1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the quarterly period ended: March 31, 1999
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Shares Outstanding
Class as of March 31, 1999
Common Stock, $.01 Par Value 395,663,154
- --------------------------------------------------------------------------------
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
In millions, except share and per share data 1999 1998
- -------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 110 $ 70
Short-term investments 4 5
Trade accounts receivable, net 547 538
Inventories 463 462
Deferred income taxes 131 130
Prepaid expenses and other current assets 48 62
--------------------
Total current assets 1,303 1,267
Property, plant and equipment 931 945
Less: accumulated depreciation 283 265
--------------------
648 680
Excess of cost over net assets acquired, net 862 877
Technology - core and developed, net 599 607
Patents, trademarks and other intangibles, net 325 330
Deferred income taxes 69 69
Investments and other assets 70 63
--------------------
$3,876 $3,893
====================
See notes to unaudited condensed consolidated financial statements.
3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
March 31, December 31,
In millions, except share and per share data 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Commercial paper $ 1,016
Bank obligations $ 1,027 11
Accounts payable and accrued expenses 338 354
Acquisition-related obligations 128 140
Accrual for restructuring and merger-related charges 64 71
Income taxes payable 48 19
Other current liabilities 2 9
------- -------
Total current liabilities 1,607 1,620
Long-term debt 1,260 1,364
Other long-term liabilities 88 88
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 600,000,000 shares,
395,663,154 shares issued at March 31, 1999 and 394,185,781 at
December 31, 1998 4 4
Additional paid-in capital 537 507
Retained earnings 481 381
Accumulated other comprehensive income (expense):
Foreign currency translation adjustment (101) (72)
Unrealized gain on available-for-sale securities, net 1
------- -------
Total stockholders' equity 921 821
------- -------
$ 3,876 $ 3,893
======= =======
See notes to unaudited condensed consolidated financial statements.
4
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
In millions, except per share data 1999 1998
- --------------------------------------------------------------------------------
Net sales $ 708 $ 453
Cost of products sold 230 138
----- -----
Gross profit 478 315
Selling, general and administrative expenses 207 159
Amortization expense 23 8
Royalties 10 7
Research and development expenses 49 45
----- -----
289 219
----- -----
Operating income 189 96
Other income (expense):
Interest and dividend income 1 1
Interest expense (35) (6)
Other, net (4) (3)
----- -----
Income before income taxes 151 88
Income taxes 51 28
----- -----
Net income $ 100 $ 60
===== =====
Net income per common share - basic $0.25 $0.15
===== =====
Net income per common share - assuming dilution $0.25 $0.15
===== =====
See notes to unaudited condensed consolidated financial statements.
5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholder's Equity
(Unaudited)
Three Months Ended March 31, 1999
-------------------------------------------------------------------------------------
Unrealized Gain
Common Stock Additional Foreign Currency (Loss) on Available-
------------------------Paid-In Retained Translation for-Sale
Shares Issued Par Value Capital Earnings Adjustment Securities, Net Total
-------------------------------------------------------------------------------------
(In millions, except share data)
Balance at December 31, 1998 394,185,781 $ 4 $ 507 $ 381 $ (72) $ 1 $ 821
Net income 100 100
Foreign currency translation adjustment (29) (29)
Issuance of common stock 1,477,373 20 20
Tax benefit relating to incentive stock option
and employee stock purchase plans 10 10
Net change in equity investments (1) (1)
-------------------------------------------------------------------------------------
Balance at March 31, 1999 395,663,154 $ 4 $ 537 $ 481 $ (101) $ -- $ 921
=====================================================================================
See notes to unaudited condensed consolidated financial statements.
6
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
In millions 1999 1998
- -----------------------------------------------------------------------------------------------
Cash provided by operating activities $ 137 $ 34
Investing activities:
Purchases of property, plant, and equipment, net (27) (49)
Other, net 2 4
------ ------
Cash used in investing activities (25) (45)
Financing activities:
Net proceeds from borrowings on revolving credit facilities 1,717
Net decrease in commercial paper (1,816) (423)
Proceeds from notes payable and long-term debt 506
Proceeds from issuances of shares of common stock,
net of tax benefits 30 20
Other, net (6)
------ ------
Cash provided by (used for) financing activities (69) 97
Effect of foreign exchange rates on cash (3) (1)
------ ------
Net increase in cash and cash equivalents 40 85
Cash and cash equivalents at beginning of period 70 58
------ ------
Cash and cash equivalents at end of period $ 110 $ 143
====== ======
See notes to unaudited condensed consolidated financial statements.
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto incorporated by
reference in Boston Scientific Corporation's Amended Annual Report on Form
10-K/A for the year ended December 31, 1998.
Certain prior years' amounts have been reclassified to conform to the current
year presentation.
Note B - Comprehensive Income
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", requires the disclosure of comprehensive income and its
components. SFAS No. 130 requires companies to report, in addition to net
income, other components of comprehensive income, which includes unrealized
gains and losses on available-for-sale securities and foreign currency
translation adjustments. For the three months ended March 31, 1999 and 1998, the
Company's comprehensive income was $70 million and $49 million, respectively.
8
Note C - Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
Three Months Ended
March 31,
(In millions, except share and per share data) 1999 1998
- --------------------------------------------------------------------------------
Basic:
Net income $ 100 $ 60
-------- --------
Weighted average shares outstanding (in thousands) 394,772 388,034
-------- --------
Net income per common share $ 0.25 $ 0.15
-------- --------
Assuming dilution:
Net income $ 100 $ 60
-------- --------
Weighted average shares outstanding (in thousands) 394,772 388,034
Net effect of dilutive put options (in thousands) 16
Net effect of dilutive stock options (in thousands) 7,030 8,764
-------- --------
Total (in thousands) 401,802 396,814
-------- --------
Net income per common share $ 0.25 $ 0.15
-------- --------
Note D - Restructuring and Merger-Related Charges
At March 31, 1999, the Company had an accrual for restructuring and
merger-related charges of $80 million which is comprised of $43
million of accrued severance and related costs primarily associated with
integrating Schneider and streamlining manufacturing operations, $15 million
related to the cost of canceling contractual commitments recorded in connection
with the Schneider acquisition and $22 million of accruals remaining from 1997
and prior mergers (primarily costs associated with rationalized facilities and
statutory benefits subject to litigation). The activity impacting the
accrual related for restructuring and merger-related charges during the first
quarter of 1999 is summarized in the following table:
9
Balance at Charges Utilized Balance at
(In millions) December 31, 1998 in 1999 March 31, 1999
- ---------------------------------------------------------------------------------------------------------
1995 AND 1996 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Facilities $11 $(1) $10
Workforce reductions 4 4
Contractual commitments 1 1
Asset write-downs 1 1
Direct transaction and other costs 2 2
--- ---- ---
$19 $(1) $18
=== ==== ===
1997 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Contractual commitments $ 1 $ 1
Asset write-downs 1 1
Direct transaction and other costs 2 2
--- ---- ---
$ 4 $ 4
=== ==== ===
1998 SCHNEIDER PURCHASE PRICE ADJUSTMENTS:
Workforce reductions $27 $(5) $22
Contractual commitments 16 (1) 15
--- ---- ---
$43 $(6) $37
=== ==== ===
1998 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Workforce reductions $13 $(2) $11
Asset write-downs 9 9
Direct transaction and other costs 1 1
--- ---- ---
$23 $(2) $21
=== ==== ===
TOTAL:
Facilities $11 $(1) $10
Workforce reductions 44 (7) 37
Contractual commitments 18 (1) 17
Asset write-downs 11 11
Direct transaction and other costs 5 5
--- ---- ---
$89 $(9) $80
=== ==== ===
As of March 31, 1999, the Company's cash obligations required to complete the
balance of the Company's initiatives to integrate businesses related to its
mergers and acquisitions and its 1998 rationalization strategy are estimated at
approximately $61 million. Further, the Company has outstanding $128 million of
acquisition-related cash obligations. The Company expects that substantially all
restructuring and merger-related charges will be paid during 1999 with the
exception of $4 million of 1997 and prior facility related costs and statutory
benefits subject to litigation which are expected to be paid or settled
subsequent to 1999. The ultimate costs to be incurred relating to the facilities
cannot be determined until a willing buyer for the properties is found and the
facilities are sold.
10
Note E - Borrowings and Credit Arrangements
In the first quarter of 1999, the Company refinanced $1.7 billion of commercial
paper borrowings with proceeds of borrowings under the revolving credit
facilities. At March 31, 1999, the Company has approximately $1.7 billion in
borrowings outstanding under the revolving credit facilities at a weighted
average interest rate of 5.5%. The Company has the ability to refinance a
portion of its short term debt on a long term basis through its credit
facilities and expects a minimum of $700 million will remain outstanding through
the next twelve months, and accordingly the Company has classified this portion
of borrowings as long-term at March 31, 1999.
Note F - Inventories
The components of inventory consist of the following:
March 31, December 31,
(In millions) 1999 1998
- -----------------------------------------------
Finished goods $242 $249
Work-in-process 71 83
Raw materials 150 130
-----------------
$463 $462
=================
Note G- New Accounting Pronouncements
During the first quarter of 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-5 "Reporting on the
Costs of Start Up Activities", which requires costs of start up activities and
organization costs to be expensed as incurred. The Company's adoption of this
statement had no material effect on the Company's reported results of operations
or financial position.
Note H - Commitments and Contingencies
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a wholly owned subsidiary
of the Company, filed a suit for patent infringement against Advanced
Cardiovascular Systems, Inc. (ACS), alleging willful infringement of two of
SCIMED's U.S. patents by ACS's RX ELIPSE(TM) PTCA catheter. The suit was filed
in the U.S. District Court for the Northern District of California seeking
monetary and injunctive relief. In January 1998, the Company added the ACS RX
MULTILINK(TM) stent delivery system to its complaint. ACS has answered, denying
the allegations of the complaint. Trial is expected to begin in 1999.
On December 29, 1998, the Company and SCIMED filed a cross-border suit against
ACS, Guidant Corporation (Guidant) and various foreign subsidiaries in The
Netherlands alleging ACS's MULTILINK(TM), RX ELIPSE, RX MULTILINK HP(TM) and RX
DUET(TM) catheters and stent delivery systems infringe one of the Company's
European patents. In this action, the Company requested relief covering The
Netherlands, the United Kingdom, France, Germany and Italy. A hearing on the
merits is set for November 5, 1999.
On January 13, 1999, SCIMED filed a suit for patent infringement against ACS,
Guidant and Guidant Sales Corporation alleging willful infringement of two of
SCIMED's U.S. patents by ACS's RX MULTILINK HP and RX DUET stent delivery
systems and one of SCIMED's U.S.
11
patents by ACS's RX MULTILINK stent delivery system. The suit was filed in the
U.S. District Court for the Northern District of California seeking monetary and
injunctive relief. ACS has answered, denying the allegations of the complaint.
On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,
alleging willful infringement by SCIMED'S EXPRESS PLUS(TM) and EXPRESS PLUS
II(TM) PTCA catheters of four U.S. patents licensed to ACS. 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. A trial date has not yet been set.
On March 12, 1996, ACS filed two suits for patent infringement against SCIMED,
alleging in one case the willful infringement of a U.S. patent by SCIMED's
EXPRESS PLUS, EXPRESS PLUS II and LEAP(R) EXPRESS PLUS PTCA catheters, and in
the other case the willful infringement of a U.S. patent by SCIMED's BANDIT(TM)
PTCA catheter. The suits were filed in the U.S. District Court for the Northern
District of California and seek monetary and injunctive relief. SCIMED has
answered, denying the allegations of the complaints. A trial date has not yet
been set for the case affecting the EXPRESS PLUS catheters. Trial has been
scheduled to begin in February 2000 in the case involving the BANDIT catheter.
On September 16, 1997, ACS filed a suit for patent infringement against the
Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter infringes two
U.S. patents licensed to ACS and one U.S. patent owned by ACS. Suit was filed in
the U.S. District Court for the Northern District of California seeking monetary
damages, injunctive relief and that the patents be adjudged valid, enforceable
and infringed. The Company and SCIMED have answered, denying the allegations in
the complaint. A trial date has not yet been set.
On August 12, 1998, ACS and an affiliate of ACS filed suit for patent
infringement against the Company and SCIMED alleging that the Company's NIR(R)
stent infringes five patents owned by ACS. The suit was filed in the U.S.
District Court for the Southern District of Indiana seeking injunctive and
monetary relief. The Company and SCIMED have answered, denying the allegations
of the complaint. A trial date has been set for February 22, 2000.
On March 25, 1996, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson Company (Johnson & Johnson), filed a suit for patent infringement
against SCIMED, alleging the infringement of five U.S. patents by SCIMED's LEAP
balloon material, used in certain SCIMED catheter products, including SCIMED's
BANDIT and EXPRESS PLUS catheters. The suit was filed in the U.S. District Court
for the District of Minnesota and seeks monetary and injunctive
12
relief. SCIMED has answered, denying the allegations of the complaint. Trial is
expected to begin in 1999.
On March 17, 1997, the Company, through its subsidiaries, filed suit against
Cordis in France seeking a declaration of noninfringement for the Company's LEAP
balloon in relation to a European patent owned by Cordis. A hearing on the
pleadings was held on May 11, 1999.
On July 18, 1997, Cordis filed a cross border suit in The Netherlands against
various subsidiaries of the Company, alleging that the LEAP balloon infringes
one of Cordis' European patents. In this action, Cordis requested expedited
relief, including an injunction, covering The Netherlands, Germany, France, the
United Kingdom and Italy. The court posed certain questions to the European
Patent Office (EPO). The Company appealed the court's decision to present
questions to the EPO. A hearing on the appeal was held June 16, 1998. In
November 1998, the Court of Appeals held that there was a "ready chance" that
the Cordis patent would be found invalid and dismissed the action. In a written
decision dated December 1, 1998, the Court of Appeals denied all of Cordis'
claims. Cordis did not appeal the decision.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis,
alleging willful infringement of several SCIMED U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in
the U.S. District Court for the District of Minnesota, Fourth District, seeking
monetary and injunctive relief. The parties have agreed to add Cordis'
CHARGER(TM) and HELIX(TM) catheters to the suit. Cordis has answered, denying
the allegations of the complaint. Trial is expected to begin in 1999.
On March 13, 1997, the Company (through its subsidiaries) filed suits against
Johnson & Johnson (through its subsidiaries) in The Netherlands, the United
Kingdom and Belgium, and on March 17, 1997 filed suit in France, seeking a
declaration of noninfringement for the NIR(R) stent relative to two European
patents licensed to Ethicon, Inc. (Ethicon), a Johnson & Johnson subsidiary, as
well as a declaration of invalidity with respect to those patents. After a trial
on the merits in the United Kingdom during March 1998, the Court ruled on June
26, 1998 that neither of the patents is infringed by the NIR(R) stent, and that
both patents are invalid. Ethicon has appealed. On October 28, 1998, the
Company's motion for a declaration of noninfringement in France was dismissed
for failure to satisfy statutory requirements; the French invalidity suits were
not affected. The Company appealed the dismissal, and a hearing was held on
March 22, 1999. On April 16, 1999, the Company withdrew its appeal.
On March 20, 21 and 22, 1997, the Company (through its subsidiaries) filed
additional suits against Johnson & Johnson (through its subsidiaries) in Sweden,
Italy and Spain, respectively, seeking a declaration of noninfringement for the
NIR(R) stent relative to one of the European
13
patents licensed to Ethicon in Sweden, Italy and Spain and a declaration of
invalidity in Italy and Spain. A hearing is scheduled for July 6, 1999 in Italy.
Ethicon and other Johnson & Johnson subsidiaries filed a cross-border suit in
The Netherlands on March 17, 1997, alleging that the NIR(R) stent infringes one
of the European patents licensed to Ethicon. In this action, the Johnson &
Johnson entities requested relief, including provisional relief (a preliminary
injunction), covering Austria, Belgium, France, Greece, Italy, The Netherlands,
Norway, Spain, Sweden, Switzerland and the United Kingdom. On April 2, 1997, the
Johnson & Johnson entities filed a similar cross-border proceeding in The
Netherlands with respect to a second European patent licensed to Ethicon.
Johnson & Johnson subsequently withdrew its request for cross-border relief in
the United Kingdom. In October, 1997, Johnson & Johnson's request for
provisional cross-border relief on both patents was denied by the Dutch court,
on the ground that it is "very likely" that the NIR(R) stent will be found not
to infringe the patents. Johnson & Johnson appealed this decision with respect
to one of the patents; the appeal has been denied on the ground that there is a
"ready chance" that the patent will be declared null and void. In January 1999,
Johnson & Johnson amended the claims of one of the patents, changed the action
from a cross-border case to a Dutch national action, and indicated its intent
not to pursue its action on the second patent. A hearing was held on March 26,
1999 and a decision is expected on May 26, 1999.
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that the Company's NIR(R) stent infringes one of Ethicon's
patents. On June 23, 1998, the case was stayed following a decision in an
unrelated nullity action in which the Ethicon patent was found to be invalid.
On June 16, 1997, the Company and SCIMED filed a suit against Johnson & Johnson,
Ethicon and Johnson & Johnson International Systems Co. in the U.S. District
Court for the District of Massachusetts seeking a declaratory judgment of
noninfringement for the NIR(R) stent relative to two patents licensed to Johnson
& Johnson and that the two patents are invalid and unenforceable. The Company
subsequently amended its complaint to add a third patent. Johnson & Johnson
answered, denying the allegations of the complaint, and counterclaiming for
patent infringement. In October 1997, Johnson & Johnson's motion to dismiss the
suit was denied. This action has been consolidated with the Delaware action
described below.
On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR(R) stent infringes certain
Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court
of Canada seeking a declaration of infringement, monetary damages and injunctive
relief. The Company has answered, denying the allegations of the complaint.
14
On October 22, 1997, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the importation and use of the NIR(R) stent
infringes two patents owned by Cordis. The suit was filed in the U.S. District
Court for the District of Delaware seeking monetary damages, injunctive relief
and that the patents be adjudged valid, enforceable and infringed. The Company
and SCIMED have answered the complaint, denying Cordis' allegations. The
Massachusetts case described above has been consolidated with this action. A
trial date has been set for March 6, 2000.
On April 13, 1998, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's NIR(R) stent infringes a third
patent owned by Cordis. The suit was filed in the U.S. District Court for the
District of Delaware seeking injunctive and monetary relief. The Company and
SCIMED have answered, denying the allegations of the complaint. A trial date has
been set for March 6, 2000.
On August 13, 1998, Arterial Vascular Engineering, Inc. (AVE) filed a suit for
patent infringement against the Company and SCIMED alleging that the Company's
NIR(R) stent infringes two patents owned by AVE. The suit was filed in the U.S.
District Court for the District of Delaware seeking injunctive and monetary
relief. The Company and SCIMED have answered, denying the allegations of the
complaint. A trial is expected to begin in 2000.
On December 15, 1998, the Company and SCIMED filed a cross-border suit against
AVE in The Netherlands alleging that AVE's AVE GFX(TM), AVE GFX 2(TM), AVE
LTX(TM) and USCI CALYPSO(TM) rapid exchange catheters and stent delivery systems
infringe one of the Company's European patents. In this action, the Company
requested relief covering The Netherlands, the United Kingdom, France, Germany
and Italy. A hearing is set for October 22, 1999.
On December 18, 1998, AVE filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's MAXXUM(TM) and VIVA!(TM)
catheters infringe a patent owned by AVE. The suit was filed in the U.S.
District Court for the District of Delaware seeking injunctive and monetary
relief. The Company and SCIMED have answered, denying the allegations of the
complaint.
On March 2, 1999, Medtronic AVE Inc., formerly known as Arterial Vascular
Engineering, Inc. (AVE), filed a cross-border suit in The Netherlands against
the Company and various subsidiaries of the Company including SCIMED, alleging
that the Company's MAXXUM(TM), MAXXUM(TM) ENERGY, MAXXUM(TM) 29 MM, NIR(R)
Primo(TM), VIVA!(TM), EXPRESS PLUS and EXPRESS PLUS II balloon dilation
catheters infringe one of AVE's European patents. In this action, AVE requested
relief covering The Netherlands, Germany, the United Kingdom, France and Spain.
The Company has not yet filed its answer, but intends to deny the allegations of
the complaint.
15
On March 10, 1999, the Company through its subsidiary Schneider (Europe) AG
filed suit against AVE in Dusseldorf, Germany, alleging that AVE's AVE GFX, AVE
GFX2, AVE LTX, CALYPSO RELY(TM), PRONTO SAMBA(TM) and SAMBA RELY(TM)
rapid-exchange catheters and stent delivery systems infringe one of the
Company's European patents.
On April 6, 1999, AVE sued the Company and SCIMED in the District Court of
Dusseldorf, Germany alleging that the Company's NIR(R) stent infringes one of
AVE's European patents. The Company and SCIMED have not yet answered, but intend
to deny the allegations of the complaint.
On May 14, 1999, Medtronic, Inc. filed suit against the Company and SCIMED in
the U.S. District Court for the District of Minnesota alleging that a variety of
the Company's NIR(R) stent products infringe a Medtronic patent. The Company is
preparing an answer, denying the allegations of the complaint.
On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District
Court for the District of Delaware alleging that certain Company products,
including the Company's MaxForce TTS(TM) catheter, infringe a patent assigned to
Bard. Following a trial and jury verdict, on February 3, 1999 the court entered
a judgment that the Company infringed the Bard patent and awarded damages to
Bard in the amount of $10.8 million. The Company was also enjoined from selling
the product found to be infringing. The Company is appealing the judgment to the
Court of Appeals for the Federal Circuit. The Company no longer markets the
accused device.
On March 7, 1996, Cook Inc. (Cook) filed suit in the Regional Court, Munich
Division for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally
Invasive Technologies alleging that the Cragg EndoPro(TM) System I and
Stentor(TM) endovascular device infringe a certain Cook patent. Since the
purchase of the assets of the Endotech/MinTec companies by the Company, the
Company has assumed control of the litigation. The defendant answered, denying
the allegations. A court-appointed technical expert has provided the court with
technical advice. A final hearing was held on May 12, 1999, and the court's
decision is scheduled to be announced on June 30, 1999.
On June 30, 1998, Cook filed suit in the Regional Court, Dusseldorf Division for
Patent Disputes, in Dusseldorf, Germany against the Company alleging that the
Company's PASSAGER(TM) peripheral vascular stent graft and VANGUARD(TM)
endovascular aortic graft products infringe the same Cook patent. A hearing date
has been set for July 22, 1999.
On January 13, 1999, Medical Innovations Corporation (Innovations) filed a
lawsuit in the U.S. District Court for the District of Utah alleging that
certain Company products, including the Company's Ultratome(TM) XL sphinctertome
product, infringe two patents assigned to Innovations. The suit also includes a
claim of unfair trade practices. Innovations is seeking injunctive relief and
monetary damages for both claims. The Company is preparing an answer, denying
the allegations of the complaint.
16
On February 1, 1999, Hewlett-Packard Company filed a suit in the U.S. District
Court for the District of Massachusetts against the Company alleging violation
of the Sherman Antitrust Act and Massachusetts General Laws Chapter 93A and
breach of contract. On April 1, 1999, the Company filed a motion to dismiss the
complaint.
Beginning November 4, 1998, a number of shareholders of the Company, on behalf
of themselves and all others similarly situated, filed purported stockholders'
class action suits in the U.S. District Court for the District of Massachusetts
alleging that the Company and certain of its officers violated certain sections
of the Securities Exchange Act of 1934. The complaints principally allege that
as a result of certain accounting irregularities involving the improper
recognition of revenue by the Company's subsidiary in Japan, the Company's
previously issued financial statements were materially false and misleading. In
all, 16 purported class action suits have been filed. Plaintiffs have moved for
the appointment of lead plaintiffs and lead counsel. The Company and its
officers have not yet filed an answer, but intend to vigorously defend all
actions.
The Company is aware that the U.S. Department of Justice is conducting an
investigation of matters that include the Company's NIR ON(TM) Ranger(TM) with
Sox(TM) coronary stent delivery system which was voluntarily recalled by the
Company in October 1998 following reports of balloon leaks. The Company is
cooperating fully in the investigation.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the Company
will prevail in any particular case. An adverse outcome in one or more cases in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against product
liability losses as could otherwise materially affect the Company's financial
position.
17
Note I - Segment Reporting
Boston Scientific is a worldwide developer, manufacturer and marketer of medical
devices for less invasive procedures. The Company has four reportable operating
segments based on geographic regions: the United States, Europe, Japan and
Emerging Markets. Each of the Company's reportable segments generates revenues
from the sale of minimally invasive medical devices. The reportable segments
represent an aggregate of operating divisions.
Sales and operating results of reportable segments are based on internally
derived standard foreign exchange rates which may differ from year to year and
do not include inter-segment profits. Because of the interdependence of the
reportable segments, the operating profit as presented may not be representative
of the geographic distribution that would occur if the segments were not
interdependent.
United Emerging
(In millions) States Europe Japan Markets Total
- --------------------------------------------------------------------------------
Three months ended March 31, 1999:
Net sales $441 $117 $105 $36 $699
Operating income 167 26 65 6 264
Three months ended March 31, 1998:
Net sales $266 $92 $72 $22 $452
Operating income 85 23 45 2 155
18
A reconciliation of the totals reported for the reportable segments to the
applicable line items in the consolidated financial statements is as follows:
Three months ended
March 31,
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Net Sales:
Total net sales for reportable segments $ 699 $ 452
Foreign exchange 9 1
----- -----
$ 708 $ 453
===== =====
Income before income taxes:
Total operating income for reportable
segments $ 264 $ 155
Corporate expenses and foreign exchange (75) (59)
------ ------
189 96
Other expense, net (38) (8)
------ ------
$ 151 $ 88
===== =====
Operating income for the U.S. and Europe for the three months ended March 31,
1999 would have been approximately $178 million and $31 million, respectively,
if certain costs had been allocated between geographic regions and corporate
expenses consistent with the allocation method used for the three months ended
March 31, 1998.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the first quarter increased 56% to $708 million as compared to
$453 million in the first quarter of 1998. The first quarter results include the
operations of Schneider Worldwide (Schneider) which was acquired in the third
quarter of 1998. On a pro forma basis, assuming Schneider revenues had been
included in the first quarter of 1998, net sales in the first quarter of 1999
increased 30%. Net income for the first quarter increased 67% to $100 million,
or $.25 per share (diluted). This compares to net income of $60 million, or $.15
per share, reported in the first quarter of 1998.
During the first quarter of 1999, United States (U.S.) revenues increased
approximately 66% to $441 million, while international revenues increased
approximately 43% to $267 million compared to the same period in the prior year.
U.S. revenues as a percentage of worldwide sales increased from 59% in the first
quarter of 1998 to 62% in the first quarter of 1999. Worldwide vascular and
nonvascular sales increased 65% and 27%, respectively, compared to the same
period in the prior year. Without the impact of foreign currency exchange rates
on translation of international revenues, worldwide sales for the first quarter
increased approximately 53% compared to the same period in the prior year. The
increases in U.S. sales as a percentage of worldwide sales and in vascular sales
were primarily attributable to the Company's domestic sales of coronary stents.
U.S. coronary stent revenues, primarily sales of the NIR(R) stent, were
approximately $105 million during the first quarter of 1999. Worldwide NIR(R)
coronary stent sales as a percentage of worldwide sales were approximately 20%
in the first quarter of 1999. The NIR(R) coronary stent is supplied by Medinol
LTD. (Medinol) and unforeseen delays, stoppages or interruptions in the supply
and/or mix of the NIR(R) stent could adversely affect the operating results of
the Company. The Company is committed to purchase approximately $120 million of
NIR(R) stents for the remainder of 1999.
Gross profit as a percentage of net sales decreased from 69.5% in the first
quarter of 1998 to 67.5% in the first quarter of 1999. As a result of multiple
acquisitions, the Company's supply chain has been weakened and there has been
continued pressure on gross margins, including write-downs for excess and
obsolete inventory, and high manufacturing costs. During 1998, the Company
initiated a full time global program to focus on supply chain optimization. The
program is designed to lower inventory levels and the cost of manufacturing,
improve absorption and minimize inventory write-downs. By addressing the entire
supply chain, including application of lean manufacturing techniques, the
Company seeks to return gross margins to more acceptable levels and to improve
working capital. The program should be completed by the end of 1999. The
decrease in gross margins during the first quarter of 1999 compared to the first
quarter of 1998 was partially offset by favorable pricing on new products and
mix.
Success of the global supply chain initiative is critical to realizing improved
gross margins and reducing the Company's inventory to an acceptable level. In
addition, gross margins could be significantly impacted by the purchase price of
NIR(R) coronary stents and the amount of NIR(R) coronary stent sales as a
percentage of worldwide sales. As average selling prices for the NIR(R)
20
stents fluctuate, the Company's cost to purchase the stents will change because
cost is based on a constant percentage of average selling prices.
Selling, general and administrative expenses as a percentage of net sales
decreased from 35% of net sales in the first quarter of 1998 to 29% of net sales
in the first quarter of 1999, while increasing from $159 million in the first
quarter of 1998 to $207 million in the first quarter of 1999. The decrease as a
percent of net sales is primarily attributable to the launch of coronary stents
in the U.S. and Japan, the realization of synergies as the Company integrates
Schneider into its organization, and improved returns in certain geographic
regions as the Company continues to leverage its direct sales infrastructure.
The increase in expense dollars is primarily attributable to higher selling
expenses as a result of the launch of coronary stents in the U.S., the results
of Schneider operations in the period, and increased costs to expand the
Company's direct sales presence in certain geographic regions. Additionally,
legal costs associated with asserting the Company's patent portfolio and
defending against claims that the Company's products infringe the intellectual
property of others are increasing. Similarly, legal costs associated with
non-patent litigation and compliance activities are also rising. Depending upon
the prevalence, significance and complexity of these matters, the Company's
legal provision could be adversely impacted in the future.
The Company is involved in various lawsuits, including patent infringement and
product liability suits, from time to time in the normal course of business. In
management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in the notes to the
unaudited condensed consolidated financial statements which, individually or in
the aggregate, could have a material effect on the financial condition,
operations and cash flows of the Company. The Company believes that it has
meritorious defenses against claims that it has infringed patents of others.
However, there can be no assurance that the Company will prevail in any
particular case. An adverse outcome in one or more cases in which the Company's
products are accused of patent infringement could have a material adverse effect
on the Company.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position. The Company is aware that the U.S. Department of Justice is conducting
an investigation of matters that include the Company's decision to voluntarily
recall the NIR ON(TM) Ranger(TM) with SOX(TM) coronary stent system in the U.S.
The Company is cooperating fully in the investigation.
Amortization expense increased 188% from $8 million in the first quarter of 1998
to $23 million in the first quarter of 1999 and increased as a percentage of net
sales from 1.8% to 3.2%. The increase is primarily a result of the amortization
of intangibles related to the purchase of Schneider.
Royalty expenses increased approximately 43% from $7 million in the first
quarter of 1998 to $10 million in the first quarter of 1999. The Company
continues to enter into strategic technological alliances, some of which include
royalty commitments.
21
Research and development expense dollars increased approximately 9% from $45
million in the first quarter of 1998 to $49 million in the first quarter of
1999, while decreasing as a percentage of net sales from 10% in the first
quarter of 1998 to 7% in the first quarter of 1999. The increase in research and
development dollars reflects increased spending on new product development
programs and regulatory and clinical research, and reflects the Company's
continued commitment to refine existing products and procedures and to develop
new technologies that provide simpler, less traumatic, less costly and more
efficient diagnosis and treatment. The decrease as a percent of net sales is
primarily attributable to the launch of coronary stents in the U.S. and Japan.
The Company's research and development projects acquired in connection with its
prior business combinations are generally progressing in line with the schedules
and cost estimates previously reported in the Company's most recent filing with
the SEC. The trend in countries around the world toward more stringent
regulatory requirements for product clearance and more vigorous enforcement
activities has generally caused or may cause medical device manufacturers to
experience more uncertainty, greater risk and higher expenses.
Interest expense increased from $6 million in the first quarter of 1998 to $35
million in the first quarter of 1999. The overall increase in interest expense
is primarily attributable to a significantly higher outstanding debt balance due
primarily to the Schneider acquisition.
The Company's effective tax rate increased from approximately 32% in the first
quarter of 1998 to 34% in the first quarter of 1999. The increase is primarily
attributable to a shift in the mix of U.S. and international business.
The Company has substantially completed the integration of all mergers and
acquisitions consummated prior to 1998 and expects to complete the integration
of Schneider by the end of 1999. 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 change 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 operating results in the near
term, and could impair the Company's ability to realize the strategic and
financial objectives of these transactions.
Uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers in
the U.S. may result in continued pressure on selling prices of certain products
and resulting compression on gross margins. In addition to impacting selling
prices, the trend to managed care in the U.S. has also resulted in more complex
billing and collection procedures. The Company's ability to effectively react to
the changing environment may impact its bad debt and sales return provision in
the future. Further, the U.S. marketplace is increasingly characterized by
consolidation among healthcare providers and purchasers of medical devices who
prefer to limit the number of suppliers from whom they purchase medical
products. There can be no assurance that these entities will continue to
purchase products from the Company.
International markets are also being affected by economic pressure to contain
reimbursement levels and healthcare costs. The Company's ability to benefit from
its international expansion
22
may be limited by risks and uncertainties related to economic conditions in
these regions, competitive offerings, infrastructure development, rights to
intellectual property, and the ability of the Company to implement its overall
business strategy. Any significant changes in the political, regulatory or
economic environment where the Company conducts international operations may
have a material impact on revenues and profits. Specifically, the deterioration
in the Japan economy may impact the Company's ability to collect its outstanding
Japan receivables.
Although these factors may impact the rate at which Boston Scientific can grow,
the Company believes that it is well positioned to take advantage of
opportunities for growth that exist in the markets it serves.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments totaled $114 million at March 31, 1999 compared
to $75 million at December 31, 1998. The increase in cash and short-term
investments is primarily attributable to cash provided by operating activities
and proceeds from the exercise of stock options. Cash proceeds were partially
offset by the repayment of approximately $100 million of outstanding debt
obligations and capital expenditures of approximately $27 million to expand the
capacity of certain manufacturing facilities and to purchase machinery and
equipment. Working capital improved from current liabilities exceeding current
assets by $353 million at December 31, 1998 to current liabilities exceeding
current assets by $304 million at March 31, 1999. The improvement in working
capital is primarily attributable to the increase in cash and short term
investments.
During the first quarter of 1999, the Company refinanced $1.7 billion of
commercial paper borrowings with proceeds from borrowings under its revolving
credit facilities (Facilities) due to the limited market for its commercial
paper. The weighted average interest rate on the borrowings is approximately
5.5%. The Company intends to continue to borrow under its Facilities until it is
able to issue commercial paper at reasonable rates. At March 31, 1999, the
Company had no commercial paper outstanding. The Company has the ability to
refinance a portion of its short-term debt on a long-term basis through its
Facilities and expects a minimum of $700 million will remain outstanding
through the next twelve months, and accordingly, the Company has classified this
portion of borrowings as long-term at March 31, 1999. The Facilities require the
Company to maintain a specific ratio of consolidated funded debt (as defined) to
consolidated net worth (as defined) plus consolidated funded debt. The ratio
requirement is 70% through December 31, 1999 and 60% thereafter. As of March 31,
1999, the ratio was approximately 61%. The Company currently intends to comply
with the reduction in the ratio through a securities issuance as discussed
below.
During 1999, the Company intends to refinance a portion of the outstanding
credit facilities balance by raising more permanent financing through an
issuance of convertible securities and/or additional equity securities. In
September 1998, the Company filed a Public Registration Statement with the U.S.
Securities and Exchange Commission. At March 31, 1999, the Company had no
outstanding securities issued under this registration statement.
23
Since early 1995, the Company has entered into several transactions involving
acquisitions and alliances, certain of which have involved equity investments.
As the healthcare environment continues to undergo rapid change, management
expects that it will continue to focus on strategic initiatives and/or make
additional investments in existing relationships. In connection with these
acquisitions, the Company has acquired numerous in-process research and
development projects. As the Company continues to build its research base in
future years, it is reasonable to assume that it will acquire additional
research and development platforms. Management does not expect the acquisitions
and alliances to be significant during 1999. As of March 31, 1998, the Company's
cash obligations required to complete the balance of the Company's initiatives
to integrate businesses related its mergers and acquisitions and its 1998
rationalization plan are estimated to be approximately $61 million.
Substantially all of these cash outlays will occur during 1999. In addition, the
Company has outstanding $128 million of acquisition-related cash obligations
which will be paid during the second quarter of 1999. Further, the Company
expects to make estimated tax payments in the second quarter of 1999 of
approximately $40 million and to incur capital expenditures of approximately
$100 million during the remainder of 1999.
The Company expects that its cash and cash equivalents, marketable securities,
cash flows from operating activities, proceeds from the issuance of debt and
equity securities discussed previously and borrowing capacity will be sufficient
to meet its projected operating cash needs, including integration costs, through
the end of 1999. The Company has $1.2 billion of 364-day credit facilities that
expire in September 1999. The Company may extend the 364-day revolving credit
facilities for an additional 364 days under certain conditions. An extension of
these facilities will be needed if the Company does not obtain additional
financing through an equity offering or other means. The Company intends to
issue equity and other securities, but there are no assurances that additional
financing can be or will be obtained.
YEAR 2000 READINESS
The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. The Company has undertaken a global effort to
identify and mitigate Year 2000 issues in its information systems, products,
facilities and suppliers.
The Company established a multidisciplinary Year 2000 Task Force in 1998,
comprised of management from each of the Company's principal functional areas,
including Finance, Information Technology, Regulatory Affairs, Customer Service,
Manufacturing, Distribution, Purchasing, Facilities, Legal and Communications. A
core team and a program management office has also been established for
coordinating and tracking all Year 2000 issues. This office is comprised of
Company management and staff and representatives of an experienced Year 2000
consulting firm. These efforts report directly to members of the Company's
Executive Committee.
An independent consulting firm has been working with the Company for over two
years to implement a global information system that is designed to be Year 2000
compliant. In addition to the Company's information systems project, other
internal systems are being addressed largely through the replacement and testing
of much of the Company's older systems. The efforts are
24
both company-wide and site specific, spanning the range from the Information
Technology department systems to manufacturing operations (including production
facilities, support equipment, and process control) and infrastructure
technologies.
The vast majority of the Company's products are not date-sensitive and are
therefore unaffected by Year 2000 issues. Steps have been taken to correct
non-compliance which affects the functional performance of the few remaining
products.
Through March 31, 1999, the Company has expended in excess of $100 million to
implement and operate a Year 2000 compliant global information system, and other
costs relating to Year 2000 compliance. The Company does not anticipate that
additional compliance costs will have a material impact on its business
operations or its financial condition.
The Company relies on third party providers for services such as
telecommunications, Internet service, utilities, certain product components and
other key services. Interruption of those services due to Year 2000 issues could
affect the Company's operations. The Company has initiated an evaluation of the
status of third party service providers' compliance efforts and of alternative
and contingency requirements. While approaches to reducing risks of interruption
of business operations vary by business unit, options include identification of
alternative service providers available to provide such services if a service
provider fails to become Year 2000 compliant within an acceptable time frame.
Based on the Company's evaluation to date, management believes that in most
cases redundant capacity exists at the supplier or that alternative sources of
supply are available or could be developed within a reasonable amount of time
should compliance become an issue for individual suppliers.
The Company believes that its Year 2000 program will identify and correct all
material non-compliant systems and operations before the end of 1999. Third
party service providers are being assessed and the Company expects to have
contingency plans that will avoid failures having a material effect on the
Company's business operations or financial condition in place before the end of
1999.
There can be no assurance that the Company's Year 2000 program will identify and
correct all non-compliant systems of the Company and its third party service
providers or that any such failure will not have a material effect on the
Company's business operations or financial condition.
MARKET RISK DISCLOSURES
In the normal course of business, the Company is exposed to market risk from
changes in interest rates and foreign currency exchange rates. The Company
addresses these risks through a risk management program that includes the use of
derivative financial instruments. The use of derivative financial instruments
are initiated within the guidelines of documented corporate risk management
policies. The Company does not enter into any derivative transactions for
speculative purposes.
25
The Company's floating and fixed rate debt obligations are subject to interest
rate risk. A 100 basis point increase in interest rates related to the Company's
floating rate borrowings, assuming the amount borrowed remains constant, would
result in an annual increase in the Company's then current interest expense of
approximately $17 million. The Company intends to refinance a portion of its
floating rate borrowings through a combination of issuance of convertible
securities and additional equity securities, which are subject to market risk. A
100 basis point increase in interest rates related to the Company's fixed
long-term debt would not result in a material change in its fair value.
The Company enters into foreign exchange contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with commitments,
generally one to six months. The Company does not engage in speculation. The
Company's foreign exchange contracts should not subject the Company to material
risk due to exchange rate movements because gains and losses on these contracts
should offset losses and gains on the assets and liabilities being hedged. The
Company had spot and forward foreign exchange contracts outstanding in the
notional amounts of $242 million as of March 31, 1999. Although the Company
engages in hedging transactions that may offset the effect of fluctuations in
foreign currency exchange rates on foreign currency denominated assets and
liabilities, financial exposure may nonetheless result, primarily from the
timing of transactions and the movement of exchange rates. The short-term nature
of these contracts has resulted in these instruments having insignificant fair
values at March 31, 1999.
A sensitivity analysis of changes in the fair value of foreign currency exchange
contracts outstanding at March 31, 1999 indicates that, if the U.S. dollar
uniformly weakened by 10% against all currencies, the fair value of these
contracts would decrease by approximately $14 million. While these hedging
instruments are subject to fluctuations in value, such fluctuations are
generally offset by changes in the value of the underlying exposures being
hedged. In addition, unhedged foreign currency balance sheet exposures as of
March 31, 1999 are not expected to result in a significant loss of earnings or
cash flows. As the Company has expanded its international operations, its sales
and expenses denominated in foreign currencies have expanded and that trend is
expected to continue. Therefore, most international sales and expenses have
been, and are expected to be, subject to the effect of foreign currency
fluctuations and these fluctuations may have an impact on margins. The Company's
sensitivity analysis of the effects of changes in foreign currency exchange
rates does not factor in a potential change in sales levels or local currency
selling prices.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the euro. The participating countries agreed to adopt the euro as their
common legal currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the legacy currencies) and the
euro were established as of that date. The legacy currencies are scheduled to
remain legal tender as denominations of the euro until at least January 1, 2002
(but not later than July 1, 2002). During this transition period, parties may
settle transactions using either the euro or a participating country's legacy
currency. The Company is addressing the potential impact
26
resulting from the euro conversion, including adaptation of information
technology systems, competitive implications related to pricing and foreign
currency considerations.
Management currently believes that the euro will not have a material impact
related to the adaptation of information technology systems or foreign currency
exposures. The increased price transparency resulting from the use of a single
currency in the eleven participating countries may affect the ability of the
Company to price its products differently in the various European markets. A
possible result of this is price harmonization at lower average prices for
products sold in some markets. However, uncertainty exists as to the effects the
euro will have on the marketplace.
SEC REVIEW OF FINANCIAL REPORTING
Within the past year, the Securities and Exchange Commission (SEC) has publicly
stated its desire to focus on transparent financial reporting and potential
earnings management issues, including restructuring charges, asset write-downs,
acquired in-process research and development write-offs, materiality thresholds,
revenue recognition, and general reserves. In connection with these efforts, the
SEC sent out letters to approximately 150 public companies indicating that their
1998 financial statements may be subject to review. Following its receipt of one
of these letters, the Company requested the SEC staff to evaluate the Company's
purchase price allocation of the Schneider acquisition, including the amount
allocated to purchased research and development. Shortly thereafter, the Company
informed the SEC of its intention to offer equity to refinance a portion of its
outstanding credit facilities balance with more permanent financing. The
Company's discussions with the SEC on the Schneider purchase price allocation
are continuing. The SEC has also recently requested that the Company provide
additional disclosures with respect to prior acquisitions and merger-related and
special charges and provide the SEC with additional information with respect to
direct transactions and other costs. The Company has supplemented its
disclosures and provided the information requested. There can be no assurance
that the SEC will not require the Company to further expand or modify its
disclosures relating to these or other issues or to make related changes in its
financial reporting, including the restatement of prior reported results, which
could materially impact future earnings per share of the Company.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements contained in this report
include, but are not limited to, statements with respect to and the Company's
performance may be affected by : (a) the Company's ability to obtain benefits
from the Schneider acquisition, including purchased research and development and
physician and hospital relationships; (b) the process, outlays and plan for the
integration of businesses acquired by the Company, and the successful and timely
implementation of the rationalization plan; (c) the impact and timing of
successful implementation of the Company's supply chain initiatives; (d) the
potential impacts of
27
continued consolidation among healthcare providers, trends towards managed care
and economically motivated buyers, healthcare cost containment, more stringent
regulatory requirements and more vigorous enforcement activities; (e) the
Company's belief that it is well positioned to take advantages for growth that
exist in the markets it serves; (f) 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; (g) the Company's ability to launch products on a timely basis,
including products resulting from purchased research and development; (h) risks
associated with international operations; (i) the potential effects of foreign
currency fluctuations on revenues, expenses and resulting margins and the trend
toward increasing sales and expenses denominated in foreign currencies; (j) the
ability of the Company to manage accounts receivable, manufacturing costs and
inventory levels and mix and to react effectively to the changing managed care
environment and worldwide economic conditions; (k) the ability of the
Company to meet its projected cash needs through the end of 1999; (l) the
effect of litigation and compliance activities on the Company's legal provision;
(m) costs and risks associated with implementing Year 2000 compliance and
business process reengineering; (n) timely and uninterrupted supply of the
NIR(R) coronary stent and increases in purchase price; (o) the ability of the
Company to obtain more permanent financing to re-finance a portion of its
commercial paper and amounts borrowed under the Facilities, to comply with its
debt ratio through a securities issuance and to place its commercial paper at
reasonable rates; (p) the Company's expectation that a minimum of $700 million
of short-term debt supported by the Facilities will remain outstanding through
the next twelve months; (q) the Company's ability to fund development of
purchased technology and to realize value assigned to in-process research and
development and other intangible assets; (r) the impact of stockholder class
action, patent, product liability and other litigation, the outcome of the U.S.
Department of Justice investigation, and the adequacy of the Company's product
liability insurance; (s) the potential impact resulting from the euro
conversion, including adaptation of information technology systems, competitive
implications related to pricing and foreign currency considerations; (t) the
final outcome of the Company's discussions with the SEC relating to the
Schneider purchase price allocation and the SEC's request for additional
information and the resulting impact on prior reported results as well as on
future earnings per share of the Company; and (u) the timing, size and nature
of strategic initiatives available to the Company.Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect the future results of the
Company and could cause those results to differ materially from those expressed
in the forward-looking statements contained herein. Such additional factors
include, among other things, future economic, competitive and regulatory
conditions, demographic trends, third-party intellectual property, financial
market conditions and future business decisions of Boston Scientific and its
competitors, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of Boston Scientific. Therefore, the
Company wishes to caution each reader of this report to consider carefully
these factors as well as the specific factors discussed with each
forward-looking statement in this report and as disclosed in the Company's
filings with the Securities and Exchange Commission as such factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the ability of the Company to implement its business strategy and may
cause actual results to differ materially from those contemplated by the
statements expressed herein.
28
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Note H - Commitments and Contingencies to the Company's unaudited condensed
consolidated financial statements contained elsewhere in this
Quarterly Report is incorporated herein by reference.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 - Second Amendment to Boston Scientific Corporation
401(k) Plan
(b) The following current reports on Form 8-K were filed during the
quarter ended March 31, 1999:
FORM 8-K/A2 DATE OF EVENT DESCRIPTION
----------- ------------- -----------
Item 7 September 10, Completion of acquisition of Schneider
1998 Worldwide, formerly a member of the Medical
Technology Group of Pfizer Inc.
29
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 14, 1999.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
---------------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and Senior Vice
President - Finance and Administration