<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended: June 30, 1999
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Boston Scientific Place, Natick, Massachusetts 01760-1537
- -------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
--------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Shares Outstanding
Class as of June 30, 1999
----- -------------------
Common Stock, $.01 Par Value 413,573,130
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Page 1 of 32
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
In millions, except share and per share data 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 69 $ 70
Short-term investments 5 5
Trade accounts receivable, net 491 538
Inventories 456 462
Other current assets 171 192
--------------------------
Total current assets 1,192 1,267
Property, plant and equipment, net 627 680
Excess of cost over net assets acquired, net 859 877
Technology - core and developed, net 590 607
Patents, trademarks and other intangibles, net 325 330
Other assets 153 132
--------------------------
$3,746 $3,893
==========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE> 3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
In millions, except share and per share data 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Commercial paper $1,016
Bank obligations $ 503 11
Accounts payable and accrued expenses 358 354
Acquisition-related obligations 140
Accrual for restructuring and merger-related charges 58 71
Other current liabilities 26 28
-----------------------
Total current liabilities 945 1,620
Long-term debt 1,060 1,364
Other long-term liabilities 83 88
Commitments and contingencies
Stockholders' equity:
Preferred stock, $ .01 par value - authorized 50,000,000 shares,
none issued and outstanding
Common stock, $ .01 par value - authorized 600,000,000 shares,
413,573,130 shares issued at June 30, 1999 and 394,185,781 at
December 31, 1998 4 4
Additional paid-in capital 1,181 507
Retained earnings 590 381
Accumulated other comprehensive income (expense):
Foreign currency translation adjustment (118) (72)
Unrealized gain on available-for-sale securities, net 1 1
-----------------------
Total stockholders' equity 1,658 821
-----------------------
$3,746 $3,893
=======================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
In millions, except per share data 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 726 $ 488 $1,434 $ 941
Cost of products sold 235 149 465 287
---------------- ------------------
Gross profit 491 339 969 654
Selling, general and administrative expenses 204 174 411 333
Amortization expense 23 8 46 16
Royalties 13 7 23 14
Research and development expenses 49 49 98 94
Special charges (credits) (9) (9)
---------------- ------------------
289 229 578 448
---------------- -----------------
Operating income 202 110 391 206
Other income (expense):
Interest and dividend income 1 1 2 2
Interest expense (35) (8) (70) (14)
Other, net (3) 4 (7) 1
---------------- -----------------
Income before income taxes 165 107 316 195
Income taxes 56 40 107 68
---------------- -----------------
Net income $ 109 $ 67 $ 209 $ 127
================ =================
Net income per common share - basic $0.27 $0.17 $ 0.53 $ 0.33
================ =================
Net income per common share - assuming dilution $0.27 $0.17 $ 0.52 $ 0.32
================ =================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
------------------------------------------------------------------------------------------
Common Stock Foreign
------------------------- Additional Currency Unrealized Gain/(Loss)
Shares Issued Par Value Paid-In Retained Translation on Available-for-sale
Capital Earnings Adjustment Securities, Net Total
------------------------------------------------------------------------------------------
(In millions, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 394,185,781 $ 4 $ 507 $381 $ (72) $ 1 $ 821
Net income 209 209
Foreign currency translation adjustment (46) (46)
Issuance of common stock 19,387,349 633 633
Tax benefit relating to incentive stock
option and employee stock purchase
plans 41 41
==========================================================================================
Balance at June 30, 1999 413,573,130 $ 4 $1,181 $590 $(118) $ 1 $1,658
==========================================================================================
See notes to unaudited condensed consolidated financial statements.
</TABLE>
5
<PAGE> 6
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
In millions 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 323 $ 50
Investing activities:
Purchases of property, plant, and equipment, net (42) (94)
Payments related to 1998 acquisition (128)
Other, net (2)
-----------------------
Cash used in investing activities (172) (94)
Financing activities:
Net proceeds from borrowings on revolving credit facilities 992
Net decrease in commercial paper (1,816) (423)
Net proceeds from notes payable and long-term debt 516
Proceeds from issuances of shares of common stock,
net of tax benefits 674 49
Other, net (1) (6)
-----------------------
Cash provided by (used for) financing activities (151) 136
Effect of foreign exchange rates on cash (1) (1)
-----------------------
Net increase (decrease) in cash and cash equivalents (1) 91
Cash and cash equivalents at beginning of period 70 58
-----------------------
Cash and cash equivalents at end of period $ 69 $ 149
=======================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1999
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto
incorporated by reference in Boston Scientific Corporation's Amended Annual
Report on Form 10-K/A2 for the year ended December 31, 1998.
Certain prior years' amounts have been reclassified to conform to the current
year presentation.
Note B - Comprehensive Income
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", requires the disclosure of comprehensive income and its
components. SFAS No. 130 requires companies to report, in addition to net
income, other components of comprehensive income, which includes unrealized
gains and losses on available-for-sale securities and foreign currency
translation adjustments. For the three months ended June 30, 1999 and 1998, the
Company's comprehensive income was $93 million and $57 million, respectively.
For the six months ended June 30, 1999 and 1998, the Company's comprehensive
income was $163 million and $106 million, respectively.
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<PAGE> 8
Note C - Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
(In millions, except share and per share data) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic:
Net income $109 $67 $209 $127
-----------------------------------------------------------
Weighted average shares outstanding (in thousands) 397,684 389,796 396,228 388,915
-----------------------------------------------------------
Net income per common share $0.27 $0.17 $0.53 $0.33
===========================================================
Assuming dilution:
Net income $109 $67 $209 $127
-----------------------------------------------------------
Weighted average shares outstanding (in thousands) 397,684 389,796 396,228 388,915
Net effect of dilutive put options (in thousands) 8
Net effect of dilutive stock options (in thousands) 9,061 9,932 8,045 9,348
-----------------------------------------------------------
Total (in thousands) 406,745 399,728 404,273 398,271
===========================================================
Net income per common share $0.27 $0.17 $0.52 $0.32
===========================================================
</TABLE>
Note D - Restructuring and Merger-Related Charges
At June 30, 1999, the Company had an accrual for restructuring and
merger-related charges of $64 million which is comprised of $39 million of
accrued severance and related costs primarily associated with integrating
Schneider (acquired in September 1998) and streamlining manufacturing
operations, $10 million related to the cost of canceling contractual commitments
recorded in connection with the Schneider acquisition and $15 million of
accruals remaining from 1997 and prior mergers (primarily costs associated with
rationalized facilities and statutory benefits which are subject to litigation).
The activity impacting the accrual related to restructuring and merger-related
charges during the six months ended June 30, 1999 is summarized in the following
tables:
8
<PAGE> 9
<TABLE>
<CAPTION>
Purchase Price Charges
Balance at Adjustments Utilized in Balance at
(In millions) December 31, 1998 in 1999 1999 June 30, 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 AND 1996 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Facilities $11 $(7) $4
Workforce reductions 4 4
Contractual commitments 1 1
Asset write-downs 1 1
Direct transaction and other costs 2 2
----------------------------------------------------------------
$19 $(7) $12
================================================================
1997 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Contractual commitments $1 $1
Asset write-downs 1 $(1)
Direct transaction and other costs 2 2
----------------------------------------------------------------
$4 $(1) $3
================================================================
1998 SCHNEIDER PURCHASE PRICE ADJUSTMENTS:
Workforce reductions $27 $4 $(11) $20
Contractual commitments 16 3 (9) 10
----------------------------------------------------------------
$43 $7 $(20) $30
================================================================
1998 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Workforce reductions $13 $ (4) $9
Asset write-downs 9 9
Direct transaction and other costs 1 1
----------------------------------------------------------------
$23 $ (4) $19
================================================================
TOTAL:
Facilities $11 $ (7) $4
Workforce reductions 44 $4 (15) 33
Contractual commitments 18 3 (9) 12
Asset write-downs 11 (1) 10
Direct transaction and other costs 5 5
----------------------------------------------------------------
$89 $7 $(32) $64
================================================================
</TABLE>
9
<PAGE> 10
As of June 30, 1999, the Company's cash obligations required to complete the
balance of the Company's initiatives to integrate businesses related to its
mergers and acquisitions and its 1998 rationalization strategy are estimated at
approximately $47 million. The Company expects that substantially all
restructuring and merger-related actions will be completed by the end of 1999
although some related payments (primarily severance) will be made during the
first half of 2000.
Note E - Borrowings and Credit Arrangements
During the first quarter of 1999, the Company refinanced $1.7 billion of
commercial paper borrowings with proceeds from borrowings under its revolving
credit facilities (Facilities). On June 30, 1999, the Company completed a public
offering of 14,950,000 shares at a price of $39.875 per share under a shelf
registration filed with the Securities and Exchange Commission in September
1998. The public offering reduced the amount available for the issuance of
securities under the shelf registration to $604 million. The Company does not
expect to issue additional securities under the shelf registration for the
remainder of 1999. The Company used the net proceeds from its public offering of
approximately $578 million to repay indebtedness under its Facilities.
In conjunction with the public offering discussed above, the Company's borrowing
availability under its Facilities was reduced by the amount of the net proceeds
of the offering. Of the remaining $1.6 billion of borrowings available under the
Facilities, approximately $1.0 billion was outstanding at June 30, 1999 with a
weighted average interest rate of 5.5%. The Company has a $600 million 364-day
credit facility that expires in September 1999. The Company is in the process of
seeking an extension of this facility for another 364 days under certain
conditions. The Company believes it will be successful in obtaining this
extension in the near term. At June 30, 1999, the Company had no commercial
paper outstanding. The Company has the ability to refinance a portion of its
short-term debt on a long-term basis through its credit facilities and expects a
minimum of $500 million will remain outstanding through the next twelve months,
and accordingly, the Company has classified this portion of borrowings as
long-term at June 30, 1999.
Note F - Inventories
The components of inventory consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
(In millions) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Finished goods $228 $249
Work-in-process 68 83
Raw materials 160 130
----------------------------------
$456 $462
==================================
</TABLE>
Note G - New Accounting Pronouncements
During the first quarter of 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-5, "Reporting on the
Costs of Start Up Activities", which requires costs of start up activities and
organization costs to be expensed as incurred. The Company's adoption of this
statement had no material effect on the Company's reported results of operations
or financial position.
10
<PAGE> 11
Note H - Commitments and Contingencies
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a subsidiary of the
Company, filed a suit for patent infringement against Advanced Cardiovascular
Systems, Inc. (ACS), alleging willful infringement of two of SCIMED's U.S.
patents by ACS's RX ELIPSE(TM) PTCA catheter. The suit was filed in the U.S.
District Court for the Northern District of California seeking monetary and
injunctive relief. In January 1998, the Company added the ACS RX MULTILINK(TM)
stent delivery system to its complaint. On June 6, 1999, the Court granted
summary judgment in favor of ACS affirming that ACS's patents were not
infringed. SCIMED has appealed the judgment.
On December 29, 1998, the Company and SCIMED filed a cross-border suit against
ACS, Guidant Corporation (Guidant) and various foreign subsidiaries in The
Netherlands alleging ACS's MULTILINK(TM), RX ELIPSE, RX MULTILINK HP(TM) and RX
DUET(TM) catheters and stent delivery systems infringe one of the Company's
European patents. In this action, the Company requested relief covering The
Netherlands, the United Kingdom, France, Germany and Italy. A hearing on the
merits is set for November 5, 1999.
On January 13, 1999, SCIMED filed a suit for patent infringement against ACS,
Guidant and Guidant Sales Corporation alleging willful infringement of two of
SCIMED's U.S. patents by ACS's RX MULTILINK HP and RX DUET stent delivery
systems and one of SCIMED's U.S. patents by ACS's RX MULTILINK stent delivery
system. The suit was filed in the U.S. District Court for the Northern District
of California seeking monetary and injunctive relief. ACS has answered, denying
the allegations of the complaint.
On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,
alleging willful infringement by SCIMED'S EXPRESS PLUS(TM) and EXPRESS PLUS
II(TM) PTCA catheters of four U.S. patents licensed to ACS. Suit was filed in
the U.S. District Court for the Northern District of California and seeks
monetary and injunctive relief. SCIMED has answered, denying the allegations of
the complaint. A trial date is scheduled for July 31, 2000.
On March 12, 1996, ACS filed two suits for patent infringement against SCIMED,
alleging in one case the willful infringement of a U.S. patent by SCIMED's
EXPRESS PLUS, EXPRESS PLUS II and LEAP(R) EXPRESS PLUS PTCA catheters, and in
the other case the willful infringement of a U.S. patent by SCIMED's BANDIT(TM)
PTCA catheter. The suits were filed in the U.S. District Court for the Northern
District of California and seek monetary and injunctive relief. On June 24,
1999, the Court granted ACS's motions for summary judgment asserting the
validity (with respect to certain issues) and infringement of ACS's patent. The
Court denied ACS's motion for summary judgment on the enforceability of its
patent and SCIMED's motions for summary judgment asserting the invalidity of,
and SCIMED's failure to willfully infringe, ACS's patent. A trial date on the
remaining issues with respect to the BANDIT PTCA catheter is expected to begin
in February 2000. A trial date with respect to the EXPRESS PLUS catheters is
scheduled to begin in July 2000.
11
<PAGE> 12
On September 16, 1997, ACS filed a suit for patent infringement against the
Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter infringes two
U.S. patents licensed to ACS and one U.S. patent owned by ACS. Suit was filed in
the U.S. District Court for the Northern District of California seeking monetary
damages, injunctive relief and that the patents be adjudged valid, enforceable
and infringed. The Company and SCIMED have answered, denying the allegations in
the complaint. A trial date has not yet been set.
On August 12, 1998, ACS and an affiliate of ACS filed suit for patent
infringement against the Company and SCIMED alleging that the Company's NIR(R)
stent infringes five patents owned by ACS. The suit was filed in the U.S.
District Court for the Southern District of Indiana seeking injunctive and
monetary relief. The Company and SCIMED have answered, denying the allegations
of the complaint. A trial date has been set for February 22, 2000.
On March 25, 1996, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson Company (Johnson & Johnson), filed a suit for patent infringement
against SCIMED, alleging the infringement of five U.S. patents by SCIMED's LEAP
balloon material, used in certain SCIMED catheter products, including SCIMED's
BANDIT and EXPRESS PLUS catheters. The suit was filed in the U.S. District Court
for the District of Minnesota and seeks monetary and injunctive relief. SCIMED
has answered, denying the allegations of the complaint. A trial date has not
yet been set.
On March 17, 1997, the Company, through its subsidiaries, filed suit against
Cordis in France seeking a declaration of noninfringement for the Company's LEAP
balloon in relation to a European patent owned by Cordis. A hearing on the
pleadings was held on May 11, 1999 and the Court dismissed the action for
failure to satisfy statutory requirements.
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
12
<PAGE> 13
and injunctive relief. The parties have agreed to add Cordis' CHARGER(TM) and
HELIX(TM) catheters to the suit. Cordis has answered, denying the allegations of
the complaint. A trial date has not yet been set.
On March 13, 1997, the Company (through its subsidiaries) filed suits against
Johnson & Johnson (through its subsidiaries) in The Netherlands, the United
Kingdom and Belgium, and on March 17, 1997 filed suit in France, seeking a
declaration of noninfringement for the NIR(R) stent relative to two European
patents licensed to Ethicon, Inc. (Ethicon), a Johnson & Johnson subsidiary, as
well as a declaration of invalidity with respect to those patents. After a trial
on the merits in the United Kingdom during March 1998, the Court ruled on June
26, 1998 that neither of the patents is infringed by the NIR(R) stent, and that
both patents are invalid. Ethicon has appealed and a hearing is expected in
early 2000. On October 28, 1998, the Company's motion for a declaration of
noninfringement in France was dismissed for failure to satisfy statutory
requirements; the French invalidity suits were not affected. The Company
appealed the dismissal, and a hearing was held on March 22, 1999. On April 16,
1999, the Company withdrew its appeal.
On March 20, 21 and 22, 1997, the Company (through its subsidiaries) filed
additional suits against Johnson & Johnson (through its subsidiaries) in Sweden,
Italy and Spain, respectively, seeking a declaration of noninfringement for the
NIR(R) stent relative to one of the European patents licensed to Ethicon in
Sweden, Italy and Spain and a declaration of invalidity in Italy and Spain. A
hearing was held on July 9, 1999 in Italy with respect to the retention of a
court-appointed expert. The next hearing is set for March 21, 2000.
Ethicon and other Johnson & Johnson subsidiaries filed a cross-border suit in
The Netherlands on March 17, 1997, alleging that the NIR(R) stent infringes one
of the European patents licensed to Ethicon. In this action, the Johnson &
Johnson entities requested relief, including provisional relief (a preliminary
injunction), covering Austria, Belgium, France, Greece, Italy, The Netherlands,
Norway, Spain, Sweden, Switzerland and the United Kingdom. On April 2, 1997, the
Johnson & Johnson entities filed a similar cross-border proceeding in The
Netherlands with respect to a second European patent licensed to Ethicon.
Johnson & Johnson subsequently withdrew its request for cross-border relief in
the United Kingdom. In October, 1997, Johnson & Johnson's request for
provisional cross-border relief on both patents was denied by the Dutch court,
on the ground that it is "very likely" that the NIR(R) stent will be found not
to infringe the patents. Johnson & Johnson appealed this decision with respect
to one of the patents; the appeal has been denied on the ground that there is a
"ready chance" that the patent will be declared null and void. In January 1999,
Johnson & Johnson amended the claims of one of the patents, changed the action
from a cross-border case to a Dutch national action, and indicated its intent
not to pursue its action on the second patent. A hearing was held on March 26,
1999 and on June 23, 1999, the Dutch Court affirmed that there were no remaining
infringement claims. A decision as to the validity of one of the patents was
referred to the Dutch Patent Office for advice.
13
<PAGE> 14
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that the Company's NIR(R) stent infringes one of Ethicon's
patents. On June 23, 1998, the case was stayed following a decision in an
unrelated nullity action in which the Ethicon patent was found to be invalid.
On June 16, 1997, the Company and SCIMED filed a suit against Johnson & Johnson,
Ethicon and Johnson & Johnson International Systems Co. in the U.S. District
Court for the District of Massachusetts seeking a declaratory judgment of
noninfringement for the NIR(R) stent relative to two patents licensed to Johnson
& Johnson and that the two patents are invalid and unenforceable. The Company
subsequently amended its complaint to add a third patent. Johnson & Johnson
answered, denying the allegations of the complaint, and counterclaiming for
patent infringement. In October 1997, Johnson & Johnson's motion to dismiss the
suit was denied. This action has been consolidated with the Delaware action
described below.
On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR(R) stent infringes certain
Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court
of Canada seeking a declaration of infringement, monetary damages and injunctive
relief. The Company has answered, denying the allegations of the complaint.
On October 22, 1997, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the importation and use of the NIR(R) stent
infringes two patents owned by Cordis. The suit was filed in the U.S. District
Court for the District of Delaware seeking monetary damages, injunctive relief
and that the patents be adjudged valid, enforceable and infringed. The Company
and SCIMED have answered the complaint, denying Cordis' allegations. The
Massachusetts case described above has been consolidated with this action. A
trial date has been set for November 2000.
On April 13, 1998, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's NIR(R) stent infringes two
patents owned by Cordis. The suit was filed in the U.S. District Court for the
District of Delaware seeking injunctive and monetary relief. The Company and
SCIMED have answered, denying the allegations of the complaint. A trial date has
been set for November 2000.
On June 7, 1999, the Company, SCIMED and Medinol Ltd. filed suit for patent
infringement against Johnson & Johnson, Johnson & Johnson Interventional Systems
and Cordis, alleging two U.S. patents owned by Medinol Ltd. are infringed by
Cordis' CROWN, MINI CROWN and CORINTHIAN stents. The suit was filed in the U.S.
District Court for the District of Minnesota seeking injunctive and monetary
relief.
On August 13, 1998, Arterial Vascular Engineering, Inc., now named Medtronic AVE
Inc. (AVE), filed a suit for patent infringement against the Company and SCIMED
alleging that the Company's NIR(R) stent infringes two patents owned by AVE. The
suit was filed in the U.S. District Court for the District of Delaware seeking
injunctive and monetary relief. The Company and
14
<PAGE> 15
SCIMED have answered, denying the allegations of the complaint. A trial date
has not yet been set.
On December 15, 1998, the Company and SCIMED filed a cross-border suit against
AVE in The Netherlands alleging that AVE's AVE GFX(TM), AVE GFX 2(TM), AVE
LTX(TM) and USCI CALYPSO(TM) rapid exchange catheters and stent delivery systems
infringe one of the Company's European patents. In this action, the Company
requested relief covering The Netherlands, the United Kingdom, France, Germany
and Italy. A hearing is set for October 22, 1999.
On December 18, 1998, AVE filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's MAXXUM(TM) and VIVA!(TM)
catheters infringe a patent owned by AVE. The suit was filed in the U.S.
District Court for the District of Delaware seeking injunctive and monetary
relief. The Company and SCIMED have answered, denying the allegations of the
complaint. A trial date has not yet been set.
On March 2, 1999, AVE filed a cross-border suit in The Netherlands against
the Company and various subsidiaries of the Company including SCIMED, alleging
that the Company's MAXXUM(TM), MAXXUM(TM) ENERGY, MAXXUM(TM) 29 MM, NIR(R)
Primo(TM), VIVA!(TM), EXPRESS PLUS and EXPRESS PLUS II balloon dilation
catheters infringe one of AVE's European patents. In this action, AVE requested
relief covering The Netherlands, Germany, the United Kingdom, France and Spain.
The Company has not yet filed its answer, but intends to deny the allegations of
the complaint. A hearing is scheduled for January 7, 2000.
On March 10, 1999, the Company through its subsidiary Schneider (Europe) AG
filed suit against AVE alleging that AVE's AVE GFX, AVE GFX2, AVE LTX, CALYPSO
RELY(TM), PRONTO SAMBA(TM) and SAMBA RELY(TM) rapid-exchange catheters and stent
delivery systems infringe one of the Company's German patents. The suit was
filed in the District Court of Dusseldorf, Germany seeking injunctive and
monetary relief. A hearing is scheduled for January 2000.
On April 6, 1999, AVE filed suit against the Company and SCIMED alleging that
the Company's NIR(R) stent infringes one of AVE's European patents. The suit was
filed in the District Court of Dusseldorf, Germany seeking injunctive and
monetary relief. The Company and SCIMED have answered, denying the allegations
of the complaint. A hearing is scheduled in Germany for September 23, 1999.
On May 14, 1999, Medtronic, Inc. (Medtronic) filed suit against the Company and
SCIMED alleging that a variety of the Company's NIR(R) stent products infringe a
Medtronic patent. The suit was filed in the U.S. District Court for the District
of Minnesota seeking injunctive and monetary relief. The Company has answered,
denying the allegations of the complaint.
On July 7, 1999, Medtronic filed suit against the Company and SCIMED, alleging
that SCIMED's RADIUS(TM) stent
15
<PAGE> 16
infringes two patents owned by Medtronic. The suit was filed in the U.S.
District Court for the District Court of Minnesota seeking injunctive and
monetary relief. The Company is preparing an answer, denying allegations of the
complaint.
On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District
Court for the District of Delaware alleging that certain Company products,
including the Company's MaxForce TTS(TM) catheter, infringe a patent assigned to
Bard. Following a trial and jury verdict, on February 3, 1999 the court entered
a judgment that the Company infringed the Bard patent and awarded damages to
Bard in the amount of $10.8 million. The Company was also enjoined from selling
the product found to be infringing. The Company is appealing the judgment to the
Court of Appeals for the Federal Circuit. The Company no longer markets the
accused device.
On March 7, 1996, Cook Inc. (Cook) filed suit in the Regional Court, Munich
Division for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally
Invasive Technologies alleging that the Cragg EndoPro(TM) System I and
Stentor(TM) endovascular device infringe a certain Cook patent. Since the
purchase of the assets of the Endotech/MinTec companies by the Company, the
Company has assumed control of the litigation. 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.
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 is expected in September 1999.
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., a wholly owned
subsidiary of the Company, as a party to the suit, and adding a breach of
contract claim. The Company is preparing an answer, denying the allegations of
the complaint.
On January 13, 1999, Medical Innovations Corporation (Innovations) filed suit in
the U.S. District Court for the District of Utah alleging that certain Company
products, including the Company's Ultratome(TM) XL sphinctertome product,
infringe two patents assigned to Innovations. The suit also included a claim of
unfair trade practices. The parties agreed to settle the action and an order of
dismissal was filed with the Court on May 19, 1999.
On February 1, 1999, Hewlett-Packard Company filed a suit in the U.S. District
Court for the District of Massachusetts against the Company alleging violation
of the Sherman
16
<PAGE> 17
Antitrust Act and Massachusetts General Laws Chapter 93A and breach of
contract. The Company has moved to dismiss the complaint. A trial date has not
yet been set.
Beginning November 4, 1998, a number of shareholders of the Company, on behalf
of themselves and all others similarly situated, filed purported stockholders'
class action suits in the U.S. District Court for the District of Massachusetts
alleging that the Company and certain of its officers violated certain sections
of the Securities Exchange Act of 1934. The complaints principally alleged that
as a result of certain accounting irregularities involving the improper
recognition of revenue by the Company's subsidiary in Japan, the Company's
previously issued financial statements were materially false and misleading. In
August 1999, lead plaintiffs and lead counsel filed a purported consolidated
class action complaint. The Company and its officers have not yet filed an
answer, but intend to vigorously defend all actions.
The Company is aware that the U.S. Department of Justice is conducting an
investigation of matters that include the Company's NIR ON(TM) Ranger(TM) with
Sox(TM) coronary stent delivery system which was voluntarily recalled by the
Company in October 1998 following reports of balloon leaks. The Company is
cooperating fully in the investigation.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the Company
will prevail in any particular case. An adverse outcome in one or more cases in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against product
liability losses as could otherwise materially affect the Company's financial
position.
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<PAGE> 18
Note I - Segment Reporting
Boston Scientific is a worldwide developer, manufacturer and marketer of medical
devices for less invasive procedures. The Company has four reportable operating
segments based on geographic regions: the United States, Europe, Japan and
Emerging Markets. Each of the Company's reportable segments generates revenues
from the sale of minimally invasive medical devices. The reportable segments
represent an aggregate of operating divisions.
Sales and operating results of reportable segments are based on internally
derived standard foreign exchange rates which may differ from year to year and
do not include inter-segment profits. Because of the interdependence of the
reportable segments, the operating profit as presented may not be representative
of the geographic distribution that would occur if the segments were not
interdependent.
<TABLE>
<CAPTION>
United Emerging
(In millions) States Europe Japan Markets Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months ended June 30, 1999
Net sales $455 $122 $108 $43 $ 728
Operating income excluding special charges 183 21 64 10 278
Three months ended June 30, 1998
Net sales $287 $ 91 $ 85 $28 $ 491
Operating income excluding special charges 80 23 49 2 154
Six months ended June 30, 1999
Net sales $896 $239 $213 $79 $1,427
Operating income excluding special charges 350 47 129 16 542
Six months ended June 30, 1998
Net sales $553 $183 $157 $50 $ 943
Operating income excluding special charges 165 46 94 4 309
</TABLE>
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<PAGE> 19
A reconciliation of the totals reported for the reportable segments to the
applicable line items in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
- -----------------------------------------------------------------------------------------------------------------
(In millions) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
Total net sales for reportable segments $728 $491 $1,427 $ 943
Foreign exchange (2) (3) 7 (2)
-------------------------------------------
$726 $488 $1,434 $ 941
===========================================
Income before income taxes:
Total operating income excluding special
charges for reportable segments $278 $154 $ 542 $ 309
Corporate expenses and foreign exchange (76) (53) (151) (112)
Restructuring and merger-related credits 9 9
-------------------------------------------
202 110 391 206
Other expense, net (37) (3) (75) (11)
-------------------------------------------
$165 $107 $ 316 $ 195
===========================================
</TABLE>
Operating income (excluding special charges) for the U.S. and Europe for the
three months ended June 30,1999 would have been approximately $190 million and
$25 million, respectively, and $368 million and $56 million, respectively, for
the six months ended June 30, 1999, if certain costs had been allocated between
geographic regions and corporate expenses consistent with the allocation method
used in 1998.
Note J - Subsequent Event
On August 6, 1999, the Company announced it was voluntarily recalling from
commercial distribution and use its Rotablator(R) Rotalink(TM) Advancer and
RotaLink Plus(TM) rotational atherectomy systems. The original Rotablator
Rotational Atherectomy Device, which is the product currently sold in Japan, is
not affected by this recall. The Company has determined that the brake on some
advancers included in these systems may not adequately secure the guide wire as
intended, making such units unsafe for use. A program to remedy the problem and
resume the manufacture and sale of these systems is being developed. During the
first half of 1999, sales of the recalled devices and related products amounted
to approximately $60 million.
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<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the second quarter increased 49% to $726 million as compared to
$488 million in the second quarter of 1998. The second quarter results include
the operations of Schneider Worldwide (Schneider) which was acquired in the
third quarter of 1998. On a pro forma basis, assuming Schneider revenues had
been included in the second quarter of 1998, net sales in the second quarter of
1999 increased 25%. Net income for the second quarter increased 63% to $109
million, or $.27 per share (diluted). This compares to net income of $67
million, or $.17 per share, inclusive of net reversals of merger-related and
special charges (approximately $1 million, net of tax), reported in the second
quarter of 1998.
Net sales for the six months ended June 30, 1999 increased 52% to $1,434
million as compared to $941 million in the first half of 1998. On a pro forma
basis, assuming Schneider revenues had been included in the first half of 1998,
net sales in the first half of 1999 increased 28%. Net income for the six
months ended June 30, 1999 increased 65% to $209 million, or $.52 per share
(diluted). This compares to net income of $127 million, or $.32 per share,
inclusive of net reversals of merger-related and special charges, reported in
the first half of 1998.
During the second quarter of 1999, United States (U.S.) revenues increased
approximately 59% to $455 million, while international revenues increased
approximately 35% to $271 million compared to the same period in the prior year.
U.S. revenues as a percentage of worldwide sales increased from 59% in the
second quarter of 1998 to 63% in the second quarter of 1999. Worldwide vascular
and nonvascular sales increased 57% and 24%, respectively, compared to the same
period in the prior year. Without the impact of foreign currency exchange rates
on translation of international revenues, worldwide sales for the second quarter
increased approximately 47% compared to the same period in the prior year. The
increases in pro forma worldwide sales, U.S. sales as a percentage of
worldwide sales and in vascular sales were primarily attributable to the
Company's domestic sales of coronary stent systems. U.S. coronary stent
revenues, primarily sales of the NIR(R) stent, were approximately $106 million
during the second quarter of 1999.
U.S. revenues increased approximately 62% to $896 million during the first six
months of 1999, while international revenues increased approximately 39% to $538
million compared to the same period in the prior year. U.S. revenues as a
percentage of worldwide sales increased from 59% in the first six months of 1998
to 62% in the first six months of 1999. Worldwide vascular and nonvascular sales
increased 61% and 25%, respectively, compared to the same period in the prior
year. Without the impact of foreign currency exchange rates on translation of
international revenues, worldwide sales for the six month period ended June 30,
1999 increased approximately
20
<PAGE> 21
50% compared to the same period in the prior year. The increases in pro forma
worldwide sales, U.S. sales as a percentage of worldwide sales and in vascular
sales were primarily attributable to the Company's domestic sales of coronary
stent systems. U.S. coronary stent revenues, primarily sales of the NIR(R)
stent, were approximately $210 million during the first six months of 1999.
Worldwide NIR(R) coronary stent sales as a percentage of worldwide sales were
approximately 20% in the second quarter of 1999 and for the six months ended
June 30,1999. The NIR(R) coronary stent is supplied by Medinol Ltd. (Medinol)
and unforeseen delays, stoppages or interruptions in the supply and/or mix of
the NIR(R) stent could adversely affect the operating results of the Company. At
June 30, 1999, there was approximately $182 million of NIR(R) coronary stent
systems in inventory. The Company is committed to purchase approximately $90
million of NIR(R) stents during the remainder of 1999.
On August 6, 1999 the Company announced it was voluntarily recalling from
commercial distribution and use its Rotablator(R) RotaLink(TM) Advancer and
RotaLink Plus(TM) rotational atherectomy systems. The original Rotablator
Rotational Atherectomy Device, which is the product currently sold in Japan, is
not affected by this recall. The Company has determined that the brake on some
advancers included in these systems may not adequately secure the guide wire as
intended, making such units unsafe for use. A program to remedy the problem and
resume the manufacture and sale of these systems is being developed. During the
first half of 1999, sales of the recalled devices and related products amounted
to approximately $60 million.
Gross profit as a percentage of net sales decreased from 69.5% in the three and
six months ended June 30, 1998 to 67.6% in the three and six months ended June
30, 1999. As a result of multiple acquisitions, the Company's supply chain has
been weakened and there has been continued pressure on gross margin, including
write-downs for excess and obsolete inventory, and high manufacturing costs. In
addition, in the second quarter of 1999, the Company provided $11 million ($7
million, net of tax) for costs associated with the Company's decision to
voluntarily recall the Discovery(TM) catheter and to discontinue selling the
BANDIT(TM) PTCA catheter following an adverse patent decision. During 1998, the
Company initiated a full time global program to focus on supply chain
optimization. The program is designed to lower inventory levels and the cost of
manufacturing, improve absorption and minimize inventory write-downs. By
addressing the entire supply chain, including application of lean manufacturing
techniques, the Company seeks to return gross margins to more acceptable levels
and to improve working capital. The program should be substantially completed by
the end of 1999. Gross margin benefits will, however, be delayed until
historical inventories are sold. The Company is also implementing other programs
to improve manufacturing processes and policies. The Company continues to
challenge its plant network strategy.
Success of the global supply chain initiative is critical to realizing improved
gross margins and reducing the Company's inventory to an acceptable level. In
addition, gross margins could be significantly impacted by the purchase price of
NIR(R) coronary stents and the amount of NIR(R) coronary stent sales as a
percentage of worldwide sales. As average selling prices for the NIR(R) stents
fluctuate, the Company's cost to purchase the stents will change because cost is
based on a constant percentage of average selling prices. Therefore, if higher
costing NIR(R) stents are being sold as average selling prices are declining,
gross margins could be negatively impacted.
The coronary stent market is dynamic and highly competitive with significant
market share volatility. In addition, technology in the market is constantly
changing. This environment increases the Company's risk profile in its
investment in coronary stent inventory.
Selling, general and administrative expenses as a percentage of net sales
decreased from 36% of net sales in the second quarter of 1998 to 28% of net
sales in the second quarter of 1999, and
21
<PAGE> 22
increased approximately $30 million from the same period of the prior year to
$204 million. Selling, general and administrative expenses as a percentage of
net sales decreased from 35% in the first six months of 1998 to 29% in the first
six months of 1999, and increased approximately $78 million from the same period
of the prior year to $411 million. The decrease as a percent of net sales is
primarily attributable to the launch of coronary stent systems in the U.S. and
Japan, the realization of synergies as the Company integrates Schneider into its
organization, and improved returns in certain geographic regions as the Company
continues to leverage its direct sales infrastructure. The increase in expense
dollars is primarily attributable to higher selling expenses as a result of the
launch of coronary stents in the U.S., the results of Schneider operations in
the period, and increased costs to expand the Company's presence in certain
geographic regions. Additionally, legal costs associated with asserting the
Company's patent portfolio and defending against claims that the Company's
products infringe the intellectual property of others are increasing. Similarly,
legal costs associated with non-patent litigation and compliance activities are
also rising. Depending upon the prevalence, significance and complexity of these
matters, the Company's legal provision could be adversely affected in the
future.
The Company is involved in various lawsuits, including patent infringement and
product liability suits, from time to time in the normal course of business. In
management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in the notes to the
unaudited condensed consolidated financial statements which, individually or in
the aggregate, could have a material effect on the financial condition,
operations and cash flows of the Company. The Company believes that it has
meritorious defenses against claims that it has infringed patents of others.
However, there can be no assurance that the Company will prevail in any
particular case. An adverse outcome in one or more cases in which the Company's
products are accused of patent infringement could have a material adverse effect
on the Company.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position. The Company is aware that the U.S Department of Justice is conducting
an investigation of matters that include the Company's decision to voluntarily
recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent system in the U.S.
The Company is cooperating fully in the investigation.
Amortization expense increased from $8 million in the second quarter of 1998 to
$23 million in the second quarter of 1999 and increased as a percentage of sales
from 1.6% to 3.2%. Amortization expense increased from $16 million in the first
six months of 1998 to $46 million in the first six months of 1999 and increased
as a percentage of sales from 1.7% to 3.2%. The increase is primarily a result
of the amortization of intangibles related to the purchase of Schneider.
22
<PAGE> 23
Royalty expenses increased approximately 86% from $7 million in the second
quarter of 1998 to $13 million in the second quarter of 1999 and increased
approximately 64% from $14 million in the first six months of 1998 to $23
million in the first six months of 1999. The increase in royalties is primarily
due to royalty obligations assumed in connection with the Schneider acquisition,
new product launches and non-recurring payments of approximately $3 million made
in the second quarter of 1999. Additionally, the Company continues to enter into
strategic technological alliances, some of which include royalty commitments.
Research and development expenses decreased as a percentage of net sales from
10% in the second quarter of 1998 and the six months ended June 30, 1998 to 7%
in the second quarter of 1999 and the six months ended June 30, 1999. Research
and development dollars remained at $49 million in the second quarter of 1999
compared to the second quarter of 1998 and increased $4 million from $94 million
for the six months ended June 30, 1998 to $98 million for the six months ended
June 30, 1999. The decrease as a percentage of sales is primarily attributable
to the launch of coronary stent systems in the U.S. and Japan and the
realization of synergies in connection with the Schneider acquisition. The
increase in research and development dollars reflects spending on new product
development programs, and regulatory and clinical research, and reflects the
Company's continued commitment to refine existing products and procedures and to
develop new technologies that provide simpler, less traumatic, less costly and
more efficient diagnosis and treatment. The Company's research and development
projects acquired in connection with its prior business combinations are
generally progressing in line with the estimates set forth in the Company's 1998
Amended Annual Report on Form 10-K/A2. 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.
In the second quarter of 1998, the Company realigned its operating units and
decided to operate Target Therapeutics, Inc. (Target) independently instead of
as a part of its vascular division as was planned at the date of the Target
acquisition. Management believed that an independent Target would allow the
business unit to develop its technologies and markets more effectively than it
would as part of the vascular division. As a result of this decision, in the
second quarter of 1998, the Company reversed $20 million ($13 million, net of
tax) of 1997 Target merger-related charges primarily related to revised
estimates for costs of workforce reductions and costs of cancelling contractual
commitments. In addition, in the second quarter of 1998, the Company recorded
purchased research and development of approximately $11 million in connection
with a strategic acquisition.
Interest expense increased from $8 million in the second quarter of 1998 to $35
million in the second quarter of 1999, and from $14 million in the first six
months of 1998 to $70 million in the first six months of 1999. The overall
increase in interest expense is primarily attributable to a significantly higher
outstanding debt balance due primarily to the Schneider acquisition.
23
<PAGE> 24
The Company's effective tax rate excluding the impact of merger-related and
special charges increased from approximately 32% in the second quarter and the
first six months of 1998 to 34% in the second quarter and the first six months
of 1999. The increase is primarily attributable to a shift in the mix of U.S.
and international business.
The Company has substantially completed the integration of all mergers and
acquisitions consummated prior to 1998 and expects to complete the integration
of Schneider by the end of 1999. Management believes it has developed a sound
plan for continuing and concluding the integration process, and that it will
achieve that plan. However, in view of the number of major transactions
undertaken by the Company, the dramatic change in the size of the Company and
the complexity of its organization resulting from these transactions, management
also believes that the successful implementation of its plan presents a
significant degree of difficulty. The failure to integrate these businesses
effectively could adversely affect the Company's operating results in the near
term, and could impair the Company's ability to realize the strategic and
financial objectives of these transactions.
Uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers in
the U.S. may result in continued pressure on selling prices of certain products
and resulting compression on gross margins. In addition to impacting selling
prices, the trend to managed care in the U.S. has also resulted in more complex
billing and collection procedures. The Company's ability to effectively react to
the changing environment may impact its bad debt and sales return provision in
the future. Further, the U.S. marketplace is increasingly characterized by
consolidation among healthcare providers and purchasers of medical devices that
prefer to limit the number of suppliers from whom they purchase medical
products. There can be no assurance that these entities will continue to
purchase products from the Company.
International markets are also being affected by economic pressure to contain
reimbursement levels and healthcare costs. The Company's ability to benefit from
its international expansion may be limited by risks and uncertainties related to
economic conditions in these regions, competitive offerings, infrastructure
development, rights to intellectual property, and the ability of the Company to
implement its overall business strategy. Any significant changes in the
political, regulatory or economic environment where the Company conducts
international operations may have a material impact on revenues and profits.
Specifically, the deterioration in the Japan economy may impact the Company's
ability to collect its outstanding Japan receivables.
Although these factors may impact the rate at which Boston Scientific can grow
revenues, the Company believes that it is well positioned to take advantage of
opportunities for growth that exist in the markets it serves.
24
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1999, the Company refinanced $1.7 billion of
commercial paper borrowings with proceeds from borrowings under its revolving
credit facilities (Facilities). On June 30, 1999, the Company completed a public
offering of 14,950,000 shares at a price of $39.875 per share under a shelf
registration filed with the Securities and Exchange Commission in September
1998. The public offering reduced the amount available for the issuance of
securities under the shelf registration to $604 million. The Company does not
expect to issue additional securities under the shelf registration for the
remainder of 1999. The Company used the net proceeds from its public offering of
approximately $578 million to repay indebtedness under its Facilities.
In conjunction with the public offering, the Company's borrowing availability
under its Facilities was reduced by the amount of the net proceeds of the
offering. Of the remaining $1.6 billion of borrowings available under the
Facilities, approximately $1.0 billion was outstanding at June 30, 1999 with a
weighted average interest rate of 5.5%. The Company has a $600 million 364-day
credit facility that expires in September 1999. The Company is in the process of
seeking an extension of this facility for another 364 days under certain
conditions. The Company believes it will be successful in obtaining this
extension in the near term. The Company intends to continue to borrow under its
Facilities until it is able to issue commercial paper at reasonable rates. At
June 30, 1999, the Company had no commercial paper outstanding. The Company has
the ability to refinance a portion of its short-term debt on a long-term basis
through its credit facilities and expects a minimum of $500 million will remain
outstanding through the next twelve months, and accordingly, the Company has
classified this portion of borrowings as long-term at June 30, 1999. The
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 greater than 60%. As of June 30, 1999, the ratio was approximately 42%.
Cash and short-term investments totaled $74 million at June 30, 1999 compared to
$75 million at December 31, 1998. Cash proceeds during the six months ended June
30, 1999 were generated primarily from the Company's public offering, operating
activities and the exercise of stock options. Cash proceeds during the period
were offset by the repayment of approximately $824 million of outstanding debt
obligations, payment of $128 million of acquisition-related obligations and
capital expenditures of approximately $42 million. Working capital increased to
$247 million at June 30, 1999 from current liabilities exceeding current assets
by $353 million at December 31, 1998. The improvement in working capital is
primarily attributable to the repayment of short-term borrowings financed by net
proceeds of the Company's public offering in June 1999 and cash provided by
operating activities. In addition, at June 30, 1999, approximately $100 million
of receivables were transferred to third parties in Europe and Japan and
accounted for as sales of assets compared to $70 million at December 31, 1998.
25
<PAGE> 26
Since early 1995, the Company has entered into several transactions involving
acquisitions and alliances, certain of which have involved equity investments.
As the healthcare environment continues to undergo rapid change, management
expects that it will continue to focus on strategic initiatives and/or make
additional investments in existing relationships. In connection with these
acquisitions, the Company has acquired numerous in-process research and
development projects. As the Company continues to build its research base in
future years, it is reasonable to assume that it will acquire additional
research and development platforms. Management does not expect acquisitions to
be significant during 1999. As of June 30, 1999, the Company's cash obligations
required to complete the balance of the Company's initiatives to integrate
businesses related to its mergers and acquisitions and its 1998 rationalization
plan are estimated to be approximately $47 million. Substantially all of these
cash outlays will be completed by the first half of 2000. The Company expects
that its cash and cash equivalents, marketable securities, cash flows from
operating activities and borrowing capacity will be sufficient to meet its
projected operating cash needs, including integration costs, through the end of
1999.
Year 2000 Readiness
The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. The Company has undertaken a global effort to
identify and mitigate Year 2000 issues in its information systems, products,
facilities and suppliers.
The Company established a multidisciplinary Year 2000 Task Force in 1998,
comprised of management from each of the Company's principal functional areas,
including Finance, Information Technology, Regulatory Affairs, Customer Service,
Manufacturing, Distribution, Purchasing, Facilities, Legal and Communications. A
core team and a program management office have also been established for
coordinating and tracking all Year 2000 issues. This office is comprised of
Company management and staff and representatives of an experienced Year 2000
consulting firm. These efforts report directly to members of the Company's
Executive Committee.
An independent consulting firm has been working with the Company for over 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 Information Technology
26
<PAGE> 27
department systems to manufacturing operations (including production facilities,
support equipment, and process control) and infrastructure technologies.
The vast majority of the Company's products are not date-sensitive and are
therefore unaffected by Year 2000 issues. Steps have been taken to correct
non-compliance, which affects the functional performance of the few remaining
products.
Through June 30, 1999, the Company has expended in excess of $100 million to
implement and operate a Year 2000 compliant global information system and other
costs relating to Year 2000 compliance. The Company does not anticipate that
additional compliance costs will have a material impact on its business
operations or its financial condition.
The Company relies on third party providers for services such as
telecommunications, Internet service, utilities, certain product components and
other key services. Interruption of those services due to Year 2000 issues could
affect the Company's operations. The Company has initiated an evaluation of the
status of third party service providers' compliance efforts and of alternative
and contingency requirements. While approaches to reducing risks of interruption
of business operations vary by business unit, options include identification of
alternative service providers available to provide such services if a service
provider fails to become Year 2000 compliant within an acceptable time frame.
Based on the Company's evaluation to date, management believes that in most
cases redundant capacity exists at the supplier or that alternative sources of
supply are available or could be developed within a reasonable amount of time
should compliance become an issue for individual suppliers.
The Company believes that its Year 2000 program will identify and correct all
material non-compliant systems and operations before the end of 1999. Third
party service providers are being assessed and the Company expects to have
contingency plans that will avoid failures having a material effect on the
Company's business operations or financial condition in place before the end of
1999.
There can be no assurance that the Company's Year 2000 program will identify and
correct all non-compliant systems of the Company and its third party service
providers or that any such failure will not have a material effect on the
Company's business operations or financial condition.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the euro. The participating countries agreed to adopt the euro as their
common legal currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the legacy
27
<PAGE> 28
currencies) and the euro were established as of that date. The legacy currencies
are scheduled to remain legal tender as denominations of the euro until at least
January 1, 2002 (but not later than July 1, 2002). During this transition
period, parties may settle transactions using either the euro or a participating
country's legacy currency. The Company is addressing the potential impact
resulting from the euro conversion, including adaptation of information
technology systems; competitive implications related to pricing and foreign
currency considerations.
Management currently believes that the euro will not have a material impact
related to the adaptation of information technology systems or foreign currency
exposures. The increased price transparency resulting from the use of a single
currency in the eleven participating countries may affect the ability of the
Company to price its products differently in the various European markets. A
possible result of this is price harmonization at lower average prices for
products sold in some markets. However, uncertainty exists as to the effects the
euro will have on the marketplace.
SEC REVIEW OF FINANCIAL REPORTING
Within the past year, the Securities and Exchange Commission (SEC) has publicly
stated its desire to focus on transparent financial reporting and potential
earnings management issues, including restructuring charges, asset write-downs,
acquired in-process research and development write-offs, materiality thresholds,
revenue recognition, and general reserves. In connection with these efforts, the
SEC sent out letters to approximately 150 public companies indicating that their
1998 financial statements may be subject to review. Following its receipt of one
of these letters, the Company requested the SEC staff to evaluate the Company's
purchase price allocation of the Schneider acquisition, including the amount
allocated to purchased research and development. Shortly thereafter, the Company
informed the SEC of its intention to offer equity to refinance a portion of its
outstanding credit facilities balance with more permanent financing. The SEC
also requested that the Company provide additional disclosures with respect to
prior acquisitions and merger-related and special charges and provide the SEC
with additional information with respect to direct transactions and other costs.
The Company supplemented its disclosures and provided the information requested.
In June 1999, the SEC completed its review, without adjustment, of the purchase
price allocation for the acquisition of Schneider.
28
<PAGE> 29
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements contained in this report
include, but are not limited to, statements with respect to and the Company's
performance may be affected by: (a) the Company's ability to obtain benefits
from the Schneider acquisition, including purchased research and development and
physician and hospital relationships; (b) the process, outlays and plan for the
integration of businesses acquired by the Company, and the successful and timely
implementation of the rationalization plan; (c) the timing of completion of the
Company's supply chain initiatives and the Company's ability to achieve gross
margin benefits and inventory reductions; (d) the potential impacts of continued
consolidation among healthcare providers, trends towards managed care and
economically motivated buyers, healthcare cost containment, more stringent
regulatory requirements and more vigorous enforcement activities; (e) the
Company's belief that it is well positioned to take advantage of opportunities
for revenue growth that exist in the markets it serves; (f) the Company's
continued commitment to refine existing products and procedures and to develop
new technologies that provide simpler, less traumatic, less costly and more
efficient diagnosis and treatment; (g) the Company's ability to launch products
on a timely basis, including products resulting from purchased research and
development; (h) risks associated with international operations; (i) the
potential effects of foreign currency fluctuations on revenues, expenses and
resulting margins and the trend toward increasing sales and expenses denominated
in foreign currencies; (j) the ability of the Company to manage accounts
receivable, manufacturing costs and inventory levels and mix and to react
effectively to the changing managed care environment, worldwide economic
conditions and market share volatility in the coronary stent market; (k) the
ability of the Company to meet its projected cash needs through the end of 1999;
(l) the effect of litigation and compliance activities on the Company's legal
provision; (m) costs and risks associated with implementing Year 2000 compliance
and business process reengineering; (n) unforeseen delays, stoppages or
interruptions in the supply and/or mix of the NIR(R) stent and our cost to
purchase the NIR(R) stent; (o) the development of competing or technologically
advanced products by our competitors; (p) the Company's ability to resume the
manufacture and sale of the Rotablator(R) RotaLink(TM) rotational atherectomy
systems; (q) the Company's ability to place commercial paper at reasonable rates
and to extend its existing 364-day revolving credit facilities; (r) the
Company's ability to comply with the debt ratio under its revolving credit
facilities; (s) the Company's expectation as of June 30, 1999 that a minimum of
$500 million of short-term debt supported by its revolving credit facilities
will remain outstanding through the next twelve months; (t) the Company's
ability to fund development of purchased technology at currently estimated costs
and to realize value assigned to in-process research and development and other
intangible assets; (u) the impact of stockholder class action, patent, product
liability and other litigation, the outcome of the U.S. Department of Justice
29
<PAGE> 30
investigation, and the adequacy of the Company's product liability insurance;
(v) the potential impact resulting from the euro conversion, including
adaptation of information technology systems, competitive implications related
to pricing and foreign currency considerations; and (w) the timing, size and
nature of strategic initiatives available to the Company. Several important
factors, in addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect the future results of the
Company and could cause those results to differ materially from those expressed
in the forward-looking statements contained herein. Such additional factors
include, among other things, future economic, competitive and regulatory
conditions, demographic trends, third-party intellectual property, financial
market conditions and future business decisions of Boston Scientific and its
competitors, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of Boston Scientific. Therefore, the
Company wishes to caution each reader of this report to consider carefully these
factors as well as the specific factors discussed with each forward-looking
statement in this report and as disclosed in the Company's filings with the
Securities and Exchange Commission as such factors, in some cases, have
affected, and in the future (together with other factors) could affect, the
ability of the Company to implement its business strategy and may cause actual
results to differ materially from those contemplated by the statements expressed
herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's assessment of its sensitivity
to market risk since its presentation set forth in its Amended Annual Report on
Form 10-K/A2 for the year ended December 31, 1998.
30
<PAGE> 31
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Note H - Commitments and Contingencies to the Company's unaudited condensed
consolidated financial statements contained elsewhere in this Quarterly Report
is incorporated herein by reference.
ITEM 4: SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 4, 1999, to
consider and vote upon a proposal to elect three Class I Directors of the
Company to hold office until the 2002 Annual Meeting of Stockholders of the
Company, and until their respective successors are chosen and qualified or until
their earlier resignation, death or removal. Pete M. Nicholas, James R. Tobin
and Ray J. Groves were elected as Class I Directors of the Company by a vote of
349,197,828, 347,942,189, and 350,006,250 for, respectively, and 5,016,221,
6,271,860, and 4,207,799 withheld, respectively.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) The following reports were filed during the quarter ended June
30, 1999:
<TABLE>
<CAPTION>
FORM 8-K DATE OF EVENT DESCRIPTION
-------- ------------- -----------
<S> <C> <C>
Item 5 and 7 June 24, 1999 Press release announcing patent infringement decision
involving the Company's BANDIT(TM)PTCA catheter.
Item 5 and 7 June 24, 1999 Execution of U.S. Purchase Agreement dated June 24, 1999
between the Company and the Underwriters named therein and
execution of International Purchase Agreement dated June
24, 1999 between the Company and the International
Managers named therein in connection with the Company's
equity offering and issuance of 14,950,000 shares of
common stock on June 30, 1999.
</TABLE>
31
<PAGE> 32
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 13, 1999.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
--------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and
Senior Vice President -
Finance and Administration
32
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<CASH> 69
<SECURITIES> 5
<RECEIVABLES> 491
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<INVENTORY> 456
<CURRENT-ASSETS> 1,192
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0
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