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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended: September 30, 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 Identification No.)
of incorporation or organization)
One Boston Scientific Place, Natick, Massachusetts 01760-1537
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Shares Outstanding
Class as of September 30, 1999
----- ------------------------
Common Stock, $.01 Par Value 414,701,219
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
In millions, except share and per share data 1999 1998
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 72 $ 70
Short-term investments 5
Trade accounts receivable, net 436 538
Inventories 414 462
Other current assets 173 192
----------------------
Total current assets 1,095 1,267
Property, plant and equipment 976 945
Less: accumulated depreciation 344 265
---------------------
632 680
Excess of cost over net assets acquired, net 850 877
Technology - core and developed, net 579 607
Patents, trademarks and other intangibles, net 320 330
Other assets 163 132
----------------------
$3,639 $3,893
======================
See notes to unaudited condensed consolidated financial statements.
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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
September 30, December 31,
In millions, except share and per share data 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Commercial paper $1,016
Bank obligations $ 559 11
Accounts payable and accrued expenses 405 354
Acquisition-related obligations 140
Accrual for restructuring and merger-related charges 39 71
Other current liabilities 39 28
--------------------------
Total current liabilities 1,042 1,620
Long-term debt 761 1,364
Other long-term liabilities 83 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, 414,701,219
shares issued at September 30, 1999 and 394,185,781 issued at
December 31, 1998 4 4
Additional paid-in capital 1,207 507
Retained earnings 645 381
Accumulated other comprehensive income (expense):
Foreign currency translation adjustment (107) (72)
Unrealized gain on available-for-sale securities, net 4 1
--------------------------
Total stockholders' equity 1,753 821
--------------------------
$3,639 $3,893
==========================
See notes to unaudited condensed consolidated financial statements.
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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
In millions, except per share data 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Net sales $ 691 $ 576 $2,125 $1,517
Cost of products sold 283 206 748 493
--------------------- ---------------------
Gross profit 408 370 1,377 1,024
Selling, general and administrative expenses 220 191 631 524
Amortization expense 23 11 69 27
Royalties 12 7 35 21
Research and development expenses 48 49 146 143
Special charges (credits) (10) 671 (10) 662
-------------------- ---------------------
293 929 871 1,377
-------------------- ---------------------
Operating income (loss) 115 (559) 506 (353)
Other income (expense):
Interest and dividend income 1 2 3 4
Interest expense (26) (16) (96) (30)
Other, net (6) (2) (13) (1)
-------------------- ---------------------
Income (loss) before income taxes 84 (575) 400 (380)
Income taxes 29 (113) 136 (45)
--------------------- ---------------------
Net income (loss) $ 55 $ (462) $ 264 $ (335)
==================== =====================
Net income (loss) per common share - basic $0.13 $(1.18) $ 0.66 $(0.86)
==================== =====================
Net income (loss) per common share - assuming dilution $0.13 $(1.18) $ 0.64 $(0.86)
==================== =====================
See notes to unaudited condensed consolidated financial statements.
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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Nine Months Ended September 30, 1999
----------------------------------------------------------------------------------------
Common Stock Foreign Unrealized
--------------------------- Additional Currency Gain
Shares Issued Par Value Paid-In Retained Translation on Available-for-sale
Capital Earnings Adjustment Securities, Net
----------------------------------------------------------------------------------------
(In millions, except share data)
Balance at December 31, 1998 394,185,781 $4 $ 507 $381 $ (72) $1
Net income 264
Foreign currency translation adjustment (35)
Issuance of common stock 20,515,438 652
Tax benefit relating to incentive stock
option and employee stock purchase plans 48
Net change in equity investments 3
--------------------------------------------------------------------------------
Balance at September 30, 1999 414,701,219 $4 $1,207 $645 $(107) $4
================================================================================
Total
--------
Balance at December 31, 1998 $ 821
Net income 264
Foreign currency translation adjustment (35)
Issuance of common stock 652
Tax benefit relating to incentive stock
option and employee stock purchase plans 48
Net change in equity investments 3
-------
Balance at September 30, 1999 $1,753
=======
See notes to unaudited condensed consolidated financial statements.
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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
In millions 1999 1998
- --------------------------------------------------------------------------------------------------------
Cash provided by operating activities $ 562 $ 103
Investing activities:
Purchases of property, plant, and equipment, net (57) (135)
Payments related to 1998 acquisition (128) (2,060)
Other, net 7
-----------------------
Cash used in investing activities (185) (2,188)
Financing activities:
Net proceeds from borrowings on revolving credit facilities 741
Net increase (decrease) in commercial paper (1,816) 1,628
Net proceeds from notes payable and long-term debt 523
Proceeds from issuances of shares of common stock,
net of tax benefits 700 82
Other, net (1) (14)
-----------------------
Cash provided by (used for) financing activities (376) 2,219
Effect of foreign exchange rates on cash 1 3
-----------------------
Net increase in cash and cash equivalents 2 137
Cash and cash equivalents at beginning of period 70 58
-----------------------
Cash and cash equivalents at end of period $ 72 $ 195
=======================
See notes to unaudited condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 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 and nine month
periods ended September 30, 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/A2 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
The Company had comprehensive income of $69 million for the three months ended
September 30, 1999 and a comprehensive loss of $442 million for the three months
ended September 30, 1998. The Company had comprehensive income of $232 million
for the nine months ended September 30, 1999 and a comprehensive loss of $336
million for the nine months ended September 30, 1998.
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Note C - Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions, except share and per share data) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Basic:
Net income (loss) $ 55 $ (462) $ 264 $ (335)
-----------------------------------------------------
Weighted average shares outstanding (in thousands) 414,530 392,432 402,328 390,087
=====================================================
Net income (loss) per common share $ 0.13 $ (1.18) $ 0.66 $ (0.86)
=====================================================
Assuming dilution:
Net income (loss) $ 55 $ (462) $ 264 $ (335)
-----------------------------------------------------
Weighted average shares outstanding (in thousands) 414,530 392,432 402,328 390,087
Net effect of dilutive stock options (in thousands) 6,975 7,689
-----------------------------------------------------
Total (in thousands) 421,505 392,432 410,017 390,087
=====================================================
Net income (loss) per common share $ 0.13 $ (1.18) $ 0.64 $ (0.86)
=====================================================
Note D - Restructuring and Merger-Related Charges
During the third quarter, the Company identified and reversed restructuring and
merger-related charges of $10 million ($7 million, net of tax) no longer deemed
necessary. These amounts relate primarily to the restructuring charges accrued
in the fourth quarter of 1998 and reflect the reclassification of assets from
held for disposal to held for use following management's decision to resume a
development program previously planned to be eliminated. In addition estimated
severance costs for 1998 initiatives were reduced as a result of attrition.
At September 30, 1999, the Company had an accrual for restructuring and
merger-related charges of $43 million, which is comprised of $26 million of
accrued severance and related costs primarily associated with integrating
Schneider (acquired in September 1998) and streamlining manufacturing
operations, $6 million related to the cost of canceling contractual commitments
recorded in connection with the Schneider acquisition and $11 million of
accruals remaining from 1997 and prior mergers (primarily costs associated with
rationalized facilities and statutory benefits that are subject to litigation).
The activity impacting the accrual related to restructuring and merger-related
charges during the nine months ended September 30, 1999 is summarized in the
following table:
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Purchase Charges
Balance at Price Charges (Credits) to Balance at
December 31, Adjustments Utilized in Operations September 30,
(In millions) 1998 in 1999 1999 in 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
1995 AND 1996 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Facilities $11 $ (7) $ (1) $ 3
Workforce reductions 4 4
Contractual commitments 1 1
Asset write-downs 1 (1)
Direct transaction and other costs 2 2
---------------------------------------------------------------------------
$19 $ (8) $ (1) $10
===========================================================================
1997 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Contractual commitments $ 1 $ (1)
Asset write-downs 1 (1)
Direct transaction and other costs 2 $ (1) $ 1
---------------------------------------------------------------------------
$ 4 $ (2) $ (1) $ 1
===========================================================================
1998 SCHNEIDER PURCHASE PRICE ADJUSTMENTS:
Workforce reductions $27 $4 $(14) $17
Contractual commitments 16 3 (13) 6
---------------------------------------------------------------------------
$43 $7 $(27) $23
===========================================================================
1998 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Workforce reductions $13 $ (5) $ (4) $ 4
Asset write-downs 9 (1) (4) 4
Direct transaction and other costs 1 1
---------------------------------------------------------------------------
$23 $ (6) $ (8) $9
===========================================================================
TOTAL:
Facilities $11 $ (7) $ (1) $ 3
Workforce reductions 44 $4 (19) (4) 25
Contractual commitments 18 3 (14) 7
Asset write-downs 11 (3) (4) 4
Direct transaction and other costs 5 (1) 4
---------------------------------------------------------------------------
$89 $7 $(43) $(10) $43
===========================================================================
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As of September 30, 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 $37 million. The Company expects that substantially all of these
cash outlays (primarily severance) will be made during the first half of 2000.
Note E - Borrowings and Credit Arrangements
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). On June 30, 1999, the Company completed a public
offering of 14,950,000 shares at a price of $39.875 per share under a shelf
registration filed with the Securities and Exchange Commission in September
1998. The public offering reduced the amount available for the issuance of
securities under the shelf registration to $604 million. The Company used the
net proceeds from its public offering of approximately $578 million to repay
indebtedness under its Facilities.
In conjunction with the public offering, the Company's borrowing availability
under its Facilities was reduced by the amount of the net proceeds of the
offering. At September 30, 1999, the Company had approximately $1.7 billion of
borrowings available under its Facilities, of which $743 million were
outstanding with a weighted average interest rate of 5.74%. During the third
quarter of 1999, the Company extended its $600 million 364-day credit facility
to September 2000. At September 30, 1999, the Company had no commercial paper
outstanding, however, the Company resumed issuance of its commercial paper
during October 1999. The Company intends to continue to borrow under its
Facilities until it is able to issue sufficient commercial paper at reasonable
rates. 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 $193
million will remain outstanding through the next twelve months, and accordingly,
the Company has classified this portion of borrowings as long-term at September
30, 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 of less than or equal to 60%. As of September 30,
1999, the ratio was approximately 37%.
Note F - Inventories
The components of inventory consist of the following:
September 30, December 31,
(In millions) 1999 1998
- ---------------------------------------------------------------------
Finished goods $220 $249
Work-in-process 64 83
Raw materials 130 130
-----------------------------------------
$414 $462
=========================================
During the third quarter of 1999, the Company recorded a provision for excess
NIR(R) stent inventories and purchase commitments of $62 million ($41 million,
net of tax).
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 of financial position.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), which is required to be adopted for fiscal years beginning after June 15,
2000, although earlier application is permitted as of the beginning of any
fiscal quarter. This statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company is in the process of determining if earlier
application would be feasible and what effect the adoption of SFAS No. 133 will
have on the Company's results of operations, cash flows or financial position.
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Note H - Commitments and Contingencies
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a 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. On June 6, 1999, the Court granted
summary judgment in favor of ACS affirming that ACS's patents were not
infringed. SCIMED has appealed the judgment.
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 was held on November 5, 1999. The court's decision will be announced
December 22, 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. 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. A trial date has not yet been set.
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 is scheduled for July 31, 2000.
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. On June 24,
1999, in the case involving the BANDIT PTCA catheter the Court granted ACS's
motions for summary judgment asserting the validity (with respect to certain
issues) and infringement of ACS's patent; the Court denied ACS's motion for
summary judgment on the enforceability of its patent and SCIMED's motions for
summary judgment asserting the invalidity of, and SCIMED's failure to willfully
infringe, ACS's patent. A trial date on the remaining issues with respect to the
BANDIT PTCA
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catheter is set for February 2000. A trial date with respect to the EXPRESS PLUS
catheters is set for July 2000.
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 March 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 relief. SCIMED
has answered, denying the allegations of the complaint. A trial date has not yet
been set.
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, 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. A trial date has not yet been set.
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 and a hearing is scheduled for
January 31, 2000. On October 28, 1998, the Company's motion
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for a declaration of noninfringement in France was dismissed for failure to
satisfy statutory requirements; the French invalidity suits were not affected.
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 patents licensed to Ethicon in
Sweden, Italy and Spain and a declaration of invalidity in Italy and Spain. A
hearing was held on July 9, 1999 in Italy with respect to the retention of a
court-appointed expert; the court has not yet ruled on the retention of an
expert. The next hearing is set for March 21, 2000.
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 on June 23, 1999, the Dutch Court affirmed that there were no
remaining infringement claims. A decision as to the validity of one of the
patents was referred to the Dutch Patent Office for advice.
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.
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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.
Trial is expected to begin in late 2000.
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 November 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 two
patents 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 November 2000.
On June 7, 1999, the Company, SCIMED and Medinol Ltd. filed suit for patent
infringement against Johnson & Johnson, Johnson & Johnson Interventional Systems
and Cordis, alleging two U.S. patents owned by Medinol Ltd. are infringed by at
least Cordis' CROWN(TM), MINI CROWN(TM) and CORINTHIAN(TM) stents. The suit was
filed in the U.S. District Court for the District of Minnesota seeking
injunctive and monetary relief. Trial is expected to begin in January 2001.
Johnson & Johnson is seeking to transfer the case to the U.S. District Court for
the District of Delaware.
On August 13, 1998, Arterial Vascular Engineering, Inc., now named Medtronic AVE
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. Trial is expected to begin in March 2001.
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 was held on October 22, 1999 and a decision is expected on
December 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
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seeking injunctive and monetary relief. The Company and SCIMED have answered,
denying the allegations of the complaint. A trial date is scheduled for
September 25, 2000.
On March 2, 1999, 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
answered, denying the allegations of the complaint. A hearing is scheduled for
January 7, 2000.
On March 10, 1999, the Company through its subsidiary Schneider (Europe) AG
filed suit against AVE 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 German patents. The suit was
filed in the District Court of Dusseldorf, Germany seeking injunctive and
monetary relief. A hearing is scheduled for January 27, 2000.
On April 6, 1999, AVE filed suit against the Company and SCIMED alleging that
the Company's NIR(R) stent infringes one of AVE's European patents. The suit was
filed in the District Court of Dusseldorf, Germany seeking injunctive and
monetary relief. A hearing was held in Germany on September 23, 1999, and on
November 4, 1999, the court indicated its intent to dismiss the complaint.
On May 14, 1999, Medtronic, Inc. (Medtronic) filed suit against the Company and
SCIMED alleging that a variety of the Company's NIR(R) stent products infringe a
Medtronic patent. The suit was filed in the U.S. District Court for the District
of Minnesota seeking injunctive and monetary relief. The Company has answered,
denying the allegations of the complaint. A trial date is scheduled for May
2001.
On July 7, 1999, Medtronic filed suit against the Company and SCIMED, alleging
that SCIMED's RADIUS(TM) stent infringes two patents owned by Medtronic. The
suit was filed in the U.S. District Court for the District Court of Minnesota
seeking injunctive and monetary relief. The Company has answered, denying
allegations of the complaint. A trial date is scheduled for June 2001.
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.
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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. Following the
purchase of the assets of the Endotech/MinTec companies by the Company, the
Company assumed control of the litigation. A final hearing was held on May
12, 1999, and the court held no infringement of the Cook patents. The case was
dismissed in June 1999. Cook has appealed the decision and a hearing date has
not yet been set.
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 was
held on July 22, 1999 and a decision was received in September 1999 finding the
Company's products infringe the Cook patent. The Company appealed the decision
and a hearing date has not yet been set.
On March 18, 1999, Cook filed suit against the Company and SCIMED, alleging that
SCIMED's RADIUS(TM) coronary stent infringes a certain U.S. patent owned by
Cook. The suit was filed in the U.S. District Court for the Southern District of
Indiana seeking monetary damages and injunctive relief. On July 14, 1999, Cook
filed an amended complaint adding Meadox Medicals, Inc. (Meadox), a wholly owned
subsidiary of the Company, as a party to the suit, and adding a breach of
contract claim. The Company, SCIMED and Meadox have answered, denying the
allegations of the complaint.
The U.S. Federal Trade Commission (FTC) is investigating the Company's
compliance with a Consent Order dated May 5, 1995, pursuant to which the Company
licensed certain intravascular ultrasound technology to Hewlett-Packard Company
(HP). On February 1, 1999, HP 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 the
License Agreement entered into pursuant to the FTC Consent Order. A hearing was
held in July 1999 on the Company's motion to dismiss the complaint. No ruling
from the court has been received with respect to this motion. A trial date has
not yet been set.
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 alleged 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
August 1999, lead plaintiffs and lead counsel filed a purported consolidated
class action complaint adding allegations that the Company issued false and
misleading statements with respect to the launch of its NIR ON(TM) Ranger(TM)
with SOX(TM) coronary stent delivery system and the system's subsequent recall.
The Company and its officers have filed a motion to dismiss the consolidated
complaint.
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
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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.
During the third quarter of 1999, the Company accrued an additional $22 million
of litigation-related reserves to cover certain costs of defense. These expenses
related primarily to defense costs associated with stent-related litigation. As
of September 30, 1999, the potential exposure for accruable costs is estimated
to range from $51 million to $67 million. The Company's total accrual as of
September 30, 1999 for litigation-related reserves was approximately $51
million.
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.
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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 September 30, 1999
Net sales $ 421 $109 $111 $ 45 $ 686
Operating income excluding special charges 162 17 69 8 256
Three months ended September 30, 1998
Net sales $ 375 $ 87 $ 87 $ 32 $ 581
Operating income excluding special charges 123 7 36 4 170
Nine months ended September 30, 1999
Net Sales $1,316 $349 $324 $124 $2,113
Operating income excluding special charges 512 64 198 24 798
Nine months ended September 30, 1998
Net sales $ 927 $270 $244 $ 83 $1,524
Operating income excluding special charges 288 53 130 8 479
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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 Nine months ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------
(In millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Net sales:
Total net sales for reportable segments $686 $ 581 $2,113 $1,524
Foreign exchange 5 (5) 12 (7)
---------------------------------------------------
$691 $ 576 $2,125 $1,517
===================================================
Income (loss) before income taxes:
Total operating income excluding special
charges for reportable segments $ 256 $ 170 $ 798 $ 479
Corporate expenses and foreign exchange (151) (58) (302) (170)
Restructuring and merger-related credits (charges) 10 (671) 10 (662)
--- ------------------------------------------------
115 (559) 506 (353)
Other expense, net (31) (16) (106) (27)
---------------------------------------------------
$ 84 $(575) $ 400 $ (380)
===================================================
Operating income (excluding special charges) for the U.S. and Europe for the
three months ended September 30, 1999 would have been approximately $161 million
and $20 million, respectively, and $529 million and $76 million, respectively,
for the nine months ended September 30, 1999 if certain costs had been allocated
between geographic regions and corporate expenses consistent with the allocation
method used in 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the third quarter increased 20% to $691 million as compared to
$576 million in the third quarter of 1998. The third quarter results include the
operations of Schneider Worldwide (Schneider) which was acquired in the third
quarter of 1998. On a pro forma basis, assuming all Schneider revenues had been
included in the third quarter of 1998, net sales in the third quarter of 1999
increased 7%. Net sales for the nine months ended September 30, 1999 increased
40% to $2,125 million as compared to $1,517 million for the nine months ended
September 30, 1998. On a pro forma basis, assuming all Schneider revenues had
been included in the nine months ended September 30, 1998, net sales increased
20%.
During the third quarter of 1999, United States (U.S.) revenues increased
approximately 12% to $421 million, while international revenues increased
approximately 34% to $270 million compared to the same period in the prior year.
U.S. revenues as a percentage of worldwide sales decreased from 65% in the third
quarter of 1998 to 61% in the third quarter of 1999. The decrease in U.S.
revenues as a percentage of worldwide sales is due primarily to the launch of a
coronary stent in Japan during the first quarter of 1999 and the favorable
impact of foreign currency exchange rates on translation of international
revenues in the quarter as the Japanese yen strengthened versus the U.S. dollar.
Without the impact of foreign currency exchange rates on translation of
international revenues, worldwide sales for the third quarter increased
approximately 17% compared to the same period in the prior year. Worldwide
vascular and nonvascular sales increased 22% and 20%, respectively, compared to
the same period in the prior year. The increases in pro forma worldwide sales
and in vascular sales were primarily attributable to the Company's sales of
coronary stents in the U.S. and Japan. U.S. coronary stent revenues and
worldwide coronary stent revenues, primarily sales of the NIR(R) stent, were
approximately $107 million and $156 million, respectively, during the third
quarter of 1999 compared to $82 million and $109 million, respectively, during
the third quarter of 1998.
U.S. revenues increased approximately 42% to $1,316 million during the nine
months ended September 30, 1999, while international revenues increased
approximately 37% to $809 million 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 nine months ended September 30,
1999 increased approximately 38% compared to the same period in the prior year.
U.S. revenues as a percentage of worldwide sales increased from 61% during the
nine months ended September 30, 1998 to 62% during the nine months ended
September 30, 1999. Worldwide vascular and nonvascular sales increased 46% and
24%, respectively, compared to the same period in the prior year. The increases
in pro forma worldwide sales and in vascular sales were primarily attributable
to the Company's sales of coronary stents in the U.S. and Japan. U.S. coronary
stent revenues and worldwide coronary stent revenues, primarily sales of the
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NIR(R) stent, were approximately $317 million and $461 million, respectively for
the nine months ended September 30, 1999 compared to $82 million and $165
million, respectively, during the same period of the prior year. Worldwide
NIR(R) coronary stent sales as a percentage of worldwide sales were
approximately 21% and 20% for the third quarter of 1999 and the nine months
ended September 30, 1999, respectively. 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.
On August 6, 1999, the Company announced it was voluntarily recalling from
commercial distribution and use its Rotablator(R) RotaLink(TM) Advancer and
RotaLink Plus(TM) rotational atherectomy systems. The original Rotablator
Rotational Atherectomy Device (Rotablator), which is the product currently sold
in Japan, was not affected by this recall. A program to resume the manufacture
and sale of the original Rotablator was put in place and the Company began
shipping product at the end of the third quarter. The Company estimates the net
income that was foregone related to the recalled devices and related products to
be approximately $14 million during the third quarter of 1999.
Net income for the third quarter was $55 million or $0.13 per share (diluted).
Third quarter results include a provision for excess inventories and purchase
commitments of approximately $62 million ($41 million, net of tax), a provision
for increased legal costs of $22 million ($15 million, net of tax), and a
special credit of $10 million ($7 million, net of tax) relating primarily to
previously recorded valuation reserves no longer deemed necessary. The Company
reported a net loss of $462 million or $1.18 per share in the third quarter of
1998. The results for the third quarter of 1998 include a $671 million ($524
million, net of tax) charge to account for purchased research and development
acquired in the $2.1 billion cash purchase of Schneider and a provision of $31
million ($21 million, net of tax) for costs associated with the Company's
decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary
stent systems in the U.S. Net income for the nine months ended September 30,
1999 was approximately $264 million or $0.64 per share. This compares to a net
loss of $335 million or $0.86 per share reported in the nine months ended
September 30, 1998.
Gross profit as a percentage of net sales decreased from 64.2% in the three
months ended September 30, 1998 to 59.0% in the three months ended September 30,
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1999, and decreased from 67.5% in the nine months ended September 30, 1998 to
64.8% in the nine months ended September 30, 1999. The decrease in gross margin
is primarily due to a provision recorded in the third quarter of 1999 for excess
NIR(R) stent inventories and purchase commitments of $62 million ($41 million,
net of tax). The excess position was driven primarily by a shortfall in planned
third quarter NIR(R) stent revenues, a reduction in NIR(R) stent sales
forecasted for the remainder of 1999 and 2000, and strategic decisions regarding
NIR(R) stent versions to be launched. At September 30, 1999, the Company had
approximately $150 million of net NIR(R) coronary stent inventory and was
committed to purchase approximately $84 million of NIR(R) stents from Medinol.
In the third quarter of 1998, the Company provided $31 million ($21 million, net
of tax) for costs associated with the Company's decision to voluntarily recall
the NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent system in the U.S.
As a result of multiple acquisitions, the Company's supply chain and
manufacturing processes have 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 and, during 1999, the program has
been expanded to include a review of manufacturing processes. The program is
designed to lower inventory levels and the cost of manufacturing, improve
absorption and minimize inventory write-downs. The infrastructure related to the
supply chain aspect of the program is substantially in place. However gross
margin benefits will be delayed until manufacturing processes are addressed, the
program has time to develop and until historical inventories are sold. The
Company continues to assess its plant network strategy.
Success of the global supply chain and manufacturing process initiative is
critical to realizing improved gross margins and reducing the Company's
inventory to an acceptable level. The Company's ability to effectively control
the supply of NIR(R) stents from Medinol could impact gross margins in the
future. Generally, the Company has less control over inventory manufactured by
third parties as compared to inventory manufactured internally. Furthermore,
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) stents fluctuate, the
Company's cost to purchase the stents will change because cost is based on a
constant percentage of average selling prices. Therefore, if higher costing
NIR(R) stents are being sold as average selling prices are declining, gross
margins could be negatively impacted.
The coronary stent market is dynamic and highly competitive with significant
market share volatility. In addition, technology in the market is constantly
changing. This environment continues to increase the Company's risk profile in
its investment in coronary stent inventory.
Selling, general and administrative expenses as a percentage of net sales
decreased from 33% of net sales in the third quarter of 1998 to 32% of net sales
in the third quarter of 1999, and increased approximately $29 million from the
same period of the prior year to $220 million. Selling, general and
administrative expenses as a percentage of net sales decreased from 35% in the
nine months ended September 30, 1998 to 30% in the nine months ended September
30, 1999 and increased approximately $107 million from the same period of the
prior year to $631
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million. The decrease as a percent of net sales for the nine month period 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. and increased costs to expand the
Company's direct sales presence in certain geographic regions. Additionally,
during the third quarter of 1999, the Company recorded a provision for increased
legal costs of $22 million ($15 million, net of tax) to cover certain costs of
defense. These expenses relate primarily to defense costs associated with
stent-related litigation. 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 affected 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 in the U.S. The
Company is cooperating fully in the investigation.
Amortization expense increased from $11 million in the third quarter of 1998 to
$23 million in the third quarter of 1999 and increased as a percentage of sales
from 1.9% to 3.3%. Amortization expense increased from $27 million in the nine
months ended September 30, 1998 to $69 million in the nine months ended
September 30, 1999 and increased as a percentage of sales from 1.8%
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24
to 3.2%. The increase is primarily a result of the amortization of intangibles
related to the purchase of Schneider.
Royalty expenses increased approximately 71% from $7 million in the third
quarter of 1998 to $12 million in the third quarter of 1999 and increased
approximately 67% from $21 million in the nine months ended September 30, 1998
to $35 million in the nine months ended September 30, 1999. The increase in
royalties is primarily due to royalty obligations assumed in connection with the
Schneider acquisition. Additionally, the Company continues to enter into
strategic technological alliances, some of which include royalty commitments.
Research and development expenses decreased as a percentage of net sales from 9%
in the third quarter of 1998 and the nine months ended September 30, 1998 to 7%
in the third quarter of 1999 and the nine months ended September 30, 1999.
Research and development expenses were $49 million in the third quarter of 1998
and $48 million in the third quarter of 1999 and increased from $143 million for
the nine months ended September 30, 1998 to $146 million for the nine months
ended September 30, 1999. The decrease as a percentage of sales is primarily
attributable to the launch of coronary stents in the U.S. and Japan and the
realization of synergies in connection with the Schneider acquisition. The
increase in research and development dollars reflects 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 Company's research and development
projects acquired in connection with its prior business combinations are
generally progressing in line with the estimates set forth in the Company's 1998
Amended Annual Report on Form 10-K/A2. Certain products from the Schneider
coronary stent projects have been introduced to the market in the last year. As
part of a project consolidation program, the Schneider and Endotech/Mintec
abdominal aortic aneurysm projects have been integrated. The Company expects to
continue to pursue these research and development efforts and believes it has a
reasonable chance of completing the projects. However, research and development
projects are subject to risks and uncertainties and there can be no assurance of
project completion or that the resulting products will achieve commercial
viability. The trend in countries around the world toward more stringent
regulatory requirements for product clearance and more vigorous enforcement
activities has generally caused or may cause medical device manufacturers to
experience more uncertainty, greater risk and higher expenses.
During the third quarter, the Company identified and reversed restructuring and
merger-related charges of $10 million ($7 million, net of tax) no longer deemed
necessary. These amounts relate primarily to the restructuring charges accrued
in the fourth quarter of 1998 and reflect the reclassification of assets from
held for disposal to held for use following management's decision to resume a
development program previously planned to be eliminated. In addition, estimated
severance costs for 1998 initiatives were reduced as a result of attrition.
During the third quarter of 1998, the Company recorded a $671 million ($524
million, net of tax) charge to account for purchased research and development
acquired in the $2.1 billion cash purchase of Schneider. Additionally, in the
second quarter of
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1998, the Company realigned its operating units and decided to operate Target
Therapeutics, Inc. (Target) independently instead of as a part of its vascular
division as was planned at the date of the Target acquisition. Management
believed that an independent Target would allow the business unit to develop its
technologies and markets more effectively than it would as part of the vascular
division. As a result of this decision, in the second quarter of 1998, the
Company reversed $20 million ($13 million, net of tax) of 1997 Target
merger-related charges primarily related to revised estimates for costs of
workforce reductions and costs of canceling contractual commitments. In
addition, in the second quarter of 1998, the Company recorded purchased research
and development of approximately $11 million in connection with a strategic
acquisition.
Interest expense increased from $16 million in the third quarter of 1998 to $26
million in the third quarter of 1999, and from $30 million in the nine months
ended September 30, 1998 to $96 million in the nine months ended September 30,
1999. The overall increase in interest expense is primarily attributable to a
significantly higher outstanding debt balance borrowed in conjunction with the
Schneider acquisition.
The Company's effective tax rate, excluding the impact of special charges
identified on the Statement of Operations, increased from approximately 33% in
the nine months ended September 30, 1998 to 34% in the nine months ended
September 30, 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 that
prefer to limit the number of suppliers from whom they purchase medical
products.
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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 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
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). On June 30, 1999, the Company completed a public
offering of 14,950,000 shares at a price of $39.875 per share under a shelf
registration filed with the Securities and Exchange Commission in September
1998. The public offering reduced the amount available for the issuance of
securities under the shelf registration to $604 million. The Company used the
net proceeds from its public offering of approximately $578 million to repay
indebtedness under its Facilities.
In conjunction with the public offering, the Company's borrowing availability
under its Facilities was reduced by the amount of the net proceeds of the
offering. At September 30, 1999, the Company had approximately $1.7 billion of
borrowings available under its Facilities, of which $743 million were
outstanding with a weighted average interest rate of 5.74%. During the third
quarter of 1999, the Company extended its $600 million 364-day credit facility
to September 2000. At September 30, 1999, the Company had no commercial paper
outstanding, however, the Company resumed issuance of its commercial paper
during October 1999. The Company intends to continue to borrow under its
Facilities until it is able to issue sufficient commercial paper at reasonable
rates. 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 $193
million will remain outstanding through the next twelve months, and accordingly,
the Company has classified this portion of borrowings as long-term at September
30, 1999. The Facilities require the Company to maintain a specific ratio of
consolidated funded debt (as defined) to consolidated net worth (as
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defined) plus consolidated funded debt of less than or equal to 60%. As of
September 30, 1999, the ratio was approximately 37%.
Cash and short-term investments totaled $72 million at September 30, 1999
compared to $75 million at December 31, 1998. Cash proceeds during the nine
months ended September 30, 1999 were generated primarily from the Company's
public offering, operating activities and the exercise of stock options. Cash
proceeds during the period were offset by the repayment of approximately $1.1
billion of outstanding debt obligations, payment of $128 million of
acquisition-related obligations and capital expenditures of approximately $57
million. Working capital increased to $53 million at September 30, 1999 from
current liabilities exceeding current assets by $353 million at December 31,
1998. The improvement in working capital is primarily attributable to the
repayment of short-term borrowings financed by net proceeds of the Company's
public offering in June 1999 and cash provided by operating activities.
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 acquisitions and
alliances to be significant during 1999. As of September 30, 1999, the Company's
cash obligations required to complete the balance of its rationalization
initiatives to integrate businesses related to its mergers and acquisitions and
its 1998 rationalization plan are estimated to be approximately $37 million.
Substantially all of these cash outlays will be completed by the first half of
2000.
Additionally, the Company is authorized to purchase on the open market up to
approximately 40 million shares of the Company's common stock. Stock repurchased
under the Company's systematic plan will be used to satisfy its obligations
pursuant to employee benefit and incentive plans. As of September 30, 1999, a
total of 20 million shares of the Company's common stock were repurchased under
the plan. Between November 1, 1999 and November 12, 1999, the Company
repurchased 2.5 million shares at an aggregate cost of approximately $52
million. The Company may also repurchase within its authorization shares outside
of the Company's systematic plan. These additional shares will also be used to
satisfy the Company's obligations pursuant to employee benefit and incentive
plans.
The Company expects that its cash and cash equivalents, marketable securities,
cash flows from operating activities and borrowing capacity will be sufficient
to meet its projected operating cash needs, including integration costs, through
December 31, 1999.
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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 have 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 three
years to implement a global information system that was designed and has been
tested 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
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. For the remaining products, functional
performance is unaffected by the time and date displayed.
Through September 30, 1999, the Company has expended in excess of $110 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 material and service providers. A disruption
in the supply from any of these providers due to Year 2000 issues could
potentially affect the Company's operations. To minimize this risk, the Company
is completing its evaluation of all critical third party providers' compliance
efforts, including their contingency plans should a Year 2000 problem arise, as
well as alternative sources of supply. The Company has surveyed its largest
customers concerning their anticipated purchase activity with respect to
potential inventory needs
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as a result of Year 2000 concerns. The Company has also evaluated its current
finished goods and emergency stocking levels worldwide. At this time, the
Company believes that it will have an adequate supply to meet customer
expectations but intends to monitor customer purchase activity during the fourth
quarter to identify and respond to any unusual ordering patterns.
The Company believes that its Year 2000 program will identify and correct all
material non-compliant systems and operations before the end of 1999. 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.
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 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 its 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.
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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 timing of the Company's
supply chain initiatives and the Company's ability to achieve gross margin
benefits and inventory reductions; (d) the potential impacts of 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 advantage of opportunities
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, worldwide economic
conditions and market share volatility in the coronary stent market; (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) unforeseen delays, stoppages or
interruptions in the supply and/or mix of the NIR(R) stent, difficulties in
managing inventory relating to new product introductions, and the Company's cost
to purchase the NIR(R) stent; (o) the development of competing or
technologically advanced products by our competitors; (p) the Company's ability
to resume commercial volume manufacture and sale of the Rotablator(R)
Rotalink(TM) rotational atherectomy systems; (q) the Company's program to
repurchase shares of its Company stock; (r) the Company's expectation as of
September 30, 1999 that a minimum of $193 million of short-term debt supported
by its revolving credit facilities will remain outstanding through the next
twelve months; (s) the Company's ability to fund development of purchased
technology at currently estimated costs and to realize value assigned to
in-process research and development and other intangible assets; (t) the impact
of stockholder class action,
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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; (u) the potential impact resulting from the euro
conversion, including adaptation of information technology systems, competitive
implications related to pricing and foreign currency considerations; and (v) 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's assessment of its sensitivity
to market risk since its presentation set forth in its Amended Annual Report on
Form 10-K/A2 for the year ended December 31, 1998.
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PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Note H Commitments and Contingencies to the Company's unaudited condensed
consolidated financial statements contained elsewhere in this Quarterly
Report is incorporated herein by reference.
ITEM 5: OTHER INFORMATION
On October 28, 1999, the Company announced that John E. Pepper and
Warren B. Rudman were elected to serve as members of its Board of
Directors. The Company also announced that Dale A. Spencer retired his
directorship after a four and one half year term. Mr. Pepper, Chairman,
Executive Committee of the Board of Directors of Procter & Gamble, was
elected to serve as a Class III director to fill the vacancy created by
Mr. Spencer's retirement. Mr. Pepper's term will expire at the
Company's 2001 Annual Meeting of Stockholders. Mr. Rudman, a partner in
the law firm of Paul, Weiss, Rifkind, Wharton & Garrison and former
U.S. Senator from New Hampshire, was elected to serve as a Class I
director with a term expiring at the Company's 2002 Annual Meeting of
Stockholders.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 - Form of Third Amendment to Boston Scientific
Corporation 401(k) Plan
Exhibit 10.2. - Form of Amended and Restated Credit
Agreement among Boston Scientific
Corporation, The Several Lenders and The
Chase Manhattan Bank dated as of August 19,
1999
(b) The following reports were filed during the quarter ended September
30, 1999:
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 15, 1999.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
----------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and
Senior Vice President -
Finance and Administration