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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: June 30, 2001
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
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(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
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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 June 30, 2001
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Common Stock, $.01 Par Value 402,405,387
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Page 1 of 35
Exhibit Index on Page 34
Part I
Financial Information
Item 1. Financial Statements
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
In millions, except share and per share data 2001 2000
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 55 $ 54
Short-term investments 28 6
Trade accounts receivable, net 377 361
Inventories 319 354
Other current assets 219 217
--------------------------
Total current assets 998 992
Property, plant and equipment 1,004 942
Less: accumulated depreciation 420 375
--------------------------
584 567
Excess of cost over net assets acquired, net 825 821
Technology - core and developed, net 684 507
Patents, trademarks and other intangibles, net 374 343
Other assets 125 197
--------------------------
$ 3,590 $ 3,427
==========================
See notes to unaudited condensed consolidated financial statements.
Page 2 of 35
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
June 30, December 31,
In millions, except share and per share data 2001 2000
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Commercial paper $ 56
Bank obligations $ 556 204
Accounts payable and accrued expenses 469 419
Other current liabilities 104 140
--------------------------
Total current liabilities 1,129 819
Long-term debt 568 574
Other long-term liabilities 96 99
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, 414,922,050 shares
issued at June 30, 2001 and December 31, 2000 4 4
Additional paid-in capital 1,217 1,210
Treasury stock, at cost - 12,516,663 shares
at June 30, 2001 and 15,074,381 shares at
December 31, 2000 (231) (282)
Deferred compensation (17) (15)
Retained earnings 920 1,116
Accumulated other comprehensive loss (96) (98)
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Total stockholders' equity 1,797 1,935
--------------------------
$ 3,590 $ 3,427
==========================
See notes to unaudited condensed consolidated financial statements.
Page 3 of 35
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
In millions, except per share data 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------
Net sales $ 672 $ 695 $ 1,326 $ 1,374
Cost of products sold 268 217 490 430
----------------------- ---------------------
Gross profit 404 478 836 944
Selling, general and administrative expenses 230 214 455 428
Amortization expense 52 23 75 46
Royalties 9 10 18 21
Research and development expenses 71 49 127 98
Purchased research and development 188 267
Restructuring charges 4 4
----------------------- ---------------------
554 296 946 593
----------------------- ---------------------
Operating income (loss) (150) 182 (110) 351
Other income (expense):
Interest expense (16) (19) (30) (40)
Other, net 7 1 15
----------------------- ---------------------
Income (loss) before income taxes (166) 170 (139) 326
Income taxes 6 48 38 98
----------------------- ---------------------
Net income (loss) $ (172) $ 122 $ (177) $ 228
======================= =====================
Net income (loss) per common share - basic $ (0.43) $ 0.30 $ (0.44) $ 0.56
======================= =====================
Net income (loss) per common share - assuming
dilution $ (0.43) $ 0.30 $ (0.44) $ 0.55
======================= =====================
See notes to unaudited condensed consolidated financial statements.
Page 4 of 35
Boston Scientific Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
In millions, except share data Six Months Ended June 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
----------------------- Additional Accumulated Other
Shares Issued Par Paid-In Treasury Deferred Retained Comprehensive
(In thousands) Value Capital Stock Compensation Earnings Income (Loss) Total
-------------------------------------------------------------------------------------------------
Balance at December 31, 2000 414,922 $4 $1,210 $(282) $(15) $1,116 $(98) $1,935
Net loss (177) (177)
Foreign currency translation
adjustment (13) (13)
Issuance of common stock 5 53 (8) (18) 32
Cancellation of restricted stock (2) 1 (1) (2)
Tax benefit relating to incentive
stock option and employee
stock purchase plans 2 2
Amortization of deferred
compensation 5 5
Unrealized gains on derivative
financial instruments, net 11 11
Unrealized gains on equity
investments, net 4 4
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Balance at June 30, 2001 414,922 $4 $1,217 $(231) $(17) $920 $(96) $1,797
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See notes to unaudited condensed consolidated financial statements.
Page 5 of 35
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30
In millions 2001 2000
- --------------------------------------------------------------------------------
Cash provided by operating activities $ 214 $ 384
Investing activities:
Purchases of property, plant and equipment, net (67) (33)
Acquisitions of businesses, net of cash acquired (438)
Payments for acquisitions of and/or investments
in certain technologies, net (30) (41)
Sales of available for sale securities 8 15
-----------------------
Cash used for investing activities (527) (59)
Financing activities:
Net decrease in commercial paper (56) (28)
Net proceeds from (payments on) borrowings
on revolving credit facilities 355 (244)
Proceeds from issuances of shares of common stock 18 17
Acquisitions of treasury stock (99)
Other, net (2) 12
-----------------------
Cash provided by (used for) financing activities 315 (342)
Effect of foreign exchange rates on cash (1) (3)
-----------------------
Net increase (decrease) in cash and cash equivalents 1 (20)
Cash and cash equivalents at beginning of period 54 64
-----------------------
Cash and cash equivalents at end of period $ 55 $ 44
=======================
See notes to unaudited condensed consolidated financial statements.
Page 6 of 35
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2001
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Boston
Scientific Corporation (Boston Scientific or the Company) 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 six months ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto incorporated by
reference in Boston Scientific's Annual Report on Form 10-K for the year ended
December 31, 2000.
Certain prior years' amounts have been reclassified to conform to the current
year presentation.
Note B - Comprehensive Income
For the three months ended June 30, 2001 and 2000, the Company reported a
comprehensive loss of $179 million and comprehensive income of $120 million,
respectively. For the six months ended June 30, 2001 and 2000, the Company
reported a comprehensive loss of $175 million and comprehensive income of $222
million, respectively.
Note C - Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
Three Months Six Months
Ended June 30, Ended June 30,
(In millions, except share and per share data) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------
Basic:
Net income (loss) $(172) $122 $(177) $228
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Weighted average shares outstanding (in thousands) 400,438 406,573 399,812 407,376
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Net income (loss) per common share $(0.43) $0.30 $(0.44) $0.56
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Page 7 of 35
Assuming dilution:
Net income (loss) $(172) $122 $(177) $228
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Weighted average shares outstanding (in thousands) 400,438 406,573 399,812 407,376
Net effect of dilutive stock-based compensation
(in thousands) 3,909 3,544
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Total (in thousands) 400,438 410,482 399,812 410,920
----------------------------------------------
Net income (loss) per common share $(0.43) $0.30 $(0.44) $0.55
==============================================
During the second quarter and the first half of 2001, approximately 4 million
potential common shares were not included in the computation of earnings per
share, assuming dilution, as they would have been anti-dilutive.
Note D - Business Combinations
On April 2, 2001, the Company completed its acquisition of Interventional
Technologies, Inc (IVT) for $345 million in cash, excluding future contingent
payments. IVT develops, manufactures and markets minimally invasive devices for
use in interventional cardiology, including the Cutting Balloon(TM) catheter and
the Infiltrator(R) transluminal drug delivery catheter.
During the first quarter of 2001, the Company completed its acquisitions of
Embolic Protection, Inc. (EPI), Catheter Innovations, Inc. (CI), and Quanam
Medical Corporation (Quanam). The cost for these three acquisitions, excluding
future contingent payments, amounted to approximately $104 million, consisting
of approximately $90 million in cash and the issuance of 969,459 Company shares.
The Company's acquisitions were accounted for using the purchase method of
accounting. The condensed consolidated financial statements include the
operating results for each acquired entity from their respective date of
acquisition. Pro forma information is not presented, as the acquired companies'
results of operations prior to their date of acquisition are not material to the
Company.
The aggregate purchase price for each acquisition has been allocated to the
assets acquired and liabilities assumed based on their fair values at date of
acquisition. The estimated excess of purchase price over the fair value of the
net tangible assets acquired was allocated to identifiable intangible assets, as
valued by an independent appraiser using information and assumptions provided by
management. Based upon these valuations, the Company recorded charges of $267
million to account for purchased research and development related to businesses
acquired during the first half of 2001. The valuation of purchased research and
development, for which management is primarily responsible, represents the
estimated fair value at the date of acquisition related to in-process projects.
As of the date of acquisition, the in-process projects had not yet reached
technological feasibility and had no alternative future uses. The primary basis
Page 8 of 35
for determining technological feasibility of these projects is obtaining Food
and Drug Administration (FDA) approval. Accordingly, the value attributable to
these projects, which have not yet obtained FDA approval, was immediately
expensed at acquisition. If the projects are not successful or completed in a
timely manner, the Company may not realize the financial benefits expected for
these projects. Other intangible assets recorded in connection with these
acquisitions are being amortized on a straight-line basis ranging from 9 to 25
years.
The income approach was used to establish the fair values of the purchased
research and development. This approach established the fair value of an asset
by estimating the after-tax cash flows attributable to the in-process project
over its useful life and then discounting these after-tax cash flows back to a
present value. Revenue estimates were based on estimates of relevant market
sizes, expected market growth rates, expected trends in technology and expected
product introductions by competitors. In arriving at the value of the in-process
research and development projects, the Company considered, among other factors,
the in-process project's stage of completion, the complexity of the work
completed as of the acquisition date, the costs already incurred, the projected
costs to complete, the contribution of core technologies and other acquired
assets, the expected introduction date, and the estimated useful life of the
technology. The discount rate used to arrive at a present value as of the date
of acquisition was based on the time value of money and medical technology
investment risk factors. For the purchased research and development programs,
risk-adjusted discount rates ranging from 16% to 28% were utilized to discount
the projected cash flows. The Company believes that the estimated purchased
research and development amounts so determined represent the fair value at the
date of acquisition and do not exceed the amount a third party would pay for the
projects.
The most significant projects, relative to the purchased research and
development charge recorded in connection with the IVT acquisition, are the next
generation Cutting Balloon and the next generation Infiltrator transluminal drug
delivery catheter which represent over 67% of the in-process value. The Cutting
Balloon is a novel balloon angioplasty device with mounted scapels that relieves
stress in the artery, reducing the force necessary to expand the vessel. This
contributes to less inadvertent arterial trauma and injury as compared to
standard balloon angioplasty. The Infiltrator transluminal drug delivery
catheter is designed to directly deliver therapeutic agents into the wall of the
artery with high levels of efficiency. As of the date of acquisition, the
projects were expected to be completed and the products to be commercially
available on a worldwide basis within one to four years, with an estimated cost
to complete of approximately $16 million to $20 million.
The most significant projects, relative to the purchased research and
development charge recorded in connection with the other acquisitions, are
embolic protection devices acquired in connection with the EPI transaction which
represent over 78% of the in-process value. The embolic protection devices are
filters that are mounted on a guidewire and are used to capture embolic material
that is dislodged during cardiovascular interventions. As of the date of
acquisition, the projects were expected to be completed and the products to be
commercially available on a worldwide basis within one to three years, with an
estimated cost to complete of approximately $20 million to $30 million.
The Company is subject to contingent payments over the next four years based on
the acquired companies reaching certain performance and other milestones. These
payments, some of which may be made in the Company's stock, would be allocated
to specific intangible asset categories with the remainder assigned to excess of
cost over net assets acquired on the basis that the consideration had been paid
as of the date of acquisition.
Page 9 of 35
Note E - Plant Optimization Initiative
At June 30, 2001, the Company had approximately $61 million of accrued severance
and related costs associated with the Company's 2000 plant optimization
initiative. The intent of the plant optimization initiative is to better
allocate the Company's resources by creating a more effective network of
manufacturing and research and development facilities. It will consolidate
manufacturing operations along product lines and shift significant amounts of
production to Company facilities in Miami and Ireland and to contract
manufacturing. The Company's plan includes the discontinuation of manufacturing
activities at three facilities in the U.S., and includes the planned
displacement of approximately 2,000 manufacturing, manufacturing support and
management employees. The Company expects that the plan will be substantially
completed over the next six months. During the second quarter of 2001, the
Company recorded a pre-tax charge of $4 million primarily as a result of changes
in estimates of severance costs associated with the plant optimization
initiative. As of June 30, 2001, approximately $1 million had been charged
against the restructuring accrual for the approximately 90 employees terminated
pursuant to the plan.
Note F - Inventories
The components of inventory consist of the following:
June 30, December 31,
(In millions) 2001 2000
- ------------------------------------------------------
Finished goods $158 $172
Work-in-process 68 59
Raw materials 93 123
------------------------------
$319 $354
==============================
At June 30, 2001, the Company had approximately $64 million of net NIR(R)
coronary stent inventory, which is supplied by Medinol Ltd. (Medinol), and was
committed to purchase approximately $22 million of NIR(R) stents from Medinol.
Unavailability, delays, stoppages or interruptions in the supply and/or mix of
NIR(R) stent inventory could adversely affect the operating results and/or
revenues of the Company. During the second quarter of 2001, the Company recorded
a provision of $49 million ($34 million, net of tax) for excess NIR(R) stent
inventories. The excess provision was driven primarily by declining demand for
the current NIR(R) coronary stent technology.
Note G - Derivative Instruments and Hedging Activities
The Company hedges its net recognized foreign currency transactional exposures
with forward foreign exchange contracts to reduce the risk that the Company's
earnings and cash flows will be adversely affected by changes in foreign
currency exchange rates. These foreign exchange contracts are not designated as
cash flow, fair value or net investment hedges under Statement 133. These
derivative instruments do not subject
Page 10 of 35
the Company's earnings or cash flows to material risk due to exchange rate
movements because gains and losses on these derivatives offset losses and gains
on the assets and liabilities being hedged. These forward foreign exchange
contracts are entered into for periods consistent with commitments, generally
one to six months.
In addition, the Company hedges a portion of its forecasted inter-company and
third-party transactions with foreign exchange forward and option contracts.
These contracts are entered into to reduce the risk that the Company's earnings
and cash flows resulting from certain forecasted transactions will be adversely
affected by changes in foreign currency exchange rates. However, the Company may
be impacted by changes in foreign currency exchange rates related to the
unhedged portion. The success of the hedging program depends, in part, on
forecasts of transaction activity in various currencies (currently the Japanese
yen and the euro). The Company may experience unanticipated foreign currency
exchange gains or losses to the extent that there are timing differences between
forecasted and actual activity during periods of currency volatility. However,
since the critical terms of forward contracts designated as cash flow hedging
instruments are the same as the underlying forecasted transaction, changes in
the fair value of forward contracts should be highly effective in offsetting the
present value of changes in the expected cash flows from the forecasted
transaction. The ineffective portion of any changes in the fair value of option
contracts designated as cash flow hedging instruments is recognized immediately
in earnings. The Company did not recognize material gains or losses resulting
from either hedge ineffectiveness or changes in forecast probability during the
six months ended June 30, 2001.
The effective portion of any changes in the fair value of the derivative
instruments, designated as cash flow hedges, is recorded in accumulated other
comprehensive income/(loss) (AOCI), net of tax, until the third-party
transaction associated with the hedged forecasted transaction occurs. Once the
third-party transaction associated with the hedged forecasted transaction
occurs, the effective portion of any related gain or loss on the cash flow hedge
is reclassified from AOCI to earnings. In the event the hedged forecasted
intercompany or third-party transaction does not occur, or it becomes probable
that it will not occur, the effective portion of any gain or loss on the related
cash flow hedge would be reclassified from AOCI to earnings at that time.
The Company recognized a net gain of approximately $14 million and $16 million
in earnings from derivative instruments designated as cash flow hedges of
forecasted transactions during the three and six months ended June 30, 2001,
respectively. All of the derivative instruments, designated as cash flow hedges,
outstanding at June 30, 2000, mature within the subsequent 24-month period. As
of June 30, 2001, approximately $38 million of unrealized net gains have been
recorded in AOCI, net of tax, to recognize the effective portion of any fair
value of derivative instruments that are, or previously were, designated as cash
flow hedges. Based upon current exchange rates, a gain of approximately $33
million, net of tax, may be reclassified to earnings within the next twelve
months to mitigate foreign exchange risk.
Note H - New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations", and Statement No. 142, "Goodwill and Other Intangible
Assets", which are effective July 1, 2001 and January 1, 2002, respectively for
the Company. Statement 141 requires that the purchase method of accounting be
used for all business combinations subsequent to June 30, 2001 and specifies
criteria for
Page 11 of 35
recognizing intangible assets acquired in a business combination. Statement 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized upon adoption of this standard, but instead be tested for
impairment at least annually. In addition, goodwill and intangible assets with
indefinite useful lives recorded as a result of business combinations completed
during the six-month period ending December 31, 2001 will not be amortized.
Intangible assets with definite useful lives will continue to be amortized over
their respective estimated useful lives. The Company is in the process of
determining the effect of adoption of these statements on its consolidated
financial statements and related disclosures.
Note I - Commitments and Contingencies
On May 16, 2000, the Company entered into an agreement with Guidant Corporation
(Guidant) to settle all outstanding litigation between the two companies and
their affiliates. The Company and Guidant had pending a number of lawsuits in
the U.S. and Europe in which each had accused the other of patent infringement.
The litigation involved coronary stent delivery systems and dilatation
catheters. As part of the settlement, the companies agreed to license certain
patents to each other. In addition, the companies agreed to specified financial
terms depending upon the ultimate resolution of Guidant's August 12, 1998
lawsuit against the Company filed in Indiana related to the Company's NIR(R)
stent and of the Company's May 31, 1994 lawsuit against Guidant in California
related to Guidant's RX ELIPSE(TM) PTCA catheter and RX MULTILINK(TM) stent
delivery system. The U.S. Court of Appeals for the Federal Circuit has now ruled
on both cases; the financial impact of the Court's decisions are not material to
the Company.
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(TM) balloon material used in certain SCIMED catheter products, including
SCIMED's BANDIT(TM) and EXPRESS PLUS(TM) 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
Page 12 of 35
ruled on June 26, 1998 that neither of the patents is infringed by the NIR(R)
stent, and that both patents are invalid. Ethicon appealed, and on March 20,
2000, the appellate court upheld the trial outcome. 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.
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. In
Italy, following a July 9, 1999 hearing, a technical expert was appointed by the
court. 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 the second patent; 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 the second patent, changed the action
from a cross-border case to a Dutch national action, and indicated its intent
not to pursue its action on the first patent. On June 23, 1999, the Dutch Court
affirmed that there were no remaining infringement claims with respect to either
patent. In late 1999, Johnson & Johnson appealed this decision. A hearing on the
appeal has not yet been scheduled.
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 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. A
trial is expected to begin in late 2003.
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. 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 suits were
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. A trial on both actions was held in late November through early
December 2000. A jury found that the NIR(R) stent does not infringe three Cordis
patents, but does infringe one claim of one Cordis patent and awarded damages of
approximately $324 million to Cordis. A post-trial hearing was held July 26,
2001. Judgement has not yet been entered by the Court.
Page 13 of 35
On June 7, 1999, the Company, SCIMED and Medinol filed suit for patent
infringement against Johnson & Johnson, Johnson & Johnson Interventional Systems
and Cordis, alleging two U.S. patents owned by Medinol and exclusively licensed
to the Company 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. The case has been
transferred to the U.S. District Court for the District of Delaware. A trial is
scheduled to begin August 23, 2001.
On March 24, 2000, the Company (through its subsidiaries) and Medinol filed a
cross-border suit against Johnson & Johnson, Cordis and certain of their foreign
subsidiaries in The Netherlands alleging Cordis' BX Velocity(TM) stent delivery
system infringes one of Medinol's European patents. In this action, the Company
and Medinol requested monetary and injunctive relief covering The Netherlands,
Austria, Belgium, Switzerland, Germany, Denmark, Spain, France, Greece, Ireland,
Italy, Liechtenstein, Luxembourg, Monaco, Portugal and Sweden. A hearing was
held January 12, 2001. On March 19, 2001, the Company's request for preliminary
injunction was denied by the Court. On May 11, 2001, the Company appealed this
decision. A hearing on the appeal has not yet been scheduled.
On March 30, 2000, the Company (through its subsidiary) filed suit for patent
infringement against two subsidiaries of Cordis alleging that Cordis' BX
Velocity stent delivery system infringes a published utility model owned by
Medinol and exclusively licensed to the Company. The complaint was filed in the
District Court of Dusseldorf, Germany seeking monetary and injunctive relief. A
hearing was held on March 15, 2001 and on June 6, 2001, the Court issued a
written decision that Cordis' BX Velocity stent delivery system infringes the
Medinol published utility model.
On April 14, 2000, the Company (through its subsidiaries) and Medinol filed suit
for patent infringement against Johnson & Johnson, Cordis, and a subsidiary of
Cordis alleging that Cordis' BX Velocity stent delivery system infringes a
patent owned by Medinol and exclusively licensed to the Company. The complaint
was filed in the U.S. District Court for the District of Delaware seeking
monetary and injunctive relief. Trial is expected to begin August 23, 2001.
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. On May 25, 2000, AVE amended the complaint to
include a third patent. The Company and SCIMED have answered, denying the
allegations of the complaint. The parties have filed a stipulation requesting
the Court stay the case until the third quarter of 2002.
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 on the merits was held on October 22, 1999. The Court
delayed its decision pending advice from the Dutch Patent Office, which has been
received. On June 12, 2001, the Company and AVE agreed to settle the litigation.
Pursuant to the terms of the agreement, both parties have agreed to license
certain patents to each other.
Page 14 of 35
On December 18, 1998, AVE filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's MAXXUM(TM), VIVA!(TM), ADANTE(TM)
and NIR(R) PRIMO(R) 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 suit has been amended to add infringement allegations
relating to two other AVE patents. On June 12, 2001, the Company and AVE agreed
to settle the litigation. Pursuant to the terms of the agreement, both parties
have agreed to license certain patents to each other.
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 was held on January 27, 2000. The Court has delayed
its decision pending expert advice and on May 15, 2000, the Court appointed a
technical expert.
On April 6, 1999, AVE filed suit against SCIMED and another subsidiary of the
Company 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 dismissed the complaint. On December
21, 1999, AVE appealed the dismissal. The appeal is stayed pending the outcome
of a related nullity action.
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 Fourth
District of Minnesota seeking injunctive and monetary relief. In February 2000,
the court found that the NIR(R) stent products do not infringe Medtronic's
patent and the suit was dismissed. Medtronic appealed the decision. A hearing on
the appeal was held on January 9, 2001 and on April 23, 2001, the Appeals Court
affirmed the district court's judgment that the Company's NIR(R) stent products
do not infringe the Medtronic patent.
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 Fourth District Court of
Minnesota seeking injunctive and monetary relief. The Company has answered,
denying allegations of the complaint. A trial date has not been set.
On March 28, 2000, the Company and certain subsidiaries filed suit for patent
infringement against AVE alleging that AVE's S670(TM) rapid exchange coronary
stent system infringes a patent licensed to the Company. The suit was filed in
the U.S. District Court for the Northern District of California seeking monetary
and injunctive relief. In July 2000, this matter was sent to arbitration. An
arbitration hearing was held in April 2001 to determine whether AVE's S670 and
S660(TM) rapid exchange coronary stent delivery systems and the R1 rapid
exchange catheter are licensed pursuant to the terms of a settlement agreement.
On July 18, 2001, the arbitration panel determined that the rapid exchange stent
delivery and balloon dilatation catheters sold in the United States willfully
infringe a patent exclusively licensed to the Company. The Company was awarded
$169 million in damages, as well as costs and attorneys fees, and a permanent
injunction against AVE's sales of its S670, S660 and BeStent 2(TM) stent
delivery systems and R1S rapid exchange catheter. The Company is seeking
confirmation of the award in the U.S. District Court for the Northern District
of California.
Page 15 of 35
On December 6, 2000, the Company and SCIMED filed suit for patent infringement
against AVE alleging that AVE's S660 and S670 coronary stent delivery systems
and R1 rapid exchange catheter infringe a patent owned by the Company. The suit
was filed in the United Stated District court for the District of Delaware
seeking monetary and injunctive relief. AVE has answered, denying the
allegations of the complaint. On June 12, 2001, the Company and AVE agreed to
settle the litigation. Pursuant to the terms of the agreement, both parties have
agreed to license certain patents to each other.
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. A hearing was held on
May 4, 2000. On July 27, 2000, the Court stayed the action pending the outcome
of a nullity action filed by the Company against the patent.
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.
A hearing originally scheduled for August 2001 has been postponed pending the
outcome of a nullity action filed by the Company against the patent.
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. A trial is expected in June 2002.
On May 19, 2000, the Company and SCIMED filed suit against a subsidiary of Cook
alleging that Cook's MBL-4(TM), MBL-6(TM), MBL-4-XL(TM) and MBL-6-OV(TM)
ligating devices infringe three of the Company's patents. The suit was filed in
the U.S. District Court for the District of Massachusetts seeking monetary
damages and injunctive relief. Cook counterclaimed seeking declaratory judgment
that the Company's patents are invalid and unenforceable and Cook's products do
not infringe the Company's patents. The Company filed a motion requesting a
preliminary injunction which was denied in September 2000. The Company has filed
a notice of appeal of the court's decision. A hearing on the appeal has not yet
been scheduled.
On May 23, 2001, Cook filed suit against the Company alleging that the Company's
VortX(R) embolization coils infringe a 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 27, 2001, the Company answered and
countersued Cook alleging certain of their products infringe a patent owned by
the Company.
Page 16 of 35
On October 31, 2000, the Federal Trade Commission (FTC) filed suit against the
Company for alleged violations of a Consent Order dated May 5, 1995, pursuant to
which the Company had licensed certain intravascular ultrasound technology to
Hewlett-Packard Company (HP). The suit was filed in the U.S. District Court for
the District of Massachusetts seeking civil penalties and injunctive relief. The
Company has filed a motion to dismiss the complaint and the FTC has filed a
motion for summary judgment. The motions were heard on June 21, 2001 and a
decision is pending.
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(R) 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 Plaintiffs have opposed the Company's motion to dismiss the
consolidated complaint. A hearing on the motion is scheduled for August 15,
2001.
On July 28, 2000, Dr. Tassilo Bonzel filed a complaint naming certain of the
Company's Schneider Worldwide subsidiaries and Pfizer Inc. ("Pfizer") and
certain of its affiliates as defendants, alleging that Pfizer failed to pay Dr.
Bonzel amounts owed under a license agreement involving Dr. Bonzel's patented
Rapid Exchange technology. The suit was filed in the District Court for the
State of Minnesota seeking monetary relief. Dr. Bonzel has also provided a
notice of breach of the agreement which could lead to its termination.
On April 5, 2001, Medinol filed a complaint against the Company and certain of
its current and former employees alleging breaches of contract, fraud and other
claims. Medinol supplies NIR(R) stents exclusively to the Company. The suit was
filed in the U.S. District Court for the Southern District of New York seeking
monetary and injunctive relief. On April 26, 2001, Medinol amended its complaint
to add claims alleging misappropriation of trade secrets in relation to the
Company's internal Express(TM) stent development program. Medinol seeks monetary
and injunctive relief, as well as an end to the Company's right to distribute
Medinol stents and access to certain Company intellectual property. On April 30,
2001, the Company answered and countersued Medinol and its principals, Judith
and Jacob Richter, alleging multiple breaches of contract, fraud and deceptive
practices, and defamation. The Company seeks monetary and injunctive relief. On
June 11, 2001, the Company filed suit in the Jerusalem District Court in Israel
against Medinol, Judith and Jacob Richter and Zuli Holdings Ltd., alleging,
among other things, loss of faith in Medinol management and misappropriation of
corporate opportunities, including trade secrets and intellectual property. The
suit seeks, among other things, monetary relief and costs.
The Company is aware that the U.S. Department of Justice is conducting an
investigation of matters that include the Company's NIR ON(R) Ranger(TM) with
Sox(TM) coronary stent delivery system which was
Page 17 of 35
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. As of June 30, 2001, the potential
exposure for litigation-related accruable costs is estimated to range from $10
million to $16 million. As of June 30, 2001, the range of loss for reasonably
possible contingencies that can be estimated is $0 to $344 million, plus
interest, and additional damages for sales occurring after the jury verdict
related to the Cordis suit for patent infringement filed on October 22, 1997.
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.
Note J - 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
Inter-Continental. 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. The segment information presented for 2000
has been restated based on the Company's standard foreign exchange rates used
for 2001. 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.
Page 18 of 35
United Inter-
(In millions) States Europe Japan Continental Total
- -------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2001
Net sales $403 $93 $148 $49 $693
Operating income excluding special charges 141 25 90 5 261
Three months ended June 30, 2000
Net sales $414 $91 $138 $43 $686
Operating income excluding special charges 175 26 88 3 292
Six months ended June 30, 2001
Net sales $794 $186 $284 $92 $1,356
Operating income excluding special charges 288 52 171 6 517
Six months ended June 30, 2000
Net sales $805 $184 $276 $86 $1,351
Operating income excluding special charges 341 55 181 6 583
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 Six Months Ended
June 30, June 30,
- ---------------------------------------------------------------------------------------------------------------
(In millions) 2001 2000 2001 2000
- --------------------------------------------------------------------- ------------- ------------- -------------
Net sales:
Total net sales for reportable segments $693 $686 $1,356 $1,351
Foreign exchange (21) 9 (30) 23
------------- ------------- ------------- -------------
$672 $695 $1,326 $1,374
Income (loss) before income taxes:
Total operating income for reportable segments
excluding special charges $ 261 $292 $517 $583
Manufacturing operations (22) (22) (48) (52)
Corporate expenses and foreign exchange (197) (88) (308) (180)
Purchased research and development (188) (267)
Restructuring charges (4) (4)
------------- ------------- ------------- -------------
(150) 182 (110) 351
Other expense, net (16) (12) (29) (25)
------------- ------------- ------------- -------------
$(166) $170 $(139) $326
============= ============= ============= =============
Page 19 of 35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the second quarter of 2001 were $672 million as compared to $695
million in the second quarter of 2000, a decline of 3 percent. Net sales for the
second quarter of 2001 were adversely impacted by approximately $29 million due
to foreign currency fluctuations compared to the second quarter of 2000. The
reported net loss for the second quarter of 2001 was $172 million, or $0.43 per
share, as compared to net income of $122 million, or $0.30 per share (diluted),
in the second quarter of 2000. The results for the second quarter of 2001
include a provision for purchased research and development ($188 million)
primarily related to the acquisition of Interventional Technologies, Inc. (IVT);
a write-down of intangible assets ($24 million) related to research and
development programs discontinued in the second quarter of 2001; a provision for
excess inventories ($49 million) due to declining demand for the current NIR(R)
coronary stent technology; and costs associated with the Company's global
operations plan ($19 million).
Net sales for the six months ended June 30, 2001 were $1,326 million as compared
to $1,374 million in the first half of 2000, a decline of 3 percent. Net sales
for the six months ended June 30, 2001 were adversely impacted by approximately
$53 million due to foreign currency fluctuations compared to the six months
ended June 30, 2000. The reported net loss for the six months ended June 30,
2001 was $177 million, or $0.44 per share, as compared to net income of $228
million, or $0.55 per share (diluted), in the first half of 2000. The results
for the first half of 2001 include a provision for purchased research and
development ($267 million); a write-down of intangible assets ($24 million)
related to research and development programs discontinued in the second quarter
of 2001; a provision for excess inventories ($49 million) due to declining
demand for the current NIR(R) coronary stent technology; and costs associated
with the Company's global operations plan ($32 million).
During the second quarter of 2001, United States (U.S.) revenues decreased
approximately 3% to $403 million, while international revenues decreased
approximately 4% to $269 million. The decreases in revenue were primarily due to
the effects of foreign currency fluctuations and decreases in the Company's
sales of coronary stents and coronary balloons. Worldwide coronary stent
revenues and worldwide coronary balloon revenues were approximately $91 million
and $79 million, respectively, during the second quarter of 2001, compared to
$123 million and $95 million, respectively, during the second quarter of 2000.
However, the Company launched its new Maverick(R) Balloon Dilatation Catheter in
the U.S. in the first quarter of 2001, which has strengthened the Company's
leadership position in the coronary balloon market during the second quarter of
2001. The reduction in the Company's coronary stent and coronary balloon
revenues was partially offset by revenue growth in the Company's other product
lines and by revenue generated by businesses acquired in 2001.
U.S. revenues decreased approximately 1% to $794 million, while international
revenues decreased approximately 7% to $532 million during the six months ended
June 30, 2001
Page 20 of 35
compared to the same period in the prior year. The decreases in revenue were
primarily due to the effects of foreign currency fluctuations and to decreases
in the Company's sales of coronary stents and coronary balloons. Worldwide
coronary stent revenues and worldwide coronary balloon revenues were
approximately $191 million and $154 million, respectively, during the first half
of 2001, compared to $236 million and $196 million, respectively, during the
same period in the prior year. The reduction in the Company's coronary stent and
coronary balloon revenues was partially offset by revenue growth in the
Company's other product lines and by revenue generated by businesses acquired in
2001.
The worldwide coronary stent market is dynamic and highly competitive, with
significant market share volatility. In addition, technology and competitive
offerings in the market are constantly changing. Stent revenues for 2001 will
continue to be impacted by the volatility in the worldwide coronary stent market
and by competitive offerings. Delays in product development and the timing of
submission for and receipt of regulatory approvals to market next generation
coronary and peripheral stent platforms in the U.S. and international markets
will influence the Company's ability to offer competitive stent products.
Gross profit as a percentage of net sales decreased to 60.1% in the second
quarter of 2001 from 68.8% in the second quarter of 2000, and decreased to 63.0%
in the first half of 2001 from 68.7% in the first half of 2000. The decrease in
gross margin is primarily due to a provision recorded in the second quarter of
2001 of $49 million ($34 million, net of tax) for excess NIR(R) stent
inventories. The excess position was driven primarily by declining demand for
the current NIR(R) coronary stent technology. Gross margin was also negatively
impacted by $15 million ($10 million, net of tax) of expenses associated with
the Company's global operations plan. These reductions to gross margin were
partially offset by operational cost improvements and the Company's hedging
activities. The Company's ability to effectively manage its mix and levels of
inventory, including consignment inventory, until new products are available and
as the Company transitions to new products will be critical in minimizing excess
inventories.
Medinol Ltd. (Medinol), an Israeli company, is the supplier of the NIR(R)
coronary stent. Any unavailability, unforeseen delays, stoppages or
interruptions in the supply and/or mix of NIR(R) stent inventory could adversely
affect the operating results and/or revenues of the Company. Generally, the
Company has less control over inventory manufactured by third parties as
compared to inventory manufactured internally. Furthermore, the purchase price
of NIR(R) coronary stents, the amount of NIR(R) coronary stent sales as a
percentage of worldwide sales and the mix of coronary stent platforms could
significantly impact gross margins. At June 30, 2001, the Company had
approximately $64 million of net NIR(R) coronary stent inventory and was
committed to purchase approximately $22 million of NIR(R) stents from Medinol.
Worldwide NIR(R) coronary stent sales as a percentage of worldwide sales were
approximately 13% and 17% during the second quarter of 2001 and 2000,
respectively, and were approximately 14% and 16% during the first half of 2001
and 2000, respectively.
On April 5, 2001, Medinol filed a lawsuit against the Company and a number of
its current and former employees, alleging fraud, breaches of contract, and
other claims. On April 26, 2001, Medinol amended its complaint to add claims
alleging misappropriation of trade secrets. In the
Page 21 of 35
suit, Medinol is seeking, among other things, to end the Company's right to
distribute Medinol stents and to access certain Company intellectual property.
On April 30, 2001, the Company answered and countersued Medinol and its
principals charging them with fraud, multiple breaches of contract, unfair and
deceptive practices and defamation. On June 11, 2001, the Company filed suit
in the Jerusalem District Court in Israel against Medinol, Judith and Jacob
Richter and Zuli Holdings Ltd., alleging among other things, loss of faith in
Medinol management and misappropriation of corporate opportunities, including
trade secrets and intellectual property. The suit seeks, among other things,
injuctive relief and costs. The Company's ability to manage its relationship
with Medinol during the pendency of the litigation and the outcome of the
litigation with Medinol could impact the future operating results of the
Company.
During 2000, the Company approved and committed to a global operations plan
consisting of a series of strategic initiatives designed to increase
productivity and enhance innovation. The plan includes manufacturing process and
supply chain programs and a plant optimization initiative. The manufacturing
process and supply chain programs are designed to lower inventory levels and the
cost of manufacturing and to minimize inventory write-downs. Gross margin
benefits will not be fully realized until manufacturing processes are improved
and historical inventories are sold.
The intent of the plant optimization initiative is to better allocate the
Company's resources by creating a more effective network of manufacturing and
research and development facilities. It will consolidate manufacturing
operations along product lines and shift significant amounts of production to
Company facilities in Miami and Ireland and to contract manufacturing. The
Company's plan includes the discontinuation of manufacturing activities at three
facilities in the U.S., and includes the planned displacement of approximately
2,000 manufacturing, manufacturing support and management employees. The Company
expects that the plan will be substantially completed over the next six months.
As of June 30, 2001, approximately $1 million had been charged against the
restructuring accrual for the approximately 90 employees terminated pursuant to
the plan. During the first half of 2001, the Company recorded pre-tax costs of
$28 million ($19 million, net of tax) as cost of sales related to transition
costs associated with the plant optimization plan and accelerated depreciation
on fixed assets whose useful lives have been reduced as a result of the
initiative. The Company also recorded a pre-tax charge of $4 million during the
second quarter of 2001 primarily as a result of changes in estimates of
severance costs associated with the plant optimization initiative. During the
remainder of 2001, the Company estimates that it will record pre-tax expenses of
approximately $30 million as cost of sales related to the plant optimization
initiative, primarily for transition costs, accelerated depreciation and
abnormal production variances related to underutilized plant capacity.
The Company expects that it will make total cash outlays, net of proceeds from
building and fixed asset sales, of approximately $115 million for the plant
optimization initiative. The Company has made cash outlays of $50 million for
the plan, and expects to make additional payments of approximately $40 million
during the remainder of 2001. Cash outlays to be made beyond 2001 primarily
represent severance costs for employees terminated during 2001 but paid out in
2002.
Page 22 of 35
The Company anticipates that these cash outlays will be funded from cash flows
from operating activities and from the Company's borrowing capacity. The cash
outlays include severance and outplacement costs, transition costs and capital
expenditures related to the plan. The success of the initiative may be dependent
on the Company's ability to retain existing employees and attract new employees
during the transition period. The Company's ability to effectively manage
inventories during the transition period may impact the operating results of the
Company.
The Company estimates that the global operations plan will achieve pre-tax
operating savings, relative to the base year of 1999, of approximately $100
million in 2001, $220 million in 2002 and $250 million in annualized savings
thereafter. Incremental pre-tax savings expected to be realized in 2001 relative
to 2000 are estimated to be approximately $30 million. These savings will be
realized primarily as reduced cost of sales and are expected to help mitigate
gross margin pressures that have resulted from the launch of higher costing
stents and stent delivery systems in the first quarter of 2001. Additionally,
the Company intends to use a portion of these savings to increase its investment
in research and development.
Selling, general and administrative expenses as a percentage of sales increased
to 34% of sales in the second quarter of 2001 from 31% in the second quarter of
2000 and increased approximately $16 million to $230 million. Selling, general
and administrative expenses as a percentage of sales increased to 34% of sales
in the first half of 2001 from 31% in the first half of 2000 and increased
approximately $27 million to $455 million. The increase as a percentage of sales
in 2001 is primarily attributable to the reduction in sales combined with an
increase in selling expenses. The increase in expense dollars is primarily
attributable to incremental costs incurred to strengthen and retain the
Company's field sales force and costs associated with the businesses acquired in
2001. The Company's ability to retain its established sales force and to control
operating expenses may impact the operating results of the Company.
Amortization expense increased to $52 million in the second quarter of 2001 from
$23 million in the second quarter of 2000 and increased as a percentage of sales
to 8% from 3%. Amortization expense increased to $75 million in the first half
of 2001 from $46 million in the first half of 2000 and increased as a percentage
of sales to 6% from 3%. The increase is a result of a $24 million ($17 million,
net of tax) write-down of intangible assets primarily related to research and
development programs discontinued in the second quarter of 2001. The increase in
amortization expense dollars is also attributable to the amortization of
intangible assets related to businesses acquired in the first half of 2001.
Royalties decreased to $9 million in the second quarter of 2001 from $10 million
in the second quarter of 2000 and decreased to $18 million during the six months
ended June 30, 2001 from $21 million during the six months ended June 30, 2000.
The decrease is primarily due to a reduction in sales of royalty bearing
products. The Company continues to enter into strategic technological alliances,
some of which include royalty commitments.
Research and development expenses were approximately $71 million and 11% of net
sales during the second quarter of 2001, and approximately $49 million and 7% of
net sales during the second quarter of 2000. Research and development expenses
were approximately $127 million and 10%
Page 23 of 35
of net sales during the six months ended June 30, 2001, and approximately $98
million and 7% of net sales during the six months ended June 30, 2000. The
increase in research and development is primarily due to increased funding for
the development of new products and clinical trials, including the Company's
internally developed stent platform, its drug-coated stent program, its carotid
program and programs acquired in connection with the Company's business
combinations consummated in the first half of 2001. The investment in research
and development dollars reflects spending on new product development programs as
well as regulatory compliance and clinical research. The Company continues to be
committed to refining existing products and procedures and to developing new
technologies that can reduce risk, trauma, cost, procedure time and the need for
aftercare. In the second half of 2001, the Company expects to increase its
investment in research and development over current levels primarily to fund its
clinical trials.
On April 2, 2001, the Company completed its acquisition of Interventional
Technologies, Inc (IVT) for $345 million in cash, excluding future contingent
payments. IVT develops, manufactures and markets minimally invasive devices for
use in interventional cardiology, including the Cutting Balloon(TM) catheter and
the Infiltrator(R) transluminal drug delivery catheter.
During the first quarter of 2001, the Company completed its acquisitions of
Embolic Protection, Inc. (EPI), Catheter Innovations, Inc. (CI), and Quanam
Medical Corporation (Quanam). The cost for these three acquisitions, excluding
future contingent payments, amounted to approximately $104 million, consisting
of approximately $90 million in cash and the issuance of 969,459 Company shares.
The Company's acquisitions were accounted for using the purchase method of
accounting. The condensed consolidated financial statements include the
operating results for each acquired entity from their respective date of
acquisition. Pro forma information is not presented, as the acquired companies'
results of operations prior to their date of acquisition are not material to the
Company.
The aggregate purchase price for each acquisition has been allocated to the
assets acquired and liabilities assumed based on their fair values at date of
acquisition. The estimated excess of purchase price over the fair value of the
net tangible assets acquired was allocated to identifiable intangible assets, as
valued by an independent appraiser using information and assumptions provided by
management. Based upon these valuations, the Company recorded charges of $267
million to account for purchased research and development related to businesses
acquired during the first half of 2001. The valuation of purchased research and
development, for which management is primarily responsible, represents the
estimated fair value at the date of acquisition related to in-process projects.
As of the date of acquisition, the in-process projects had not yet reached
technological feasibility and had no alternative future uses. The primary basis
for determining technological feasibility of these projects is obtaining Food
and Drug Administration (FDA) approval. Accordingly, the value attributable to
these projects, which have not yet obtained FDA approval, was immediately
expensed at acquisition. If the projects are not successful or completed in a
timely manner, the Company may not realize the financial benefits expected for
these projects. Other intangible assets recorded in connection with these
acquisitions are being amortized on a straight-line basis ranging from 9 to 25
years.
Page 24 of 35
The income approach was used to establish the fair values of the purchased
research and development. This approach established the fair value of an asset
by estimating the after-tax cash flows attributable to the in-process project
over its useful life and then discounting these after-tax cash flows back to a
present value. Revenue estimates were based on estimates of relevant market
sizes, expected market growth rates, expected trends in technology and expected
product introductions by competitors. In arriving at the value of the in-process
research and development projects, the Company considered, among other factors,
the in-process project's stage of completion, the complexity of the work
completed as of the acquisition date, the costs already incurred, the projected
costs to complete, the contribution of core technologies and other acquired
assets, the expected introduction date, and the estimated useful life of the
technology. The discount rate used to arrive at a present value as of the date
of acquisition was based on the time value of money and medical technology
investment risk factors. For the purchased research and development programs,
risk-adjusted discount rates ranging from 16% to 28% were utilized to discount
the projected cash flows. The Company believes that the estimated purchased
research and development amounts so determined represent the fair value at the
date of acquisition and do not exceed the amount a third party would pay for the
projects.
The most significant projects, relative to the purchased research and
development charge recorded in connection with the IVT acquisition, are the next
generation Cutting Balloon and the next generation Infiltrator transluminal drug
delivery catheter which represent over 67% of the in-process value. The Cutting
Balloon is a novel balloon angioplasty device with mounted scapels that relieves
stress in the artery, reducing the force necessary to expand the vessel. This
contributes to less inadvertent arterial trauma and injury as compared to
standard balloon angioplasty. The Infiltrator transluminal drug delivery
catheter is designed to directly deliver therapeutic agents into the wall of the
artery with high levels of efficiency. As of the date of acquisition, the
projects were expected to be completed and the products to be commercially
available on a worldwide basis within one to four years, with an estimated cost
to complete of approximately $16 million to $20 million.
The most significant projects, relative to the purchased research and
development charge recorded in connection with the other acquisitions, are
embolic protection devices acquired in connection with the EPI transaction which
represent over 78% of the in-process value. The embolic protection devices are
filters that are mounted on a guidewire and are used to capture embolic material
that is dislodged during cardiovascular interventions. As of the date of
acquisition, the projects were expected to be completed and the products to be
commercially available on a worldwide basis within one to three years, with an
estimated cost to complete of approximately $20 million to $30 million.
Interest expense decreased to $16 million in the second quarter of 2001 from $19
million in the second quarter of 2000 and decreased to $30 million during the
six months ended June 30, 2001 from $40 million during the six months ended June
30, 2000. The overall decrease in interest expense is primarily attributable to
a lower average debt balance.
Other income (expense), net, changed to income of less than $1 million in the
second quarter of 2001 from income of approximately $7 million in the second
quarter of 2000, and to income of $1
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million in the first half of 2001 from income of $15 million in the first half
of 2000. The change is primarily due to net gains recognized on sales of
available-for-sale securities of approximately $7 million and $14 million
recorded in the second quarter and the first half of 2000, respectively.
The Company's effective tax rate, excluding the impact of purchased research and
development, was approximately 30% in the first half of 2001 and 2000.
Uncertainty remains with regard to future changes within the health care
industry. The trend toward managed care and economically motivated and more
sophisticated 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 react effectively to the changing environment may impact its bad debt
and sales allowances in the future. Further, the U.S. marketplace is
increasingly characterized by consolidation among health care providers and
purchasers of medical devices that prefer to limit the number of suppliers from
which 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 health care 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, regulatory and reimbursement
approvals, 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 competitive, political,
regulatory, reimbursement or economic environment where the Company conducts
international operations may have a material impact on revenues and profits,
especially in Japan given its high profitability relative to its contribution to
revenues. Deterioration in the Japanese and/or emerging markets economies may
impact the Company's ability to grow its business and to collect its accounts
receivable. Additionally, 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.
These factors may impact the rate at which the Company can grow.
In addition, the impact of selling higher costing stents, the cost of
maintaining the Company's sales force and increasing its investment in research
and development is expected to result in lower operating margins throughout 2001
as compared to 2000. However, management believes that it is positioning the
Company to take advantage of opportunities that exist in the markets it serves.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments totaled $83 million at June 30, 2001, compared
to $60 million at December 31, 2000. Working capital decreased to current
liabilities exceeding current assets by $131 million at June 30, 2001, compared
to $173 million of working capital at December 31, 2000. The change in working
capital is primarily due to short-term borrowings to fund the
Page 26 of 35
Company's strategic acquisitions. Cash proceeds during the first half of 2001
were primarily generated from operating activities and through the Company's
short-term borrowings. Cash proceeds were primarily used to fund acquisitions
and capital expenditures during the period.
At June 30, 2001, the Company had $1.6 billion in revolving credit facilities.
The revolving credit facilities consist of a $600 million 364-day credit
facility that expires in September 2001 and a $1.0 billion credit facility that
expires in June 2002. The Company has lender commitments to refinance its $600
million 364-day credit facility with a new $600 million five-year credit
facility. The Company believes that it will successfully complete the
refinancing during the third quarter of 2001.
At June 30, 2001, the Company had $543 million in credit facility borrowings
outstanding at a weighted-average interest rate of 3.70% compared to
approximately $187 million of credit facility borrowings outstanding at a
weighted-average interest rate of 4.54% at December 31, 2000. At June 30, 2001,
the Company had no commercial paper outstanding, compared to $56 million of
commercial paper outstanding at a weighted-average interest rate of 8.00% at
December 31, 2000. The Company intends to continue to borrow under its credit
facilities until it is able to issue sufficient commercial paper at reasonable
rates.
The Company has recognized net deferred tax assets aggregating $148 million at
June 30, 2001, and $226 million at December 31, 2000. The assets relate
principally to the establishment of inventory and product-related reserves and
purchased research and development. In light of the Company's historical
financial performance, the Company believes that these assets will be
substantially recovered.
In December 2000, a jury found that the Company's NIR(R) coronary stent
infringed one claim of a patent owned by Johnson & Johnson. Judgement has not
yet been entered. The Company could be found liable and owe damages of
approximately $324 million for past sales, plus interest, and additional damages
for sales occurring after the jury verdict. The Company expects to appeal any
adverse determination and post the necessary bond pending appeal.
On July 18, 2001, an arbitration panel determined that rapid exchange delivery
systems and balloon dilatation catheters sold in the U.S. by Medtronic AVE, Inc.
willfully infringe a patent exclusively licensed to the Company. The panel
awarded the Company $169 million in damages, as well as costs and attorneys'
fees, and a permanent injunction against Medtronic AVE's sales of the infringing
devices for the duration of the patent. The Company is seeking confirmation of
the arbitration award in the U.S. District Court for the Northern District of
California.
On June 29, 2001, the Company announced the signing of a definitive agreement to
acquire Cardiac Pathways Corporation (CPC), a publicly held company, in an all
cash transaction for a purchase price of approximately $115 million, or $5.267
per common share. Cardiac Pathways Corporation designs, manufactures and markets
minimally invasive systems used by electrophysiologists to diagnose and treat
cardiac tachyarrhythmias (abnormally rapid heart rhythms). The transaction
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will be accounted for using the purchase method of accounting. The acquisition
was consummated on August 9, 2001.
The IVT, EPI, CI and Quanam acquisition transactions involve payments based on
earn-out provisions. The Company expects to make earn-out payments in 2001 of
approximately $70 million to $100 million for performance and other milestones
achieved in connection with these transactions.
Management believes it is developing a sound plan to integrate these businesses.
The failure to successfully integrate these businesses effectively could impair
the Company's ability to realize the strategic and financial objectives of these
transactions. As the health care 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 and other acquisitions consummated during the last five years, the Company
has acquired numerous in-process research and development projects. As the
Company continues to undertake strategic initiatives, it is reasonable to assume
that it will acquire additional in-process research and development platforms.
Additionally, the Company expects to incur capital expenditures of approximately
$50 million during the remainder of 2001. 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 capital expenditures, litigation related payments,
restructuring initiatives, and the above-mentioned acquisitions and integration
of businesses.
The Company was engaged in negotiations to acquire Medinol prior to Medinol's
lawsuit against the Company earlier this year. In the event these negotiations
were to recommence, the Company may need to arrange additional financing
capacity to complete any potential acquisition of Medinol. Although the Company
believes it would be able to obtain additional financing, there are no
assurances that additional financing could or would be obtained.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates among existing sovereign currencies and the
euro. On January 1, 2001, Greece became the twelfth member of the participating
countries that have agreed to adopt the euro as their common legal currency.
Fixed conversion rates among the participating countries' existing currencies
(the legacy currencies) and the euro have been established. 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 has addressed and/or
continues to address the potential impact resulting from the euro conversion,
including competitive implications related to pricing and foreign currency
considerations, and
Page 28 of 35
expects to adapt its information technology systems to be euro compatible in the
third quarter of 2001.
Management currently believes that the euro conversion will not have a material
impact related to its overall business in Europe or elsewhere. The increased
price transparency resulting from the use of a single currency in the twelve
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.
LITIGATION
The Company is involved in various lawsuits, including patent infringement and
product liability suits, from time to time in the normal course of business. In
management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in the notes to the
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. 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 significant,
and legal costs associated with non-patent litigation and compliance activities
are rising. Depending upon the prevalence, significance and complexity of these
matters, the Company's legal provision could be adversely affected in the
future.
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 that management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position.
CAUTIONARY STATEMENTS 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 discussed 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 timely implement
the global operations plan within its cost estimates, to retain and attract
employees as it implements its plant optimization initiative, to effectively
manage inventories during the plan's transition period and to achieve estimated
operating savings; (b) the Company's ability to achieve manufacturing cost
declines, gross margin benefits and inventory reductions from its manufacturing
process and supply chain programs; (c)
Page 29 of 35
the Company's ability to realize benefits from the EPI, CI, Quanam, IVT and CPC
acquisitions, including purchased research and development; (d) 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, reimbursement levels and worldwide economic and political
conditions; (e) the potential impacts of continued consolidation among health
care providers, trends toward managed care, disease state management and
economically motivated buyers, health care cost containment, the financial
viability of health care providers, more stringent regulatory requirements and
more vigorous enforcement activities; (f) management's ability to position the
Company to take advantage of opportunities that exist in the markets it serves;
(g) the Company's ability to retain its established sales force and to control
operating expenses; (h) the Company's continued commitment to refine existing
products and procedures and to develop new technologies that can reduce risk,
trauma, cost, procedure time, and the need for aftercare; (i) the Company's
ability to develop, trial and launch products on a timely basis, including
products resulting from purchased research and development and increased
research and development spending; (j) risks associated with international
operations; (k) the potential effect of foreign currency fluctuations on
revenues, expenses and resulting margins and the trend toward increasing sales
and expenses denominated in foreign currencies; (l) the Company's ability to
maintain its effective tax rate for 2001 and to substantially recover its net
deferred tax assets; (m) the ability of the Company to meet its projected cash
needs and obtain additional financing, if necessary; (n) the ability of the
Company to manage its relationship with Medinol during the pendency of the
litigation and the outcome of the Medinol litigation; (o) unavailability,
unforeseen delays, stoppages or interruptions in the supply and/or mix of NIR(R)
coronary stent inventory, difficulties in managing inventory relating to new
product introductions and the Company's cost to purchase NIR(R) stents; (p)
NIR(R) coronary stent sales as a percentage of worldwide sales and the mix of
coronary stent platforms; (q) volatility in the coronary stent market,
competitive offerings, delays in product development and the timing of
submission for and receipt of regulatory approvals to market new coronary and
peripheral stent platforms; (r) the Company's ability to compete in the coronary
stent and balloon markets; (s) the development of competing or technologically
advanced products by the Company's competitors; (t) the Company's ability to
complete the refinancing of its $600 million 364-day credit facility during the
third quarter of 2001; (u) the effect of litigation and compliance activities on
the Company's legal provision and cash flow; (v) the impact of stockholder class
action, patent, product liability, Federal Trade Commission, Medinol and other
litigation, as well as the outcome of the U.S. Department of Justice
investigation and the adequacy of the Company's product liability insurance; (w)
the potential impact resulting from the euro conversion, including adaptation of
information technology systems, competitive implications related to pricing, and
foreign currency considerations; and (x) the timing, size and nature of
strategic initiatives and research and development platforms 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 and growth rates of the Company and could cause those results and
rates to differ materially from those expressed in the forward-looking
statements contained herein. Such additional factors include, among other
things,
Page 30 of 35
future economic, competitive, reimbursement and regulatory conditions,
demographic trends, third-party intellectual property, financial market
conditions and future business decisions of the Company and its competitors, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. 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
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 program is operated pursuant to documented
corporate risk management policies. The Company does not enter into any
derivative transactions for speculative purposes.
The Company's floating and fixed-rate investments and debt obligations are
subject to interest rate risk. As of both June 30, 2001 and December 31, 2000, a
100-basis-point increase in interest rates, assuming the amounts invested and
borrowed remained constant, would not result in a material increase in the
Company's then current net interest expense.
The Company hedges its net recognized foreign currency transactional exposures
with forward foreign exchange contracts to reduce the risk that the Company's
earnings and cash flows will be adversely affected by changes in foreign
currency exchange rates. These foreign exchange contracts are not designated as
cash flow, fair value or net investment hedges under Statement 133. These
derivative instruments do not subject the Company's earnings or cash flows to
material risk due to exchange rate movements because gains and losses on these
derivatives offset losses and gains on the assets and liabilities being hedged.
These forward foreign exchange contracts are entered into for periods consistent
with commitments, generally one to six months.
In addition, the Company hedges a portion of its forecasted inter-company and
third-party transactions with foreign exchange forward and option contracts.
These contracts are entered into to reduce the risk that the Company's earnings
and cash flows resulting from certain forecasted transactions will be adversely
affected by changes in foreign currency exchange rates. However, the Company may
be impacted by changes in foreign currency exchange rates related to the
unhedged portion. The success of the hedging program depends, in part, on
forecasts of transaction activity in various currencies (currently the Japanese
yen and the euro). The Company may experience unanticipated foreign currency
exchange gains or losses to the extent that there are timing differences between
forecasted and actual activity during periods of currency volatility. The
Company had foreign exchange forward and option contracts outstanding in the
total notional amounts of $751 million and $452 million as of June 30, 2001, and
December 31, 2000, respectively. The Company recorded approximately $49 million
of assets and $1 million of
Page 31 of 35
liabilities to recognize the fair value of its contracts outstanding on June 30,
2001, as compared to approximately $37 million of assets and $1 million of
liabilities on December 31, 2000. Foreign exchange contracts that hedge net
recognized foreign currency transaction exposures should not subject the
Company's earnings and cash flows to material risk due to exchange rate
movements because gains and losses on these contracts should offset losses and
gains on the transactions being hedged. Hedges of anticipated transactions may
subject the income statement to volatility.
A sensitivity analysis of changes in the fair value of foreign exchange
contracts outstanding at June 30, 2001 indicates that, if the U.S. dollar
uniformly weakened by 10% against all currencies, the fair value of these
contracts would decrease by $43 million as compared to a $37 million decrease on
foreign exchange contracts outstanding at December 31, 2000. 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. 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.
Although the Company engages in hedging transactions that may offset the effect
of fluctuations in foreign currency exchange rates on foreign currency
denominated assets, liabilities, earnings and cash flows, financial exposure may
nonetheless result, primarily from the timing of transactions, forecast
volatility and the movement of exchange rates.
Page 32 of 35
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Note I Commitments and Contingencies to the Company's unaudited
condensed consolidated financial statements contained
elsewhere in this Quarterly Report is incorporated herein
by reference.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 30, 2001, the Company issued an aggregate of
969,459 shares of its common stock pursuant to the
acquisition by the Company of Quanam Medical Corporation.
All of the Company's common shares issued in this
transaction were issued in a non-public offering pursuant
to an exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Act"), under
Section 4(2) of the Act. This sale was made without general
solicitation or advertising. The Company has filed a
Registration Statement on Form S-3 (Reg. No. 333-61994)
which became effective on June 22, 2001, covering the
resale of these securities. All net proceeds from the sale
of the securities will go to the selling stockholders who
offer and sell these shares. The Company has not received
and will not receive any proceeds from the sale of these
shares.
ITEM 4: SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held
on May 8, 2001, to consider and vote upon proposals to (i)
elect two Class III Directors of the Company to hold office
until the 2004 Annual Meeting of Stockholders of the
Company, and until their respective successors are chosen
and qualified or until their earlier resignation, death or
removal, and (ii) to approve an amendment to the Company's
Global Employee Stock Ownership Plan (the "GESOP")
increasing the number of shares available for issuance
under the GESOP. Joseph A. Ciffolillo and N.J. Nicholas,
Jr. were elected as Class III Directors of the Company by a
vote of 322,076,151 and 321,930,130 for, respectively, and
6,406,869 and 6,552,890 withheld, respectively. The
amendment to the Company's Global Employee Stock Ownership
Plan was approved by a vote of 309,419,728 for, 17,365,623
against and 1,697,669 abstained.
Page 33 of 35
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Fifth Amendment to the Company's 401(k) Retirement
Savings Plan.
(b) The following reports were filed during the quarter ended
June 30, 2001:
Form 8-K Date of Event Description
-------- ------------- -----------
Item 5 April 5, 2001 Press Releases describing the Medinol litigation
Page 34 of 35
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 August 14, 2001.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
--------------------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and Senior
Vice President - Finance and
Administration
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