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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
June 1, 2004
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BOSTON SCIENTIFIC CORPORATION
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(Exact Name of Registrant as Specified in Charter)
DELAWARE 1-11083 04-2695240
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
One Boston Scientific Place, Natick, Massachusetts 01760
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
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This Current Report on Form 8-K/A amends and supplements the Current Report on
Form 8-K filed by Boston Scientific Corporation (the "Company") on June 04,
2004(the "Initial Form 8-K") to include financial statements and pro forma
financial information permitted pursuant to Item 7 of Form 8-K to be excluded
from the Initial Form 8-K and filed by amendment to the Initial Form 8-K no
later than 60 days after the date the Initial Form 8-K was required to be filed.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Late in the afternoon of June 1, 2004, Boston Scientific Corporation (the
"Registrant") and Scimed Life Systems, Inc., a wholly-owned subsidiary of the
Registrant ("Scimed"), completed the acquisition of Advanced Bionics
Corporation, a privately-held company located in Valencia, CA, in accordance
with the terms of the Agreement and Plan of Merger dated May 28, 2004, among the
Registrant, Scimed, Claude Acquisition Corp., a wholly-owned subsidiary of
Scimed, Advanced Bionics Corporation, Bionics Trust and Alfred E. Mann, Jeffrey
H. Greiner, and David MacCullum, collectively in their capacity as the
Stockholders' Representatives (the "Agreement").
Pursuant to the Agreement, the Registrant acquired 100 percent of the fully
diluted equity of Advanced Bionics Corporation for an initial payment of
approximately $740 million in cash, plus earn out payments tied to future
performance milestones. The initial purchase price was funded by the issuance of
commercial paper.
The acquisition has been structured to include a substantial earnout mechanism.
Performance milestones are primarily based on the achievement of net sales, with
certain milestone payments also tied to profitability.
The performance milestones are segmented by the four principal technology
platforms (cochlear implants, implantable pulse generators, drug pumps and bion
microstimulators), each with a 72-month earnout horizon. Base earnout payments
on these performance milestones approximate two and a quarter times incremental
sales for each annual period. There are also bonus earnout payments available
based on the attainment of certain aggregate sales performance targets and a
certain gross margin level.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED
Advanced Bionics Corporation and Subsidiaries Consolidated
Financial Statements for the Years Ended December 31, 2003 and
2002 and Report of Independent Registered Public Accounting
Firm.
Advanced Bionics Corporation and Subsidiaries Unaudited
Condensed Consolidated Financial Statements for the Three
Months Ended March 31, 2004 and 2003.
(b) UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Combined Condensed Statements of
Operations of the Company and Advanced Bionics Corporation for
the Year Ended December 31, 2003 and the Three Months Ended
March 31, 2004.
Unaudited Pro Forma Combined Condensed Balance Sheet of the
Company and Advanced Bionics Corporation as of March 31, 2004.
Notes to Unaudited Pro Forma Combined Condensed Financial
Information of the Company and Advanced Bionics Corporation.
ITEM 7.(a) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED
ADVANCED BIONICS
CORPORATION AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2003 AND 2002
AND REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Advanced Bionics Corporation
Valencia, California
We have audited the accompanying consolidated balance sheets of Advanced Bionics
Corporation and its subsidiaries (the "Company") as of December 31, 2003 and
2002, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2003
and 2002, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
May 7, 2004
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(Dollars in thousands, except par value)
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ASSETS 2003 2002
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 24,664 $ 44,915
Marketable securities (Notes 2 and 3) 11,875 33,228
Accounts receivable, net of allowance for doubtful accounts
of $214 and $738 at December 31, 2003 and 2002, respectively (Note 2) 13,167 7,379
Inventory (Notes 2 and 4) 13,731 14,284
Prepaid expenses and other current assets 1,046 443
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Total current assets 64,483 100,249
PROPERTY AND EQUIPMENT - Net (Notes 2 and 5) 12,473 13,257
OTHER LONG-TERM ASSETS - Net (Notes 2 and 6) 3,618 3,171
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TOTAL $ 80,574 $ 116,677
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,657 $ 2,822
Accrued liabilities (Notes 2 and 7) 15,013 12,439
Related-party payable (Note 11) 11,001 10,872
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Total current liabilities 30,671 26,133
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COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 8 and 9):
Preferred stock - 598,000 shares authorized and available for
issuance at December 31, 2003 and 2002
Series A preferred stock, par value $0.01 - 150,000 shares
authorized; 141,248 shares issued and outstanding at
December 31, 2003 and 2002 (liquidation preference of
$1,024,000 at December 31, 2003) 1 1
Series B preferred stock, par value $0.01 - 172,000 shares
authorized; 134,000 shares issued and outstanding at
December 31, 2003 and 2002 (liquidation preference of $6,700,000
at December 31, 2003) 1 1
Series C preferred stock, par value $0.01 - 80,000 shares
authorized, issued and outstanding at December 31, 2003 and 2002
(liquidation preference of $4,000,000 at December 31, 2003) 1 1
Common stock, par value $0.01 - 80,000,000 shares authorized;
29,745,790 and 29,570,818 shares issued and outstanding at
December 31, 2003 and 2002, respectively 297 296
Common stock issuable to related party (Note 11) 1,800
Additional paid-in capital 202,684 201,707
Accumulated deficit (153,946) (111,503)
Accumulated other comprehensive (loss) income (935) 41
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Total stockholders' equity 49,903 90,544
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TOTAL $ 80,574 $ 116,677
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See accompanying notes to consolidated financial statements.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(Dollars in thousands)
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2003 2002
NET SALES (Notes 1 and 2) $ 56,445 $ 46,731
COST OF SALES 23,412 23,281
Related party royalty expense (Note 11) 1,600 1,400
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GROSS PROFIT 31,433 22,050
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OPERATING EXPENSES:
Research and development (Note 2) 33,116 36,938
Selling, general and administrative 39,290 32,274
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Total operating expenses 72,406 69,212
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LEGAL SETTLEMENTS (Note 10) (2,700) 9,800
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LOSS FROM OPERATIONS (43,673) (37,362)
OTHER INCOME - Net 1,230 2,879
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NET LOSS (42,443) $(34,483)
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See accompanying notes to consolidated financial statements.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002
(Dollars in thousands)
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Common Stock
Preferred ---------------------- Additional
Stock Number of Par Common stock Paid-in Accumulated
Par Value Shares Value Issuable Capital Deficit
BALANCE - January 1, 2002 $ 1 26,103,523 $ 261 $ -- $ 85,664 $ (77,020)
Issuance of preferred stock-Series B,
134,000 shares (Note 8) 1 50,249
Issuance of preferred stock-Series C,
80,000 shares (Note 8) 1 (4,285,714) (43) 42
Legal settlement (Note 10) (200,000) (2) (1,798)
Exercise of stock options (Note 9) 257,750 3 637
Issuance of common stock (Note 8) 8,933,179 89 77,974
Repurchase of common stock (1,237,920) (12) (11,129)
Compensation expense related to stock
options (Note 9) 68
Comprehensive loss:
Net loss (34,483)
Foreign currency translation adjustment
Comprehensive loss
BALANCE - December 31, 2002 3 29,570,818 296 201,707 (111,503)
Compensation expense related to stock
options (Note 9) 456
Exercise of stock options (Note 9) 174,972 1 521
Common stock subscriptions (Note 10) 1,800
Comprehensive loss:
Net loss (42,443)
Foreign currency translation adjustment
Comprehensive loss
BALANCE - December 31, 2003 $ 3 29,745,790 $ 297 $ 1,800 $ 202,684 $ (153,946)
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Total (Loss)
BALANCE - January 1, 2002 $ 354 $ 9,260
Issuance of preferred stock-Series B,
134,000 shares (Note 8) 50,250
Issuance of preferred stock-Series C,
80,000 shares (Note 8)
Legal settlement (Note 10) (1,800)
Exercise of stock options (Note 9) 640
Issuance of common stock (Note 8) 78,063
Buyback of common stock (11,141)
Compensation expense related to stock
options (Note 9) 68
Comprehensive loss:
Net loss (34,483) $(34,483)
Foreign currency translation adjustment (313) (313) (313)
Comprehensive loss $(34,796)
BALANCE - December 31, 2002 41 90,544
Compensation expense related to stock
options (Note 9) 456
Exercise of stock options (Note 9) 522
Common stock subscriptions (Note 10) 1,800
Comprehensive loss:
Net loss (42,443) $(42,443)
Foreign currency translation adjustment (976) (976) (976)
Comprehensive loss $(43,419)
BALANCE - December 31, 2003 $ (935) $ 49,903
See accompanying notes to consolidated financial statements.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(Dollars in thousands)
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2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(42,443) $(34,483)
Adjustments to reconcile net loss to net cash used
in operating activities:
Stock compensation expense 456 68
Depreciation and amortization 5,672 5,641
Legal settlements 2,100 (1,800)
Gain on disposition of property and equipment 2
Foreign currency transaction gain (1,526)
Changes in operating assets and liabilities:
Marketable securities 21,352 (33,228)
Accounts receivable (5,032) 3,420
Inventory 860 (274)
Prepaid expenses and other current assets (1,009) 507
Accounts payable 1,696 (3,151)
Accrued liabilities 2,348 (3,323)
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Net cash used in operating activities (15,526) (66,621)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,242) (5,681)
Proceeds from sale of property and equipment 5
Other long-term assets (442) (490)
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Net cash used in investing activities (4,684) (6,166)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,590
Repurchase of common stock (11,141)
Proceeds from exercise of stock options 522 640
Principal payments on capital lease obligation (32)
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Net cash provided by (used in) financing
activities 522 (4,943)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (563) (489)
NET DECREASE IN CASH AND CASH EQUIVALENTS (20,251) (78,219)
CASH AND CASH EQUIVALENTS - Beginning of year 44,915 123,134
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CASH AND CASH EQUIVALENTS - End of year $ 24,664 $ 44,915
======== ========
(Continued)
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(Dollars in thousands)
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2003 2002
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the year for:
Interest $ - $ 3
Income taxes $ 1 $ 1
During 2002, in satisfaction of the stock subscriptions payable, the Company
issued 8,052,778 shares of common stock at $9.00 per share, par value $0.01,
and 134,000 shares of Series B preferred stock at $375.00 per share, par
value $0.01.
During 2002, the Company converted 4,285,714 shares of common stock, with a
related additional paid-in-capital balance of approximately $30.0 million,
into 80,000 shares of Series C preferred stock at $375.00 per share, par
value $0.01.
See accompanying notes to consolidated financial statements.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
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1. ORGANIZATION
ORGANIZATION--Advanced Bionics Corporation and subsidiaries (the
"Company") was founded by Alfred E. Mann, Chairman and Co-chief
Executive Officer, ("Mr. Mann") and was incorporated in Delaware in
May 1993. The Company has authorized 80,000,000 shares of common
stock and 1,000,000 shares of preferred stock.
OPERATIONS--The Company's principal activities consist of research,
development, manufacture, marketing and sales of neurostimulation
devices, including cochlear implants that restore hearing to the
deaf, spinal cord stimulators and other devices that provide therapy
for a variety of neurological maladies. The Company's net sales
during 2003 and 2002 in the United States were approximately $38.6
and $33.4 million representing 68% and 72% of total company net
sales, respectively. The majority of these domestic sales were
cochlear implants and related accessories sold to hospitals,
clinicians and patients. Foreign sales in 2003 and 2002 were
approximately $17.8 and $13.3 million representing 32% and 28%,
respectively. At December 31, 2003 and 2002, assets aggregating
$10.6 and $6.8 million, respectively, are located outside the United
States.
BASIS OF PRESENTATION--The accompanying consolidated financial
statements have been prepared assuming the Company will continue as
a going concern. The Company's operations to date have resulted in
operating losses. As shown in the accompanying consolidated
financial statements, during the years ended December 31, 2003 and
2002, the Company incurred net losses of approximately $42.4 and
$34.5 million, respectively.
Historically, the Company has raised capital from the private
placement of its equity securities and borrowings from its Chairman.
The management of the Company believes that its existing cash and
marketable securities, along with its ability to raise additional
capital and financial support from its Chairman, will be adequate to
fund operations for a period of at least one year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Advanced Bionics Corporation and
its direct and indirect wholly owned subsidiaries, Advanced Bionics
S.A.R.L. ("S.A.R.L.") and its subsidiaries and Advanced Bionics NV,
Antwerp ("Belgium"). All intercompany accounts and transactions have
been eliminated. The financial statements of the foreign
subsidiaries have been translated using the exchange rate at the end
of each period as to balance sheet items and the weighted-average
exchange rate during each period as to operating results. S.A.R.L.'s
and Belgium's functional currency is the Euro. The cumulative
translation adjustment is reflected in accumulated other
comprehensive income (loss). Currency transaction gains/losses are
included in the consolidated statement of operations.
USE OF ESTIMATES--The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
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CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash
on hand and short-term, highly liquid instruments that are readily
convertible to known amounts of cash and are of an original maturity
of three months or less.
MARKETABLE SECURITIES--The Company accounts for marketable
securities, which are investment instruments with original
maturities of greater than three months, as trading securities in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES.
CONCENTRATION OF CREDIT RISK--Financial instruments which
potentially subject the Company to concentration of credit risk
consist principally of trade accounts receivable. The concentration
of credit risk is generally diversified over a large number of
customers, including hospitals, physicians and patients, composing
the Company's customer base. The Company monitors credit levels and
the financial condition of its customers on a continuing basis to
minimize credit risk and believes that adequate provision for credit
loss has been made in the accompanying consolidated financial
statements.
The Company is also subject to concentrations of credit risk with
respect to cash, cash equivalents and marketable securities. The
Company attempts to minimize such risks by entering into these
arrangements with major banks and financial institutions and by
investing in high-quality instruments.
INVENTORY--Inventory is stated at the lower of cost or market. Cost
is determined by using the first-in, first-out method.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the
estimated three-to-eight year useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the
estimated lives of the assets or the terms of the leases.
OTHER LONG-TERM ASSETS--Other long-term assets consist primarily of
identifiable intellectual property in the form of issued U.S. and
foreign patents. These patents were either acquired or are capital
costs associated with maintaining and defending the Company's
patents. The Company amortizes the costs of these patents over 17
years on a straight-line basis. The Company reviews the
recoverability of the carrying value of long-lived intangible assets
whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable in accordance
with the methodology prescribed in SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.
REVENUE RECOGNITION--The Company recognizes revenue when persuasive
evidence of an arrangement exists, title transfer has occurred, the
price is fixed or readily determinable, and collectibility is
probable. Sales are recorded net of sales returns and discounts.
DEFERRED REVENUE--The Company offers several incentive programs that
enable customers to earn discounts based on volume purchases or
receive new or upgraded products at a future date. Until such time
as the discounts are taken, or new or upgraded products are
delivered to the customer, the fair value of these programs are
accounted for as deferred revenue and are included in current
liabilities as accrued liabilities.
PRODUCT WARRANTIES--The Company offers warranties on its products
for various periods ranging from one to ten years. The Company
accrues for product warranties to pay for service, repair and/or
replacement of products based on warranty repair cost and the
estimated rate of returns. The Company periodically reviews and
adjusts its warranty accrual.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
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RESEARCH AND DEVELOPMENT--Research and development costs are
expensed as incurred.
INCOME TAXES--Income taxes are provided for taxes currently payable
or refundable and deferred income taxes arising from future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns. Deferred income tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amount that is more likely
than not to be realized.
STOCK-BASED COMPENSATION--At December 31, 2003, the Company has
stock-based compensation plans, which are described more fully in
Note 9. The Company accounts for employee stock options using the
intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
its interpretations, and has adopted the disclosure-only alternative
of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Stock
options issued to consultants are accounted for in accordance with
the provisions of Emerging Issues Task Force Issue No. 96-18,
ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN
EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR
SERVICES.
The Company estimates the fair value of employee stock options at
the grant date by using the minimum value method with the following
weighted-average assumptions as of December 31:
2003 2002
Risk-free interest rate 2.97 % 4.67 %
Expected lives 5 years 5 years
Dividends 0.00 0.00
The weighted-average estimated fair value of options granted in 2003
and 2002 was $1.14 and $1.85, respectively.
Had compensation cost been determined under the accounting
provisions of SFAS No. 123, the Company's net loss would have been
adjusted to the pro forma amounts indicated below (in thousands):
2003 2002
Net loss - as reported $(42,443) $(34,483)
Add: Stock-based employee compensation
expense included in reported net loss 456 68
Deduct: Total stock-based employee
compensation expense determined under the
fair-value-based method for all awards (1,423) (1,528)
-------- --------
Pro forma net loss $(43,410) $(35,943)
======== ========
RECENT ACCOUNTING PRONOUNCEMENTS--In December 2003, the FASB issued
FIN 46R, CONSOLIDATION OF VARIABLE INTEREST ENTITIES. This
pronouncement requires that the assets, liabilities and results of
the activity of variable interest entities be consolidated into the
financial statements of the company that has controlling financial
interest. It also provides the framework for determining whether a
variable interest entity should be consolidated based on voting
interest or significant financial support provided to it.
Application of FIN 46R is required in financial statements of
entities that have interests in variable interest entities, or
potential variable interest entities commonly referred to as
special-purpose entities, for periods ending after December 15,
2003. Application by entities (other than small business issuers)
for all other types of entites is required in financial statements
for periods ending after March 15, 2004.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------
Management believes that the adoption of FIN 46R will not have a
material impact on the Company's financial condition or results of
operations.
RECLASSIFICATIONS--Certain reclassifications have been made to the
2002 financial statements to conform to the 2003 presentation.
3. MARKETABLE SECURITIES
The Company has classified all marketable securities as trading
securities, which requires the securities to be reported at fair
value with net realized and unrealized gains and losses included in
net loss. The following is a summary of the trading securities
classified as current assets as of December 31 (in thousands):
2003 2002
U.S. government securities $10,663 $33,228
Corporate debt instruments 1,212
------- -------
$11,875 $33,228
======= =======
The unrealized holding (loss) gain of trading securities was ($3)
thousand and $261 thousand at December 31, 2003 and 2002,
respectively. The change in net realized holding (losses) gains
included in other income are ($143) thousand and $54 thousand in
2003 and 2002, respectively.
4. INVENTORY
Inventory consists of the following as of December 31 (in
thousands):
2003 2002
Raw materials $ 8,480 $ 8,755
Work-in-process 3,575 3,823
Finished goods 1,676 1,706
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$13,731 $14,284
======= =======
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31
(in thousands):
Useful
Lives 2003 2002
Machinery and equipment 3 to 8 years $23,100 $22,565
Tooling and molds 3 to 8 years 1,681 1,197
Furniture and fixtures 3 to 8 years 3,320 3,253
Leasehold improvements Life of lease 3,842 3,550
Construction in progress 993
------- -------
32,936 30,565
Less accumulated depreciation and
amortization (20,463) (17,308)
------- -------
Property and equipment - net $12,473 $13,257
======= =======
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------
Depreciation and amortization expense related to property and
equipment was $5,458 thousand and $5,290 thousand in 2003 and 2002,
respectively.
6. OTHER LONG-TERM ASSETS
Other long-term assets consist of the following as of December 31
(in thousands):
2003 2002
Patents $ 3,750 $ 3,402
Less accumulated amortization (694) (488)
3,056 2,914
Other non current assets 562 257
------- -------
$ 3,618 $ 3,171
======= =======
Expected amortization expense for patent-related costs capitalized
as of December 31, 2003 is $215 thousand for each year from 2004
through 2008, with $1,981 thousand remaining thereafter.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31 (in
thousands):
2003 2002
Accrued salaries and related benefits $ 3,797 $ 2,959
Accrued warranty 3,331 1,913
Accrued royalty 1,294 521
Deferred revenue 3,175 2,874
Customer deposits 1,738 2,135
Other accrued expenses 1,678 2,037
------- -------
$15,013 $12,439
======= =======
WARRANTY RESERVE--The Company provides a warranty reserve against
defects in materials and workmanship following the date of sale as
follows: ten years for implants and three years for speech
processors and headsets. Warranty reserves are established using
historical information on the nature, frequency and average cost of
warranty claims applied to the aggregate implant and accessory
installed base.
Accrued warranties include the following for the years ended
December 31 (in thousands):
2003 2002
Beginning balance $ 1,913 $ 1,179
Payments/replacements (2,059) (3,547)
Increase in liability (warranties
issued during period) 1,483 551
Adjustments to liability (pre existing
warranties) 1,994 3,730
------- -------
Ending balance $ 3,331 $ 1,913
======= =======
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS
In May 1999, the Company and Mr. Mann completed an exchange
transaction pursuant to which Mr. Mann and certain entities that he
owns and controls exchanged 5,650,000 outstanding shares of common
stock of the Company for 141,248 shares of Series A convertible
preferred stock of the Company. The preferred stock is convertible
into an aggregate of 5,650,000 shares of common stock of the Company
(subject to adjustment) at the option of Mr. Mann. The holders of
the preferred stock are entitled to preferred distributions, in the
event the Company is liquidated, dissolved or wound up, of $7.25 per
preferred share (approximately $1.0 million in the aggregate).
In January 2002, the Company completed a private placement of shares
of the Company's common stock to accredited investors. Under the
private placement, the Company issued 8,673,707 shares of common
stock, at a purchase price of $9.00 per share, for total proceeds of
approximately $78.1 million. In addition, under the private
placement, the Company paid Besinor Invest and Finance Corporation
("Besinor"), an affiliate of a director of the Company, 5% of all
private placement stock sales that they referred to the Company in
common stock valued at $8.55 per share. The total number of shares
issued to Besinor was 259,472. Concurrently with the private
placement of common stock, Mr. Mann purchased 134,000 shares of
Series B convertible preferred stock of the Company for
approximately $50.3 million. The total proceeds received from the
sale of the common stock and preferred stock was approximately
$128.4 million. As of December 31, 2001, the Company had received
total proceeds from the sale of preferred and common stock of
approximately $122.7 million. All stock was issued during 2002.
The Series B preferred stock is convertible into an aggregate of
5,583,333 shares of common stock of the Company (subject to
adjustment) at the option of Mr. Mann or upon the occurrence of
certain other events, including the signing of an underwriting
agreement with respect to a public offering of the common stock of
the Company. The holder of the Series B preferred stock is entitled
to preferred distributions in the event the Company is liquidated,
dissolved or wound up of $50 per preferred share ($6.7 million in
the aggregate).
In October 2002, the Company issued 80,000 shares of Series C
convertible preferred stock to Mr. Mann in exchange for 4,285,714
shares of common stock that had been issued to him in July 2001 for
the cancellation of a $30 million loan made to the Company. The loan
originated in December 2000. The preferred stock is convertible into
4,285,714 shares of common stock (subject to adjustment) at the
option of Mr. Mann after July 31, 2003 or upon the occurrence of
certain other events, including the signing of an underwriting
agreement with respect to a public offering of the common stock of
the Company. A value of approximately $8.6 million has been ascribed
to the beneficial conversion feature of this preferred stock
issuance. The holder of the preferred stock is entitled to preferred
distributions in the event the Company is liquidated, dissolved or
wound up of $50 per preferred share ($4.0 million in the aggregate).
Subsequent to the liquidation preference as described above on the
Series A, B and C preferred stock, any remaining amounts will be
distributed to the holders of the common stock until they have
received in the aggregate (not per share) an amount equal to the
aggregate preferential amount delivered to the holders of the
preferred stock, and thereafter the holders of the preferred stock
and the common stock share in distributions pro rata based on the
number of shares of common stock issuable on conversion of the
preferred stock. Holders of the Series A, B and C preferred stock
are not entitled to vote on any matters except as required by law.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------
9. STOCK OPTIONS
During 1994, the Company adopted a qualified stock option plan,
which provided that employees, consultants and advisors may be
granted options to purchase an aggregate of up to 2,000,000 shares
of the Company's common stock. The options are granted at fair value
for terms of up to ten years and vest in equal annual increments
over three to four years.
During 1997, 1999, 2001 and 2003 the Company adopted second, third,
fourth and fifth qualified stock option plans, which provided that
employees, consultants and advisors may be granted options to
purchase an aggregate of up to 1,500,000, 2,500,000, 2,000,000 and
2,000,000 shares, respectively, of the Company's common stock. Stock
options are usually granted at the fair value of the Company's
common stock at the grant date for terms of up to ten years and vest
in equal annual increments over four to five years.
As of December 31, 2003, there were 2,986,795 shares available for
grant under the plans. Stock option activity is as follows:
Weighted-
Average
Incentive Exercise Exercise
Stock Price Price
Options per Share per Share
Outstanding - January 1, 2002 5,786,625 1.75-7.00 $ 3.98
Granted 1,420,955 7.00-9.00 $ 8.98
Exercised (257,750) 1.75-7.00 $ 2.48
Canceled (592,998) 1.75-9.00 $ 6.85
---------
Outstanding - December 31, 2002 6,356,832 1.75-9.00 $ 4.93
Granted 1,227,775 9.00 $ 9.00
Exercised (174,972) 1.75-9.00 $ 2.98
Canceled (396,430) 2.20-9.00 $ 8.15
---------
Outstanding - December 31, 2003 7,013,205 1.75-9.00 $ 5.47
=========
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2003 Life (Years) Price 2003 Price
$1.75 - $2.50 1,208,300 1.74 $ 2.03 1,208,300 $ 2.03
$2.80 - $3.10 1,615,850 3.96 $ 2.82 1,615,850 $ 2.82
$5.00 - $5.50 1,192,750 5.78 $ 5.02 1,026,202 $ 5.02
$7.00 746,750 7.23 $ 7.00 411,151 $ 7.00
$9.00 2,249,555 8.58 $ 9.00 401,997 $ 9.00
--------- ---------
7,013,205 $ 5.49 4,663,500 $ 4.00
========= =========
As of December 31, 2003 and 2002, there were 4,663,500 and 3,909,588
shares exercisable with a weighted-average exercise price of $4.00
and $3.29 per share, respectively.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------
Compensation expense of $456,000 and $68,000 has been recognized in
2003 and 2002, respectively, relating to the issuance of
non-employee stock options and modifications to employee stock
option grants.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--Minimum fixed payments required under real estate
operating leases in effect are as follows as of December 31, 2003
(in thousands):
Year Ending Related
December 31 Party Other Total
2004 $1,844 $179 $2,023
2005 1,421 134 1,555
2006 1,503 70 1,573
2007 1,586 23 1,609
------ ---- ------
$6,354 $406 $6,760
====== ==== ======
Rental expense under operating leases amounted to approximately $2.0
and $1.6 million in 2003 and 2002, respectively.
LITIGATION--During July 2002, after preliminary research and
discussions with the Food and Drug Administration, the Company
recalled all outstanding Clarion products from the market due to
concerns that the "positioner" generally used with the device may
have had a role in causing meningitis in patients. The Company
removed the positioner from the recalled implants and was approved
to begin shipping implants in September 2002. The Company is unable
to determine the ultimate liability, if any, which may result from
this issue; however, the outcome of any litigation related to this
issue could have a material impact on the Company's consolidated
financial position or results of operations.
The Company is also involved in other routine litigation arising in
the ordinary course of business. In the opinion of management, none
of the other routine litigation will have a material adverse effect
on the Company's consolidated financial position or results of
operations.
LEGAL SETTLEMENTS--During 2003 the Company settled various legal
matters totaling $2.7 million. These settlements include employment
litigation and a settlement with Quallion LLC, a related party, for
the cancellation of finished goods orders made by the Company and
research and development activities. The Quallion LLC settlement
totals $2.1 million (200,000 shares of common stock in the Company
valued at $9.00 per share and $300,000 in cash).
In March 2000, the Company entered into an exclusive license and
distribution agreement whereby Medical Research Group, Inc. ("MRG"),
a related party, granted exclusive distribution and sales rights
with respect to certain technology to the Company. The license
agreement provides for the Company to pay to MRG 200,000 shares of
common stock and $5.0 million in cash to fund research and
development activities. During 2001, MRG was sold to Medtronic, Inc.
("Medtronic") and the Company pursued litigation against Medtronic
for breach of contract. During 2002, the Company settled this
litigation against Medtronic in exchange for $8.0 million and the
return of 200,000 shares of common stock in the Company valued at
$9.00 per share, for a total legal settlement amount of $9.8
million.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------
11. RELATED-PARTY TRANSACTIONS
The Company has a related-party payable to Mr. Mann in the amount of
approximately $11.0 and $10.9 million at December 31, 2003 and 2002,
respectively. The amounts outstanding at December 31, 2003 include
$10.5 million in principal and approximately $0.5 million in accrued
interest, which is being accrued at an annual rate of 1.8%. Amounts
outstanding under the related-party payable are due upon demand or
convertible to equity in the Company at fair market value.
The Company's sole supplier of batteries for its devices is Quallion
LLC, a related party that is substantially owned by Mr. Mann. During
2003 and 2002, the Company purchased products from Quallion LLC
totaling approximately $2.1 and $3.6 million, respectively, and has
a payable to the related party of approximately $0.2 and $0.06
million as of December 31, 2003 and 2002, respectively.
The Company conducts a portion of its operations in facilities
leased from Mann Biomedical Park LLC and Sylmar Biomedical Park LLC,
both of which are related parties owned by Mr. Mann. Total rent
expense relating to these operating lease agreements was
approximately $2.4 and $2.0 million during 2003 and 2002,
respectively.
During 2003, the Company reimbursed Mannco LLC, a related party that
is owned by Mr. Mann, for the business use of a non-commercial
airplane. The reimbursement for 2003 totaled $0.2 million.
During 1999, the Company and the Alfred E. Mann Foundation ("AEM
Foundation") entered into license agreements whereby the AEM
Foundation granted the Company licenses with respect to certain
cochlear technology. The license agreements provide for the Company
to pay royalties at the rate of 3% of net sales (as defined), except
that the royalties payable with respect to the licensed cochlear
technology decline to 2.5% in the fifth through eighth years and 2%
thereafter. The Company accrues the royalty for the use of this
technology to the AEM Foundation, based on net sales. Royalty
expense was approximately $1.6 and $1.4 million in 2003 and 2002,
respectively. The accrued royalty at the end of 2003 and 2002 was
approximately $0.7 and $0.3 million, respectively. During 2003, the
Company entered into negotiations with the AEM Foundation to amend
this agreement in an attempt to reduce its future royalty expenses
and improve the overall gross profitability of the Company.
During 1999, the Company and the AEM Foundation also entered into
license agreements whereby the AEM Foundation granted the Company
licenses with respect to certain neurostimulation ("bion(R)")
technology. The agreements provide the Company the exclusive and/or
worldwide rights to the use of certain patents owned by the AEM
Foundation. The agreements require royalty payments, to the AEM
Foundation, of 3% of net sales from sales related to the agreements.
There have been no sales from the sale of the licensed products
since inception of the agreements. The agreements also contain
certain termination rights on the part of the AEM Foundation if the
Company does not reach certain developmental and revenue targets by
certain dates. As of December 31, 2003, the Company does not expect
to meet all of these targets. During 2003, the Company entered into
negotiations with the AEM Foundation to amend the agreements.
12. EMPLOYEE BENEFITS
The Company has a defined contribution retirement plan, which is
available to substantially all full-time employees of the Company.
In 2003 and 2002, the Company made contributions of approximately
$0.4 and $0.4 million, respectively.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------
13. INCOME TAXES
Loss before the provision for income taxes consisted of the
following:
2003 2002
United States $(38,767) $(32,575)
Non-United States (3,676) (1,908)
-------- --------
Total $(42,443) $(34,483)
======== ========
As of December 31, 2003, the Company had net operating loss ("NOL")
carryforwards for federal and state income tax purposes of
approximately $122.1 and $20.7 million, respectively. For state
income tax purposes, the Company amortizes certain research and
development expenses over a fixed period of time, thereby minimizing
their NOL carryforwards, which have brief carryforward periods.
These NOL carryforwards expire through 2023 as to federal and 2004
as to state. The components of deferred income tax assets are as
follows as of December 31 (in thousands):
2003 2002
NOL carryforwards $43,339 $31,061
Reseach and development credits 12,684 9,095
Fixed asset basis difference 7,087 6,683
Reserves 3,563 2,453
Accrued expense and compensation 994 389
Stock options 398 203
Other credits 2,397 1,569
------- -------
Total deferred tax assets 70,462 51,453
Valuation allowance (70,462) (51,453)
------- -------
$ -- $ --
======= =======
The change in the valuation account for federal income taxes was
approximately $15.0 and $12.7 million in 2003 and 2002,
respectively. The change in the valuation account for state income
taxes was $4.1 and $4.7 million in 2003 and 2002, respectively. The
Company's foreign subsidiaries have not had significant earnings to
date, and the Company does not intend to repatriate any future
earnings.
A reconciliation of the Company's provision for income taxes to the
U.S. federal statutory rate is as follows:
2003 2002
Benefit for income taxes at statutory rate $(14,431) $(11,724)
Research and development credits (1,439) (1,241)
Other 1,214 265
Valuation allowance 14,656 12,700
-------- --------
Total $ -- $ --
======== ========
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------
14. SUBSEQUENT EVENTS
SALE OF COMPANY--On March 19, 2004, the Company entered into a
non-binding agreement to sell the Company.
EQUITY TRANSACTIONS--On March 22, 2004, Mr. Mann converted all of
his holdings in the Company's Series A, B and C preferred stock to
common stock. The effect of this transaction increased the issued
and outstanding shares of the Company's common stock by 15,519,047
shares and eliminated all issued and outstanding shares of the
Company's preferred stock.
ACQUISITIONS--On February 1, 2004, the Company acquired from its
Japanese distributor, Getz Bros. Co., Ltd. ("Getz"), the right to
market and sell its cochlear products in Japan. Prior to acquiring
these rights the Company established an incorporated wholly owned
subsidiary in Japan, Bionics Japan Co., Ltd, ("Nihon Bionics").
Under the dissolution of the distribution agreement between the
parties, certain assets with an approximate value of $0.5 million,
including but not limited to inventory, were transferred to Nihon
Bionics from Getz on February 2, 2004.
On April 14, 2004, the Company acquired MRP-A LLC, a related party
substantially owned by Mr. Mann engaged in the research and
development of an implantable, programmable pump for the treatment
of chronic pain for 2.3 million shares of the Company's common
stock.
LITIGATION--On April 21, 2004, Advanced Neuromodulation Systems,
Inc., filed a lawsuit against the Company alleging, among other
things, patent infringement and misappropriation of trade secrets.
The Company intends to vigorously defend this suit.
******
ADVANCED BIONICS
CORPORATION AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
2004 AND 2003
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
(Dollars in thousands, except par value)
-----------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 2004 2003
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 23,420 $ 24,664
Marketable securities 2,042 11,875
Accounts receivable, net of allowance for doubtful accounts
of $738 at March 31, 2004 and December 31, 2003 15,759 13,167
Inventories 15,252 13,731
Prepaid expenses and other current assets 1,039 1,046
-------- --------
Total current assets 57,512 64,483
Property and equipment 33,784 32,936
Less:accumulated depreciation (21,655) (20,463)
-------- --------
12,129 12,473
Other long-term assets, net 3,763 3,618
-------- --------
TOTAL $ 73,404 $ 80,574
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,205 $ 4,657
Accrued liabilities 15,636 15,013
Related-party payable 10,917 11,001
-------- --------
Total current liabilities 29,758 30,671
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - 598,000 shares authorized and available for
issuance at March 31, 2004 and December 31, 2003
Series A preferred stock, par value $0.01 - 150,000 shares
authorized; 0 and 141,248 shares issued and outstanding at
March 31, 2004 and December 31, 2003 (liquidation preference of
$0 and $1,024,000 at March 31, 2004 and December 31, 2003) 1
Series B preferred stock, par value $0.01 - 172,000 shares
authorized; 0 and 134,000 shares issued and outstanding at
March 31, 2004 and December 31, 2003 (liquidation preference
$0 and $6,700,000 at March 31, 2004 and December 31, 2003) 1
Series C preferred stock, par value $0.01 - 80,000 shares
authorized; 0 and 80,000 shares issued and outstanding at March 31, 2004
and December 31, 2003 (liquidation preference of $0 and $4,000,000
at March 31, 2004 and December 31, 2003) 1
Common stock, par value $0.01 - 80,000,000 shares authorized;
46,110,285 and 29,745,790 shares issued and outstanding at
March 31, 2004 and December 31, 2003 461 297
Common stock issuable to related party 1,800
Additional paid-in capital 212,002 202,684
Accumulated deficit (167,779) (153,946)
Accumulated other comprehensive loss (1,038) (935)
-------- --------
Total stockholders' equity 43,646 49,903
-------- --------
TOTAL $ 73,404 $ 80,574
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Dollars in thousands)
--------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------- --------
NET SALES $ 18,472 $ 9,291
COST OF SALES 7,439 4,831
-------- --------
GROSS PROFIT 11,033 4,460
-------- --------
OPERATING EXPENSES:
Research and development 8,031 7,818
Selling, general and administrative 16,756 6,881
-------- --------
Total operating expenses 24,787 14,699
-------- --------
OTHER INCOME (EXPENSE):
Other income and expense - net (79) 495
-------- --------
Total other income (79) 495
-------- --------
NET LOSS $(13,833) $ (9,744)
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Dollars in thousands)
--------------------------------------------------------------------------------
THREE MONTHS ENDED,
MARCH 31,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (3,894) $ (6,421)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (899) (451)
Purchases of other long-term assets (288) (174)
-------- --------
Net cash used in investing activities (1,187) (625)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments related to notes payable to related parties (10,872)
Proceeds from exercise of stock options 3,885 110
Net (payments on) proceeds from long-term borrowings (43) 10,816
-------- --------
Net cash provided by financing activities 3,842 54
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (5) (421)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,244) (7,413)
CASH AND CASH EQUIVALENTS - Beginning of year 24,664 78,143
-------- --------
CASH AND CASH EQUIVALENTS - End of year $ 23,420 $ 70,730
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS DESCRIPTION
ORGANIZATION
Advanced Bionics Corporation and subsidiaries (the "Company") was founded by
Alfred E. Mann, Chairman and Co-chief Executive Officer ("Mr. Mann") and was
incorporated in Delaware in May 1993. The Company has authorized 80,000,000
shares of common stock and 1,000,000 shares of preferred stock.
BUSINESS DESCRIPTION
The Company's principal activities consist of research, development,
manufacture, marketing and sales of neurostimulation devices including cochlear
implants that restore hearing to the deaf, spinal cord stimulators and other
devices that provide therapy for a variety of neurological maladies.
2. BASIS OF PRESENTATION
The condensed consolidated financial information presented herein is unaudited.
Advanced Bionics Corporation is responsible for the unaudited financial
statements included in this document. The financial statements include all
normal recurring adjustments that are considered necessary for the fair
presentation of the financial position and operating results. Operating results
for the three months ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. The
unaudited condensed consolidated financial statements and notes thereto do not
include all disclosures required by accounting principles generally accepted in
the United States of America and should be read in conjunction with Advanced
Bionics Corporation's annual audited financial statements for 2003.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the unaudited
condensed consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. Significant accounting estimates used
include depreciation, amortization and stock compensation expense. Management
believes that it exercised reasonableness in deriving these amounts. Advanced
Bionics is subject to risks and uncertainties that may cause actual results to
differ from estimated results, such as changes in the healthcare environment,
competition, foreign exchange and legislation.
3. COMPREHENSIVE LOSS
The following table sets forth the Company's comprehensive loss for the three
months ended March 31, 2004 and 2003 (in thousands):
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Three Months Ended
March 31,
2004 2003
-------- --------
Net loss $ 13,833 $ 9,744
Foreign currency translation adjustment 103 421
-------- --------
Comprehensive loss $ 13,936 $ 10,165
======== ========
4. MARKETABLE SECURITIES
The Company has classified all marketable securities as trading securities,
which requires the securities to be reported at fair value with net realized and
unrealized gains and losses included in net loss. The following is a summary of
the trading securities classified as current assets as of March 31, 2004 and
December 31, 2003 (in thousands):
March 31, December 31,
2004 2003
-------- --------
U.S. government securities $ 560 $ 10,663
Corporate debt instruments 1,482 1,212
-------- --------
$ 2,042 $ 11,875
======== ========
5. INVENTORY
Inventory consists of the following as of March 31, 2004 and December 31, 2003
(in thousands):
March 31, December 31,
2004 2003
-------- --------
Raw materials $ 8,479 $ 8,480
Work-in-process 4,101 3,575
Finished goods 2,672 1,676
-------- --------
$ 15,252 $ 13,731
======== ========
6. EQUITY TRANSACTIONS
On March 22, 2004, Mr. Mann converted all of his holdings in the Company's
Series A, B and C preferred stock to common stock. The effect of this
transaction increased the issued and outstanding shares of the Company's common
stock by 15,519,047 shares and eliminated all issued and outstanding shares of
the Company's preferred stock.
7. ASSET PURCHASE
On February 1, 2004, the Company acquired from its Japanese distributor, Getz
Bros. Co., Ltd. ("Getz"), the right to market and sell its cochlear products in
Japan. Prior to acquiring these rights, the Company established an incorporated
wholly owned subsidiary in Japan, Bionics Japan Co., Ltd, ("Nihon Bionics").
Under the dissolution of the distribution agreement between the parties, certain
assets with an approximate value of $0.5 million were transferred to Nihon
Bionics from Getz on February 2, 2004.
8. COMMITMENTS AND CONTINGENCIES
On April 21, 2004, Advanced Neuromodulation Systems, Inc. (ANSI) filed suit
against Advanced Bionics alleging that its Precision(TM) spinal cord stimulation
system infringes a U.S. patent owned by ANSI. The suit
ADVANCED BIONICS CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
also includes allegations of misappropriation of trade secrets and tortious
interference with a contract. The suit was filed in the U.S. District Court for
the Eastern District of Texas and seeks monetary and injunctive relief. The
Company has answered, denying the allegations of the complaint. On June 25,
2004, a motion to dismiss and request for transfer of venue to California was
filed.
9. SUBSEQUENT EVENTS
On April 14, 2004, the Company acquired MRP-A, LLC, a related party
substantially owned by Mr. Mann, engaged in the research and development of an
implantable, programmable pump for the treatment of chronic pain for 2.3 million
shares of the Company's common stock.
On June 1, 2004, Boston Scientific Corporation acquired 100 percent of the fully
diluted equity of the Company for an initial payment of approximately $740
million in cash, plus earn out payments tied to future performance milestones.
ITEM 7.(b) UNAUDITED PRO FORMA FINANCIAL INFORMATION
BOSTON SCIENTIFIC
CORPORATION AND
ADVANCED BIONICS
CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
BOSTON SCIENTIFIC CORPORATION AND ADVANCED BIONICS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
On June 1, 2004, Boston Scientific Corporation completed its acquisition of
Advanced Bionics Corporation for an initial payment of approximately $740
million in cash, plus earn out payments tied to future performance milestones
(Advanced Bionics Acquisition). The initial purchase price was funded by the
issuance of commercial paper.
The aggregate Advanced Bionics Acquisition purchase price was allocated on a
preliminary basis to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The excess of purchase price
over the fair value of net tangible assets acquired was allocated to specific
intangible asset categories as follows:
(in millions)
----------------------------------------------------------------
Core technology $ 326
Developed technology 26
Customer related intangible assets 10
Purchased research and development 50
Goodwill 406
---------
$ 818
=========
During the second quarter of 2004, the Company recorded a $50 million charge to
account for purchased research and development acquired. The valuation of
purchased research and development was based upon an analysis of those projects
that had not reached technological feasibility and had no alternative future
use. The valuation considered expected future cash flows and was discounted for
risks and uncertainties related to target markets and completion of products.
In addition, the Company recorded a deferred tax asset of $35 million and a
deferred tax liability of $134 million. The deferred tax asset is primarily
attributable to net operating loss carryforwards. The deferred tax liability
mainly relates to the tax impact of amortization that is attributable to the
identified intangible assets acquired in the acquisition. The remaining net
tangible assets acquired were not significant.
The unaudited pro forma combined condensed financial information is based on the
historical consolidated financial statements of Boston Scientific and the
historical consolidated financial statements of Advanced Bionics Corporation
under the assumptions and adjustments set forth in the accompanying notes to the
unaudited pro forma combined condensed financial information. The unaudited pro
forma combined condensed statements of operations for the twelve months ended
December 31, 2003 and the three months ended March 31, 2004 give effect to the
transaction as if it had occurred on January 1, 2003. The unaudited pro forma
condensed consolidated balance sheet as of March 31, 2004 gives effect to the
transaction as if it had occurred on that date.
The unaudited pro forma combined condensed financial information may not be
indicative of the results that actually would have occurred if the Advanced
Bionics Acquisition had been in effect on the dates indicated or which may be
obtained in the future. The unaudited pro forma combined condensed financial
information should be read in conjunction with the historical consolidated
financial statements of Boston Scientific and the historical consolidated
financial statements of Advanced Bionics Corporation and the notes accompanying
these statements.
BOSTON SCIENTIFIC CORPORATION AND ADVANCED BIONICS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(IN MILLIONS, EXCEPT PER SHARE DATA)
PRO FORMA
BOSTON ADVANCED PRO FORMA BOSTON SCIENTIFIC
SCIENTIFIC BIONICS ADJUSTMENTS AND AND ADVANCED BIONICS
CORPORATION CORPORATION RECLASSIFICATIONS CORPORATION COMBINED
------------ ------------ ------------ ------------
Net sales $ 3,476 $ 56 $ 3,532
Cost of products sold 961 25 $ (3)(i) 983
------------ ------------ ------------ ------------
Gross profit 2,515 31 3 2,549
Selling, general and administrative expenses 1,171 39 1,210
Amortization expense 89 22(ii) 111
Royalties 54 3(i) 57
Research and development expenses 452 33 485
Purchased research and development 37 (iii) 37
Litigation-related charges 15 3 18
------------ ------------ ------------ ------------
1,818 75 25 1,918
------------ ------------ ------------ ------------
Operating income (loss) 697 (44) (22) 631
Other income (expense):
Interest expense (46) (10)(iv) (56)
Other, net (8) 2 (6)
------------ ------------ ------------ ------------
Income (loss) before income taxes 643 (42) (32) 569
Income taxes 171 (27)(v) 144
------------ ------------ ------------ ------------
Net income (loss) $ 472 $ (42) $ (5) $ 425
============ ============ ============ ============
Net income per common share - basic $ 0.57 $ 0.52
============ ============
Net income per common share - assuming dilution $ 0.56 $ 0.50
============ ============
Weighted average shares outstanding - assuming dilution 845.4 845.4
------------ ------------
See notes to unaudited pro forma combined condensed financial information.
BOSTON SCIENTIFIC CORPORATION AND ADVANCED BIONICS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
(IN MILLIONS, EXCEPT PER SHARE DATA)
PRO FORMA
BOSTON ADVANCED PRO FORMA BOSTON SCIENTIFIC AND
SCIENTIFIC BIONICS ADJUSTMENTS AND ADVANCED BIONICS
CORPORATION CORPORATION RECLASSIFICATIONS CORPORATION COMBINED
------------ ------------ ------------ -------------
Net sales $ 1,082 $ 18 $ 1,100
Cost of products sold 292 7 $ (1)(i) 298
------------ ------------ ------------ -------------
Gross profit 790 11 1 802
Selling, general and administrative expenses 348 17 365
Amortization expense 22 6(ii) 28
Royalties 22 1(i) 23
Research and development expenses 134 8 142
------------ ------------ ------------ -------------
526 25 7 558
------------ ------------ ------------ -------------
Operating income (loss) 264 (14) (6) 244
Other income (expense):
Interest expense (11) (2)(iv) (13)
Other, net 2 2
------------ ------------ ------------ -------------
Income (loss) before income taxes 255 (14) (8) 233
Income taxes 61 (8)(v) 53
------------ ------------ ------------ -------------
Net income (loss) $ 194 $ (14) $ $ 180
============ ============ ============ =============
Net income per common share - basic $ 0.23 $ 0.22
============ =============
Net income per common share - assuming dilution $ 0.23 $ 0.21
============ =============
Weighted average shares outstanding -
assuming dilution 855.2 855.2
------------ -------------
See notes to unaudited pro forma combined condensed financial information.
BOSTON SCIENTIFIC CORPORATION AND ADVANCED BIONICS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 2004
(IN MILLIONS, EXCEPT SHARE DATA)
PRO FORMA
PRO FORMA BOSTON SCIENTIFNIC AND
BOSTON SCIENTIFIC ADVANCED BIONICS ADJUSTMENTS AND ADVANCED BIONICS
CORPORATION CORPORATION RECLASSIFICATIONS CORPORATION COMBINED
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 615 $ 23 $ 638
Trade accounts receivable, net 675 16 691
Inventories 302 15 317
Other current assets 397 3 400
------------ ------------ ------------ ------------
Total current assets 1,989 57 2,046
Property, plant and equipment, net 787 12 799
Goodwill 1,278 $ 393(a) 1,671
Other intangible assets, net 1,187 362(a) 1,549
Other assets 603 4 35(a) 642
------------ ------------ ------------ ------------
$ 5,844 $ 73 $ 790 $ 6,707
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings due within one year $ 1,064 $ 749(b) $ 1,813
Accounts payable and accrued expenses 570 $ 19 589
Other current liabilities 109 11 120
------------ ------------ ------------ ------------
Total current liabilities 1,743 30 749 2,522
Long-term debt 611 611
Other long-term liabilities 271 134(a) 405
Commitments and contingencies
Stockholders' equity:
Preferred stock, $ .01 par value -
authorized 50,000,000 shares, none
issued and outstanding
Common stock, $ .01 par value -
authorized 1,200,000,000 shares,
835,084,057 shares issued at March
31, 2004 8 8
Additional paid-in capital 1,355 212 (212)c) 1,355
Retained earnings (accumulated deficit) 1,928 (168) 118(d) 1,878
Accumulated other comprehensive loss (72) (1) 1(c) (72)
------------ ------------ ------------ ------------
Total stockholders' equity 3,219 43 (93) 3,169
------------ ------------ ------------ ------------
$ 5,844 $ 73 $ 790 $ 6,707
============ ============ ============ ============
See notes to unaudited pro forma combined condensed financial information.
BOSTON SCIENTIFIC CORPORATION AND ADVANCED BIONICS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The unaudited pro forma combined financial information has been prepared to
reflect the Advanced Bionics Acquisition accounted for under the purchase method
of accounting and excludes any benefits from synergies that may result from the
Advanced Bionics Acquisition. The condensed statements of operations for the
twelve months ended December 31, 2003 and the three months ended March 31, 2004
give effect to the transaction as if it had occurred on January 1, 2003. The
unaudited pro forma condensed consolidated balance sheet as of March 31, 2004
gives effect to the transaction as if it had occurred on that date.
The Company's best estimate of future contingent consideration (undiscounted)
that it may be required to make associated with its acquisition of Advanced
Bionics is approximately $2.0 billion. The estimated cumulative revenue level
associated with its best estimate is approximately $4.5 billion during the
period from 2004 through 2013. These payments, when and if made, will be
allocated to goodwill.
The following is a description of pro forma adjustments reflected in the
unaudited pro forma combined condensed statements of operations:
i. Represents the reclassification of Advanced Bionics Corporation's
royalties to conform with Boston Scientific's presentation.
ii. Represents the amortization of intangible assets obtained as part of
the Advanced Bionics Acquisition. The amortization is based on the
preliminary allocation to specific intangible asset categories using
estimated useful lives associated with these specific intangible
asset categories. The intangible assets are amortized using the
straight-line method over their useful lives as follows: developed
technology, 5 years; core technology, 20 years; customer related
intangible assets, 15 years.
iii. The objective of the pro forma financial information is to provide
information about the continuing impact of the Advanced Bionics
Acquisition by showing how it might have affected historical
operating results if the acquisition was consummated at the
beginning of the most recent fiscal year. As such, the $50 million
charge for purchased research and development that was a direct
result of the transaction is excluded from the unaudited pro forma
combined condensed statements of operations.
iv. Represents the estimated increase in interest expense from the
commercial paper issued in connection with the Advanced Bionics
Acquisition. The estimated increase in interest expense assumes the
commercial paper issued in connection with the Advanced Bionics
Acquisition remained outstanding during the periods presented.
v. Represents the estimated tax effect of the pro forma adjustments
based on the statutory rates in effect during the respective periods
and the tax benefit for the losses incurred by Advanced Bionics
during the respective periods.
The following is a description of pro forma adjustments reflected in the
unaudited pro forma combined condensed balance sheet:
a. Represents the preliminary purchase price allocation to give effect
to the transaction as though it had occurred on the balance sheet
date.
b. Represents commercial paper issued to fund the initial purchase
price of the Advanced Bionics Acquisition.
c. Represents the elimination of stockholders' equity in Advanced
Bionics Corporation.
d. Represents the elimination of the accumulated deficit associated
with Advanced Bionics Corporation and the impact of recording $50
million of purchased research and development.
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
*2.1 Agreement and Plan of Merger dated May 28, 2004, among
Boston Scientific Corporation, Scimed Life Systems, Inc.,
Claude Acquisition Corp., Advanced Bionics Corporation,
Bionics Trust, Alfred E. Mann, Jeffrey H. Greiner, and
David MacCullum, collectively in their capacity as the
Stockholders' Representatives.
23.1 Consent of Deloitte and Touche LLP
* Previously filed with the Initial 8-K
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Date: August 6, 2004 By: /s/ Lawrence C. Best
-----------------------------------
Lawrence C. Best
Senior Vice President - Finance
and Administration and Chief
Financial Officer