one year $ 365,908 $ 240,556
Accounts payable and accrued expenses 213,287 163,784
Income taxes payable 27,403
Accrual related to special charges 83,075 48,144
Other current liabilities 5,463 1,929
--------------------------
Total current liabilities 667,733 481,816
Long-term debt 49,855
Accrual related to special charges 9,037
Deferred income taxes 59,975 59,975
Other long-term liabilities 49,538 48,139
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, 195,611,491 shares issued
at September 30, 1997 and at December 31, 1996 1,956 1,956
Additional paid-in capital 432,470 437,074
Contingent stock repurchase obligation 18,295 24,855
Retained earnings 707,641 574,051
Foreign currency translation adjustment (85,015) (37,964)
Unrealized gain on available-for-sale securities, net 22,158 18,886
Treasury stock, at cost - 994,796 shares at September 30,
1997 and 643,991 shares at December 31, 1996 (75,812) (23,743)
--------------------------
Total stockholders' equity 1,021,693 995,115
--------------------------
$1,857,831 $1,585,045
==========================
</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 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $474,773 $395,788 $1,379,053 $1,118,578
Cost of products sold 135,907 111,224 388,419 304,565
----------------------------------------------
Gross profit 338,866 284,564 990,634 814,013
Selling, general and administrative expenses 165,239 136,455 474,233 370,776
Royalties 5,918 3,911 17,204 12,591
Research and development expenses 43,358 35,075 123,062 98,506
Special charges 157,841 142,341
----------------------------------------------
214,515 175,441 772,340 624,214
----------------------------------------------
Operating income 124,351 109,123 218,294 189,799
Other income (expense):
Interest and dividend income 745 1,266 2,739 5,101
Interest expense (2,978) (3,503) (9,629) (8,297)
Other, net 4,057 587 4,308 (2,636)
----------------------------------------------
Income before income taxes 126,175 107,473 215,712 183,967
Income taxes 37,770 36,239 78,767 97,454
----------------------------------------------
Net income $ 88,405 $ 71,234 $ 136,945 $ 86,513
==============================================
Net income per common share $ 0.44 $ 0.36 $ 0.69 $ 0.43
==============================================
Primary weighted average number of common shares 200,986 198,988 198,791 199,245
==============================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
------------------------------------------------------------------------------------------------------------
Unrealized
Gain on
Contingent Foreign Available-
Common Stock Additional Stock Currency for-Sale
------------------------ Paid-In Repurchase Retained Translation Securities, Treasury
Shares Issued Par Value Capital Obligation Earnings Adjustment Net Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 195,611,491 $1,956 $437,074 $24,855 $574,051 $(37,964) $18,886 $(23,743) $ 995,115
Net income 136,945 136,945
Foreign currency
translation adjustment (47,051) (47,051)
Issuance of common
stock under options,
warrant and stock
purchase plans (47,799) (3,355) 98,860 47,706
Purchase of common
stock for treasury (152,437) (152,437)
Sale of stock
repurchase obligation (18,295) 18,295 1,508 1,508
Expiration of stock
repurchase obligation 24,855 (24,855)
Tax benefit relating
to stock option and
employee stock
purchase plans 36,635 36,635
Net change in equity
investments 3,272 3,272
------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1997 195,611,491 $1,956 $432,470 $18,295 $707,641 $(85,015) $22,158 $(75,812) $1,021,693
============================================================================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
In thousands 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 64,841 $ 87,851
Investing activities:
Purchases of property, plant, and equipment, net (159,746) (94,590)
Acquisition of businesses, net of cash acquired (241,493)
Net maturities of held-to-maturity short-term investments 28,093 20,133
Net (purchases of) proceeds from available-for-sale
securities (3,287) 4,405
Payments for acquisitions of and/or investments in
certain technologies (40,603) (3,229)
Other (8,251) (2,492)
--------------------
Cash used in investing activities (183,794) (317,266)
Financing activities:
Net increase in commercial paper 130,060 199,746
Proceeds from long-term borrowings 52,005
Net payments on notes payable and capital leases (9,795) (28,571)
Proceeds from issuances of shares of common stock,
net of tax benefits 84,341 58,776
Acquisition of treasury stock, net of proceeds from
put options (150,929) (63,832)
Other 25 433
--------------------
Cash provided by financing activities 105,707 166,552
Effect of foreign exchange rates on cash (4,660) (1,969)
--------------------
Net decrease in cash and cash equivalents (17,906) (64,832)
Cash and cash equivalents at beginning of period 72,175 134,831
--------------------
Cash and cash equivalents at end of period $ 54,269 $ 69,999
====================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 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 adjustments) considered
necessary for a fair presentation have been included. Operating results for
the three and nine-month periods ended September 30, 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, 1996.
Certain prior year's amounts have been reclassified to conform to the
current year presentation.
Note B - Acquisitions
On April 8, 1997, the Company completed its merger with Target Therapeutics,
Inc. (Target) in a tax-free stock-for-stock transaction accounted for as a
pooling-of-interests. As a result, the unaudited condensed consolidated
financial statements have been restated for all periods presented. In
conjunction with 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 the Company's common stock were
issued in connection with the Target acquisition.
Separate results of the combining entities for the nine months ended
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Combined
Boston Boston
(In millions) Scientific Target Scientific
- -------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,054 $65 $1,119
Net income (loss) 91 (4) 87
</TABLE>
Target's net sales and net income for the three months ended March 31, 1997
were approximately $31 million and $2 million, respectively.
Note C - Merger-Related Charges and Expenses
In the second quarter of 1997, the Company recorded special charges of $158
million ($117 million, net-of-tax). Charges include $12 million for
purchased research and development recorded in conjunction with accounting
for the Company's additional investment in Medinol Ltd., $16 million in
direct transaction costs and $96 million of estimated costs to be incurred
in merging the separate operating businesses of Target with subsidiaries of
the Company. Estimated costs include those typical in a merging of
operations and relate to, among other things, rationalization of facilities,
workforce reductions, unwinding of various contractual commitments, asset
writedowns and other integration costs. The remaining amounts represent
primarily adjustments to merger-related and special charges recorded in 1996
and 1995 based on actual costs incurred or changes in estimates
(approximately $15 million) and writedowns of assets in connection with the
Company's implementation of a global information system.
The special charges are 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 have involved substantially all of the
Company's employee groups. The amounts the Company may ultimately incur may
change as the plans are executed.
The activity impacting the accrual related to special charges during the
first nine months of 1997, net of reclassifications made by management in
prior years based on available information, is summarized in the following
table:
<TABLE>
<CAPTION>
Balance at Balance at
December 31, Charges to Charges September 30,
(In millions) 1996 Operations Utilized 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Facilities $19 $ 8 $ 5 $ 22
Workforce reductions 26 24 19 31
Contractual commitments 8 53 28 33
Asset writedowns 6 27 15 18
Direct transaction and other costs 6 34 24 16
------------------------------------------
$65 $146 $91 $120
==========================================
</TABLE>
Most of the plans are expected to be completed by the end of 1998. Cash
outlays to complete the balance of the Company's initiative to integrate the
businesses related to all business combinations consummated since 1994 are
estimated to be approximately $80 million.
At September 30, 1997, the balance of the accrual for special charges is
classified within the balance sheet as follows:
<TABLE>
<CAPTION>
(In millions)
- ----------------------------------------------------------
<S> <C>
Accrual related to special charges - current $83
Property, plant, equipment and leaseholds, net 23
Accrual related to special charges - non-current 9
Other assets 5
----
$120
====
Note D - Credit Arrangements
At December 31, 1996, the Company had a $350 million revolving line of
credit with a syndicate of U.S. and international banks. In June 1997, the
Company increased its maximum worldwide borrowings provided under an amended
and restated credit agreement to $500 million with a similar syndicate of
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 2002; use of the
borrowings is unrestricted and the borrowings are unsecured. The Credit
Agreement requires the Company to maintain a specific ratio of consolidated
funded debt (as defined) to consolidated tangible net worth (as defined)
plus consolidated funded debt. At September 30, 1997, the Company did not
have any outstanding borrowings under the Credit Agreement.
The Company maintains a commercial paper program that is supported by the
Company's Credit Agreement; outstanding commercial paper reduces available
borrowings under the Credit Agreement. At September 30, 1997, the Company
had approximately $343 million in commercial paper outstanding with interest
rates ranging from 5.72% to 6.45%.
During July 1997, the Company borrowed an additional 6 billion yen (the
equivalent of approximately $52 million) under a five-year fixed interest
rate (2.22%) financing arrangement with a syndicate of Japanese banks, all
of which is outstanding at September 30, 1997.
Note E - Inventories
The components of inventory consist of the following:
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
(In millions) 1997 1996
- ------------------------------------------------
<S> <C> <C>
Finished goods $203 $129
Work-in-process 45 45
Raw materials 115 63
---------------------
$363 $237
=====================
</TABLE>
Note F - 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.
During the second and third quarters of 1997, the Company repurchased
approximately 1.6 million and 1.1 million shares, respectively, of its
common stock under its systematic plan at a net cost of $151 million.
Previously, a total of 6.2 million shares of the Company's common stock
was repurchased under the program.
As part of the stock repurchase program, the Company has been selling
European equity put options to an independent broker-dealer. 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. During the second
quarter of 1997, put options issued in 1996 for 600,000 shares expired.
Additionally, the Company sold put options for 129,000 and 200,000 shares
during the second and third quarters, respectively, and received proceeds of
$1,508,000. At September 30, 1997, the repurchase price relating to put
options outstanding ranged from $55 per share to $56 per share. The
Company's contingent obligation to repurchase shares upon exercise of the
outstanding put options approximated $18 million at September 30, 1997.
Note G - 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.
Note H - Commitments and Contingencies
Beginning in 1993, Schneider (Europe) AG and Schneider (USA) Inc.,
subsidiaries of Pfizer, Inc., 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 Company
subsequently amended its complaint to seek a declaratory judgment that the
patent is unenforceable. The Schneider companies filed counterclaims
against the Company, alleging the Company's willful infringement of the
patent and seeking monetary and injunctive relief. In October, 1997, the
District Court granted the Company's motion for summary judgment on
noninfringement, and ruled that the Company cannot litigate the issues of
validity and enforceability, which had previously been litigated by SCIMED
Life Systems, Inc. (SCIMED), the Company's subsidiary. The Company is
considering filing an appeal. The Company ceased marketing its Synergy
catheters in August 1996.
On May 31, 1994, 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. Trial is scheduled to begin in
late 1998 or early 1999.
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. Trial is scheduled to begin in November 1998.
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.
Trial is scheduled to begin in November 1998.
On June 10, 1997, SCIMED filed in the U.S. District Court for the Northern
District of California a suit for patent infringement against ACS alleging
willful infringement of two SCIMED patents by ACS's COMET(TM) PTCA
catheters. SCIMED was seeking monetary and injunctive relief. The lawsuit
has been dismissed without prejudice pending arbitration relating to a
threshold determination covered by the November 27, 1991 settlement
agreement between the parties.
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. In October 1997, the court granted the defendants' motion to
dismiss. The Company is considering filing an appeal.
SCIMED has accused ACS' RX MULTILINK(TM) stent delivery systems and ACS'
ROCKET(TM) PTCA catheters of infringing a SCIMED patent. The parties are
engaged in arbitration relating to a threshold determination under the
November 27, 1991 settlement agreement. The hearing in the arbitration is
scheduled to begin on May 11, 1998. If SCIMED is successful in the
arbitration, it intends immediately to commence patent infringement
litigation to enforce its rights under this patent against ACS.
On September 16, 1997, ACS filed a suit for patent infringement against the
Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter
infringes two U.S. patents licensed to ACS and one U.S. patent owned by ACS.
Suit was filed in the U.S. District Court for the Northern District of
California seeking monetary damages, injunctive relief and that the patents
be adjudged valid, enforceable and infringed. The Company and SCIMED have
yet to answer the complaint, but intend to vigorously defend against ACS'
allegations.
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 is proceeding
in the District Court.
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 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 MaxForce 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. After a jury trial
in June 1997, the jury returned a verdict finding that the Company infringed
the Bard patent and awarded damages to Bard in the amount of $10.8 million.
No judgment has been entered pending trial on the Company's claim that the
patent was obtained by inequitable conduct. The Company intends to appeal
any judgment entered on the jury verdict. The Company no longer markets the
accused device.
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. The case is not currently scheduled for trial.
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. A court decision has been postponed until December
10, 1997.
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 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. Trial is scheduled
for March 1998.
On March 13, 1997, the Company (through its subsidiaries) 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
balloon in relation to a European patent owned by Cordis. The United
Kingdom suit has been dismissed for lack of controversy.
On July 18, 1997, Cordis Corporation sued various subsidiaries of the
Company in The Netherlands alleging that the Company's LEAP balloon products
infringed a different, newly-issued European patent of Cordis. Cordis has
requested cross-border relief, including injunctive relief, in The
Netherlands, Germany, France, the United Kingdom and Italy. A hearing has
been scheduled for November 25, 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 the U.S.
District Court for the District of Minnesota, Fourth District, seeking
monetary and injunctive relief. Cordis has answered, denying the
allegations of the complaint. Trial is scheduled for November 1998.
On December 13, 1996, the Superior Court of the State of Arizona granted the
motion of Impra, Inc., to add the Company as an additional defendant in
Impra's case against Endomed, Inc. Impra (now a subsidiary of C.R. Bard,
Inc.) alleges that Endomed, Inc. misappropriated certain Impra trade secrets
and that the Company acted in concert with Endomed to utilize the
technology. On the same date, Endomed and the Company were preliminarily
enjoined, among other things, from any further use or disclosure of the
technology. The Company has answered, denying the allegations of the
complaint. Trial is scheduled to begin in January 1998.
On March 13, 1997, the Company (through its subsidiaries) filed suits
against Johnson & Johnson (through its subsidiaries) in The Netherlands, the
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., 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. 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,
the Johnson & Johnson entities requested relief, including provisional
relief (a preliminary injunction), covering Austria, Belgium, France,
Greece, Italy, The Netherlands, Norway, Spain, Sweden, Switzerland and the
United Kingdom. The Johnson & Johnson entities thereafter filed a similar
cross-border proceeding in The Netherlands with respect to the second
European patent licensed to Ethicon. Johnson & Johnson subsequently
withdrew its request for cross-border relief in the United Kingdom. In
October, 1997, Johnson & Johnson's request for provisional cross-border
relief on both patents was denied by the Dutch court, on the ground that it
is "very likely" that the NIR stent will be found not to infringe the
patents. Johnson & Johnson has appealed this decision with respect to one
of the patents. A hearing on Johnson & Johnson's request for permanent
cross-border relief is expected to be held in the Spring of 1998.
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that its NIR stent infringes one of Ethicon's patents. A
hearing is scheduled for June 1998.
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 June 16, 1997, the Company and SCIMED filed a suit against Johnson &
Johnson, Ethicon, Inc. and Johnson & Johnson International Systems Co.
(Johnson & Johnson) in the U.S. District Court for the District of
Massachusetts seeking a declaratory judgment of noninfringement for the NIR
stent relative to two patents licensed to Johnson & Johnson and that the two
patents are invalid and unenforceable. The Company subsequently amended its
complaint to add a third patent. In October, 1997, Johnson & Johnson's
motion to dismiss the suit was denied. Johnson & Johnson has answered,
denying the allegations of the complaint, and counterclaiming for patent
infringement. Johnson & Johnson has also moved to tranfer the action to the
U.S. District Court for the District of Delaware, where it has commenced a
separate patent infringement action relative to the NIR stent. (See below.)
The Company opposes the motion. Trial is scheduled for November 1998.
On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR stent infringes
certain Canadian patents owned by Johnson & Johnson. Suit was filed in the
federal court of Canada seeking a declaration of infringement, monetary
damages and injunctive relief. The Company has yet to answer the complaint,
but intends to vigorously defend against Johnson & Johnson's allegations.
On October 22, 1997, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the importation and use of the NIR
stent infringes two patents owned by Cordis. The suit was filed in the U.S.
District Court for the District of Delaware seeking monetary damages,
injunctive relief and that the patents be adjudged valid, enforceable and
infringed. The Company and SCIMED have answered the complaint, denying
Cordis' allegations.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net sales for the third quarter of 1997 increased 20% to $475 million as
compared to $396 million in the third quarter of 1996. International
revenues for the quarter were adversely impacted by changes in foreign
currency exchange rates. Without the impact of changes in exchange rates,
net sales for the third quarter increased approximately 24%. Net income
for the third quarter increased 24% to $88 million, or $.44 per share, as
compared to net income of $71 million, or $.36 per share, in the third
quarter of 1996.
Net sales for the nine-month period ended September 30, 1997 increased 23%
to $1,379 million as compared to $1,119 million in the same period of 1996.
International revenues for the nine-month period ended September 30, 1997
were adversely impacted by changes in foreign currency exchange rates.
Without the impact of changes in exchange rates, net sales for the nine-month
period ended September 30, 1997 increased approximately 27%. The Company
reported net income of $137 million for the nine-month period ended September
30, 1997, inclusive of merger-related and special charges of $158 million
($117 million, net-of-tax). This compares to net income of $87 million in
the nine-month period ended September 30, 1996, inclusive of merger-related
and special charges of $142 million ($128 million, net-of-tax). Net income,
exclusive of merger-related and special charges, increased 19% to $254
million in the nine-month period ended September 30, 1997 from $214 million
in the same period of 1996.
During the third quarter, United States (U.S.) revenues increased
approximately 18%, while international revenues increased approximately 22%
compared to the same period in the prior year. International sales as a
percentage of worldwide sales increased from 41% in the third quarter of
1996 to 42% in the third quarter of 1997. Revenues in the United States
increased approximately 19% during the first nine months of 1997 compared to
the same period of the prior year. International revenues increased
approximately 30% during the first nine months of 1997 compared to the same
period in the prior year.
Gross profit as a percentage of net sales decreased from 71.9% in the third
quarter of 1996 to 71.4% in the third quarter of 1997, and decreased from
72.8% in the nine months ended September 30, 1996 to 71.8% in the nine
months ended September 30, 1997. The decrease in the Company's gross margin
percentage is primarily due to a shift in the Company's product sales mix
and a decline in average selling prices due to continuing pressure on
healthcare costs and increased competition. In addition, since the second
half of 1996, the Company's gross margins and inventory levels reflect the
impact of increased inventory and reserves for inventory resulting
principally from 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. The Company's future gross
margins may be impacted by its ability to effectively manage its inventory
levels and mix. The Company recognizes its inventory levels are relatively
high and will continue to evaluate the adequacy of its reserves for
inventory. Increases to these reserves would have a negative impact on
gross margins. The Company's cost savings programs may offset, in part,
declines in gross margin.
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 healthcare 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 remained approximately 35% of
net sales while increasing 21% from $136 million in the third quarter of
1996 to $165 million in the third quarter of 1997. Selling, general and
administrative expenses increased 28% from $371 million in the first nine
months of 1996 to $474 million in the first nine months of 1997. The
increase reflects continued expansion of the Company's domestic and
international sales and distribution organizations.
Royalty expenses remained at approximately 1% of sales while increasing 51%
from $4 million in the third quarter of 1996 to $6 million in the third
quarter of 1997, and 37% from $13 million in the first nine months of 1996
to $17 million in the first nine months of 1997. The increase in overall
royalty expense dollars is due primarily to royalties due under several
strategic alliances the Company initiated in the first nine months of 1997
and in prior years.
Research and development expenses increased 24% from $35 million in the
third quarter of 1996 to $43 million in the third quarter of 1997, and 25%
from $99 million in the first nine months of 1996 to $123 million in the
first nine months of 1997. Research and development expenses remained at 9%
of sales. The increase in research and development 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 certain spending programs so as to be
in a position to take advantage of the expanded market opportunities it
expected in the remainder of 1996 and beyond. The programs impacted the
Company's manufacturing, selling, general and administrative costs. During
the third quarter of 1997, the Company's operating income increased 14% from
the third quarter of 1996 compared to a 20% increase in sales. These results
were below internal expectations and reflect an expense infrastructure that
has not yet been fully 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 these accelerated spending programs may
be limited by risks and uncertainties related to competitive offerings, timing
and scope of regulatory approvals, foreign exchange rates, 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 $1 million in both the third quarter of
1997 and the third quarter of 1996, and $3 million in the first nine months
of 1997 compared to $5 million in the first nine months 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
fund the Company's working capital and finance several of the Company's
recent acquisitions and alliances. Interest expense remained at approximately
$3 million in the third quarters of 1997 and 1996, and increased approximately
$1 million to $10 million in the first nine months of 1997 from the first
nine months of 1996. The overall increase in interest expense is primarily
attributable to a higher outstanding balance related to the Company's
issuance of commercial paper, while the decrease in the third quarter from
the prior year is related to the capitalization of interest on asset
construction programs. Other income (expense), net, increased from income of
$1 million in the third quarter of 1996 to income of $4 million in the third
quarter of 1997. Other income (expense), net, changed from expense of $3
million in the first nine months of 1996 to income of $4 million in the first
nine months of 1997. The changes are primarily attributable to net gains on
sales of equity investments of approximately $5 million and $11 million
recorded in the third quarter of 1997 and the first nine months of 1997,
respectively, as compared to net gains of approximately $1 million recognized
during the same periods of 1996.
As the Company 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 and
these fluctuations may 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 $161 million at September 30, 1997, should not
subject the Company to material risk due to exchange rate movements because
gains and losses on these contracts should 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 improved from approximately 34% in the third
quarter of 1996 to 30% in the third quarter of 1997. The tax rate in the
third quarter of 1997 benefited from the cumulative year to date impact of
reducing the estimated 1997 rate from 33% to 32%. The Company's effective
tax rate, excluding the impact of merger-related and special charges,
improved from approximately 34% in the first nine months of 1996 to 32% in
the first nine months 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 certain tax planning initiatives.
Liquidity and Capital Resources
Cash and short-term investments totaled $97 million at September 30, 1997
compared to $118 million at December 31, 1996. Working capital was reduced
slightly from $335 million at December 31, 1996 to $333 million at September
30, 1997. The decrease in cash and marketable securities is primarily
attributable to cash used to repurchase the Company's common stock, capital
expenditures incurred to expand the Company's manufacturing and distribution
facilities, additional strategic initiatives and payments of merger-related
costs. Cash expenditures during the first nine months of 1997 were
partially offset by proceeds from normal operating activities and additional
borrowings under the Company's financing arrangements. The increase in
accounts receivable from December 31, 1996 to September 30, 1997 is
primarily due to an increase in international sales that tend to have longer
payment periods than domestic sales and reducing the number of international
distributors as the Company streamlines its distribution channels. The
Company's bad debt provision may be impacted by its ability to effectively
collect receivables due from its distributors. Refer to the future cash
impact of special charges referenced in Note C - Merger-Related Charges and
Expenses in the unaudited condensed consolidated financial statements.
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 addition, the Company expects to incur capital expenditures of
approximately $80 million during the remainder of 1997, including
construction of additional manufacturing and distribution space and
continued development of a global information system.
In October 1997, the Company filed a Public Debt Registration Statement with
the U.S. Securities and Exchange Commission. Under the Registration
Statement, the Company may issue up to $500 million in debt securities. Net
proceeds, if securities are issued, will be added to the Company's general
corporate funds and may be used to reduce other borrowings, for acquisitions,
or for other business purposes. 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. However, the Company may need to increase its bank facilities
and/or issue debt securities during the fourth quarter if it continues to
execute strategic initiatives and/or to expand manufacturing and distribution
capacity. The Company is therefore pursuing additional financing
opportunities although there are no assurances that the financing can be or
will be obtained.
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 Note H - Commitments and Contingencies
in 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 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 Company's ability to realize benefits from its cost
savings programs; c) the potential impacts of continued consolidation among
healthcare providers, trends towards managed care, and healthcare 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
Company's ability to absorb certain spending programs over a number of
quarters and to take advantage of expanded market opportunities; g) the
continued trend toward expanding sales and expenses denominated in foreign
currencies as well as the potential effect of foreign currency fluctuations
on sales and expenses and on the Company's hedge transactions; h) the process
and plans for the integration of businesses acquired by the Company and the
future cash impact; i) the Company's continuing focus on strategic initiatives
and existing relationships; j) the Company's plans to continue to invest
aggressively in its global information system and worldwide manufacturing
and distribution capacity; k) the ability of the Company to obtain additional
financing facilities; 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.
OTHER INFORMATION
Item 1: Legal Proceedings
Note H - 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 on Form 8-K were filed during the
quarter ended September 30, 1997:
None
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, 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------------------------------------------
(In thousands, except per share information)
<S> <C> <C> <C> <C>
Primary
Weighted average shares outstanding 194,934 193,429 194,759 193,319
Net effect of dilutive put options and warrants--based
on the reverse treasury stock method using quarter-end
market price, if lower than average market price
Net effect of dilutive stock options and warrants--based
on the treasury stock method using average
market price 6,052 5,559 4,032 5,926
--------------------------------------------
Total 200,986 198,988 198,791 199,245
============================================
Net income 88,405 71,234 136,945 86,513
============================================
Per share amount $ 0.44 $ 0.36 $ 0.69 $ 0.43
============================================
Fully Diluted
Weighted average shares outstanding 194,934 193,429 194,759 193,319
Net effect of dilutive put options and warrants--based
on the reverse treasury stock method using quarter-end
market price, if lower than average market price 3 3
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 6,058 6,386 6,058 6,386
--------------------------------------------
Total 200,995 199,815 200,820 199,705
============================================
Net income 88,405 71,234 136,945 86,513
============================================
Per share amount $ 0.44 $ 0.36 $ 0.68 $ 0.43
============================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 54,269
<SECURITIES> 42,670
<RECEIVABLES> 385,555
<ALLOWANCES> 0
<INVENTORY> 362,964
<CURRENT-ASSETS> 1,000,583
<PP&E> 652,398
<DEPRECIATION> 196,315
<TOTAL-ASSETS> 1,857,831
<CURRENT-LIABILITIES> 667,733
<BONDS> 49,855
0
0
<COMMON> 1,956
<OTHER-SE> 1,019,737
<TOTAL-LIABILITY-AND-EQUITY> 1,857,831
<SALES> 1,379,053
<TOTAL-REVENUES> 1,379,053
<CGS> 388,419
<TOTAL-COSTS> 388,419
<OTHER-EXPENSES> 772,340
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,629
<INCOME-PRETAX> 215,712
<INCOME-TAX> 78,767
<INCOME-CONTINUING> (136,945)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (136,945)
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.68
</TABLE>
