-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EVqBgNcx9zU+sSzrsYYvZYaNSMAQ1g0cBT4dqwMD0O9/pkrWrl2URKOee1CvQUOc PnKG7StIxL1+kdRtX+kYkg== 0000910647-96-000194.txt : 19961118 0000910647-96-000194.hdr.sgml : 19961118 ACCESSION NUMBER: 0000910647-96-000194 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON SCIENTIFIC CORP CENTRAL INDEX KEY: 0000885725 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 042695240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11083 FILM NUMBER: 96665507 BUSINESS ADDRESS: STREET 1: ONE BOSTON SCIENTIFIC PL CITY: NATICK STATE: MA ZIP: 01760-1537 BUSINESS PHONE: 5086508000 10-Q 1 BODY OF 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the quarterly period ended: September 30, 1996 Commission file number: 1-11083 BOSTON SCIENTIFIC CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-2695240 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) One Boston Scientific Place, Natick, Massachusetts 01760-1537 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 650-8000 - ---------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Shares Outstanding Class as of September 30, 1996 - ----------------------------------------------------------------- Common Stock, $.01 Par Value 177,915,164 - ---------------------------------------------------------------------------- Page 1 of 27 Exhibit Index on Page 24 Part I Financial Information Item 1. Financial Statements BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited)
September 30, December 31, In thousands, except share data 1996 1995 - ---------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 59,420 $ 117,321 Marketable securities 23,699 43,832 Trade accounts receivable, net 283,017 214,232 Inventories 209,837 148,572 Prepaid expenses and other current assets 66,551 32,688 ------------------------- Total current assets 642,524 556,645 Property, plant, equipment and leaseholds, net 319,350 256,093 Intangibles, net 307,068 137,704 Deferred income taxes 4,855 46,352 Other investments and assets 83,354 103,094 ------------------------- $1,357,151 $1,099,888 =========================
See notes to unaudited condensed consolidated financial statements. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (continued) (Unaudited)
September 30, December 31, In thousands, except share data 1996 1995 - -------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Commercial paper $ 199,746 Bank obligations 26,237 $ 57,520 Accounts payable and accrued expenses 147,107 106,322 Accrual related to special charges 65,116 80,144 Other current liabilities 54,493 29,691 -------------------------- Total current liabilities 492,699 273,677 Long term liabilities 8,468 52,061 Commitments and contingencies Contingent stock repurchase obligation 24,855 Stockholders' equity: Preferred stock, $ .01 par value - authorized 25,000,000 shares, none issued and outstanding Common stock, $ .01 par value - authorized 300,000,000 shares, 179,101,866 shares issued at September 30, 1996 and 179,079,298 at December 31, 1995 1,791 1,791 Additional paid-in capital 386,828 386,610 Retained earnings 508,313 417,951 Foreign currency translation adjustment (31,806) (14,739) Unrealized gain on available-for-sale securities, net 12,329 8,833 Treasury stock, at cost - 1,186,702 shares at September 30, 1996 and 2,425,490 shares at December 31, 1995 (46,326) (26,296) -------------------------- Total stockholders' equity 831,129 774,150 -------------------------- $1,357,151 $1,099,888 ==========================
See notes to unaudited condensed consolidated financial statements. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
Three months ended Nine months ended September 30, September 30, In thousands, except per share data 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------------- Net sales $373,744 $283,094 $1,053,315 $823,955 Cost of products sold 104,454 82,475 284,972 243,334 ------------------------------------------- Gross profit 269,290 200,619 768,343 580,621 Selling, general and administrative expenses 130,375 92,774 352,910 265,311 Research and development expenses 30,309 24,367 84,755 68,564 Royalties 3,431 5,403 11,141 20,151 Special charges - - 128,341 124,749 ------------------------------------------- 164,115 122,544 577,147 478,775 ------------------------------------------- Operating income 105,175 78,075 191,196 101,846 Other income (expense): Interest and dividend income 837 3,262 3,677 10,902 Interest expense (3,490) (1,907) (7,982) (7,288) Other, net 1 (1,630) (3,689) 4,684 ------------------------------------------- Income before income taxes 102,523 77,800 183,202 110,144 Income taxes 34,680 28,444 92,840 75,821 ------------------------------------------- Net income $ 67,843 $ 49,356 $ 90,362 $ 34,323 =========================================== Primary net income per common share $0.37 $0.27 $0.50 $0.19 =========================================== Primary weighted average number of common shares 182,382 180,571 180,699 177,882 =========================================== Fully diluted net income per common share $0.37 $0.27 $0.49 $0.19 =========================================== Fully diluted weighted average number of common shares 183,040 181,084 183,040 180,121 ===========================================
See notes to unaudited condensed consolidated financial statements. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Stockholder's Equity (Unaudited)
Nine Months Ended September 30, 1996 ----------------------------------------------------------------------------------------- Foreign Common Stock Additional Currency ------------------------ Paid in Retained Translation Unrealized Treasury Shares Issued Par Value Capital Earnings Adjustment Gain Stock Total ----------------------------------------------------------------------------------------- (In thousands, except share data) Balance at December 31, 1995 179,079,298 $1,791 $386,610 $417,951 ($14,739) $ 8,833 ($26,296) $774,150 Net income 90,362 90,362 Foreign currency translation adjustment (17,067) (17,067) Issuance of Common Stock under options, warrants and stock purchase plans 22,568 (631) 29,760 29,129 Purchase of Common Stock for treasury (52,313) (52,313) Contingent stock repurchase obligation (24,855) 2,523 (22,332) Tax benefit relating to stock option and employee stock purchase plans 25,704 25,704 Net change in equity investments 3,496 3,496 Balance at September 30, 1996 179,101,866 $1,791 $386,828 $508,313 ($31,806) $12,329 ($46,326) $831,129
See notes to unaudited condensed consolidated financial statements. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flow (Unaudited)
Nine Months Ended September 30, In thousands 1996 1995 - --------------------------------------------------------------------------------- Cash provided by operating activities $ 81,913 $ 27,801 Investing activities: Purchases of property, plant, and equipment (86,041) (54,664) Net maturities of marketable securities 20,133 47,316 Payment for purchase of Symbiosis Corporation, net of cash acquired (153,907) - Payment for purchase of Cardiovascular Imaging Systems, Inc., net of cash acquired - (87,783) Payment for purchase of MinTec Inc., net of cash acquired (71,160) - Payment for acquisition of minority interest ownership in a subsidiary (16,513) - Net payments for other acquistions of certain technologies (3,229) (11,796) Other (4,217) (1,939) ------------------- Cash used in investing activities (314,934) (108,866) Financing actvities: Net increase in commercial paper 199,746 - Net payments on notes payable and capital leases (28,100) (37,402) Proceeds from exercise of stock options, warrants and stock purchase plans 29,129 14,459 Acquisitions of treasury stock, net of proceeds from put options (49,790) - Tax benefit relating to stock option and employee stock purchase plans 25,704 11,044 Other 400 1,429 ------------------- Cash provided by (used in) financing activities 177,089 (10,470) Effect of foreign exchange rates on cash (1,969) (4,700) ------------------- Net decrease in cash and cash equivalents (57,901) (96,235) Cash and cash equivalents at beginning of period 117,321 269,282 ------------------- Cash and cash equivalents at end of period $ 59,420 $173,047 =================== Supplemental Schedule of Noncash Investing and Financing Activities: Payments due in connection with the purchase of technology $ 11,650 $ 10,000
See notes to unaudited condensed consolidated financial statements. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 1996 Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto incorporated by reference in the Boston Scientific Corporation's Annual Report on Form 10-K for the year ended December 31, 1995. Certain prior year's amounts have been reclassified to conform to the current year presentation. Note B - Acquisitions On January 22, 1996, Boston Scientific Corporation (the Company) completed its merger of EP Technologies, Inc. (EPT) in a stock-for-stock transaction. The transaction, which was accounted for as a pooling-of-interests, was effected through the exchange of 0.297 shares of the Company's common stock for each EPT share held. Approximately 3.4 million shares of the Company's common stock were issued in conjunction with the EPT merger. The accompanying unaudited condensed consolidated financial statements have been restated to include the accounts and operations of EPT for all prior periods. Separate results of the combining entities for the nine months ended September 30, 1995 are as follows (in thousands):
Combined Boston Boston Scientific EPT Scientific --------------------------------- Net sales $807,461 $16,494 $823,955 Net income (loss) $ 35,897 $(1,574) $ 34,323
On March 14, 1996, the Company acquired Symbiosis Corporation (Symbiosis), formerly a wholly-owned subsidiary of American Home Products Corporation. Boston Scientific purchased Symbiosis, a developer and manufacturer of specialty medical devices, for approximately $153 million in a cash transaction. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired based on their estimated fair values. This accounting treatment resulted in approximately $146 million of intangible assets that will be amortized over their estimated period of benefit. Approximately $38.7 million of the acquisition cost represented purchased research and development. The Company also recorded a deferred tax liability of approximately $38.7 million representing the tax effect of timing differences recorded as part of the acquisition. The following unaudited pro forma information presents a summary of consolidated results of operations of the Company and Symbiosis as if the acquisition had occurred at the beginning of 1995, with pro forma adjustments to give effect to purchased research and development, amortization of intangibles, reduction in interest income on acquisition financing and certain other adjustments, together with the related tax effects:
For the Nine Months Ended September, 1996 1995 --------------------- Net sales $1,057,491 $841,507 Net income (loss) $ 128,849 $ (5,551) Primary net income (loss) per common share $ .71 $ (.03) Fully diluted net income (loss) per common share $ .72 $ (.03)
On May 3, 1996, Boston Scientific acquired assets from Endotech, Ltd. and MinTec Inc., and certain related companies (Endotech/MinTec), a privately held company dedicated to the development of stent graft technology for the repair of diseased blood vessels. The Company purchased Endotech/MinTec's assets for approximately $72 million in a cash transaction. The transaction, which was accounted for under the purchase method of accounting, was financed from the Company's available cash and borrowings under its financing arrangements (see Notes C and D). The purchase price was allocated to the assets acquired based on their estimated fair values. The treatment resulted in approximately $14 million of intangible assets that will be amortized over their estimated period of benefit. The acquisition did not have a material pro forma impact on the Company's operations, other than approximately $57.3 million of the acquisition cost representing purchased research and development. Note C - Merger-Related Charges In the first nine months of 1996, the Company recorded special charges of $128.3 million ($113.7 million net of tax) which primarily related to the merger with EPT and the acquisitions of Symbiosis and Endotech/MinTec. Charges include $96.0 million for purchased research and development, $4.6 million in direct transaction costs, and $12.2 million of estimated costs to be incurred in merging the separate operating businesses of EPT with subsidiaries of the Company. Estimated costs include those typical in a merging of operations and relate to, among other things, rationalization of facilities, workforce reductions, unwinding of various contractual commitments, asset writedowns and other integration costs. The majority of the remaining $15.5 million, which is primarily non-deductible for tax purposes, represents a change in management's estimates of the merger- related charges recorded in 1995. The change to prior year estimates relates primarily to the costs of unwinding various contractual obligations and the rationalization of facilities. The special charges are determined based on formal plans approved by Company's management using the best information available to it at the time. The workforce-related initiatives involve substantially all of the Company's employee groups. The amounts the Company may ultimately incur may change as the plans are executed. Note D - Credit Arrangements At December 31, 1995, the Company had line of credit agreements with two U.S. banks (the Credit Agreements) that provided maximum worldwide borrowings of $71 million. On April 1, 1996, the Company increased its maximum worldwide borrowings provided under the Credit Agreements to $121 million. The term of the increased borrowings extended through June 7, 1996, at which time, the Credit Agreements were terminated and replaced by a new $350 million revolving line of credit with a syndicate of U.S. and international banks (New Credit Agreement). Under the New Credit Agreement, the Company has the option to borrow amounts at various interest rates, payable quarterly in arrears. The term of the borrowings extends through June 6, 2002; use of the borrowings is unrestricted and the borrowings are unsecured. The New Credit Agreement requires the Company to maintain a minimum consolidated tangible net worth and a ratio of consolidated funded debt to consolidated tangible net worth. At September 30, 1996, the Company did not have any outstanding borrowings under the New Credit Agreement. During the second quarter of 1996, the Company initiated a commercial paper program. The commercial paper is supported by the Company's New Credit Agreement; outstanding commercial paper reduces available borrowings under the New Credit Agreement. Proceeds from issuing the commercial paper were used for repayment of a $100 million short term seller-financed loan associated with the acquisition of Symbiosis, repayment of borrowings under the Credit Agreements, and repurchase of the Company's common stock. The remaining proceeds primarily were used for general operating purposes. At September 30, 1996, the Company had approximately $199.7 million in commercial paper outstanding with interest rates ranging from 5.50% to 5.63%. Note E - Inventories The components of inventory consist of the following (in thousands):
September 30, December 31, 1996 1995 ---------------------------- Finished goods $111,416 $ 76,531 Work-in-process 45,485 35,179 Raw materials 52,936 36,862 ------------------------ $209,837 $148,572 ========================
Note F - Stockholders' Equity During the second quarter of 1996, the Company resumed its program to repurchase stock. The Board of Directors authorized the Company to purchase on the open market up to 15,000,000 shares of the Company's common stock in addition to the stock repurchased during 1993. Purchases will be made at prevailing prices as market conditions and cash availability warrant. Repurchased stock will be used to satisfy the Company's obligations pursuant to its employee benefit and incentive plans. During the second quarter of 1996, the Company repurchased 1,262,500 shares of its common stock at an aggregate cost of $52.3 million. No additional shares were repurchased during the third quarter of 1996. As part of the stock repurchase program, the Company sold European equity put options to an independent broker-dealer during the second quarter of 1996. Each option, if exercised, obligates the Company to purchase from the broker-dealer a specified number of shares of the Company's common stock at a predetermined exercise price. The put options are exercisable only on the first anniversary of the date the options were sold. During the second quarter of 1996, the Company sold European put options for 600,000 shares and received proceeds of approximately $2.5 million. Proceeds are recorded as a reduction to the cost of the Company's treasury stock. The Company did not sell any European put options during the third quarter of 1996. Repurchase prices relating to put options outstanding at September 30, 1996 range from $41.10 per share to $41.75 per share. The Company's contingent obligation to repurchase shares upon exercise of the outstanding put options approximated $24.9 million at September 30, 1996. At September 30, 1996, the aggregate contingent repurchase obligation has been reclassified from permanent equity and is presented as a contingent stock repurchase obligation. Note G - Accounting Pronouncement As of January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", which establishes criteria for the recognition and measurement of impairment loss associated with long-lived assets. Adoption of this standard had no material impact on the Company's financial position or results of operations. Note H - Commitments and Contingencies Schneider (Europe) AG and Schneider (USA) Inc., subsidiaries of Pfizer, Inc., have alleged that the Company's Synergy(TM) products infringe one of their patents. On May 13, 1994, the Company filed a lawsuit against them in the United States Federal District Court for the District of Massachusetts seeking a declaratory judgment that this patent is invalid and that the Company's Synergy products do not infringe the patent. The Schneider companies filed counterclaims against the Company, alleging the Company's willful infringement of the patent and seeking monetary and injunctive relief. The parties have made cross motions for summary judgment on various aspects of the case. On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED) filed a suit for patent infringement against Advanced Cardiovascular Systems, Inc. (ACS), alleging willful infringement of two of SCIMED's U.S. patents by ACS's FLOWTRACK-40(TM) and RX ELIPSE(R) PTCA catheters. Suit was filed in the U.S. District Court for the Northern District of California and seeks monetary and injunctive relief. The case has been sent to arbitration for a threshold determination of one issue covered by the November 27, 1991 Settlement Agreement (the Settlement Agreement) between the parties. The arbitration hearing was held in October 1996 and a final decision is expected by February 8, 1997. On November 17, 1995, SCIMED filed a suit for patent infringement against ACS, alleging willful infringement of three of SCIMED's U.S. patents by the ACS RX LIFESTREAM(TM) PTCA catheter. Suit was filed in the U.S. District Court for the Northern District of California and seeks monetary and injunctive relief. The case has also been sent to arbitration under the terms of the Settlement Agreement. The arbitration hearing was held in October 1996 and a final decision is expected by February 8, 1997. On October 10, 1995, ACS filed a suit for patent infringement against SCIMED, alleging willful infringement of four U.S. patents licensed to ACS by SCIMED'S EXPRESS PLUS(TM) and EXPRESS PLUS II(TM) PTCA catheters. Suit was filed in the U.S. District Court for the Northern District of California and seeks monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaint. On December 15, 1995, the Company and SCIMED filed a suit for restraint of trade, unfair competition and conspiracy to monopolize against ACS and the Schneider companies, alleging certain violations of state and federal antitrust laws arising from the improper prosecution, enforcement and cross- licensing of U.S. patents relating to rapid exchange balloon dilatation angioplasty catheters. Suit was filed in the U.S. District Court for the District of Massachusetts and seeks monetary, declaratory and injunctive relief. The defendants have moved for dismissal. On March 12, 1996, ACS filed two suits for patent infringement against SCIMED, alleging in one case the willful infringement of a U.S. patent by SCIMED's EXPRESS PLUS, EXPRESS PLUS II and LEAP EXPRESS PLUS PTCA catheters, and in the other case the willful infringement of a U.S. patent by SCIMED's BANDIT(TM) PTCA catheter. The suits were filed in the U.S. District Court for the Northern District of California and seek monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaint. On November 9, 1994, Target Therapeutics, Inc. (Target) filed a lawsuit in the U.S. District Court for the Northern District of California alleging that SCIMED's VENTURE(R) and VENTURE II(TM) microcatheters infringe a patent assigned to Target. On May 2, 1996, the District Court entered an order granting a preliminary injunction prohibiting SCIMED from marketing or selling the accused product. On July 1, 1996, the Court of Appeals for the Federal Circuit stayed the preliminary injunction pending a decision on SCIMED's appeal of the District Court's order. The appeal is presently scheduled to be heard in early 1997. On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District Court for the District of Delaware alleging that certain Company products, including the Company's Max Force TTS(TM) catheter, infringes a patent assigned to Bard. The lawsuit seeks a declaratory judgment that the Company has infringed the Bard patent, preliminary and permanent injunctions enjoining the manufacture, use or sale of the Max Force TTS catheter or any other infringing product, monetary damages and expenses. The Company has answered, denying the allegations of the complaint. On March 25, 1996, Cordis Corporation, a subsidiary of Johnson & Johnson Company, filed a suit for patent infringement against SCIMED, alleging the infringement of five U.S. patents by SCIMED's LEAP(TM) balloon material, used in certain models of SCIMED's BANDIT and EXPRESS PLUS products. The suit was filed in the U.S. District Court for the District of Minnesota and seeks monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaint. On March 7, 1996, Cook Inc. filed suit in the Regional Court, Munich, Division for Patent Disputes in Munich Germany against Mintec, Inc. Minimally Invasive Technologies alleging that the Cragg EndoPro(TM) System I and Stentor(TM) endovascular devise infringes a certain Cook patent. Since the purchase of the assets of Endotech/MinTec by the Company, the Company has assumed control of the litigation. The defendant's answer has not been filed. On September 1, 1995, a purported class action lawsuit was filed in the Court of Chancery in the State of Delaware in and for New Castle County captioned Kinder v. Auth, et al., alleging breaches of fiduciary duty by the Board of Directors of Heart Technology, Heart Technology and the Company in connection with the Agreement and Plan of Merger entered into between the Company and Heart Technology. In January 1996, the parties agreed to settle the suit for an amount the Company does not deem to be material. On June 12, 1995, the Trustee in Bankruptcy for SMEC, Inc. filed a complaint in the U.S. Bankruptcy Court in Nashville, Tennessee alleging that a transaction between Datascope Corp. and the Company constitutes a fraudulent settlement of prior litigation among the Trustee, Datascope Corp., IABP Corp. and the Company. The complaint further alleges violation of the Racketeer Influenced and Corrupt Organizations Act. The Company has answered, denying the allegations of the complaint. By order entered October 16, 1996, the case was removed to the United States District Court for the Middle District of Tennessee Northeastern Division. The Company is involved in various other lawsuits from time to time. In management's opinion, the Company is not currently involved in any legal proceedings other than those specifically identified above which, individually or in the aggregate, could have a material effect on the financial condition, operations or cash flows of the Company. The Company believes that it has meritorious defenses against claims that it has infringed patents of others. However, there can be no assurance that the Company will prevail in any particular case. An adverse outcome in one or more cases in which the Company's products are accused of patent infringement could have a material adverse effect on the Company. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. The Company has insurance coverage which management believes is adequate to protect against such product liability losses as could otherwise materially affect the Company's financial position. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales in the third quarter of 1996 increased 32.0% to $373.7 million as compared to $283.1 million in the third quarter of 1995. Net income for the third quarter of 1996 increased 37.5% to $67.8 million as compared to $49.4 million in the third quarter of 1995. Net sales for the nine month period ended September 30, 1996 increased 27.8% to $1,053.3 million as compared to $824.0 million for the same period in 1995. The Company reported net income for the nine month period ended September 30, 1996 of $90.4 million including special charges ($128.3 million or $113.7 million net-of-tax) related to recent acquisitions compared to net income of $34.3 million including special charges ($124.7 million or $112.1 million net of tax) for the same period in 1995. Excluding special charges related to recent acquisitions, net income for the nine month period ended September 30, 1996 increased 39.3% to $204.1 million from $146.5 million for the nine month period in 1995. Revenues in the United States grew approximately 19.1% during the third quarter compared to the same period of the prior year. International revenues, including export sales, increased approximately 58.6% during the third quarter compared to the same period in the prior year and were negatively impacted by approximately $5.0 million due to changes in foreign currency exchange rates. Revenues in the United States grew approximately 17.5% during the nine months of 1996 compared to the same period of the prior year. International revenues, including export sales, increased approximately 49.0% during the nine months of 1996 compared to the same period in the prior year and were negatively impacted by approximately $15.1 million due to changes in foreign currency exchange rates. The increase in international sales reflects results from the Company's strategy to build its international organization. During the third quarter of 1996, the Company accelerated its forward build and spend programs so as to be in a position to take advantage of the expanded market opportunities it expects in 1997 and beyond. The Company's ability to benefit from its forward build and spend programs may be limited by risks and uncertainties related to competitive offerings, timing and scope of regulatory approvals, infrastructure development, continued international expansion, rights to intellectual property, and the ability of the Company to implement its overall business strategy. Gross profit as a percentage of net sales improved from 70.9% in the three months ended September 30, 1995 to 72.1% in the three months ended September 30, 1996, and improved from 70.5% in the nine months ended September 30, 1995 to 72.9% in the nine months ended September 30, 1996. The improvement in the Company's gross margins is primarily due to the Company's U.S. cost containment programs, an increase in the percentage of international sales compared to U.S. sales, and certain benefits of converting from selling through international distributors to direct sales operations. However, the positive impact of these initiatives was partially offset by the forward spend programs discussed above, and a slight decline in average selling prices due to continuing efforts to contain healthcare costs and increased competition. Uncertainty remains with regard to future changes within the health care industry. Continued consolidation among U.S. health care providers and the trend towards managed care in the United States may result in continued pressure on selling prices of certain products and resulting compression on gross margins. In addition, international markets are also being affected by economic pressure to contain health care costs. Although these factors will continue to impact the rate at which Boston Scientific can grow, the Company believes that it is well positioned to take advantage of opportunities for growth that exist in the markets it serves. Selling, general and administrative expenses increased 40.5% from $92.8 million in the three months ended September 30, 1995 to $130.4 million in the three months ended September 30, 1996 and increased as a percentage of sales from 32.8% to 34.9% during the same periods. Selling, general and administrative expenses increased 33.0% from $265.3 million for the nine month period ended September 30, 1995 to $352.9 million for the same period in 1996. The increase in overall expense dollars reflects continued forward expansion of the Company's domestic and international sales organizations and related marketing support in anticipation of increased volume, an increase in legal expenses incurred to strengthen and defend the Company's patent position, and amortization of intangibles acquired during 1995 and 1996. Research and development expenses increased 24.4% from $24.4 million in the third quarter of 1995 to $30.3 million in the third quarter of 1996, and 23.6% from $68.6 million in the nine month period of 1995 to $84.8 million in the nine month period of 1996. Research and development expenses decreased slightly as a percentage of net sales (8.6% in the third quarter of 1995 and 8.1% in the third quarter of 1996). The increase in dollars reflects increased spending in regulatory, clinical research and various other product development programs, and reflects the Company's continued commitment to refine existing products and procedures and to develop new technologies that provide simpler, less traumatic, less costly and more efficient diagnosis and treatment. The trend toward more stringent regulatory oversight in countries around the world for product clearance and enforcement activities has generally caused or may cause medical device manufacturers to experience more uncertainty, greater risk and higher expenses. In addition, regulatory approval times for new products continues to be lengthy, a concern of medical device manufacturers generally. Royalty expenses decreased 36.5% from $5.4 million in the third quarter of 1995 to $3.4 million in the third quarter of 1996, and 44.7% from $20.2 million in the nine month period of 1995 to $11.1 million in the nine month period of 1996. Royalty expenses decreased from approximately 1.9% of net sales in the third quarter of 1995 to 0.9% of net sales in the third quarter of 1996. The decrease in royalties is primarily attributable to a reduction in sales of certain of the Company's PTCA products that are subject to royalties. In the nine month period of 1996, the Company recorded special charges of $128.3 million ($113.7 million net of tax) which primarily related to the merger with EPT and the acquisitions of Symbiosis and Endotech/MinTec. Charges include $96.0 million for purchased research and development, $4.6 million in direct transaction costs, and $12.2 million of estimated costs to be incurred in merging the EPT business with subsidiaries of the Company. Estimated costs include those typical in a merging of operations and relate to, among other things, rationalization of facilities, workforce reductions, unwinding of various contractual commitments, asset writedowns and other integration costs. The majority of the remaining $15.5 million, which is primarily non-deductible for tax purposes, represents a change in management's estimates of the merger-related charges recorded in 1995. The change to prior year estimates relates primarily to the costs of unwinding various contractual obligations and the rationalization of facilities. In the nine month period of 1995, the Company recorded special charges of $124.7 million ($112.1 million, net-of-tax) in connection with the acquisitions of SCIMED, Cardiovascular Imaging Systems (CVIS) and Vesica Medical, Inc. (Vesica). Charges included $32.6 million for purchased research and development, $21.1 million in direct transaction costs, and $71.0 million of estimated costs to be incurred in merging the SCIMED business with subsidiaries of the Company. Estimated costs included those typical in a merging of operations and relate to, among other things, rationalization of facilities, workforce reductions, unwinding of various contractual commitments, asset writedowns and other integration costs. The special charges are determined based on formal plans approved by Company's management using the best information available to it at the time. The amounts the Company may ultimately incur may change as the plans are executed. Interest and dividend income was $837 thousand in the third quarter of 1996 compared to $3.3 million in the third quarter of 1995, and $3.7 million for the nine month period of 1996 compared to $10.9 million for the nine month period of 1995. The decrease is primarily attributable to a decrease in the Company's average cash and marketable securities balance resulting from the use of cash to finance several of the Company's strategic acquisitions and alliances during the second half of 1995 and the first half of 1996. Interest expense increased from $1.9 million in the third quarter of 1995 to $3.5 million in the third quarter of 1996 and from $7.3 million in the nine month period of 1995 to $8.0 million in the nine month period of 1996. The increase in interest expense is primarily attributable to interest on a $100 million short term seller-financed loan associated with the acquisition of Symbiosis and the Company's issuance of commercial paper. Other income (expense), net, changed from expense of $1.6 million in the third quarter of 1995 to income of $1 thousand in the third quarter of 1996. The change is primarily attributable to net foreign exchange transaction losses recorded in the third quarter of 1995. Other income (expense), net, changed from income of $4.7 million for the nine month period in 1995 to expense of $3.7 million for the nine month period in 1996. The change for the nine month period ended September 30, 1996 relates primarily to net foreign exchange transaction losses as compared to foreign exchange transaction gains for the nine month period ended September 30, 1995. The Company's effective tax rate improved from approximately 36.6% in the third quarter of 1995 to 33.8% in the third quarter of 1996. The effective tax rate including special charges was 50.7% for the nine month period of 1996 compared to 68.8% for the same period in 1995. The Company's effective tax rate, excluding the impact on special charges, was approximately 37.6% in the nine month period of 1995 as compared to approximately 34.5% in the nine month period of 1996. The reduction in the Company's effective tax rate, excluding the impact of special charges, is primarily due to increased business in lower tax geographies and various tax planning initiatives. On January 22, 1996, the Company completed its merger of EPT in a stock-for- stock transaction. The transaction, which was accounted for as a pooling-of- interests, was effected through the exchange of 0.297 shares of the Company's common stock for each EPT share held. Approximately 3.4 million shares of the Company's common stock were issued in conjunction with the EPT merger. On March 14, 1996, the Company acquired Symbiosis, formerly a wholly-owned subsidiary of American Home Products Corporation. Boston Scientific purchased Symbiosis, a developer and manufacturer of specialty medical devices, for approximately $153 million in a cash transaction. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired based on their estimated fair values. This accounting treatment resulted in approximately $146 million of intangible assets that will be amortized over their estimated period of benefit. Approximately $38.7 million of the acquisition cost represented purchased research and development. The Company also recorded a deferred tax liability of approximately $38.7 million representing the tax effect of timing differences recorded as part of the acquisition. On May 3, 1996, Boston Scientific acquired assets from Endotech/MinTec, a privately held company dedicated to the development of stent graft technology for the repair of diseased blood vessels. The Company purchased assets from Endotech/MinTec for approximately $72 million in a cash transaction. The transaction, which was accounted for under the purchase method of accounting, was financed from the Company's available cash and borrowings under its financing arrangements. The purchase price was allocated to the assets acquired based on their estimated fair values. The treatment resulted in approximately $14 million of intangible assets which will be amortized over their estimated period of benefit. Approximately $57.3 million of the acquisition cost represented purchased research and development. The Company has substantially completed the integration of the businesses acquired early in 1995, and is in the process of integrating the businesses acquired more recently. Integration plans are expected to be substantially completed by the end of 1997. Management believes it has developed a sound plan for continuing and concluding the integration process, and that it will achieve that plan. However, in view of the number of major transactions undertaken by the Company, the dramatic changes in the size of the Company and the complexity of its organization resulting from these transactions, management also believes that the successful implementation of its plan presents a significant degree of difficulty. The failure to integrate these businesses effectively could adversely affect the Company's ability to realize the strategic and financial objectives of these transactions. Liquidity and Capital Resources Cash and marketable securities totaled $83.1 million at September 30, 1996 compared to $161.2 million at December 31, 1995. Working capital decreased from $283.0 million at December 31, 1995 to $149.8 million at September 30, 1996. The decrease in cash and marketable securities is primarily attributable to approximately $225.1 million paid in conjunction with the Company's acquisitions of Symbiosis and Endotech/MinTec, capital expenditures incurred primarily to expand the Company's manufacturing and distribution facilities in Europe, cash used to repurchase the Company's common stock, payment of merger related costs and net payments on line of credit borrowings. The cash expenditures were partially offset by proceeds received in connection with the Company's initiation of a commercial paper program. The increase in accounts receivable from December 31, 1995 to September 30, 1996 is primarily due to the growth of international sales which typically have longer payment periods, the shift from international distributors to direct sales forces and the accounts receivable recorded in connection with the acquisitions of Symbiosis and Endotech/MinTec. The increase in inventory during the same period is primarily related to the Company's overall increase in sales and the shift from international distributors to direct sales forces. In connection with the acquisitions of SCIMED, CVIS, Vesica, Meadox Medicals, Inc., Heart Technology, Inc., EPT, Symbiosis, and Endotech/MinTec, the Company recorded non-recurring and special charges of approximately $237.1 million ($195.3 million net-of-tax) and $128.3 million ($113.7 million net-of tax) during 1995 and the first half of 1996, respectively. Cash outflows to complete the balance of the Company's initiatives to integrate the businesses are estimated to be approximately $22.0 million and $32.0 million during the fourth quarter and thereafter, respectively. Additionally, the Company expects to continue to invest aggressively in building its international organization, global systems and worldwide manufacturing and distribution capacity. The Company's international strategy is subject to the economic and political risks inherent to international business, including fluctuations in currency and exchange rates, as well as risks inherent in shifting from international distributors to a direct sales force. The Company is involved in various lawsuits, including product liability suits, from time to time in the normal course of business. In management's opinion, the Company is not currently involved in any legal proceeding other than those specifically identified in the notes to the unaudited condensed consolidated financial statements which, individually or in the aggregate, could have a material effect on the financial condition, operations and cash flows of the Company. The Company has insurance coverage which management believes is adequate to protect against such product liability losses which could otherwise materially affect the Company's financial position. Since early 1995, the Company has entered into several transactions involving acquisitions and alliances, certain of which have involved equity investments. As the health care environment continues to undergo rapid change, management expects that it will continue focusing on strategic initiatives. The Company expects its cash and cash equivalents, marketable securities, cash flows from operating activities, and borrowing capacity will be sufficient to meet its projected operating cash needs, including integration costs, at least through the end of 1997. Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 This report contains forward-looking statements. The Company desires to take advantage of the new safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all forward-looking statements. Forward-looking statements contained in this report include, but are not limited to, statements with respect to: a) the Company's forward build and spend programs; b) the Company's plans to continue to invest aggressively in its global systems and worldwide manufacturing and distribution capacity; c) the potential impacts of continued consolidation among health care providers, trends towards managed care, and health care cost containment; d) the Company's belief that it is well positioned to take advantage of opportunities for growth that exist in the markets it serves; e) the Company's continued commitment to refine existing products and procedures and to develop new technologies that provide simpler, less traumatic, less costly and more efficient diagnosis and treatment; f) the process and plan for the integration of businesses acquired by the Company; and, g) the ability of the Company to meet its projected cash needs through the end of 1997. Therefore, the Company wishes to caution each reader of this report to consider carefully the specific factors discussed with each forward-looking statement in this report and other factors contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995 as such factors in some cases have affected, and in the future (together with other factors) could affect, the ability of the Company to implement its business strategy and may cause actual results to differ materially from those contemplated by the statements expressed herein. OTHER INFORMATION Item 1: Legal Proceedings Schneider (Europe) AG and Schneider (USA) Inc., subsidiaries of Pfizer, Inc., have alleged that the Company's Synergy(TM) products infringe one of their patents. On May 13, 1994, the Company filed a lawsuit against them in the United States Federal District Court for the District of Massachusetts seeking a declaratory judgment that this patent is invalid and that the Company's Synergy products do not infringe the patent. The Schneider companies filed counterclaims against the Company, alleging the Company's willful infringement of the patent and seeking monetary and injunctive relief. The parties have made cross motions for summary judgment on various aspects of the case. On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED) filed a suit for patent infringement against Advanced Cardiovascular Systems, Inc. (ACS), alleging willful infringement of two of SCIMED's U.S. patents by ACS's FLOWTRACK-40(TM) and RX ELIPSE(R) PTCA catheters. Suit was filed in the U.S. District Court for the Northern District of California and seeks monetary and injunctive relief. The case has been sent to arbitration for a threshold determination of one issue covered by the November 27, 1991 Settlement Agreement (the Settlement Agreement) between the parties. The arbitration hearing was held in October 1996 and a final decision is expected by February 8, 1997. On November 17, 1995, SCIMED filed a suit for patent infringement against ACS, alleging willful infringement of three of SCIMED's U.S. patents by the ACS RX LIFESTREAM(TM) PTCA catheter. Suit was filed in the U.S. District Court for the Northern District of California and seeks monetary and injunctive relief. The case has also been sent to arbitration under the terms of the Settlement Agreement. The arbitration hearing was held in October 1996 and a final decision is expected by February 8, 1997. On October 10, 1995, ACS filed a suit for patent infringement against SCIMED, alleging willful infringement of four U.S. patents licensed to ACS by SCIMED'S EXPRESS PLUS(TM) and EXPRESS PLUS II(TM) PTCA catheters. Suit was filed in the U.S. District Court for the Northern District of California and seeks monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaint. On December 15, 1995, the Company and SCIMED filed a suit for restraint of trade, unfair competition and conspiracy to monopolize against ACS and the Schneider companies, alleging certain violations of state and federal antitrust laws arising from the improper prosecution, enforcement and cross- licensing of U.S. patents relating to rapid exchange balloon dilatation angioplasty catheters. Suit was filed in the U.S. District Court for the District of Massachusetts and seeks monetary, declaratory and injunctive relief. The defendants have moved for dismissal. On March 12, 1996, ACS filed two suits for patent infringement against SCIMED, alleging in one case the willful infringement of a U.S. patent by SCIMED's EXPRESS PLUS, EXPRESS PLUS II and LEAP EXPRESS PLUS PTCA catheters, and in the other case the willful infringement of a U.S. patent by SCIMED's BANDIT(TM) PTCA catheter. The suits were filed in the U.S. District Court for the Northern District of California and seek monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaint. On November 9, 1994, Target Therapeutics, Inc. (Target) filed a lawsuit in the U.S. District Court for the Northern District of California alleging that SCIMED's VENTURE(R) and VENTURE II(TM) microcatheters infringe a patent assigned to Target. On May 2, 1996, the District Court entered an order granting a preliminary injunction prohibiting SCIMED from marketing or selling the accused product. On July 1, 1996, the Court of Appeals for the Federal Circuit stayed the preliminary injunction pending a decision on SCIMED's appeal of the District Court's order. The appeal is presently scheduled to be heard in early 1997. On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District Court for the District of Delaware alleging that certain Company products, including the Company's Max Force TTS(TM) catheter, infringes a patent assigned to Bard. The lawsuit seeks a declaratory judgment that the Company has infringed the Bard patent, preliminary and permanent injunctions enjoining the manufacture, use or sale of the Max Force TTS catheter or any other infringing product, monetary damages and expenses. The Company has answered, denying the allegations of the complaint. On March 25, 1996, Cordis Corporation, a subsidiary of Johnson & Johnson Company, filed a suit for patent infringement against SCIMED, alleging the infringement of five U.S. patents by SCIMED's LEAP(TM) balloon material, used in certain models of SCIMED's BANDIT and EXPRESS PLUS products. The suit was filed in the U.S. District Court for the District of Minnesota and seeks monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaint. On March 7, 1996, Cook Inc. filed suit in the Regional Court, Munich, Division for Patent Disputes in Munich Germany against Mintec, Inc. Minimally Invasive Technologies alleging that the Cragg EndoPro(TM) System I and Stentor(TM) endovascular devise infringes a certain Cook patent. Since the purchase of the assets of Endotech/MinTec by the Company, the Company has assumed control of the litigation. The defendant's answer has not been filed. On September 1, 1995, a purported class action lawsuit was filed in the Court of Chancery in the State of Delaware in and for New Castle County captioned Kinder v. Auth, et al., alleging breaches of fiduciary duty by the Board of Directors of Heart Technology, Heart Technology and the Company in connection with the Agreement and Plan of Merger entered into between the Company and Heart Technology. In January 1996, the parties agreed to settle the suit for an amount the Company does not deem to be material. On June 12, 1995, the Trustee in Bankruptcy for SMEC, Inc. filed a complaint in the U.S. Bankruptcy Court in Nashville, Tennessee alleging that a transaction between Datascope Corp. and the Company constitutes a fraudulent settlement of prior litigation among the Trustee, Datascope Corp., IABP Corp. and the Company. The complaint further alleges violation of the Racketeer Influenced and Corrupt Organizations Act. The Company has answered, denying the allegations of the complaint. By order entered October 16, 1996, the case was removed to the United States District Court for the Middle District of Tennessee Northeastern Division. The Company is involved in various other lawsuits from time to time. In management's opinion, the Company is not currently involved in any legal proceedings other than those specifically identified above which, individually or in the aggregate, could have a material effect on the financial condition, operations or cash flows of the Company. The Company believes that it has meritorious defenses against claims that it has infringed patents of others. However, there can be no assurance that the Company will prevail in any particular case. An adverse outcome in one or more cases in which the Company's products are accused of patent infringement could have a material adverse effect on the Company. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. The Company has insurance coverage which management believes is adequate to protect against such product liability losses as could otherwise materially affect the Company's financial position. Item 6: Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11 - Computation of Earnings Per Share SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 14, 1996. BOSTON SCIENTIFIC CORPORATION By: /s/ Lawrence C. Best Name: Lawrence C. Best Title: Chief Financial Officer and Senior Vice President - Finance and Administration EX-11 2 COMPUTATION OF EARNINGS Exhibit 11 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES Computation of Earnings Per Share (In thousands, except per share information) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ------------------------------------- Primary: Weighted average shares outstanding 177,527 176,113 177,526 175,151 Net effect of dilutive stock options - based on the treasury stock method using average market price 4,855 4,458 3,173 2,731 -------------------------------------- Total 182,382 180,571 180,699 177,882 ====================================== Net income $ 67,843 $ 49,356 $ 90,362 $ 34,323 ====================================== Per share amount $ 0.37 $ 0.27 $ 0.50 $ 0.19 ====================================== Fully Diluted: Weighted average shares outstanding 177,527 176,113 177,526 175,151 Net effect of dilutive stock options - based on the treasury stock method using quarter end market price, if higher than average market price 5,513 4,971 5,514 4,970 -------------------------------------- Total 183,040 181,084 183,040 180,121 ====================================== Net income $ 67,843 $ 49,356 $ 90,362 $ 34,323 ====================================== Per share amount $ 0.37 $ 0.27 $ 0.49 $ 0.19 ======================================
EX-27 3 FDS FOR 3RD QUARTER
5 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 59,420 23,699 283,017 0 209,837 642,524 319,350 0 1,357,151 492,699 0 0 0 1,791 829,338 1,357,151 1,053,315 1,053,315 284,972 284,972 577,147 0 7,982 183,202 92,840 90,362 0 0 0 90,362 0.50 0.49
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