<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
[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> 2
I. INTRODUCTION
On November 3, 1998, Boston Scientific Corporation (the "Company")
announced it had detected the occurrence of business irregularities in the
operations of its Japanese subsidiary. As a result, the Company has restated its
1997 results as well as its quarterly results for the first three quarters of
1998, which allows for more accurate period to period comparisons (see Note A to
the Condensed Consolidated Financial Statements).
In addition, all historical share and per share amounts have been
restated to reflect the Company's November 30, 1998 two-for-one common stock
split in the form of a 100% stock dividend, except for share amounts presented
in the Condensed Consolidated Balance Sheets and the Condensed Consolidated
Statements of Stockholders' Equity which reflect the actual share amounts
outstanding for each period presented.
Financial statement information and related disclosures included in
this amended filing reflect, where appropriate, changes as a result of the
restatements.
All other information is presented as of the original filing date and
has not been updated in this amended filing.
<PAGE> 3
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
- -------------------------------------------------------------------------------
Restated
<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 358,264 365,463
Inventories 438,898 391,580
Deferred income taxes 150,380 146,956
Prepaid expenses and other current assets 38,580 36,176
---------------------------
Total current assets 1,140,653 1,020,484
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
---------------------------
$2,066,678 $1,924,270
===========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 4
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
- --------------------------------------------------------------------------------------
Restated
<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 176,773 161,236
Accrual for merger-related charges 64,932 68,358
Income taxes payable 25,795 11,436
Other current liabilities 6,275 6,292
-------------------------
Total current liabilities 357,988 793,408
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 724,170 677,608
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 1,025,625 957,298
-------------------------
$2,066,678 $1,924,270
=========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended
Restated March 31,
In thousands, except per share data 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $453,465 $425,892
Cost of products sold 138,305 119,906
------------------------
Gross profit 315,160 305,986
------------------------
Selling, general and administrative expenses 167,655 158,834
Royalties 6,735 5,898
Research and development expenses 44,648 38,698
------------------------
219,038 203,430
------------------------
Operating income 96,122 102,556
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 87,708 102,233
Income taxes 28,067 33,715
------------------------
Net income $ 59,641 $ 68,518
========================
Net income per common share - basic $ 0.15 $ 0.18
========================
Net income per common share - assuming dilution $ 0.15 $ 0.17
========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 6
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholder's Equity
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
---------------------------------------------------------------------------------------------
Restated
Unrealized
Gain on
Contingent Foreign Available-
Common Stock Additional Stock Currency for-Sale
----------------------- Paid-In Repurchase Retained Translation Securities,
Shares Issued Par Value Capital Obligation Earnings Adjustment Net
---------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 195,611,491 $1,956 $432,556 $18,295 $677,608 $(94,279) $17,422
Net income 59,641
Foreign currency translation
adjustment (5,701)
Issuance of common stock 1 (21,642)
Tax benefit relating to incentive
stock option and employee stock
purchase plans 8,563
Net change in equity investments (5,156)
---------------------------------------------------------------------------------------------
Balance at March 31, 1998 195,611,491 $1,956 $432,557 $18,295 $724,170 $(99,980) $12,266
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
-------------------------
Treasury
Stock Total
-------------------------
<S> <C> <C>
Balance at December 31, 1997 $(96,260) $957,298
Net income 59,641
Foreign currency translation
adjustment (5,701)
Issuance of common stock 32,621 10,980
Tax benefit relating to incentive
stock option and employee stock
purchase plans 8,563
Net change in equity investments (5,156)
-------------------------
Balance at March 31, 1998 $(63,639) $1,025,625
=========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 7
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.
<PAGE> 8
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/A for
the year ended December 31, 1997.
On November 3, 1998, the Company announced it had detected the occurrence of
business irregularities in the operations of its Japanese subsidiary. As a
result, the Company has restated its results for the three months ended March
31, 1998 and 1997 which allows for more accurate period to period comparisons.
The restatement resulted in a decrease in revenues from $470 million, previously
reported, to $453 million for the three months ended March 31, 1998. Net income
decreased from $67 million, previously reported, to $60 million for the same
period.
The Company paid a two-for-one stock split on November 30,1998. All historical
per share amounts have been restated to reflect the stock split except for share
amounts presented in the Condensed Consolidated Balance Sheets and the Condensed
Consolidated Statements of Stockholders' Equity which reflect the actual share
amounts outstanding for each period presented.
Financial statement information and related disclosures reflect, where
appropriate, changes as a result of the restatement. Unless otherwise stated,
information is presented as of the original filing date, and has not been
updated.
Certain prior year's amounts have been reclassified to conform to the current
year presentation.
<PAGE> 9
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 $49 million and $38 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 $ 59,641 $ 68,518
-----------------------
Weighted average shares outstanding 388,034 389,282
-----------------------
Net income per common share $ 0.15 $ 0.18
=======================
Assuming dilution:
Net income $ 59,641 $ 68,518
-----------------------
Weighted average shares outstanding 388,034 389,282
Net effect of dilutive put options 16
Net effect of dilutive stock options 8,764 12,088
-----------------------
Total 396,814 401,370
-----------------------
Net income per common share $ 0.15 $ 0.17
=======================
</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.
<PAGE> 10
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.
<PAGE> 11
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 $ 221,094 $ 209,506
Work-in-process 56,857 45,683
Raw materials 160,947 136,391
-----------------------------
$ 438,898 $ 391,580
=============================
</TABLE>
Note G - Stockholders' Equity
The Company is authorized to purchase on the open market up to approximately 40
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 20 million shares of the Company's
common stock was repurchased under the program.
<PAGE> 12
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
$27.50 per share to $28.00 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.
<PAGE> 13
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(TM) 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.
<PAGE> 14
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 suits 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.
<PAGE> 15
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(R) 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
late 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.
<PAGE> 16
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 and 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 injuctive and monetary relief. The Company and SCIMED
have answered, denying the allegations of the complaint. A hearing date has not
yet been set.
<PAGE> 17
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
judgment 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.
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
On November 3, 1998, the Company announced it had detected the occurrence of
business irregularities in the operations of its Japanese subsidiary. As a
result, the Company has restated its results for the three months ended
March 31, 1998 and 1997 which allows for more accurate period to period
comparisons. The restatement resulted in a decrease in revenues from
$470 million, previously reported, to $453 million for the three months ended
March 31, 1998. Net income decreased from $67 million, previously reported, to
$60 million for the same period.
Net sales for the first quarter increased 6% to $453 million as compared to $426
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 10%. Net income for the first quarter amounted to $60 million, or
$0.15 per share (diluted). This compares to net income of $69 million, or $0.17
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 6% 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 14%
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 41% in the
first quarter of 1998. U.S. revenues as a percentage of worldwide sales was 58%
in the first quarter of 1997 compared to 59% in the first quarter of 1998.
Gross profit as a percentage of net sales decreased from 71.8% in the first
quarter of 1997 to 69.5% 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
remained at 37% of net sales while increasing from $159 million in the first
quarter of 1997 to $168 million in the first quarter of 1998 . The increase
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.
<PAGE> 19
Royalty expenses as a percentage of net sales increased from 1.4% in the first
three months of 1997 to 1.5% in the first three months of 1998 and increased
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
9.1% in the first three months of 1997 to 9.8% 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.
<PAGE> 20
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 $227 million at December 31, 1997 to $783 million at March 31, 1998. The
significant improvement in working capital is primarily attributable to the
refinancing of commercial paper with the Debt Securities.
<PAGE> 21
The decrease in accounts receivable, net, from December 31, 1997 to March 31,
1998 is primarily attributable to a reduction in sales from the fourth quarter
of 1997 to the first quarter of 1998. 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 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.
<PAGE> 22
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.
<PAGE> 23
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
<PAGE> 24
and may cause actual results to differ materially from those contemplated by the
statements expressed herein.
<PAGE> 25
PART II
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.
<PAGE> 26
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 March 29, 1999.
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
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 142,587
<SECURITIES> 11,944
<RECEIVABLES> 358,264
<ALLOWANCES> 0
<INVENTORY> 438,898
<CURRENT-ASSETS> 1,140,653
<PP&E> 750,119
<DEPRECIATION> 223,501
<TOTAL-ASSETS> 2,066,678
<CURRENT-LIABILITIES> 357,988
<BONDS> 554,888
0
0
<COMMON> 1,956
<OTHER-SE> 1,023,669
<TOTAL-LIABILITY-AND-EQUITY> 2,066,678
<SALES> 453,465
<TOTAL-REVENUES> 453,465
<CGS> 138,305
<TOTAL-COSTS> 138,305
<OTHER-EXPENSES> 219,038
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,054
<INCOME-PRETAX> 87,708
<INCOME-TAX> 28,067
<INCOME-CONTINUING> 59,641
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,641
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
