<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended: September 30, 1998
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Boston Scientific Place, Natick, Massachusetts 01760-1537
- - -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
--------------
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
<TABLE>
<CAPTION>
Shares Outstanding
Class as of September 30, 1998
----- ------------------------
<S> <C>
Common Stock, $.01 Par Value 196,459,662
</TABLE>
________________________________________________________________________________
<PAGE>
Part I
Financial Information
Item 1. Financial Statements
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
In thousands, except share and per share data 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $194,850 $57,993
Short-term investments 5,498 22,316
Trade accounts receivable, net 494,056 413,838
Inventories 491,828 386,742
Deferred income taxes 139,196 146,956
Prepaid expenses and other current assets 46,756 36,176
-------------------------------------
Total current assets 1,372,184 1,064,021
Property, plant, equipment and leaseholds 924,474 706,515
Less: accumulated depreciation and amortization 253,782 207,548
-------------------------------------
670,692 498,967
Excess of cost over net assets acquired, net 832,445 100,382
Other intangibles, net 960,323 212,964
Deferred income taxes 79,079
Investments and other assets 79,284 91,473
-------------------------------------
$3,994,007 $1,967,807
=====================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
In thousands, except share and per share data 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings due within one year $2,084,007 $447,208
Accounts payable 70,802 98,878
Accrued expenses 220,730 161,236
Accrual for merger-related charges 204,654 68,358
Income taxes payable 49,628 26,039
Other current liabilities 7,523 6,292
--------------------------------------
Total current liabilities 2,637,344 808,011
Long-term debt 553,875 46,325
Deferred income taxes 58,034
Other long-term liabilities 77,746 69,205
Stockholders' equity:
Preferred stock, $ .01 par value - authorized 25,000,000 shares, none issued
and outstanding
Common stock, $ .01 par value - authorized 300,000,000 shares, 196,459,662
shares issued at September 30, 1998 and
195,611,491 at December 31, 1997 1,964 1,956
Additional paid-in capital 488,429 432,556
Contingent stock repurchase obligation 18,295
Retained earnings 312,754 706,542
Foreign currency translation adjustment (77,168) (94,279)
Unrealized (loss) gain on available-for-sale securities, net (937) 17,422
Treasury stock, at cost - no shares at September 30, 1998
and 1,800,627 shares at December 31, 1997 (96,260)
--------------------------------------
Total stockholders' equity 725,042 986,232
--------------------------------------
$3,994,007 $1,967,807
======================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
In thousands, except per share data 1998 1997 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $575,390 $474,773 $1,551,126 $1,379,053
Cost of products sold 200,452 135,907 491,641 388,419
----------------------------- -------------------------------
Gross profit 374,938 338,866 1,059,485 990,634
Selling, general and administrative expenses 186,263 157,313 523,932 450,652
Amortization expense 10,964 7,926 26,829 23,581
Royalties 7,982 5,918 21,324 17,204
Research and development expenses 49,721 43,358 143,007 123,062
Purchased research and development 671,000 681,952 11,950
Merger-related charges (20,314) 145,891
Special charges 79,000 79,000
----------------------------- -------------------------------
1,004,930 214,515 1,455,730 772,340
----------------------------- -------------------------------
Operating income (loss) (629,992) 124,351 (396,245) 218,294
Other income (expense):
Interest and dividend income 1,851 745 3,800 2,739
Interest expense (15,695) (2,978) (29,947) (9,629)
Other, net (2,358) 4,057 (1,620) 4,308
----------------------------- -------------------------------
Income (loss) before income taxes (646,194) 126,175 (424,012) 215,712
Income tax provision (benefit) (136,798) 37,770 (60,251) 78,767
----------------------------- -------------------------------
Net income (loss) ($509,396) $88,405 ($363,761) $136,945
============================= ===============================
Net income (loss) per common share - basic ($2.60) $0.45 ($1.87) $0.70
============================= ===============================
Net income (loss) per common share - assuming dilution ($2.60) $0.44 ($1.87) $0.68
============================= ===============================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
--------------------------------------------------------------------------
Contingent
Common Stock Additional Stock
------------------------ Paid in Repurchase Retained
Shares Issued Par Value Capital Obligation Earnings
--------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 195,611,491 $ 1,956 $ 432,556 $ 18,295 $ 706,542
Net loss (363,761)
Foreign currency translation
adjustment
Issuance of common stock 848,171 8 37,578 (55,492)
Expiration of stock repurchase obligation 18,295 (18,295)
Tax benefit relating to incentive stock option
and employee stock purchase plans 25,465
Net change in equity investments
--------------------------------------------------------------------------
Balance at September 30, 1998 196,459,662 $ 1,964 $ 488,429 $ 312,754
==========================================================================
<CAPTION>
Nine Months Ended September 30, 1998
------------------------------------------------------------------------------
Unrealized
Gain (Loss)
Foreign on Available
Currency for-Sale
Translation Securities, Treasury
Adjustment Net Stock Total
-----------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $ (94,279) $ 17,422 $ (96,260) $ 986,232
Net loss (363,761)
Foreign currency translation
adjustment 17,111 17,111
Issuance of common stock 96,260 78,354
Expiration of stock repurchase obligation
Tax benefit relating to incentive stock option
and employee stock purchase plans 25,465
Net change in equity investments (18,359) (18,359)
----------------------------------------------------------------------------
Balance at September 30, 1998 $ (77,168) $ (937) $ 725,042
============================================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
In thousands 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $103,468 $64,841
Investing activities:
Purchases of property, plant, and equipment, net (135,155) (159,746)
Net maturities of held-to-maturity short-term investments 28,093
Sales of available-for-sale securities 11,136 3,145
Purchases of available-for-sale securities (4,422)
Proceeds from sales of equity investments 4,277
Acquisition of business, net of cash acquired (2,059,979)
Payments for acquisitions of and/or investments in
certain technologies, net (7,995) (42,613)
Other, net (8,251)
------------------------------------
Cash used in investing activities (2,187,716) (183,794)
Financing activities:
Proceeds from the issuance of long-term debt securities,
net of debt issuance costs 496,441
Net increase in commercial paper, net of debt issuance costs 1,627,915 130,060
Proceeds from notes payable and long-term borrowings 26,409 52,030
Payments on notes payable, capital leases and
long-term borrowings (13,709) (9,795)
Proceeds from issuances of shares of common stock,
net of tax benefits 81,479 84,341
Acquisition of treasury stock, net of proceeds from
put options (150,929)
------------------------------------
Cash provided by financing activities 2,218,535 105,707
Effect of foreign exchange rates on cash 2,570 (4,660)
------------------------------------
Net increase (decrease) in cash and cash equivalents 136,857 (17,906)
Cash and cash equivalents at beginning of period 57,993 72,175
------------------------------------
Cash and cash equivalents at end of period $194,850 $54,269
====================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE>
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto incorporated by reference in Boston Scientific Corporation's Annual
Report on Form 10-K for the year ended December 31, 1997.
Certain prior year's amounts have been reclassified to conform to the current
year presentation.
Note B - Acquisition
On September 10, 1998, the Company consummated its acquisition of Schneider
Worldwide (Schneider), formerly a member of the Medical Technology Group of
Pfizer Inc. (Pfizer), for $2.1 billion in cash. The acquisition was accounted
for using the purchase method of accounting. The condensed consolidated
financial statements include the Schneider operating results from the date of
acquisition.
The aggregate purchase price has been allocated on a preliminary basis to the
assets acquired and liabilities assumed based on their estimated fair values at
date of acquisition, as valued by an independent appraiser using information and
assumptions provided by management. The excess of purchase price over the fair
value of net tangible assets acquired was allocated to specific intangible asset
categories as follows (in thousands):
7
<PAGE>
<TABLE>
<S> <C>
Excess of cost over net assets acquired $ 734,475
Purchased research and development 671,000
Core technology 420,960
Developed technology 126,940
Assembled workforce, customer lists,
trademarks and patents 194,040
----------
$2,147,415
==========
</TABLE>
The Company recorded an adjustment to the purchase price of approximately $179
million related primarily to an estimate of additional payments due to Pfizer as
part of the purchase transaction and estimated costs to be incurred in
integrating the separate operating businesses of Schneider with businesses of
Boston Scientific. Certain severance and other exit costs of the acquired
Schneider businesses that relate to events occurring as of the consummation date
will be accounted for as additional costs of the acquisition at the time the
formal plan of integration is completed. The Company expects integration related
plans to be finalized no later than the third quarter of 1999. Further, the
Company recorded a deferred tax liability of approximately $19 million
representing the tax effect of timing differences recorded as part of the
acquisition.
The Company recorded a $671 million charge to account for purchased research and
development acquired. The valuation of purchased research and development was
based upon an analysis of those projects which had not reached technological
feasibility and had no alternative use. The valuation considered expected future
cash flows and was discounted for risks and uncertainties related to target
markets and completion of products. The other intangible assets recorded in
connection with the Schneider acquisition will be amortized over their estimated
period of benefit.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Schneider as if the acquisition had
occurred at the beginning of 1997 and 1998, with pro forma adjustments to give
effect to amortization of intangibles, purchased research and development, an
increase in interest expense on acquisition financing and certain other
adjustments together with related tax effects:
8
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(in thousands, except per share data) 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,800,359 $1,624,427
Net loss (400,978) (431,172)
Net loss per share - assuming dilution (2.06) (2.21)
- - ------------------------------------------------------------------------------
</TABLE>
Note C - Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which
requires the disclosure of comprehensive income and its components. SFAS No.
130 requires companies to report, in addition to net income, other components of
comprehensive income, which includes unrealized gains and losses on available-
for-sale securities and foreign currency translation adjustments. The Company
had a comprehensive loss of $490 million for the three months ended September
30, 1998 and comprehensive income of $83 million for the three months ended
September 30, 1997. The Company had a comprehensive loss of $365 million for
the nine months ended September 30, 1998 and comprehensive income of $93 million
for the nine months ended September 30, 1997. The Company's adoption of SFAS
No. 130 had no effect on the Company's reported results of operations or
financial position.
9
<PAGE>
Note D - Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands, except per share data) 1998 1997 1998 1997
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic:
Net income (loss) ($509,396) $ 88,405 ($363,761) $136,945
-------------------------------------------------------------
Weighted average shares outstanding 196,216 194,934 195,044 194,759
Net income (loss) per common share ($2.60) $ 0.45 ($1.87) $ 0.70
=============================================================
Assuming dilution:
Net income (loss) ($509,396) $ 88,405 ($363,761) $136,945
-------------------------------------------------------------
Weighted average shares outstanding 196,216 194,934 195,044 194,759
Net effect of dilutive put options 2
Net effect of dilutive stock options 6,052 5,775
-------------------------------------------------------------
Total 196,216 200,986 195,044 200,536
Net income (loss) per common share ($2.60) $ 0.44 ($1.87) $ 0.68
=============================================================
</TABLE>
Note E - Merger-Related Charges and Expenses
At September 30, 1998, the Company had an accrual for merger-related and special
charges of $222 million with respect to the Company's mergers and acquisitions.
The accrual includes those remaining costs typical in merging operations and
relate to, among other things, rationalization of facilities, workforce
reductions, unwinding of various contractual commitments, asset write-downs and
other integration costs. The merger-related charges were determined based on
plans approved by the Company's management using the best information available
to it at the time. The Schneider workforce-related initiatives recognized to
date involve substantially all of the Company's employee groups. The amounts the
Company may ultimately incur may change as the balance of the Company's
initiative to integrate the businesses related to these mergers and acquisitions
is executed.
The Company periodically reviews the amounts included in the accrual related to
these charges in comparison to their respective requirements and adjusts the
accrual as necessary. During a review in the second quarter of 1998, the
Company identified and reversed amounts no longer required which were included
in the accrual for merger-related and special charges of
10
<PAGE>
approximately $20 million. The amounts related primarily to severance,
contractual commitments and facilities closure charges accrued in the second
quarter of 1997.
The activity impacting the accrual for merger-related and special charges during
the first nine months of 1998 is summarized in the following table:
<TABLE>
<CAPTION>
Balance at Purchase Balance at
December 31, Price Charges September 30,
(in thousands) 1997 Adjustments Utilized Adjustments 1998
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Facilities $ 19,989 $ 470 $ 4,410 $ 2,176 $ 13,873
Workforce reductions 25,242 28,449 3,921 9,351 40,419
Contractual commitments 29,334 16,135 18,961 5,371 21,137
Asset write-downs 15,802 6,627 2,416 6,759
Direct transaction and
other costs 11,291 134,244 4,427 1,000 140,108
----------------------------------------------------------------------------------
$101,658 $179,298 $38,346 $20,314 $222,296
==================================================================================
</TABLE>
Substantially all of the purchase price adjustment costs classified as direct
transaction and other costs are related to a working capital adjustment to be
paid to Pfizer and the purchase from Pfizer of certain tax benefits. Most of
the integration plans are expected to be completed by the end of 1999. Cash
outlays to complete the balance of the Company's initiative to integrate the
businesses related to mergers and acquisitions are estimated to be approximately
$197 million.
The September 30, 1998 accrual for merger-related and special charges is
classified within the balance sheet as follows:
<TABLE>
(in thousands)
- - ---------------------------------------------------------------------
<S> <C>
Accrual for merger-related charges $204,654
Property, plant, equipment and leaseholds 10,669
Other long-term liabilities 6,973
--------
$222,296
========
</TABLE>
11
<PAGE>
Note F - Credit Arrangements
In connection with the Schneider acquisition, the Company established $1.7
billion in additional revolving credit facilities (the Facilities). The
Facilities are comprised of $1.2 billion of 364-day borrowings, and a $500
million increase to a previously existing five year amended and restated credit
facility originally closed in June 1997. The Company's total revolving credit
facilities (Total Facilities) now aggregate $2.2 billion of which $1.2 billion
are 364-day facilities and $1 billion expire in 2002. Use of the borrowings is
unrestricted and the borrowings are unsecured. The Total Facilities require the
Company to maintain a ratio of consolidated funded debt (as defined) to
consolidated net worth (as defined) plus consolidated funded debt not in excess
of certain specified levels.
The Company financed the Schneider acquisition by issuing approximately $2.1
billion in commercial paper. The commercial paper is supported by the above
mentioned revolving credit facilities. Outstanding commercial paper reduces
available borrowings under the Total Facilities. At September 30, 1998, the
Company had approximately $2.1 billion of commercial paper outstanding with
interest rates ranging from 5.5% to 6.2%.
In September 1998, the Company filed a Public Registration Statement with the
U.S. Securities and Exchange Commission. Under this registration statement,
while it is likely that the aggregate offering of the securities will be less
than $1.2 billion, in no event will the aggregate offering exceed $1.2 billion.
At September 30, 1998, the Company had no outstanding debt or other securities
issued under this registration statement.
In March 1998, the Company issued $500 million of 6.625% debt securities (Debt
Securities) due March 2005 under a Public Debt Registration Statement filed with
the U.S. Securities and Exchange Commission. The Debt Securities are not
redeemable prior to maturity and are not subject to any sinking fund
requirements. A significant portion of the net proceeds from the sale of the
Debt Securities (approximately $496 million) was used for repayment of
indebtedness under the Company's commercial paper program.
During March 1998, the Company borrowed 1.2 billion yen (the equivalent of
approximately $9 million) under a financing arrangement with a Japanese bank at
a fixed interest rate of 2.1%. The term of the borrowing extends through 2012.
In addition to its existing credit facilities with several Japanese banks, the
Company entered into a new Japanese uncommitted credit facility in March 1998.
The new credit facility provides for additional borrowings and promissory notes
discounting of up to 3 billion yen, or approximately $21 million.
12
<PAGE>
Note G - Inventories
The components of inventory consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1998 1997
- - -----------------------------------------------------------------------
<S> <C> <C>
Finished goods $235,965 $204,668
Work-in-process 65,445 45,683
Raw materials 190,418 136,391
-----------------------------------------
$491,828 $386,742
=========================================
</TABLE>
Note H - Stockholders' Equity
The Company is authorized to purchase on the open market up to approximately 20
million shares of the Company's common stock. Purchases will be made at
prevailing prices as market conditions and cash availability warrant. Stock
repurchased under the Company's systematic plan will be used to satisfy the
Company's obligations pursuant to its employee benefit and incentive plans. The
Company did not repurchase any shares of its common stock during the nine months
ended September 30, 1998. Prior to 1998, a total of 10 million shares of the
Company's common stock was repurchased under the program.
As part of the stock repurchase program, the Company has been selling European
equity put options to an independent broker-dealer. Each option, if exercised,
obligates the Company to purchase from the broker-dealer a specified number of
shares of the Company's common stock at a predetermined exercise price. The put
options are exercisable only on the first anniversary of the date the options
were sold and can be settled in cash or common stock at the Company's
discretion. During the nine months ended September 30, 1998, put options for
329,000 shares expired. There were no outstanding put options at September 30,
1998.
On August 27, 1998, the Company announced that its Board of Directors approved a
two-for-one common stock split, to be effected in the form of a 100 percent
stock dividend. On November 4, 1998, the Company announced that its stockholders
had approved an amendment to the Company's certificate of incorporation
increasing the Company's authorized common stock from 300,000,000 shares to
600,000,000 shares and authorized preferred stock from 25,000,000 to 50,000,000
shares. The amendment allows the two-for-one stock split announced on August 27,
1998 to go forward. The stock split will be payable on November 30, 1998 to
stockholders of record as of November 13, 1998. All share and per share amounts
reported herein do not reflect the impact of the stock split as the payable date
has not occurred.
13
<PAGE>
Note I - New Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities",
which provides new guidance on the financial reporting of start-up costs and
organization costs. The Company is required to adopt this statement in 1999.
The Company is in the process of determining the effect of adoption of this
statement on its consolidated financial statements and related disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which establishes new accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. The Company is required to adopt this statement in the year
2000. The Company is in the process of determining the effect of adoption of
this statement on its consolidated financial statements and related disclosures.
Note J - Japan Irregularities
During the third quarter of 1998, the Company charged to operations $79 million
as management's estimate of net unrealizable assets related to business
irregularities in the operations of its Japanese subsidiary. The Company
believes the irregularities detected involve shipments of products that have
been improperly recorded as sales to the subsidiary's dealer network in Japan.
The Company is in the process of investigating further the irregularities
identified. Based on information available at the present time, management does
not believe that the effects of the irregularities on the current or previously
issued financial statements are material to the reported results.
Note K - Commitments and Contingencies
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a wholly-owned subsidiary
of the Company, filed a suit for patent infringement against Advanced
Cardiovascular Systems, Inc. (ACS), alleging willful infringement of two of
SCIMED's U.S. patents by ACS's RX ELIPSE(TM) PTCA catheter. The suit was filed
in the U.S. District Court for the Northern District of California seeking
monetary and injunctive relief. In January 1998, the Company added the ACS RX
MULTILINK(TM) Stent Delivery System to its complaint. ACS has answered, denying
the allegations of the complaint. Trial is scheduled to begin in 1999.
SCIMED has accused ACS's COMET(TM) PTCA catheter, MULTILINK HP(TM) Stent
Delivery System and ROCKET(TM) PTCA catheter of infringing several SCIMED
patents. These claims are subject to arbitration relating to a threshold
determination under a November
14
<PAGE>
27, 1991 settlement agreement. An arbitration hearing was held in May 1998; a
final determination has not been issued. If SCIMED is successful in the
arbitration, it intends immediately to commence patent infringement litigation
to enforce its rights under the relevant patents against ACS.
On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,
alleging willful infringement by SCIMED'S EXPRESS PLUS(TM) and EXPRESS PLUS
II(TM) PTCA catheters of four U.S. patents licensed to ACS. Suit was filed in
the U.S. District Court for the Northern District of California and seeks
monetary and injunctive relief. SCIMED has answered, denying the allegations of
the complaint. Trial is expected to begin in 1999.
On March 12, 1996, ACS filed two suits for patent infringement against SCIMED,
alleging in one case the willful infringement of a U.S. patent by SCIMED's
EXPRESS PLUS, EXPRESS PLUS II and LEAP(R) EXPRESS PLUS PTCA catheters, and in
the other case the willful infringement of a U.S. patent by SCIMED's BANDIT(TM)
PTCA catheter. The suits were filed in the U.S. District Court for the Northern
District of California and seek monetary and injunctive relief. SCIMED has
answered, denying the allegations of the complaint. Trial is expected to begin
in 1999.
On September 16, 1997, ACS filed a suit for patent infringement against the
Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter infringes
two U.S. patents licensed to ACS and one U.S. patent owned by ACS. Suit was
filed in the U.S. District Court for the Northern District of California seeking
monetary damages, injunctive relief and that the patents be adjudged valid,
enforceable and infringed. The Company and SCIMED have answered, denying the
allegations in the complaint. A trial date has not yet been set.
On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District
Court for the District of Delaware alleging that certain Company products,
including the Company's MaxForce TTS(TM) catheter, infringe a patent assigned to
Bard. The lawsuit seeks a declaratory judgment that the Company has infringed
the Bard patent, preliminary and permanent injunctions enjoining the
manufacture, use or sale of the MaxForce TTS catheter or any other infringing
product, monetary damages and expenses. After a jury trial in June 1997, the
jury returned a verdict finding that the Company infringed the Bard patent and
awarded damages to Bard in the amount of $10.8 million. No judgment has been
entered pending trial on the Company's claim that the patent was obtained by
inequitable conduct. The Company intends to appeal any judgment entered on the
jury verdict. The Company no longer markets the accused device.
On March 7, 1996, Cook Inc. filed suit in the Regional Court, Munich Division
for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally Invasive
Technologies alleging
15
<PAGE>
that the Cragg EndoPro(TM) System I and Stentor(TM) endovascular device infringe
a certain Cook patent. Since the purchase of the assets of the Endotech/MinTec
companies by the Company, the Company has assumed control of the litigation. The
defendant answered, denying the allegations. A court-appointed technical expert
has provided the court with technical advice. A final hearing is expected in
1999.
On June 30, 1998 Cook, Inc. filed suit in the Region 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. The Company
has answered, denying the allegations of the complaint. Trial is expected to
begin in 1999.
On March 25, 1996, Cordis Corporation, a subsidiary of Johnson & Johnson Company
(Cordis), 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 and EXPRESS PLUS
catheters. The suit was filed in the U.S. District Court for the District of
Minnesota and seeks monetary and injunctive relief. SCIMED has answered,
denying the allegations of the complaint. Trial is expected to begin in 1999.
On March 17, 1997, the Company, through its subsidiaries, filed suit in France
seeking a declaration of noninfringement for the Company's LEAP balloon in
relation to a European patent owned by Cordis. No hearing date has been set.
On July 18, 1997, Cordis filed a cross border suit in The Netherlands against
various subsidiaries of the Company, alleging that the LEAP balloon infringes
one of Cordis' European patents. In this action, Cordis requested expedited
relief, including an injunction, covering The Netherlands, Germany, France, the
United Kingdom and Italy. The court posed certain questions to the European
Patent Office (EPO). The Company appealed the court's decision to present
questions to the EPO. A hearing on the appeal was held June 16, 1998. A
decision is expected in late November 1998. A final hearing at the lower court
is expected after the appeal decision.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis
alleging willful infringement of several SCIMED U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in
the U.S. District Court for the District of Minnesota, Fourth District, seeking
monetary and injunctive relief. The parties have agreed to add Cordis'
CHARGER(TM) and HELIX(TM) catheter to the suit. Cordis has answered, denying
the allegations of the complaint. Trial is expected to begin in 1999.
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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., a Johnson & Johnson subsidiary, as well as a
declaration of invalidity with respect to those patents. After a trial on the
merits in the United Kingdom during March, 1998, the Court ruled on June 26,
1998 that neither of the patents is infringed by the NIR stent, and that both
patents are invalid. Ethicon has appealed. In a September hearing in France,
the Company's declaration of noninfringement 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 stent relative to one of the European patents licensed to Ethicon and a
declaration of invalidity in relation to that patent (in Italy and Spain only).
Ethicon and other Johnson & Johnson subsidiaries filed a cross-border suit in
The Netherlands on March 17, 1997, alleging that the NIR 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. The Johnson & Johnson
entities thereafter filed a similar cross-border proceeding in The Netherlands
with respect to the 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 stent will be found not to infringe the
patents. Johnson & Johnson appealed this decision with respect to one of the
patents; the appeal has been denied on the ground that there is a "ready chance"
that the patent will be declared null and void. A hearing on the merits is
scheduled in The Netherlands for January 1999.
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that the Company's NIR stent infringes one of Ethicon's
patents. On June 23, 1998, the case was stayed following a decision in an
unrelated nullity action in which the Ethicon patent was found to be invalid.
On June 16, 1997, the Company and SCIMED filed a suit against Johnson & Johnson,
Ethicon, Inc. and Johnson & Johnson International Systems Co. (Johnson &
Johnson) in the U.S. District Court for the District of Massachusetts seeking a
declaratory judgment of noninfringement for the NIR stent relative to two
patents licensed to Johnson & Johnson and that the two patents are invalid and
unenforceable. The Company subsequently amended its complaint to add a third
patent. In October 1997, Johnson & Johnson's motion to dismiss the suit was
denied. Johnson &
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Johnson answered, denying the allegations of the complaint, and counterclaiming
for patent infringement. This action has been consolidated with the Delaware
action described below.
On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR 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 the complaint denying Johnson &
Johnson's allegations.
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 stent
infringes two patents owned by Cordis. The suit was filed in the U.S. District
Court for the District of Delaware seeking monetary damages, injunctive relief
and that the patents be adjudged valid, enforceable and infringed. The Company
and SCIMED have answered the complaint, denying Cordis' allegations. The
Massachusetts case described above has been consolidated with this action. On
April 13, 1998, Cordis filed a motion requesting a preliminary injunction
against the NIR stent. Following the court's decision not to grant a
preliminary injunction against co-defendant ACS, Cordis has withdrawn its
request for preliminary injunction against the Company. A trial date has not
yet been set.
On April 13, 1998, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's NIR stent infringes a third
patent owned by Cordis. The suit was filed in the U.S. District Court for the
District of Delaware seeking injunctive and monetary relief. The Company and
SCIMED have answered, denying the allegations of the complaint. A trial date
has not yet been set.
On August 12, 1998, ACS and an affiliate of ACS filed suit for patent
infringement against the Company and SCIMED alleging that the Company's NIR
stent infringes five patents owned by ACS. The suit was filed in the U.S.
District Court for the Southern District of Indiana seeking injunctive and
monetary relief. The Company and SCIMED have answered, denying the allegations
of the complaint.
On August 13, 1998, Arterial Vascular Engineering, Inc. (AVE) filed a suit for
patent infringement against the Company and SCIMED alleging that the Company's
NIR stent infringes two patents owned by AVE. The suit was filed in the U.S.
District Court for the District of Delaware seeking injunctive and monetary
relief. The Company and SCIMED have answered, denying the allegations of the
complaint.
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On April 9, 1998, Schneider (U.S.A.) Inc. filed a suit in the U.S. District
Court for the District of Delaware seeking a declaratory judgment of invalidity
of a patent owned by the Company and the noninfringement of the patent by
Schneider's Wallstent(R) products. The Company answered, denying certain
allegations and has filed a counterclaim alleging infringement of the patent by
the Wallstent products. The suit was dismissed upon consummation of the
acquisition of the Schneider businesses by the Company.
On March 6, 1998, the Company filed suit in the U.S. District Court for the
District of Massachusetts alleging that Circon Corporation's (Circon) Spiked and
Fluted VaporTrode(TM) electrodes and Grooved VaporTome(TM) resection electrode
infringe two patents owned by the Company, and requesting a declaratory
judgement for invalidity and noninfringement of three Circon patents. On March
19, 1998, the Company was served by Circon with a suit alleging that the
Company's PERCUFLEX(R), CONTOUR(R) and BEAMER(TM) ureteral stents infringe two
patents owned by Circon, including two patents that are the subject of the
Company's declaratory judgement action against Circon. The suit was filed in
the U.S. District Court for the Eastern District of Wisconsin seeking a
declaration of infringement and monetary damages. Both suits have been
dismissed pursuant to a Settlement Agreement dated September 28, 1998.
On June 22, 1998, the Company filed suit in the U.S. District Court for the
Central District of California against Mentor Medical, Inc., sometimes d/b/a
Mentor Urology, Inc. (Mentor), alleging that Mentor's Cinch(TM) Bladder Neck
Suspension Anchor System and Suspend(TM) Tutoplast(R) Processed Fascia Lata
infringe a patent owned by the Company and that Mentor's bone anchor infringes a
second patent licensed by the Company. The Company requested a preliminary
injunction on the first patent. A hearing was held on September 11, 1998.
On May 12, 1998, C.R. Bard, Inc. (Bard) filed a crossborder suit in The
Netherlands against various subsidiaries of the Company, alleging that the
Company's VIVA!(TM) and MAXXUM(TM) rapid-exchange catheters infringe one of
Bard's European patents. In this action, Bard requested relief covering The
Netherlands, Germany, France, Spain and the United Kingdom. A hearing on the
merits has not been set.
On November 4, 1998, Michael Moore and David Muller, on behalf of themselves and
all others similarly situated, filed a putative stockholders' class action suit
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 complaint principally alleges 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. A similar suit was also filed
on November 6, 1998 by Joe Califano, on behalf of himself and all others
similarly situated. Through press reports, the
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Company is also aware that other putative stockholder suits have been filed
against it and certain of its officers, but the Company has not yet been served.
The Company and its officers have not answered any such case and intend to
vigorously defend all actions.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the
Company will prevail in any particular case. An adverse outcome in one or more
cases in which the Company's products are accused of patent infringement could
have a material adverse effect on the Company.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against product
liability losses as could otherwise materially affect the Company's financial
position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net sales for the third quarter of 1998 increased 21% to $575 million as
compared to $475 million in the third quarter of 1997. Net sales for the nine
month period ended September 30, 1998 increased 12% to $1,551 million as
compared to $1,379 million in the nine month period of 1997. The growth in
revenues was significantly impacted by the launch of two coronary stent
platforms in the United States (U.S.) during the third quarter of 1998.
International revenues for the quarter and nine month period ended September 30,
1998 were impacted by changes in foreign currency exchange rates. Without the
impact of changes in exchange rates, net sales for the quarter and nine month
period ended September 30, 1998 increased approximately 25% and 16%,
respectively.
During the third quarter, U.S. revenues increased approximately 36%, while
international revenues increased approximately 1% compared to the same period of
the prior year. International revenues during the third quarter of 1998 were
negatively impacted compared to the third quarter of 1997 by unfavorable
exchange rate movements caused primarily by the strengthening of the U.S. dollar
versus the Japanese yen. Excluding the impact of foreign exchange, international
revenues for the quarter increased approximately 10% compared to the same period
of the prior year. International revenues as a percentage of worldwide sales was
approximately 35% and 42% in the third quarter of 1998 and 1997, respectively.
Revenues in the United States increased approximately 17% during the nine month
period of 1998 compared to the same period of the prior year. International
revenues increased approximately 7% during the nine month period of 1998
compared to the same period of the prior year. Excluding the impact of foreign
exchange, international revenues increased approximately 16% compared to the
same nine month period of the prior year.
Net sales for the quarter and nine month period ended September 30, 1998
included $17 million of Schneider sales from the date of acquisition (September
10, 1998) through September 30, 1998. Further, during the third quarter of 1998,
the Company charged $79 million as management's estimate of net unrealizable
assets related to apparent business irregularities in the operations of its
Japanese subsidiary. The Company believes the irregularities detected involve
shipments of products that have been improperly recorded as sales to the
subsidiary's dealer network in Japan. The Company is in the process of
investigating further the irregularities identified. Based on information
available at the present time, management does not believe that the effects of
the irregularities on the current or previously issued financial statements are
material to the reported results.
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The Company reported a net loss for the third quarter of 1998 of approximately
$509 million, or $2.60 per share (diluted). This compares to net income of $88
million, or $.44 per share, in the third quarter of 1997. The third quarter
results include a $671 million ($524 million net-of-tax) charge to account for
purchased research and development acquired in the $2.1 billion cash purchase of
Schneider. The results also include a charge for periods prior to the third
quarter of $79 million ($53 million net-of-tax) representing management's
estimate of net unrealizable assets related to the business irregularities
detected in the operations of the Japanese subsidiary. Further, the third
quarter results include a provision of $31 million ($21 million net-of-tax) for
costs associated with the Company's decision to voluntarily recall the NIR
ON(TM) Ranger(TM) with Sox(TM) coronary stent system in the United States.
The Company reported a net loss for the nine month period ended September 30,
1998 of approximately $364 million, or $1.87 per share (diluted). This compares
to net income of $137 million, or $.68 per share, in the same period of 1997.
Gross profit as a percentage of net sales decreased from 71.4% in the third
quarter of 1997 to 65.2% in the third quarter of 1998, and decreased from 71.8%
in the nine months ended September 30, 1997 to 68.3% in the nine months ended
September 30, 1998. The decrease in the Company's gross margin percentage is a
result of a provision for costs associated with the Company's decision to
voluntarily recall the NIR ON Ranger with Sox coronary stent system in the U.S.
(discussed previously), higher manufacturing costs, write-downs for excess and
obsolete inventory, and a decline in average selling prices due to continuing
pressure on healthcare costs and increased competition. Management believes that
gross margins during the next several quarters will continue to be negatively
impacted by high manufacturing costs. In addition, as average selling prices for
NIR stents fluctuate, the Company's cost to purchase the stent will change
because cost is based on a constant percentage of average selling prices. Future
gross margins are dependent upon the Company's ability to effectively manage its
inventory levels.
Selling, general and administrative expenses as a percentage of net sales
decreased from 33.1% in the third quarter of 1997 to 32.4% in the third quarter
of 1998, while increasing approximately $29 million from the same period of the
prior year to $186 million. The decrease as a percent of sales is primarily
attributable to the increase in net sales related to the launch of coronary
stents in the United States. Selling, general and administrative expenses as a
percentage of net sales increased from 32.7% in the nine month period of 1997 to
33.8% in the nine month period of 1998, while increasing approximately $73
million from the same period of the prior year to $524 million. Approximately
$5 million of the increase for the third quarter and nine month period ended
September 30, 1998 is attributable to results of Schneider operations from the
date of acquisition through September 30, 1998. The increase as a percent of
sales reflects costs to operate the Company's new global information system,
increased costs in domestic distribution, and continued expansion of the
Company's direct sales operations in certain emerging markets. The Company
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continues to expand its direct sales presence in Asia Pacific and Latin America
so as to be in a position to take advantage of opportunities in these markets.
The Company believes that it will be able to realize improved long-term returns
on its investments with a direct selling presence in these regions.
Amortization expense as a percentage of net sales increased from 1.7% in the
third quarter of 1997 to 1.9% in the third quarter of 1998, while increasing
approximately $3 million from the same period of the prior year to $11 million.
The increase in dollars in the third quarter is primarily a result of the
amortization of intangibles related to the purchase of Schneider from the date
of acquisition through September 30, 1998. Amortization expense for the nine
month period of 1998 remained at 1.7% of net sales. Amortization expenses in
1999 attributable to the Schneider acquisition will be approximately
$60-$65 million.
Royalty expenses remained approximately 1% of net sales while increasing from $6
million in the third quarter of 1997 to $8 million in the third quarter of
1998, and from $17 million in the nine month period of 1997 to $21 million in
the nine month period of 1998. The Company continues to enter into strategic
technological alliances, some of which include royalty commitments.
Research and development expenses as a percentage of net sales decreased from
9.1% in the third quarter of 1997 to 8.6% in the third quarter of 1998, and
increased $6 million to $50 million. Research and development expenses
increased from 8.9% of net sales in the nine month period of 1997 to 9.2% of net
sales in the nine month period of 1998. The impact of Schneider research and
development was not material to the third quarter or nine month period of 1998.
The increase in research and development for the nine month period reflects
increased spending on new product development programs and regulatory and
clinical research, and reflects the Company's continued commitment to refine
existing products and procedures and to develop new technologies that provide
simpler, less traumatic, less costly and more efficient diagnosis and treatment.
The trend in countries around the world toward more stringent regulatory
requirements for product clearance and more vigorous enforcement activities has
generally caused or may cause medical device manufacturers to experience more
uncertainty, greater risk and higher expenses.
During the first nine months of 1998, operating expenses increased from the same
period in the prior year at a faster percentage than net sales. The rate at
which operating expenses increased as compared to net sales is due primarily to
costs incurred in preparation of launching coronary stents in the U.S. market,
costs to operate the Company's new global information system, increased costs in
domestic distribution, and continued expansion of the Company's direct sales
operations in certain emerging markets.
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The third quarter results include a $671 million ($524 million net-of-tax)
charge to account for purchased research and development acquired in the $2.1
billion cash purchase of Schneider. The Company intends to incur in excess of
$50 million, related primarily to salaries, materials, clinical trials and
regulatory costs to develop the in-process technology into commercially viable
products over the next 3 years. Achieving product validation, the successful
completion of clinical trials and regulatory approval will be necessary before
revenues are produced. The Company expects to begin to benefit from the
purchased in-process research and development by 1999. If these projects are not
successfully developed, the Company may not realize the value assigned to the
in-process research and development projects. In addition, the value of the
other acquired intangible assets may also become impaired.
The third quarter results also include a charge for prior periods of $79 million
($53 million net-of-tax) representing management's estimate of net unrealizable
assets related to business irregularities detected in the operations of the
Japanese subsidiary. In addition to the items discussed above, the nine month
period results include a $20 million reversal in the second quarter of 1998 of
accruals for merger-related and special charges no longer required. The amounts
related primarily to severance, contractual commitments and facilities closure
charges accrued in the second quarter of 1997. The Company also recorded
purchased research and development of approximately $11 million in connection
with the Company's other strategic acquisitions that were consummated during the
second quarter of 1998. Further, during the second quarter of 1997, the Company
recorded merger-related charges of $146 million in connection with its
acquisition of Target Therapeutics, Inc. and recorded purchased research and
development of $12 million in conjunction with accounting for its additional
investment in Medinol, Ltd.
Interest expense increased from $3 million in the third quarter of 1997 to $16
million in the third quarter of 1998, and increased from $10 million in the nine
month period of 1997 to $30 million in the nine month period of 1998. The
overall increase in interest expense in the quarter and nine month period is
primarily attributable to a higher outstanding debt balance, including the
issuance of $2.1 billion in commercial paper on September 10, 1998 to finance
the acquisition of Schneider and the issuance of $500 million in fixed rate debt
securities during the first quarter of 1998 (see discussion following). The
Company expects interest expense to be higher in the fourth quarter as the
commercial paper balance (currently issued at approximately 6%) may be
outstanding for the entire quarter. Other income (expense), net, changed from
income of $4 million in the third quarter and nine month period of 1997 to
expense of $2 million in the same periods of 1998. The change is primarily
attributable to net gains on sales of equity investments in the third quarter
and nine month period of 1997 that are less significant in the same periods
of 1998.
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The Company's effective tax rate, excluding the impact of merger-related and
special charges, increased from approximately 32% in the nine month period of
1997 to 33% in the nine month period of 1998. The effective tax rate for the
full year 1998 is expected to be approximately 33%.
Uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers in
the U.S. may result in continued pressure on selling prices of certain products
and resulting compression on gross margins. The U.S. marketplace is
increasingly characterized by consolidation among healthcare providers and
purchasers of medical devices that prefer to limit the number of suppliers from
which they purchase medical products. There can be no assurance that these
entities will continue to purchase products from the Company. In addition,
international markets are also being affected by economic pressure to contain
reimbursement levels and healthcare costs. The Company's ability to benefit
from its international expansion may be limited by risks and uncertainties
related to economic conditions in these regions, competitive offerings,
infrastructure development, rights to intellectual property, and the ability of
the Company to implement its overall business strategy. Any significant changes
in the political, regulatory or economic environment where the Company conducts
international operations may have a material impact on revenues and profits.
Although these factors may impact the rate at which Boston Scientific can grow,
the Company believes that it is well positioned to take advantage of
opportunities for growth that exist in the markets it serves.
Liquidity and Capital Resources
In connection with the Schneider acquisition, the Company established $1.7
billion in additional revolving credit facilities (the Facilities). The
Facilities are comprised of $1.2 billion of 364-day borrowings, and
an increase to a previously existing five year amended and restated credit
facility, originally closed in June 1997. The Company's total revolving credit
facilities (Total Facilities) now aggregate $2.2 billion of which $1.2 billion
are 364-day facilities and $1 billion expire in 2002. Use of the borrowings is
unrestricted and the borrowings are unsecured. The Total Facilities require the
Company to maintain a ratio of consolidated funded debt (as defined) to
consolidated net worth (as defined) plus consolidated funded debt not in excess
of 70% through March 1999 and 60% thereafter. As of September 30, 1998, the
Company maintained a ratio of approximately 68%. The Company currently intends
to comply with the reduction in the ratio through an equity issuance, as
discussed below.
The Company financed the Schneider acquisition by issuing approximately $2.1
billion in commercial paper. The commercial paper is supported by the above
mentioned revolving credit facilities. Outstanding commercial paper reduces
available borrowings under the Total Facilities.
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At September 30, 1998, the Company had approximately $2.1 billion of commercial
paper outstanding with interest rates ranging from 5.5% to 6.2%. Since mid-1998,
conditions in worldwide financial markets have resulted in less liquidity for
corporate credit instruments. During this period, the Company has been able to
place and continues to place its commercial paper at market rates. However,
there is no assurance that it will be able to continue to issue its commercial
paper at reasonable interest rates. The Company has sufficient revolving credit
facilities available to refinance its commercial paper borrowings should
conditions warrant.
The Company expects to refinance a portion of the commercial paper by raising
more permanent financing through an issuance of convertible securities and
additional equity securities. In September 1998, the Company filed a Public
Registration Statement with the U.S. Securities and Exchange Commission. Under
this registration statement, while it is likely that the aggregate offering of
the securities will be less than $1.2 billion, in no event will the aggregate
offering exceed $1.2 billion. At September 30, 1998, the Company had no
outstanding debt or other securities issued under this registration statement.
In March 1998, the Company issued $500 million of 6.625% debt securities (Debt
Securities) due March 2005 under a Public Debt Registration Statement filed with
the U.S. Securities and Exchange Commission. The Debt Securities are not
redeemable prior to maturity and are not subject to any sinking fund
requirements. A significant portion of the net proceeds from the sale of the
Debt Securities (approximately $496 million) was used for repayment of
indebtedness under the Company's commercial paper program.
During March 1998, the Company borrowed 1.2 billion yen (the equivalent of
approximately $9 million) under a financing arrangement with a Japanese bank at
a fixed interest rate of 2.1%. The term of the borrowing extends through 2012.
In addition to its existing credit facilities with several Japanese banks, the
Company entered into a new Japanese uncommitted credit facility in March 1998.
The new credit facility provides for additional borrowings and promissory notes
discounting of up to 3 billion yen, or approximately $21 million.
Cash and short-term investments totaled $200 million at September 30, 1998
compared to $80 million at December 31, 1997. The increase in cash and short-
term investments is primarily attributable to cash acquired in connection with
the Schneider acquisition (approximately $40 million), cash provided in
connection with the Company's issuance of debt securities and proceeds from
operating activities. The cash proceeds were partially offset by an increase in
inventory and accounts receivable, the repayment of approximately $423 million
of commercial paper in early 1998, capital expenditures incurred to expand the
Company's manufacturing and
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distribution facilities, tax payments, and payments of merger-related costs.
Working capital decreased from $256 million at December 31, 1997 to current
liabilities exceeding current assets by $1.3 billion at September 30, 1998. The
reduction in working capital is primarily attributable to borrowings incurred to
finance the Schneider acquisition and increases in inventory and accounts
receivable.
The increase in accounts receivable, net, from December 31, 1997 to September
30, 1998 is primarily due to recording approximately $65 million of Schneider
accounts receivable, net, as of the date of the acquisition, an increase in U.S.
sales in the third quarter of 1998 compared to the fourth quarter of 1997 and an
increase in Europe's days sales outstanding due primarily to a shift in sales
mix to countries whose public hospitals take longer to pay than others. In
addition, as discussed previously, in the third quarter of 1998, the Company
recorded a charge of $79 million representing management's estimate of net
unrealizable assets (primarily accounts receivable) related to business
irregularities detected in the operations of its Japanese subsidiary.
In addition to impacting selling prices, the trend to managed care in the U.S.
has also resulted in more complex billing and collection procedures. The
Company's ability to effectively react to the changing environment may impact
its bad debt and sales return provisions in the future. In addition, the
deterioration in the Japanese economy may impact the Company's ability to
collect its outstanding receivables.
Inventory balances, net of approximately $40 million of inventory acquired from
Schneider, has remained relatively constant since the end of the second quarter
of 1998, though has increased from December 31, 1997. The increase since
December 31st is primarily a result of continued stocking of the NIR stent in
preparation for the Company's launch in the U.S. and Japan, and an increase in
U.S. finished goods. The Company is committed to purchase approximately $95
million of NIR stents through May 1999. The Company expects inventory levels
generally to peak in 1998 and then begin to decline in 1999 as the Company's new
global supply chain management system becomes fully operational. Successful
implementation of the Company's supply chain initiatives is necessary to reduce
the Company's inventory to an acceptable level.
As of September 30, 1998, the Company has accrued approximately $179 million of
liabilities in connection with the purchase of Schneider. Approximately $146
million of which are estimated to be paid during the fourth quarter of 1998.
The Company expects to incur additional capital expenditures of approximately
$40 million to $50 million during the remainder of 1998. The Company expects
that its cash and cash equivalents, marketable securities, cash flows from
operating activities and borrowing capacity
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will be sufficient to fund working capital needs and discretionary operating
spending requirements, at least through the end of 1998.
Year 2000 Readiness
The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. The Company has undertaken a global effort to
identify and mitigate Year 2000 issues in its information systems, products,
facilities and suppliers.
The Company has established a multidisciplinary Year 2000 Task Force. The Year
2000 Task Force is comprised of management from each of the Company's principal
functional areas, including Information Technology, Regulatory Affairs, Customer
Service, Manufacturing, Distribution, Purchasing, Facilities, Legal and
Communications; and reports directly to members of the Company's Executive
Committee. An independent consultant has been working with the Company for over
two years to implement a global information system that is designed to be Year
2000 compliant. In addition to the Company's information systems project, other
internal systems are being addressed largely through the replacement and testing
of much of the Company's older systems. The efforts are both company-wide and
site specific, spanning the range from the IT department systems to
manufacturing operations (including production facilities, support equipment,
and process control) and infrastructure technologies (HVAC, security, elevators,
etc.).
The vast majority of the Company's products are not date-sensitive and are
therefore unaffected by Year 2000 issues. Steps have been taken to correct non-
compliance which affects the functional performance of the remaining products.
Through September 30, 1998, the Company has expended in excess of $100 million
to implement its global information system and other costs relating to Year 2000
compliance. The Company does not anticipate that additional compliance costs
will have a material impact on its business operations or its financial
condition.
The Company relies on third party providers for services such as
telecommunications, Internet service, utilities, certain product components and
other key services. Interruption of those services due to Year 2000 issues
could affect the Company's operations. The Company has initiated an evaluation
of the status of third party service providers' compliance efforts and to
determine alternative and contingency requirements. While approaches to reducing
risks of interruption of business operations vary by business unit, options
include identification of alternative service providers available to provide
such services if a service provider fails to
28
<PAGE>
become Year 2000 compliant within an acceptable timeframe. Based on the
Company's evaluation to date, management believes that in most cases redundant
capacity exists at the supplier or that alternative sources of supply are
available or could be developed within a reasonable amount of time should
compliance become an issue for individual suppliers.
There can be no assurance that the Company's Year 2000 program will identify and
correct all non-compliant systems of the Company and its third party service
providers or that any such failure will not have a material effect on the
Company's business operations or financial condition.
Market Risk Disclosures
The Company's floating and fixed rate debt obligations and short-term
investments are subject to interest rate risk. A 100 basis point increase would
not result in a material increase in interest income or the fair value of the
Company's short-term investments.
The Company borrowed $2.1 billion in commercial paper to finance the Schneider
acquisition at the date of closing. A 100 basis point increase in interest
rates related to the acquisition financing, assuming the amount borrowed remains
constant, would result in an annualized increase in the Company's then current
interest expense of approximately $21 million. As discussed previously, the
Company intends to refinance a portion of its Schneider related borrowings
through a combination of issuance of convertible securities and additional
equity securities, which are subject to market risk.
The Company enters into forward foreign exchange contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with
commitments, generally one to six months. The Company does not engage in
speculation. The Company's foreign exchange contracts, which amounted to
approximately $155 million at September 30, 1998, should not subject the Company
to material risk due to exchange rate movements because gains and losses on
these contracts should offset losses and gains on the assets and liabilities
being hedged. Although the Company engages in hedging transactions that may
offset the effect of fluctuations in foreign currency exchange rates on foreign
currency denominated assets and liabilities, financial exposure may nonetheless
result, primarily from the timing of transactions and the movement of exchange
rates. The short-term nature of these contracts has resulted in these
instruments having insignificant fair values at September 30, 1998. In
addition, unhedged foreign currency balance sheet exposures as of September 30,
1998 are not expected to result in a significant loss of earnings or cash flows.
As the Company has expanded its international
29
<PAGE>
operations, its sales and expenses denominated in foreign currencies have
expanded and that trend is expected to continue. Therefore, most international
sales and expenses have been, and are expected to be, subject to the effect of
foreign currency fluctuations and these fluctuations may have an impact on
margins. The Company's sensitivity analysis of the effects of changes in foreign
currency exchange rates does not factor in a potential change in sales levels or
local currency selling prices.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union
are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the euro. The participating countries have agreed to
adopt the euro as their common legal currency on that date. Fixed conversion
rates between these participating countries' existing currencies (the "legacy
currencies") and the euro will be established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002 ( but not later than July 1, 2002). During this
transition period, parties may settle transactions using either the euro or a
participating country's legacy currency. The Company is addressing the
potential impact resulting from the euro conversion, including adaptation of
information technology systems, competitive implications related to pricing and
foreign currency considerations.
Management currently believes that the introduction of the euro will not have a
material impact related to the adaptation of information technology systems or
foreign currency exposures. The increased price transparency resulting from the
use of a single currency in the eleven participating countries may affect the
ability of the Company to price its products differently in the various European
markets. The Company does not expect the impact from the process of price
harmonization to be significant during 1999. 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
unaudited condensed consolidated financial statements which, individually or in
the aggregate, could have a material effect on the financial condition,
operations and cash flows of the Company. The Company believes that it has
meritorious defenses against claims that it has infringed patents of others.
However, there can be no assurance that the Company will prevail in any
particular case. An adverse outcome in one or more cases in which the Company's
products are accused of patent infringement could have a
30
<PAGE>
material adverse effect on the Company.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position.
Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements contained in this report
include, but are not limited to, statements with respect to, and the Company's
performance may be affected by: (a) the Company's ability to obtain benefits
from the Schneider acquisition; (b) the process, outlays and plan for the
integration of businesses acquired by the Company, and the successful and timely
implementation of the plan; (c) the impact and timing of successful
implementation of the Company's supply chain initiatives on timely reduction in
inventory levels; (d) the potential impacts of continued consolidation among
healthcare providers, trends towards managed care and economically motivated
buyers, healthcare cost containment, more stringent regulatory requirements and
more vigorous enforcement activities; (e) the Company's belief that it is well
positioned to take advantage of opportunities for growth that exist in the
markets it serves; (f) the Company's continued commitment to refine existing
products and procedures and to develop new technologies that provide simpler,
less traumatic, less costly and more efficient diagnosis and treatment; (g)
risks associated with international operations; (h) 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; (i) the Company's belief that its effective tax rate for 1998 will
be approximately 33%; (j) the ability of the Company to manage accounts
receivable, manufacturing costs and inventory levels and mix and to react
effectively to the changing managed care environment and worldwide economic
conditions; (k) the ability of the Company to meet its projected cash needs
through the end of 1998; (l) the ability of the global information systems to
improve supply chain management; (m) costs and risks associated with
implementing Year 2000 compliance and business process reengineering; (n) the
results of the Company's ongoing investigation of business irregularities
detected in the operations of its Japanese subsidiary and the effect of these
irregularities on the Company's financial statements; (o) the ability to realize
improved long-term returns on the Company's investments with a direct selling
presence in emerging markets; (p) the ability of the Company to place its
commercial paper at reasonable
31
<PAGE>
rates, to obtain more permanent financing to re-finance a portion of its
commercial paper and to comply with the financial ratio in its credit facilities
through an equity issuance; (q) the Company's ability to realize value assigned
to in process research and development and other intangible assets; (r) the
impact of stockholder class action, patent, product liability and other
litigation, and the adequacy of the Company's product liability insurance;
(s) the potential impact resulting from the euro conversion, including
adaptation of information technology systems, competitive implications related
to pricing and foreign currency considerations; and (t) 1999 amortization
expense attributable to the Schneider acquisition.
Several important factors, in addition to the specific factors discussed in
connection with such forward-looking statements individually, could affect the
future results of the Company and could cause those results to differ materially
from those expressed in the forward-looking statements contained herein. Such
additional factors include, among other things, future economic, competitive and
regulatory conditions, demographic trends, financial market conditions and
future business decisions of Boston Scientific and its competitors, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of Boston Scientific. Therefore, the Company wishes to caution each
reader of this report to consider carefully these factors as well as the
specific factors discussed with each forward-looking statement in this report
and as disclosed in the Company's filings with the Securities and Exchange
Commission as such factors, in some cases, have affected, and in the future
(together with other factors) could affect, the ability of the Company to
implement its business strategy and may cause actual results to differ
materially from those contemplated by the statements expressed herein.
32
<PAGE>
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Note K - Commitments and Contingencies to the Company's unaudited condensed
consolidated financial statements contained elsewhere in this Quarterly
Report is incorporated herein by reference.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) The following reports were filed during the quarter ended September
30, 1998:
Form 8-K Date of Event Description
-------- ------------- -----------
Item 5 September 10, 1998 Completion of acquisition of
Schneider Worldwide, formerly a
member of the Medical Technology
Group of Pfizer Inc.
Item 2 September 10, 1998 Completion of acquisition of
Schneider Worldwide, formerly a
member of the Medical Technology
Group of Pfizer Inc.
33
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 16, 1998.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
--------------------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and Senior Vice
President - Finance and Administration
34
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