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, 1998
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Boston Scientific Place, Natick, Massachusetts 01760-1537
- - -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
--------------
- - ----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Shares Outstanding
Class as of March 31, 1998
----- --------------------
Common Stock, $.01 Par Value 194,398,020
- - ----------------------------------------------------------------------------
Page 1 of 20
Exhibit Index on Page 18
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, except share and per share data 1998 1997
- - ----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 142,587 $ 57,993
Short-term investments 11,944 22,316
Trade accounts receivable, net 423,179 413,838
Inventories 432,406 386,742
Deferred income taxes 150,380 146,956
Prepaid expenses and other current assets 38,580 36,176
-------------------------
Total current assets 1,199,076 1,064,021
Property, plant, equipment and leaseholds 750,119 706,515
Less: accumulated depreciation and amortization 223,501 207,548
-------------------------
526,618 498,967
Intangibles, net 312,111 313,346
Investments and other assets 87,296 91,473
-------------------------
$2,125,101 $1,967,807
=========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
In thousands, except share and per share data 1998 1997
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings due within one year $ 17,699 $ 447,208
Accounts payable 66,514 98,878
Accrued expenses 180,986 161,236
Accrual for merger-related charges 64,932 68,358
Income taxes payable 43,813 26,039
Other current liabilities 6,275 6,292
-------------------------
Total current liabilities 380,219 808,011
Long-term debt 554,888 46,325
Deferred income taxes 58,034 58,034
Other long-term liabilities 70,143 69,205
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 March 31, 1998 and
at December 31, 1997 1,956 1,956
Additional paid-in capital 432,557 432,556
Contingent stock repurchase obligation 18,295 18,295
Retained earnings 760,362 706,542
Foreign currency translation adjustment (99,980) (94,279)
Unrealized gain on available-for-sale securities, net 12,266 17,422
Treasury stock, at cost - 1,213,471 shares at March 31,
1998 and 1,800,627 shares at December 31, 1997 (63,639) (96,260)
-------------------------
Total stockholders' equity 1,061,817 986,232
-------------------------
$2,125,101 $1,967,807
=========================
</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 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C>
Net sales $470,005 $430,531
Cost of products sold 139,959 121,057
---------------------
Gross profit 330,046 309,474
Selling, general and administrative expenses 171,868 151,963
Royalties 6,735 5,898
Research and development expenses 44,648 38,698
---------------------
223,251 196,559
---------------------
Operating income 106,795 112,915
Other income (expense):
Interest and dividend income 700 1,038
Interest expense (6,054) (3,298)
Other, net (3,060) 1,937
---------------------
Income before income taxes 98,381 112,592
Income taxes 31,482 37,156
---------------------
Net income $ 66,899 $ 75,436
=====================
Net income per common share - basic $ 0.34 $ 0.39
=====================
Net income per common share - assuming dilution $ 0.34 $ 0.38
=====================
</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, 1998
------------------------------------------------------------------------------------------------------
Unrealized
Gain on
Common Stock Contingent Foreign Available-
------------------- Additional Stock Currency for-Sale
Shares Par Paid-In Repurchase Retained Translation Securities, Treasury
Issued 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,
1997 195,611,491 $1,956 $432,556 $18,295 $706,542 $(94,279) $17,422 $(96,260) $ 986,232
Net income 66,899 66,899
Foreign currency
translation adjustment (5,701) (5,701)
Issuance of common stock 1 (21,642) 32,621 10,980
Tax benefit relating to
incentive stock option
and employee stock
purchase plans 8,563 8,563
Net change in equity
investments (5,156) (5,156)
------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 195,611,491 $1,956 $432,557 $18,295 $760,362 $(99,980) $12,266 $(63,639) $1,061,817
======================================================================================================
</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 1998 1997
- - --------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 33,837 $ 66,438
Investing activities:
Purchases of property, plant, and equipment, net (48,864) (54,218)
Net maturities of held-to-maturity short-term investments 12,865
Sales of available-for-sale securities 10,373 902
Payments for investments in certain technologies (6,621) (4,781)
----------------------
Cash used in investing activities (45,112) (45,232)
Financing activities:
Proceeds from the issuance of debt securities, net of
debt issuance costs 496,441
Net decrease in commercial paper (423,250) (16,000)
Proceeds from notes payable and long-term borrowings 9,417
Net payments on notes payable, long-term borrowings and
capital leases (5,467) (264)
Proceeds from issuances of shares of common stock, net of
tax benefits 19,543 13,158
----------------------
Cash provided by (used for) financing activities 96,684 (3,106)
Effect of foreign exchange rates on cash (815) (2,635)
----------------------
Net increase in cash and cash equivalents 84,594 15,465
Cash and cash equivalents at beginning of period 57,993 72,175
----------------------
Cash and cash equivalents at end of period $142,587 $ 87,640
======================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1998
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-month period ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
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 - Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which
requires the disclosure of comprehensive income and its components. SFAS
No. 130 requires companies to report, in addition to net income, other
components of comprehensive income, which includes unrealized gains and
losses on available-for-sale securities and foreign currency translation
adjustments. For the three months ended March 31, 1998 and 1997, the
Company's comprehensive income was $56 million and $45 million,
respectively. The Company's adoption of SFAS No. 130 had no effect on the
Company's reported results of operations or financial position.
Note C - Earnings Per Share
The following table sets forth the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands, except per share data) 1998 1997
- - ----------------------------------------------------------------
<S> <C> <C>
Basic:
Net income $ 66,899 $ 75,436
--------------------
Weighted average shares outstanding 194,017 194,641
--------------------
Net income per common share $ 0.34 $ 0.39
====================
Assuming dilution:
Net income $ 66,899 $ 75,436
--------------------
Weighted average shares outstanding 194,017 194,641
Net effect of dilutive put options 8
Net effect of dilutive stock options 4,382 6,044
--------------------
Total 198,407 200,685
--------------------
Net income per common share $ 0.34 $ 0.38
====================
</TABLE>
Note D - Merger-Related Charges and Expenses
At March 31, 1998, the Company has an accrual for merger-related and special
charges of $94 million with respect to the Company's mergers and
acquisitions. The accrual includes those remaining costs typical in merging
operations and relate to, among other things, rationalization of facilities,
workforce reductions, unwinding of various contractual commitments, asset
write-downs and other integration costs. The merger-related 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 these mergers
and acquisitions is executed.
The activity impacting the accrual related to these charges during the first
quarter of 1998 is summarized in the following table:
<TABLE>
<CAPTION>
Balance at Balance at
December 31, Charges March 31,
(in thousands) 1997 Utilized 1998
- - --------------------------------------------------------------------------
<S> <C> <C> <C>
Facilities $ 19,989 $1,414 $18,575
Workforce reductions 25,242 1,753 23,489
Contractual commitments 29,334 3,899 25,435
Asset write-downs 15,802 135 15,667
Direct transaction and other costs 11,291 927 10,364
----------------------------------
$101,658 $8,128 $93,530
==================================
</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 mergers and acquisitions are estimated to be
approximately $54 million.
The March 31, 1998 accrual for merger-related and special
charges is classified within the balance sheet as follows:
<TABLE>
<CAPTION>
(in thousands)
- - ---------------------------------------------------------
<S> <C>
Accrual for merger-related charges $64,932
Property, plant, equipment and leaseholds 22,231
Other long-term liabilities 6,367
-------
$93,530
=======
</TABLE>
Note E - Credit Arrangements
In March 1998, the Company issued $500 million of 6.625% debt securities
(Debt Securities) due March 2005 under a Public Debt Registration Statement
filed with the U.S. Securities and Exchange Commission. The Debt Securities
are not redeemable prior to maturity and are not subject to any sinking fund
requirements. A significant portion of the net proceeds from the sale of
the Debt Securities (approximately $496 million) was used for repayment of
indebtedness under the Company's commercial paper program.
During March 1998, the Company borrowed 1.2 billion yen (the equivalent of
approximately $9 million) under a financing arrangement with a Japanese bank
at a fixed interest rate of 2.1%. The term of the borrowing extends through
2012.
In addition to its existing credit facilities with several Japanese banks,
the Company entered into a new Japanese credit facility in March 1998. The
new credit facility provides for additional borrowings and promissory notes
discounting of up to 3 billion yen, or approximately $23 million. At March
31, 1998, the Company had no outstanding borrowings under this new credit
facility.
The Company has a $500 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 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 March 31,
1998, the Company had no 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 March 31, 1998, the Company had
no commercial paper outstanding.
Note F - Inventories
The components of inventory consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands) 1998 1997
- - ---------------------------------------------------
<S> <C> <C>
Finished goods $214,602 $204,668
Work-in-process 56,857 45,683
Raw materials 160,947 136,391
----------------------
$432,406 $386,742
======================
</TABLE>
Note G - 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 its common stock during the
first quarter of 1998. Prior to 1998, a total of 10 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 and can be settled in cash or
common stock at the Company's discretion. Repurchase prices relating to put
options outstanding range 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 March 31, 1998.
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. Both
parties filed notices of appeal, but subsequently stipulated to their
dismissal pursuant to a settlement agreement dated March 27, 1998. 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 RX ELIPSE(TM) PTCA catheter. The
suit was filed in the U.S. District Court for the Northern District of
California seeking monetary and injunctive relief. In January 1998, the
Company added the ACS RX MULTILINK(TM) Stent Delivery System to its
complaint. Trial is scheduled to begin in late 1998 or early 1999.
SCIMED has accused ACS's COMET(TM) PTCA catheter, MULTILINK HP(TM) Stent
Delivery System and ROCKET(TM) PTCA catheter of infringing several SCIMED
patents. These claims are subject to arbitration relating to a threshold
determination under the November 27, 1991 settlement agreement. The
arbitration began on May 11, 1998. If SCIMED is successful in the
arbitration, it intends immediately to commence patent infringement
litigation to enforce its rights under the relevant patents against ACS.
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 expected to begin in
1999.
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(R) 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 expected to begin in 1999.
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 and Schneider filed notices of appeal, but
subsequently stipulated to their dismissal pursuant to a settlement
agreement dated March 27, 1998.
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 answered, denying the allegations in the complaint. A trial
date has not yet been set.
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 MaxForce 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 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. The court has requested that an expert
provide the court with technical advice.
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
to begin June 1998.
On March 17, 1997, the Company, through its subsidiaries, filed suit in
France seeking a declaration of noninfringement for the Company's LEAP
balloon in relation to a European patent owned by Cordis. A decision is
expected late in 1998.
On July 18, 1997, Cordis Corporation filed a cross border suit in The
Netherlands against various subsidiaries of the Company, alleging that the
LEAP balloon infringes one of Cordis' European patents. In this action,
Cordis requested expedited relief, including an injunction, covering The
Netherlands, Germany, France, the United Kingdom and Italy. The court
posed certain questions to the European Patent Office (EPO). A response
has not yet been received. The Company appealed the court's decision to
present questions to the EPO. A hearing on the appeal is set for June 16,
1998.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis
alleging willful infringement of several SCIMED U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
SLEUTH(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. The parties have agreed
to add Cordis' CHARGER(TM) and HELIX(TM)catheter to the suit. Cordis has
answered, denying the allegations of the complaint. Trial is scheduled for
January 1999.
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. The suit has been dismissed pursuant to a Settlement Agreement
dated April 28, 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. Trial was held in the United Kingdom on March 23, 1998 and
a decision is expected in May 1998. 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's appeal of this decision with respect to one
of the patents has been denied on the ground that there is a "reasonable
chance that the patent will be declared null and void." A hearing on the
merits is expected in early 1999.
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that the Company's NIR stent infringes one of Ethicon's
patents. A hearing is scheduled for June 19, 1998.
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. This action has been consolidated with the Delaware
action described below.
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 answered the complaint
denying 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 Massachusetts case described above has been
consolidated with this action. On April 13, 1998, Cordis filed a motion
requesting a preliminary injunction against the NIR stent. A hearing date
has not yet been set.
On April 9, 1998, Schneider (U.S.A.) Inc. filed a suit in the U.S. District
Court for the District of Delaware seeking a declaratory judgment of
invalidity of a patent owned by the Company and the noninfringement of
the patent by Schneider's Wallstent(R) products. The Company has answered,
denying certain allegations and has filed a counterclaim alleging infringement
of the patent by Wallstent products.
On April 13, 1998, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's NIR stent infringes a
patent owned by Cordis. The suit was filed in the U.S. District Court for
the District of Delaware seeking injunctive and monetary relief. The
Company and SCIMED have answered, denying the allegations of the complaint.
A hearing date has not yet been set.
On March 6, 1998, the Company filed suit in the U.S. District Court for the
District of Massachusetts alleging that Circon Corporation's ("Circon")
Spiked and Fluted VaporTrode(TM) electrodes and Grooved VaporTome(TM)
resection electrode infringe two patents owned by the Company, and
requesting a declaratory judgement for invalidity and noninfringement of
three Circon patents. A trial has been set for November 1998. On March 19,
1998, the Company was served by Circon with a suit alleging that the
Company's PERCUFLEX(R), CONTOUR(R) and BEAMER(TM) ureteral stents infringe two
patents owned by Circon, including two patents that are the subject of the
Company's declaratory judgement action against Circon. The suit was filed
in the U.S. District Court for the Eastern District of Wisconsin seeking a
declaration of infringement and monetary damages. The Company has filed a
motion to dismiss the Wisconsin action in light of the pending action in
Massachusetts. A hearing date on the Wisconsin motion has not yet been
set.
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 first quarter increased 9% to $470 million as compared to
$431 million in the first quarter of 1997. 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 approximately 13%. Net income for the first quarter
amounted to $67 million, or $.34 per share (diluted). This compares to net
income of $75 million, or $.38 per share, reported in the first quarter of
1997.
During the first quarter, United States (U.S.) revenues increased
approximately 7% and international revenues increased approximately 12%
compared to the same period in the prior year. International revenues
during the first quarter of 1998 were negatively impacted compared to the
first quarter of 1997 by unfavorable exchange rate movements caused primarily
by the strengthening of the U.S. dollar versus major European currencies and
the Japanese yen. Excluding the impact of foreign exchange, international
revenues increased approximately 21% compared to the same period in the
prior year. International revenue growth from the same period in the prior
year was driven by increases in both the Asia Pacific and European regions.
International revenues as a percentage of worldwide sales was 42% in the
first quarter of 1997 compared to 43% in the first quarter of 1998.
Gross profit as a percentage of net sales decreased from 71.9% in the first
quarter of 1997 to 70.2% in the first quarter of 1998. The decrease in the
Company's gross margin percentage is due to write-downs for excess and
obsolete inventory, a shift in the Company's product sales mix, a decline in
average selling prices as a result of continuing pressure on healthcare
costs and increased competition, and unfavorable foreign exchange rate
movements discussed above. However, the negative impact of the above
conditions was partially offset by cost containment programs and new
products. Future gross margins may be impacted by the Company's ability to
effectively manage its inventory level and mix.
Selling, general and administrative expenses as a percentage of net sales
increased from 35.3% in the first three months of 1997 to 36.6% in the first
three months of 1998, and increased $20 million to $172 million. The
increase as a percentage of net sales reflects costs to operate the Company's
new global information system, continued expansion of the Company's direct
sales operations in certain emerging markets, and increased costs in domestic
distribution. The Company continues to expand its direct sales presence in
Asia Pacific and Latin America so as to be in a position to take advantage
of expanded market opportunities. The Company believes that it will be able
to realize improved long-term returns on its investments with a direct
selling presence in these regions.
Royalty expenses remained at approximately 1.4% of net sales while
increasing from $6 million in the first quarter of 1997 to $7 million in the
first quarter of 1998. The Company continues to enter into strategic
technological alliances, some of which include royalty commitments. The
Company believes the additional investments will enhance its competitive
position in the future.
Research and development expenses as a percentage of net sales increased
from 9.0% in the first three months of 1997 to 9.5% in the first three
months of 1998, and increased $6 million to $45 million. The increase in
research and development reflects increased spending on new product
development programs, and regulatory and clinical research, 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.
During the first three months of 1998, operating expenses increased from the
same period in the prior year at a faster percentage than net sales and the
Company expects this relationship to continue during the second quarter of
1998. However, the Company also expects that the additional investments in
infrastructure will enhance its competitive position in the second half of
1998 and beyond.
Interest expense increased from $3 million in the first quarter of 1997 to
$6 million in the first quarter of 1998. The overall increase in interest
expense is primarily attributable to a higher outstanding debt balance,
including the Company's issuance of $500 million in fixed rate debt
securities during the quarter (see discussion below). Other income
(expense), net, decreased from income of $2 million in the first quarter of
1997 to expense of $3 million in the first quarter of 1998. The change is
primarily attributable to net gains on sales of equity investments of
approximately $5 million recorded in the first quarter of 1997.
The Company's effective tax rate improved from approximately 33% in the
first quarter of 1997 to 32% in the first quarter of 1998. The reduction in
the Company's effective tax rate is primarily due to increased business in
lower tax geographies and certain tax planning initiatives.
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 reimbursement levels and healthcare costs. The Company's ability
to benefit from its international expansion may be limited by risks and
uncertainties related to economic conditions in these regions, competitive
offerings, infrastructure development, rights to intellectual property, and
the ability of the Company to implement its overall business strategy. Any
significant changes in the political, regulatory or economic environment
where the Company conducts international operations may have a material
impact on revenues and profits. Although these factors may 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.
Liquidity and Capital Resources
In March 1998, the Company issued $500 million of 6.625% debt securities
(Debt Securities) due March 2005 under a Public Debt Registration Statement
filed with the U.S Securities and Exchange Commission. The Debt Securities
are not redeemable prior to maturity and are not subject to any sinking fund
requirements. A significant portion of the net proceeds from the sale of
the Debt Securities (approximately $496 million) was used for repayment of
indebtedness under the Company's commercial paper program.
Cash and short-term investments totaled $155 million at March 31, 1998
compared to $80 million at December 31, 1997. The increase in cash and
short-term investments is primarily attributable to cash provided in
connection with the Company's issuance of debt securities and proceeds from
operating activities. The cash proceeds were partially offset by the
repayment of the outstanding commercial paper balance and capital
expenditures incurred to expand the Company's manufacturing and distribution
facilities. Working capital increased from $256 million at December 31,
1997 to $819 million at March 31, 1998. The significant improvement in
working capital is primarily attributable to the refinancing of commercial
paper with the Debt Securities.
The increase in accounts receivable, net, from December 31, 1997 to March 31,
1998 is primarily due to an increase in days sales outstanding from 77 to
81. In addition to impacting selling prices, the trend to managed care has
also resulted in more complex billing and collection procedures. The
Company's ability to effectively react to the changing environment may
impact its bad debt and sales return provisions in the future. The increase
in inventory is primarily a result of continued stocking of the NIR(TM) stent
in preparation for the Company's planned launch in the U.S. and Japan, and an
increase in U.S. finished goods. The Company is committed to purchase
approximately $70 million of NIR stents for the remainder of 1998. The
Company expects inventory levels to peak in mid 1998 and then begin to
decline as the NIR stent is launched in the U.S. and Japan, and as the
Company's new global supply chain management system becomes fully operational.
Regulatory approval of the NIR stent and successful implementation of the
Company's supply chain initiatives is necessary to reduce the Company's
inventory to an acceptable level.
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.
Estimated cash payments for integration costs related to prior acquisitions
are approximately $46 million for the remainder of 1998. In addition, the
Company expects to incur additional capital expenditures of approximately
$150 million in 1998, including construction of additional manufacturing
space and completion of a global information system. The Company's new
global information system is Year 2000 compliant. The Company is assessing
other programs to determine if they are Year 2000 compliant and the Company
does not anticipate that additional compliance costs will have a material
impact on its business, operations or its financial condition.
The Company may borrow additional amounts under its revolving credit
agreement and its Japanese borrowing facilities in the future. The Company
expects that its cash and cash equivalents, marketable securities, cash
flows from operating activities, and borrowing capacity will be sufficient
to meet its projected operating cash needs, including integration costs at
least through the end of 1998. The Company may need to increase its bank
facilities during 1998 if it continues to execute strategic initiatives,
although there are no assurances that the financing can be or will be
obtained.
Market Risk Disclosures
The Company's floating and fixed rate debt obligations are subject to
interest rate risk. If interest rates increase 100 basis points in 1998 the
increase would not result in a material change in the Company's interest
expense or the fair value of the Company's debt obligations. A 100 basis
point increase would not result in a material increase in interest income or
the fair value of the Company's short-term investments.
The Company enters into forward foreign exchange contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with
commitments, generally one to six months. The Company does not engage in
speculation. The Company's foreign exchange contracts, which amounted to
approximately $211 million at March 31, 1998, 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. The short-term nature of these contracts has
resulted in these instruments having insignificant fair values at March 31,
1998. In addition, unhedged foreign currency balance sheet exposures as of
March 31, 1998 are not expected to result in a significant loss of earnings
or cash flows. 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. Therefore, most international 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's sensitivity analysis of the effects of changes in foreign
currency exchange rates does not factor in a potential change in sales levels
or local currency selling prices.
Litigation
The Company is involved in various lawsuits, including patent infringement and
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 safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose
of availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements contained in this
report include, but are not limited to, statements with respect to: (a) the
Company's forward build and spend programs and its ability to benefit from
expansion; (b) the Company's plans to continue to invest aggressively in its
global systems and worldwide manufacturing and distribution capacity; (c)
the potential impacts of continued consolidation among healthcare providers,
trends towards managed care, and healthcare cost containment, more stringent
regulatory requirements and more vigorous enforcement activities; (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) risks associated with
international operations; (g) the potential effect of foreign currency
fluctuations on revenues, expenses and resulting margins and the trend
toward increasing sales and expenses denominated in foreign currencies; (h)
the ability of the Company to implement its overall business strategy; (i)
the ability of the Company to manage accounts receivable and inventory
levels and mix and to react effectively to the changing managed care
environment; (j) the ability of the Company to meet its projected cash
needs through the end of 1998; (k) the Company's plans for the launch of the
NIR stent in the U.S. and Japan: (l) the ability of the global information
systems to improve supply chain management; (m) costs associated with
implementing Year 2000 compliance and business process reengineering; (n)
the Company's belief that operating expenses will increase at a faster
percentage than net sales during the second quarter of 1998 and the
expectation that the additional investments in infrastructure will enhance
the Company's competitive position in the second half of 1998 and beyond;
(o) the ability of additional investments in technological alliances to
enhance the Company's future competitive position; (p) the ability to realize
improved long-term returns on the Company's investments with a direct selling
presence in emerging markets; and (q) risks associated with litigation.
Several important factors,in addition to the specific factors discussed in
connection with such forward-looking statements individually, could affect
the future results of the Company and could cause those results to differ
materially from those expressed in the forward-looking statements contained
herein. Such additional factors include, among other things, future
economic, competitive and regulatory conditions, demographic trends,
financial market conditions and future business decisions of Boston
Scientific and its competitors, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of Boston
Scientific. Therefore, the Company wishes to caution each reader of this
report to consider carefully these factors as well as the specific factors
discussed with each forward-looking statement in this report and as
disclosed 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
None.
(b) The following reports were filed during the quarter ended
March 31, 1998:
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 May 15, 1998.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
Name: Lawrence C. Best
Title: Chief Financial Officer and Senior Vice
President - Finance and Administration
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 142,587
<SECURITIES> 11,944
<RECEIVABLES> 423,179
<ALLOWANCES> 0
<INVENTORY> 432,406
<CURRENT-ASSETS> 1,199,076
<PP&E> 750,119
<DEPRECIATION> 223,501
<TOTAL-ASSETS> 2,125,101
<CURRENT-LIABILITIES> 380,219
<BONDS> 554,888
0
0
<COMMON> 1,956
<OTHER-SE> 1,059,861
<TOTAL-LIABILITY-AND-EQUITY> 2,125,101
<SALES> 470,005
<TOTAL-REVENUES> 470,005
<CGS> 139,959
<TOTAL-COSTS> 139,959
<OTHER-EXPENSES> 223,251
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,054
<INCOME-PRETAX> 98,381
<INCOME-TAX> 31,482
<INCOME-CONTINUING> 66,899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,899
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
