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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Boston Scientific Place, Natick, Massachusetts 01760-1537
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
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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 as
Class of September 30, 2000
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Common Stock, $.01 Par Value 405,292,405
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<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 millions, except share and per share data 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 45 $ 64
Short-term investments 5 14
Trade accounts receivable, net 395 445
Inventories 327 376
Other current assets 163 156
------ ------
Total current assets 935 1,055
Property, plant and equipment 939 940
Less: accumulated depreciation 370 336
------ ------
569 604
Excess of cost over net assets acquired, net 820 840
Technology - core and developed, net 541 570
Patents, trademarks and other intangibles, net 333 316
Investments 79 55
Other assets 136 132
------ ------
$3,413 $3,572
====== ======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
<TABLE><CAPTION>
September 30, December 31,
In millions, except share and per share data 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Commercial paper $ 98 $ 277
Bank obligations 196 323
Accounts payable 65 92
Accrued expenses 274 286
Accrual for restructuring and merger-related charges 41 32
Income taxes payable 124 42
Other current liabilities 5 3
------- -------
Total current liabilities 803 1,055
Long-term debt 566 678
Other long-term liabilities 110 115
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value - authorized 50,000,000 shares,
none issued and outstanding
Common stock, $.01 par value - authorized 600,000,000 shares, 414,922,050
shares issued at September 30, 2000 and December 31, 1999 4 4
Additional paid-in capital 1,210 1,210
Treasury stock, at cost - 9,629,645 shares at September 30, 2000 and
5,872,857 shares at December 31, 1999 (197) (126)
Deferred compensation (18)
Retained earnings 1,058 752
Accumulated other comprehensive loss (123) (116)
------- -------
Total stockholders' equity 1,934 1,724
------- -------
$ 3,413 $ 3,572
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<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 millions, except per share data 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 652 $ 691 $ 2,026 $ 2,125
Cost of products sold 200 283 630 748
------- ------- ------- -------
Gross profit 452 408 1,396 1,377
Selling, general and administrative expenses 216 220 644 631
Amortization expense 23 23 69 69
Royalties 10 12 31 35
Research and development expenses 48 48 146 146
Special charges (credits) 23 (10) 23 (10)
------- ------- ------- -------
320 293 913 871
------- ------- ------- -------
Operating income 132 115 483 506
Other income (expense):
Interest expense (16) (26) (56) (96)
Other, net 3 (5) 18 (10)
------- ------- ------- -------
Income before income taxes 119 84 445 400
Income taxes 34 29 132 136
------- ------- ------- -------
Net income $ 85 $ 55 $ 313 $ 264
======= ======= ======= =======
Net income per common share - basic $ 0.21 $ 0.13 $ 0.77 $ 0.66
======= ======= ======= =======
Net income per common share - assuming dilution $ 0.21 $ 0.13 $ 0.76 $ 0.64
======= ======= ======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
<TABLE><CAPTION>
In millions, except share data Nine Months Ended September 30, 2000
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------------------ Additional Accumulated Other
Shares Issued Par Paid-In Treasury Deferred Retained Comprehensive
(In thousands) Value Capital Stock Compensation Earnings Income (Loss) Total
-------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 414,922 $ 4 $ 1,210 $ (126) $ 752 $ (116) $ 1,724
Net income 313 313
Foreign currency translation
adjustment (27) (27)
Issuance of common stock (7) 42 (7) 28
Issuance of restricted stock 2 24 $ (26)
Cancellation of restricted stock (2) 2
Purchases of common stock for
treasury (135) (135)
Tax benefit relating to
incentive stock option and
employee stock purchase plans 5 5
Amortization of deferred
compensation 6 6
Unrealized gains on derivative
financial instruments, net 12 12
Unrealized gains on equity
investments, net 8 8
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Balance at September 30, 2000 414,922 $ 4 $ 1,210 $ (197) $ (18) $ 1,058 $ (123) $ 1,934
===================================================================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE><CAPTION>
Nine Months Ended
September 30,
In millions 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 562 $ 610
Investing activities:
Purchases of property, plant and equipment, net (51) (57)
Payments related to 1998 acquisition (128)
Sales of available-for-sale securities 15 5
Payments for acquisitions of and/or investments
in certain technologies, net (25) (5)
------- -------
Cash used for investing activities (61) (185)
Financing activities:
Net decrease in commercial paper (179) (1,816)
Net (payments on) proceeds from borrowings
on revolving credit facilities (242) 741
Proceeds from issuances of shares of common stock 28 652
Acquisitions of treasury stock (135)
Other, net 12 (1)
------- -------
Cash used for financing activities (516) (424)
Effect of foreign exchange rates on cash (4) 1
------- -------
Net (decrease) increase in cash and cash equivalents (19) 2
Cash and cash equivalents at beginning of period 64 70
------- -------
Cash and cash equivalents at end of period $ 45 $ 72
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Boston
Scientific Corporation (Boston Scientific or the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the consolidated financial statements and footnotes thereto incorporated by
reference in Boston Scientific's Annual Report on Form 10-K for the year ended
December 31, 1999.
Certain prior years' amounts have been reclassified to conform to the current
year presentation.
Note B - Comprehensive Income
For the three months ended September 30, 2000 and 1999, the Company's
comprehensive income was $84 million and $69 million, respectively. For the nine
months ended September 30, 2000 and 1999, the Company's comprehensive income was
$306 million and $232 million, respectively.
Note C - 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 millions, except share and per share data) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic:
Net income $ 85 $ 55 $ 313 $ 264
-------- -------- -------- --------
Weighted average shares outstanding (in thousands) 405,176 414,530 406,643 402,328
-------- -------- -------- --------
Net income per common share $ 0.21 $ 0.13 $ 0.77 $ 0.66
======== ======== ======== ========
<PAGE>
Assuming dilution:
Net income $ 85 $ 55 $ 313 $ 264
-------- -------- -------- --------
Weighted average shares outstanding (in thousands) 405,176 414,530 406,643 402,328
Net effect of dilutive stock-based compensation
(in thousands) 3,002 6,975 3,363 7,689
-------- -------- -------- --------
Total (in thousands) 408,178 421,505 410,006 410,017
-------- -------- -------- --------
Net income per common share $ 0.21 $ 0.13 $ 0.76 $ 0.64
======== ======== ======== ========
</TABLE>
Note D - Change in Estimated Effective Tax Rate
The Company changed its estimate of its 2000 effective tax rate, excluding the
impact of special charges, from approximately 32% to 30% in the second quarter
of 2000. The decrease is primarily attributable to changes in the geographic mix
of the Company's business. The effect of this reduction resulted in an increase
in the Company's net income for the nine months ended September 30, 2000 of
approximately $9 million, or $0.02 per share (diluted), of which approximately
$3 million, or $0.01 per share, represents the impact for the third quarter of
2000.
Note E - Restructuring and Merger-Related Charges
At September 30, 2000, the Company had an accrual for restructuring and
merger-related charges of $42 million. The details and activity of the accrual
during the nine months ended September 30, 2000 is summarized in the following
table:
<TABLE><CAPTION>
Balance at Charges to Charges Balance at
December 31, Operations Utilized September 30,
(In millions) 1999 in 2000 in 2000 2000
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 AND 1996 RESTRUCTURING AND MERGER-RELATED
INITIATIVES:
Facilities $ 3 $ 3
Workforce reductions 4 $ (1) 3
Other costs 3 3
-------- -------- -------- --------
$ 10 $ (1) $ 9
======== ======== ======== ========
1998 SCHNEIDER PURCHASE PRICE ADJUSTMENTS:
Workforce reductions $ 13 $ (10) $ 3
Contractual commitments 6 (1) 5
-------- -------- -------- --------
$ 19 $ (11) $ 8
======== ======== ======== ========
<PAGE>
1998 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Workforce reductions $ 2 $ (2)
Asset write-downs 4 (3) $ 1
Other costs 1 1
-------- -------- -------- --------
$ 7 $ (5) $ 2
======== ======== ======== ========
2000 RESTRUCTURING INITIATIVES:
Workforce reductions $ 23 $ 23
======== ======== ======== ========
TOTAL :
Facilities $ 3 $ 3
Workforce reductions 19 $ 23 $ (13) 29
Contractual commitments 6 (1) 5
Asset write-downs 4 (3) 1
Other costs 4 4
-------- -------- -------- --------
$ 36 $ 23 $ (17) $ 42
======== ======== ======== ========
</TABLE>
Amounts remaining for 1996 and prior restructuring and merger-related
initiatives relate primarily to costs associated with rationalized facilities
and statutory benefits that are subject to litigation.
In July 2000, the Company announced a global operations plan, which encompasses
a series of strategic initiatives to increase productivity and enhance
innovation. The plan includes manufacturing process and supply chain programs
and a plant optimization initiative. The intent of the plant optimization
initiative is to better allocate the Company's resources by creating a more
effective network of manufacturing and research and development facilities. The
Company's plan includes the discontinuation of manufacturing activities at two
facilities in the U.S. and the closure of a third facility and is planned to be
substantially completed over the next fifteen months. During the third quarter
of 2000, the Company recorded a special charge of $23 million associated with
the plant optimization. The charge relates to severance and outplacement costs
for the approximately 1,200 manufacturing employees who are expected to be
affected by the plan over the next twelve months. As of September 30, 2000, no
significant amounts have been charged against the related accrual.
Note F - Borrowings and Credit Arrangements
During the second quarter of 2000, the Company increased the multicurrency
borrowing sublimit under its $1.0 billion credit facility from $100 million to
$300 million. Also, during 2000, the Company increased the borrowing capacity
under its uncommitted Japanese credit facilities. These facilities provided for
borrowings and promissory notes discounting of up to 15.0 billion Japanese yen
(translated to approximately $139 million) and 11.5 billion Japanese yen
(translated to approximately $112 million) at September 30, 2000 and December
31, 1999, respectively.
<PAGE>
During the third quarter of 2000, the Company extended the termination date of
its $600 million 364-day credit facility from September 2000 to September 2001
on similar terms and conditions. There were no borrowings outstanding under this
credit facility as of September 30, 2000.
The Company has the ability to refinance a portion of its short-term debt on a
long-term basis through its revolving credit facilities. The Company does not
expect that its short-term borrowings will remain outstanding beyond the next
twelve months, and, accordingly, the Company has not reclassified any of the
short-term borrowings as long-term at September 30, 2000, compared to $108
million of such reclassifications at December 31, 1999.
Note G - Inventories
The components of inventory consist of the following:
September 30, December 31,
(In millions) 2000 1999
---------------------------------------------------------
Finished goods $ 163 $ 194
Work-in-process 59 60
Raw materials 105 122
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$ 327 $ 376
====== ======
At September 30, 2000, the Company had approximately $134 million of net NIR(R)
coronary stent inventory, which is supplied by Medinol Ltd. (Medinol), and was
committed to purchase approximately $55 million of NIR(R) stents from Medinol.
Delays, stoppages or interruptions in the supply and/or mix of NIR(R) stent
inventory could adversely affect the operating results and/or revenues of the
Company.
Note H - Stockholders' Equity
The Company is authorized to purchase on the open market up to approximately 40
million shares of the Company's common stock. Stock repurchased under the
Company's systematic plan will be used to satisfy its obligations pursuant to
employee benefit and incentive plans. Under the authorization, the Company may
also repurchase shares outside of the Company's systematic plan. These
additional shares would also be used to satisfy the Company's obligations
pursuant to employee benefit and incentive plans. During the nine months ended
September 30, 2000, the Company repurchased approximately 6.7 million shares at
an aggregate cost of approximately $135 million.
In January 2000, the Company granted under its 1992 and 1995 Long-Term Incentive
Plans approximately 1.1 million shares of its common stock to certain employees
subject to certain forfeiture restrictions. The purpose of the program was to
help retain key employees. The market value of these shares was approximately
$26 million on the date of issuance and the vesting period is three years. This
amount was recorded as deferred compensation and is shown as a separate
component of stockholders' equity. The deferred compensation is being amortized
to expense over the vesting period, and such expense amounted to approximately
$2 million and $6 million for the three and nine months ended September 30,
2000, respectively. During the nine months ended September 30, 2000,
approximately 110,000 shares of restricted stock were forfeited.
<PAGE>
Note I - Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for all fiscal years
beginning after June 15, 2000, although earlier application is permitted as of
the beginning of any fiscal quarter. The Company adopted SFAS 133 as of January
1, 2000. The Company recorded an immaterial transition adjustment upon adoption
of this Statement.
Upon adoption of SFAS 133, the Company initiated a program to hedge a portion of
its forecasted intercompany and third party transactions with forward foreign
exchange contracts. These contracts are entered into to reduce the risk that the
Company's earnings and cash flows resulting from certain forecasted transactions
will be adversely affected by changes in foreign currency exchange rates.
However, the Company may be impacted by foreign currency exchange rates related
to the unhedged portion. The success of the hedging program depends, in part, on
forecasts of transaction activity in various currencies (currently the Japanese
yen and the euro). The Company may experience unanticipated foreign currency
exchange gains or losses to the extent that there are timing differences between
forecasted and actual activity during periods of currency volatility.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at fair value and that changes in the fair value of the derivative
instruments, designated as cash flow hedges, be recorded in accumulated other
comprehensive income/(loss) (AOCI) until the third party transaction associated
with the hedged forecasted transaction occurs. Once the third party transaction
associated with the hedged forecasted transaction occurs, the related gain or
loss on the cash flow hedge is reclassified from AOCI to earnings. In the event
the hedged forecasted intercompany or third party transaction does not occur, or
it becomes probable that it will not occur, the gain or loss on the related cash
flow hedge would be reclassified from AOCI to earnings at that time. Since the
critical terms of the hedging instruments are the same as the underlying
forecasted transaction, the changes in the fair value of the derivatives should
be highly effective in offsetting changes in the expected cash flows from the
forecasted transaction. The Company did not recognize material gains or losses
resulting from either hedge ineffectiveness or changes in forecast probability
during the nine months ended September 30, 2000.
The Company recognized a net gain of approximately $1 million and $4 million in
earnings from derivative instruments designated as cash flow hedges of
forecasted transactions during the three and nine month periods ended September
30, 2000, respectively. All of the derivative instruments, designated as cash
flow hedges, outstanding at September 30, 2000 mature within the subsequent
24-month period. As of September 30, 2000, approximately $12 million of
unrealized net gains have been recorded in AOCI, net of tax, to recognize the
fair value of derivative instruments that are, or previously were, designated as
cash flow hedges. Of this amount, a gain of approximately $11 million, net of
tax, is expected to be reclassified to earnings within the next twelve months.
Furthermore, the Company continues to hedge its net recognized foreign currency
transactional exposures with forward foreign exchange contracts to reduce the
risk that the Company's earnings and cash flows will be adversely affected by
changes in foreign currency exchange rates. These foreign exchange contracts are
not designated as cash flow, fair value or net investment hedges under SFAS 133.
These derivative instruments do not subject the Company's earnings or cash flows
to material risk due to exchange rate movements because gains and losses on
these derivatives offset losses and gains on the assets and liabilities being
hedged. These forward foreign exchange contracts are entered into for periods
consistent with commitments, generally one to six months.
<PAGE>
In June 2000, the FASB approved certain interpretations of SFAS 133 that affect
the accounting for cash flow hedges of forecasted intercompany transactions in a
manner that was not consistent with the intended accounting under the Company's
hedging strategy. As a result, effective July 1, 2000, the Company removed the
cash flow hedge designation from a portion of its derivative instruments that
mature on various dates prior to December 31, 2000. Accordingly, changes in the
fair value of derivative instruments that hedge forecasted transactions but are
not designated as cash flow hedges are recorded in earnings each period. The
Company recognized a net gain of approximately $5 million in earnings from these
hedges during the third quarter of 2000.
Note J - New Accounting Standard
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No.101, "Revenue Recognition in Financial Statements", which the
Company will be required to adopt in the fourth quarter of 2000. The Company is
in the process of determining the effect of adoption of SAB No. 101 on its
consolidated financial statements and related disclosures, however, based on
preliminary analyses, the Company does not expect that SAB No. 101 will have a
material impact on its results of operations, financial position or cash flows.
Note K - Commitments and Contingencies
On May 16, 2000, the Company entered into an agreement with Guidant Corporation
(Guidant) to settle all outstanding litigation between the two companies and
their affiliates. The Company and Guidant had pending a number of lawsuits in
the U.S. and Europe in which each had accused the other of patent infringement.
The litigation involves coronary stent delivery systems and dilatation
catheters. As part of the settlement, the companies agreed to license certain
patents to each other. In addition, the companies agreed to specified financial
terms depending upon the ultimate resolution of Guidant's August 12, 1998
lawsuit against the Company filed in Indiana related to the Company's NIR(R)
stent and of the Company's May 31, 1994 lawsuit against Guidant in California
related to Guidant's RX ELIPSE(TM) PTCA catheter and RX MULTILINK(TM) stent
delivery system (described below). All other disputes between the parties were
dismissed.
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), a subsidiary of Guidant, 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 SCIMED's patents were
not infringed. SCIMED has appealed the judgment. A hearing was held October 2,
2000 and the Company is awaiting the decision.
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. On June 28, 2000, the Court granted the Company's motion to
dismiss the action. ACS has appealed the decision.
<PAGE>
On March 25, 1996, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson Company (Johnson & Johnson), filed a suit for patent infringement
against SCIMED, alleging the infringement of five U.S. patents by SCIMED's LEAP
balloon material used in certain SCIMED catheter products, including SCIMED's
BANDIT and EXPRESS PLUS catheters. The suit was filed in the U.S. District Court
for the District of Minnesota and seeks monetary and injunctive relief. SCIMED
has answered, denying the allegations of the complaint. A trial date has not yet
been set.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis,
alleging willful infringement of several SCIMED U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in
the U.S. District Court for the District of Minnesota, seeking monetary and
injunctive relief. The parties have agreed to add Cordis' CHARGER(TM) and
HELIX(TM) catheters to the suit. Cordis has answered, denying the allegations of
the complaint. A trial date has not yet been set.
On March 13, 1997, the Company (through its subsidiaries) filed suits against
Johnson & Johnson (through its subsidiaries) in The Netherlands, the United
Kingdom and Belgium, and on March 17, 1997 filed suit in France, seeking a
declaration of noninfringement for the NIR(R) stent relative to two European
patents licensed to Ethicon, Inc. (Ethicon), a Johnson & Johnson subsidiary, as
well as a declaration of invalidity with respect to those patents. After a trial
on the merits in the United Kingdom during March 1998, the court ruled on June
26, 1998 that neither of the patents is infringed by the NIR(R) stent, and that
both patents are invalid. Ethicon appealed, and on March 20, 2000, the appellate
court upheld the trial outcome. On October 28, 1998, the Company's motion for a
declaration of noninfringement in France was dismissed for failure to satisfy
statutory requirements; the French invalidity suits were not affected.
On March 20, 21 and 22, 1997, the Company (through its subsidiaries) filed
additional suits against Johnson & Johnson (through its subsidiaries) in Sweden,
Italy and Spain, respectively, seeking a declaration of noninfringement for the
NIR(R) stent relative to one of the European patents licensed to Ethicon in
Sweden, Italy and Spain and a declaration of invalidity in Italy and Spain. In
Italy, following a July 9, 1999 hearing, a technical expert was appointed by the
court. Ethicon and other Johnson & Johnson subsidiaries filed a cross-border
suit in The Netherlands on March 17, 1997, alleging that the NIR(R) stent
infringes one of the European patents licensed to Ethicon. In this action, the
Johnson & Johnson entities requested relief, including provisional relief (a
preliminary injunction), covering Austria, Belgium, France, Greece, Italy, The
Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. On April
2, 1997, the Johnson & Johnson entities filed a similar cross-border proceeding
in The Netherlands with respect to a second European patent licensed to Ethicon.
Johnson & Johnson subsequently withdrew its request for cross-border relief in
the United Kingdom. In October, 1997, Johnson & Johnson's request for
provisional cross-border relief on both patents was denied by the Dutch court,
on the ground that it is "very likely" that the NIR(R) stent will be found not
to infringe the patents. Johnson & Johnson appealed this decision with respect
to the second patent; the appeal has been denied on the ground that there is a
"ready chance" that the patent will be declared null and void. In January 1999,
Johnson & Johnson amended the claims of the second patent, changed the action
from a cross-border case to a Dutch national action, and indicated its intent
not to pursue its action on the first patent. On June 23, 1999, the Dutch Court
affirmed that there were no remaining infringement claims with respect to either
patent. In late 1999, Johnson & Johnson appealed this decision. A hearing on the
appeal has not yet been scheduled.
<PAGE>
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that the Company's NIR(R) stent infringes one of Ethicon's
patents. On June 23, 1998, the case was stayed following a decision in an
unrelated nullity action in which the Ethicon patent was found to be invalid.
On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR(R) stent infringes certain
Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court
of Canada seeking a declaration of infringement, monetary damages and injunctive
relief. The Company has answered, denying the allegations of the complaint. A
trial is expected to begin in 2001.
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. A trial is
scheduled to begin in 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 is
scheduled to begin in November, 2000.
On June 7, 1999, the Company, SCIMED and Medinol Ltd. (Medinol) filed suit for
patent infringement against Johnson & Johnson, Johnson & Johnson Interventional
Systems and Cordis, alleging two U.S. patents owned by Medinol are infringed by
at least Cordis' CROWN(TM), MINI CROWN(TM) and CORINTHIAN(TM) stents. The suit
was filed in the U.S. District Court for the District of Minnesota seeking
injunctive and monetary relief. The case has been transferred to the U.S.
District Court for the District of Delaware. A trial is scheduled to begin in
August 2001.
On March 24, 2000, the Company (through its subsidiaries) and Medinol filed a
cross-border suit against Johnson & Johnson, Cordis and certain of their foreign
subsidiaries in The Netherlands alleging Cordis' BX Velocity(TM) stent delivery
system infringes one of Medinol's European patents. In this action, the Company
and Medinol requested monetary and injunctive relief covering The Netherlands,
Austria, Belgium, Switzerland, Germany, Denmark, Spain, France, Greece, Ireland,
Italy, Liechtenstein, Luxembourg, Monaco, Portugal and Sweden. A hearing is
scheduled for January 12, 2001.
On March 30, 2000, the Company through its subsidiary filed suit for patent
infringement against two subsidiaries of Cordis alleging that Cordis' BX
Velocity stent delivery system infringes a published utility model owned by
Medinol and exclusively licensed to the Company. The complaint was filed in the
District Court of Dusseldorf, Germany seeking monetary and injunctive relief. A
hearing is scheduled for March 15, 2001.
On April 14, 2000, the Company (through its subsidiaries) and Medinol filed suit
for patent infringement against Johnson & Johnson, Cordis, and a subsidiary of
Cordis alleging that Cordis' BX Velocity stent delivery system infringes a
patent owned by Medinol and exclusively licensed to the Company. The complaint
was filed in the U.S. District Court for the District of Delaware seeking
monetary and injunctive relief. The Company filed a motion seeking a preliminary
injunction and a hearing on the motion was held on August 3, 2000. Trial is
expected to begin in August 2001.
<PAGE>
On August 13, 1998, Arterial Vascular Engineering, Inc., now named Medtronic AVE
Inc. (AVE), filed a suit for patent infringement against the Company and SCIMED
alleging that the Company's NIR(R) stent infringes two patents owned by AVE. The
suit was filed in the U.S. District Court for the District of Delaware seeking
injunctive and monetary relief. On May 25, 2000, AVE amended the complaint to
include a third patent. The Company and SCIMED have answered, denying the
allegations of the complaint. Trial is expected to begin in 2002.
On December 15, 1998, the Company and SCIMED filed a cross-border suit against
AVE in The Netherlands alleging that AVE's AVE GFX(TM), AVE GFX 2(TM), AVE
LTX(TM) and USCI CALYPSO(TM) rapid exchange catheters and stent delivery systems
infringe one of the Company's European patents. In this action, the Company
requested relief covering The Netherlands, the United Kingdom, France, Germany
and Italy. A hearing on the merits was held on October 22, 1999. The Court has
delayed its decision pending advice from the Dutch Patent Office.
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 is scheduled for June 4, 2001.
On March 10, 1999, the Company through its subsidiary Schneider (Europe) AG
filed suit against AVE alleging that AVE's AVE GFX, AVE GFX2, AVE LTX, CALYPSO
RELY(TM), PRONTO SAMBA(TM) and SAMBA RELY(TM) rapid-exchange catheters and stent
delivery systems infringe one of the Company's German patents. The suit was
filed in the District Court of Dusseldorf, Germany seeking injunctive and
monetary relief. A hearing was held on January 27, 2000. The Court has delayed
its decision pending expert advice and on May 15, 2000, the Court appointed a
technical expert.
On April 6, 1999, AVE filed suit against SCIMED and another subsidiary of the
Company alleging that the Company's NIR(R) stent infringes one of AVE's European
patents. The suit was filed in the District Court of Dusseldorf, Germany seeking
injunctive and monetary relief. A hearing was held in Germany on September 23,
1999, and on November 4, 1999, the court dismissed the complaint. On December
21, 1999, AVE appealed the dismissal and a hearing is scheduled for May 2001.
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. In February 2000, the court
found that the NIR(R) stent products do not infringe Medtronic's patent and the
suit was dismissed. Medtronic has appealed the decision.
On July 7, 1999, Medtronic filed suit against the Company and SCIMED, alleging
that SCIMED's RADIUS(TM) stent infringes two patents owned by Medtronic. The
suit was filed in the U.S. District Court for the District Court of Minnesota
seeking injunctive and monetary relief. The Company has answered, denying
allegations of the complaint. A trial is scheduled for July 2001.
On March 28, 2000, the Company and certain subsidiaries filed suit for patent
infringement against AVE alleging that AVE's S670 rapid exchange coronary stent
system infringes a patent licensed to the Company. The suit was filed in the
U.S. District Court for the Northern District of California seeking monetary and
injunctive relief. In July 2000, this matter was sent to arbitration. An
arbitration hearing is currently scheduled in May 2001 to determine whether
AVE's S670 and S660 rapid exchange coronary stent delivery systems and the R1S
rapid exchange catheter are licensed pursuant to the terms of a settlement
agreement.
<PAGE>
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 principal amount of $10.8 million. The Company was also enjoined
from selling the product found to be infringing. The Company had appealed the
judgment to the Court of Appeals for the Federal Circuit. On July 7, 2000, the
Court of Appeals for the Federal Circuit affirmed the lower Court's decision. On
October 6, 2000, the Company paid the amounts of the judgment, including
interest, to Bard. The product involved in the lawsuit has not been sold by the
Company for several years.
On March 7, 1996, Cook Inc. (Cook) filed suit in the Regional Court, Munich
Division for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally
Invasive Technologies alleging that the Cragg EndoPro(TM) System I and
Stentor(TM) endovascular device infringe a certain Cook patent. Following the
purchase of the assets of the Endotech/MinTec companies by the Company, the
Company assumed control of the litigation. A final hearing was held on May 12,
1999, and the court held no infringement of the Cook patents. The case was
dismissed in June 1999. Cook has appealed the decision. A hearing was held on
May 4, 2000. On July 27, 2000, the Court stayed the action pending the outcome
of a nullity action filed by the Company against the patent.
On June 30, 1998, Cook filed suit in the Regional Court, Dusseldorf Division for
Patent Disputes, in Dusseldorf, Germany against the Company alleging that the
Company's PASSAGER(TM) peripheral vascular stent graft and VANGUARD(TM)
endovascular aortic graft products infringe the same Cook patent. A hearing was
held on July 22, 1999 and a decision was received in September 1999 finding the
Company's products infringe the Cook patent. The Company appealed the decision.
A hearing is scheduled for April 26, 2001.
On March 18, 1999, Cook filed suit against the Company and SCIMED, alleging that
SCIMED's RADIUS(TM) coronary stent infringes a certain U.S. patent owned by
Cook. The suit was filed in the U.S. District Court for the Southern District of
Indiana seeking monetary damages and injunctive relief. On July 14, 1999, Cook
filed an amended complaint adding Meadox Medicals, Inc. (Meadox), a wholly owned
subsidiary of the Company, as a party to the suit, and adding a breach of
contract claim. The Company, SCIMED and Meadox have answered, denying the
allegations of the complaint. A trial date is scheduled for May 14, 2001.
On May 19, 2000, the Company and SCIMED filed suit against a subsidiary of Cook
alleging that Cook's MBL-4(TM), MBL-6(TM), MBL-4-XL(TM) and MBL-6-OV(TM)
ligating devices infringe three of the Company's patents. The suit was filed in
the U.S. District Court for the District of Massachusetts seeking monetary
damages and injunctive relief. Cook counterclaimed seeking declaratory judgment
that the Company's patents are invalid and unenforceable and Cook's products do
not infringe the Company's patents. The Company filed a motion requesting a
preliminary injunction which was denied in September 2000. The Company has
appealed the court's decision and a hearing on the appeal has not yet been
scheduled.
On February 3, 1999, the Company filed suit against Influence, Inc. (Influence)
alleging that Influence infringes certain of the Company's patents covering the
treatment of female urinary incontinence. The suit was filed in the Northern
District of California. Influence counterclaimed, alleging that the Company
infringes certain Influence patents, also relating to the treatment of female
urinary incontinence. Both parties are seeking monetary damages and injunctive
relief. On July 7, 2000, the Court ruled that Influence was not the proper owner
of one of the patents. A trial date is scheduled for January 12, 2001.
<PAGE>
On March 27, 2000, American Medical Systems, Inc. (AMS) filed suit against the
Company alleging that the Company induces infringement of an AMS patent covering
a certain treatment for female urinary incontinence. The complaint also alleges
misappropriation of trade secrets and breach of contract. The suit was filed in
the U.S. District Court for the District of Minnesota seeking monetary and
injunctive relief. The Company has answered, denying the allegations of the
complaint.
On October 31, 2000, the Federal Trade Commission (FTC) filed suit against the
Company for alleged violations of a Consent Order dated May 5, 1995, pursuant to
which the Company had licensed certain intravascular ultrasound technology to
Hewlett-Packard Company (HP). The suit was filed in the U.S. District Court for
the District of Massachusetts seeking civil penalties and injunctive relief. The
Company does not believe any violation of the Consent Order has occurred and
intends to vigorously defend the complaint.
On February 1, 1999, HP filed a suit in the U.S. District Court for the District
of Massachusetts against the Company alleging violation of the Sherman Antitrust
Act and Massachusetts General Laws Chapter 93A and breach of the License
Agreement entered into pursuant to the FTC Consent Order. This case has been
dismissed pursuant to a settlement agreement between the parties.
Beginning November 4, 1998, a number of shareholders of the Company, on behalf
of themselves and all others similarly situated, filed purported stockholders'
class action suits in the U.S. District Court for the District of Massachusetts
alleging that the Company and certain of its officers violated certain sections
of the Securities Exchange Act of 1934. The complaints principally alleged that
as a result of certain accounting irregularities involving the improper
recognition of revenue by the Company's subsidiary in Japan, the Company's
previously issued financial statements were materially false and misleading. In
August 1999, lead plaintiffs and lead counsel filed a purported consolidated
class action complaint adding allegations that the Company issued false and
misleading statements with respect to the launch of its NIR ON(R) Ranger(TM)
with Sox(TM) coronary stent delivery system and the system's subsequent recall.
The Company and its officers have filed a motion to dismiss the consolidated
complaint. The Plaintiffs have opposed the Company's motion to dismiss the
consolidated complaint.
On August 21, 2000, the Company entered into a settlement with the Securities
and Exchange Commission (SEC) in connection with business irregularities in its
Japanese subsidiary, previously discovered and disclosed by the Company in 1998.
Under the settlement, which does not include any fine, the Company has consented
to the entry of an order which prohibits future violations of federal securities
law provisions. The Company has neither admitted nor denied any of the findings
set forth in the SEC's order. The order does not find any intentional or
reckless conduct on the part of the Company, and it acknowledges the Company's
prompt remedial acts and cooperation.
On July 28, 2000, Dr. Tassilo Bonzel filed a complaint naming certain of the
Company's Schneider Worldwide subsidiaries and Pfizer Inc. and certain of its
affiliates as defendants, alleging that Pfizer failed to pay Dr. Bonzel amounts
owed under a license agreement involving Dr. Bonzel's patented Monorail (TM)
technology. The suit was filed in the District Court for the State of Minnesota
seeking monetary relief. Dr. Bonzel has also provided a notice of breach of the
agreement which could lead to its termination. On September 5, 2000, the Company
and Boston Scientific Scimed, Inc. (formerly known as Schneider (USA), Inc.)
filed suit against Dr. Bonzel in the U.S. District Court for the District of
Massachusetts seeking a declaratory judgment of non-infringement because the
Company has not breached the terms of the license agreement and that Dr. Bonzel
is estopped from asserting infringement. Dr. Bonzel filed a motion to dismiss or
stay the Massachusetts action and a hearing was held on October 25, 2000. A
decision on this motion is pending.
<PAGE>
The Company is aware that the U.S. Department of Justice is conducting an
investigation of matters that include the Company's NIR ON(R) Ranger(TM) with
Sox(TM) coronary stent delivery system which was voluntarily recalled by the
Company in October 1998 following reports of balloon leaks. The Company is
cooperating fully in the investigation.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company. As of September 30, 2000, the potential
exposure for litigation-related accruable costs is estimated to range from $35
million to $49 million. The Company's total accrual as of September 30, 2000 for
litigation-related reserves was approximately $35 million. As of September 30,
2000, the range of loss for reasonably possible contingencies that can be
estimated is $0 to $20 million.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the Company
will prevail in any particular case. An adverse outcome in one or more cases in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company. Further, product liability claims may be
asserted in the future relative to events not known to management at the present
time. The Company has insurance coverage which management believes is adequate
to protect against product liability losses as could otherwise materially affect
the Company's financial position.
<PAGE>
Note L - Segment Reporting
Boston Scientific is a worldwide developer, manufacturer and marketer of medical
devices for less invasive procedures. The Company has four reportable operating
segments based on geographic regions: the United States, Europe, Japan and
Inter-Continental. Each of the Company's reportable segments generates revenues
from the sale of minimally invasive medical devices. The reportable segments
represent an aggregate of operating divisions.
Sales and operating results of reportable segments are based on internally used
standard foreign exchange rates, which may differ from year to year and do not
include inter-segment profits. The segment information presented for 1999 has
been restated based on the Company's standard foreign exchange rates used for
2000. 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 Inter-
(In millions) States Europe Japan Continental Total
--------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Three months ended September 30, 2000
Net sales $ 395 $ 94 $ 131 $ 43 $ 663
Operating income excluding special charges 152 30 79 3 264
Three months ended September 30, 1999
Net sales $ 421 $ 100 $ 131 $ 43 $ 695
Operating income excluding special charges 162 29 82 5 278
Nine months ended September 30, 2000
Net sales $ 1,200 $ 305 $ 407 $ 130 $ 2,042
Operating income excluding special charges 470 103 260 9 842
Nine months ended September 30, 1999
Net sales $ 1,316 $ 316 $ 385 $ 121 $ 2,138
Operating income excluding special charges 512 93 234 17 856
</TABLE>
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 ended Nine months ended
September 30, September 30,
-------------------------------------------------------------------------------------------------------------
(In millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
Total net sales for reportable segments $ 663 $ 695 $ 2,042 $ 2,138
Foreign exchange (11) (4) (16) (13)
------- ------- ------- -------
$ 652 $ 691 $ 2,026 $ 2,125
Income before income taxes:
Total operating income excluding special
charges for reportable segments $ 264 $ 278 $ 842 $ 856
Corporate expenses and foreign exchange (109) (173) (336) (360)
Restructuring and merger related credits (charges) (23) 10 (23) 10
------- ------- ------- -------
132 115 483 506
Other expense, net (13) (31) (38) (106)
------- ------- ------- -------
$ 119 $ 84 $ 445 $ 400
======= ======= ======= =======
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the third quarter were $652 million as compared to $691 million in
the third quarter of 1999, a decline of 6%. Net sales for the nine months ended
September 30, 2000 were $2,026 million as compared to $2,125 million during the
same period in the prior year, a decline of 5%. Net income for the third quarter
was $85 million or $0.21 per share (diluted), as compared to $55 million or
$0.13 per share (diluted) in the third quarter of 1999. Net income for the nine
months ended September 30, 2000 was $313 million or $0.76 per share (diluted),
as compared to $264 million or $0.64 (diluted) during the same period in the
prior year. The third quarter results for 2000 include pre-tax charges of
approximately $26 million ($17 million, net of tax) that are associated with the
global operations plan announced in July 2000 and approximately $5 million ($3
million, net of tax) that represent an additional NIR(R) stent inventory
provision. The third quarter results for 1999 include a provision for excess
inventories and purchase commitments of approximately $62 million ($41 million,
net of tax), a provision for increased legal costs of $22 million ($15 million,
net of tax) and a special credit of $10 million ($7 million, net of tax),
relating primarily to previously recorded valuation reserves no longer deemed
necessary.
During the third quarter of 2000, United States (U.S.) revenues decreased
approximately 6% to $395 million, while international revenues decreased
approximately 5% to $257 million compared to the third quarter of 1999. Net
sales were adversely affected by approximately $7 million arising from foreign
exchange fluctuations compared to the same period in the prior year. During the
third quarter of 2000, worldwide vascular sales decreased 9% while worldwide
nonvascular sales increased 11% compared to the same period in the prior year.
The decreases in worldwide and vascular sales were primarily attributable to the
decrease of the Company's sales of coronary stents and balloons during the third
quarter of 2000. U.S. coronary stent revenues and worldwide coronary stent
revenues, primarily sales of the NIR(R) stent, were approximately $68 million
and $106 million, respectively, during the third quarter of 2000, compared to
$107 million and $156 million, respectively, during the third quarter of 1999.
Worldwide NIR(R) coronary stent sales as a percentage of worldwide sales were
approximately 15% and 21% during the third quarters of 2000 and 1999,
respectively.
U.S. revenues decreased approximately 9% to $1,200 million during the nine
months ended September 30, 2000, while international revenues increased
approximately 2% to $826 million compared to the nine months ended September 30,
1999. During the nine months ended September 30, 2000, worldwide vascular sales
decreased 8% while worldwide nonvascular sales increased 11% compared to the
same period in the prior year. The decreases in worldwide and vascular sales
were primarily attributable to the decrease of the Company's sales of coronary
stents and balloons during the first nine months 2000. U.S. coronary stent
revenues and worldwide coronary stent revenues, primarily sales of the NIR(R)
stent, were approximately $209 million and $342 million, respectively, during
the nine months ended September 30, 2000, compared to $317 million and $461
million, respectively, during the same period in the prior year. Worldwide
NIR(R) coronary stent sales as a percentage of worldwide sales were
approximately 16% and 20% during the nine months ended September 30, 2000 and
1999, respectively.
The worldwide coronary stent market is dynamic and highly competitive, with
significant market share volatility. In addition, technology and competitive
offerings in the market are constantly changing. The
<PAGE>
Company's reduction in coronary stent revenues throughout 2000 reflects this
volatility. Stent revenues for the remainder of 2000 and beyond will be impacted
by the timing of submission for and receipt of regulatory approvals to market
new coronary and peripheral stent platforms in the U.S. and international
markets.
The Company has received FDA approval and CE Marking for the NIRoyal(TM) Elite
Monorail(TM) stent system. The NIRoyal(TM) Elite Monorail(TM) stent system
offers the SOX(TM) system technology on a Monorail catheter. Although available
on a limited basis, the NIRoyal Elite stent system is now expected to be
launched in all approved sizes during the first quarter of 2001.
Gross profit as a percentage of net sales improved from 59.0% in the third
quarter of 1999 to 69.3% in the third quarter of 2000, and improved from 64.8%
for the nine months ended September 30, 1999 to 68.9% for the nine months ended
September 30, 2000. The improvement is primarily due to the recording of a
pre-tax provision of $62 million for excess NIR(R) inventories and purchase
commitments during the third quarter of 1999. Additionally, the improvement is
due to benefits that the Company realized through its ability to better manage
inventory and lower product costs, partially offset by a shift in the Company's
product sales mix. Furthermore, the Company's gross profit percentage was
positively impacted by sales of lower costing NIR(R) stents sold during the
third quarter of 2000. The purchase price of NIR(R) coronary stents, the amount
of NIR(R) coronary stent sales as a percentage of worldwide sales and the mix of
coronary stent platforms could significantly impact gross margins. 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. Additionally, beginning in the fourth quarter of 2000, the Company
expects that its gross margin percentages will be negatively impacted as the
Company launches stents that cost more to purchase, more expensive gold-coated
stents and stents with higher costing delivery systems.
Medinol Ltd. (Medinol) supplies the NIR(R) coronary stent, and unforeseen
delays, stoppages or interruptions in the supply and/or mix of NIR(R) stent
inventory could adversely affect the operating results and/or revenues of the
Company. The stents are manufactured by Medinol in Israel, a country that is
currently experiencing violence and unrest. Generally, the Company has less
control over inventory manufactured by third parties as compared to inventory
manufactured internally. In addition, the volatility of the worldwide coronary
stent market, delays in development of new stent platforms and the timing of
submission for and receipt of regulatory approvals to market new coronary stent
platforms could negatively impact the Company's ability to effectively
transition to new products. Specifically, the Company's ability to effectively
manage its mix and levels of inventory including consignment inventory resulting
from product transitions will be critical in minimizing excess inventories. At
September 30, 2000, the Company had approximately $134 million of net NIR(R)
coronary stent inventory and was committed to purchase approximately $55 million
of NIR(R) stents from Medinol. The Company's relationship with Medinol has been
contentious, and the Company's ability to manage its relationship with Medinol
could impact the future operating results of the Company.
During the third quarter of 2000, the Company announced and approved a global
operations plan, which encompasses a series of strategic initiatives to increase
productivity and enhance innovation. The plan includes manufacturing process and
supply chain programs and a plant optimization initiative. The manufacturing
process and supply chain programs are designed to lower inventory levels and the
cost of manufacturing and minimize inventory write-downs. The infrastructure
related to the supply chain program is substantially in place. However, gross
margin benefits will not be fully realized until manufacturing processes are
addressed and have time to develop, and until historical inventories are sold.
The intent of the plant optimization initiative is to better allocate the
Company's resources by creating a more effective network of manufacturing and
<PAGE>
research and development facilities. It will consolidate manufacturing
operations along product lines and shift significant amounts of production to
Company facilities in Miami and Ireland and to contract manufacturing. The
Company's plan includes the discontinuation of manufacturing activities at two
facilities in the U.S. and the closure of a third facility and is planned to be
substantially completed over the next fifteen months. During the third quarter
of 2000, the Company recorded a pre-tax special charge of $23 million ($15
million after-tax) associated with the plant optimization. The charge relates to
severance and outplacement costs for the approximately 1,200 manufacturing
employees who are expected to be affected by the plan over the next twelve
months. As of September 30, 2000, no significant amounts have been charged
against the related accrual. In addition, during the third quarter of 2000, the
Company recorded pre-tax costs of $3 million to cost of sales related to
transition costs associated with the plant optimization and accelerated
depreciation on fixed assets whose useful lives have been reduced as a result of
the initiative. During the fourth quarter, the Company estimates that it will
record a special charge for severance and outplacement costs of approximately
$34 million and a charge to cost of sales for transition costs and accelerated
depreciation of approximately $11 million. During 2001, the Company estimates
that it will record pre-tax expenses of approximately $50 million primarily as
cost of sales for transition costs and accelerated depreciation.
The Company expects that it will make cash outlays, net of proceeds from
building and fixed asset sales, of approximately $105 million for the plant
optimization initiative, which the Company anticipates will be funded from cash
flows from operating activities. The Company expects that its cash outlays
related to the plan during the remainder of 2000 will be approximately $15
million. The cash outlays include severance and outplacement costs, transition
costs and capital expenditures related to the plan. The success of the
initiative may be dependent on the Company's ability to retain employees during
the transition period.
The Company estimates that the global operations plan will achieve pre-tax
operating savings of approximately $100 million ($65 million after-tax) in 2001,
$220 million ($145 million after-tax) in 2002 and $250 million ($180 million
after-tax) in annualized savings thereafter. These savings will be realized,
primarily, as reduced cost of sales and are expected to help mitigate gross
margin pressures due to the anticipated launch of higher costing stents and
delivery systems. Additionally, the Company intends to use a portion of these
savings when generated to increase its investment in research and development.
Selling, general and administrative expenses increased as a percentage of net
sales from 32% in the third quarter of 1999 to 33% in the third quarter of 2000
and decreased approximately $4 million from the third quarter of 1999 to $216
million. Selling, general and administrative expenses increased as a percentage
of net sales from 30% during the nine months ended September 30, 1999 to 32%
during the nine months ended September 30, 2000 and increased approximately $13
million from the same period of the prior year to $644 million. The increase as
a percentage of net sales is primarily attributable to the reduction in sales
combined with an increase in selling expenses. The decrease in expense dollars
for the third quarter as compared to the same period in the prior year is
primarily due to lower legal costs recorded in 2000 compared to 1999, which were
partially offset by increased costs to strengthen and retain the Company's
domestic field sales force. The increase in expense dollars for the nine months
ended September 30, 2000 as compared to the same period in the prior year is
primarily attributable to increased costs to strengthen and retain the Company's
domestic field sales force and to expand its direct sales presence in
international regions. The Company's ability to retain its established sales
force, particularly in the U.S., may impact the operating results of the
Company.
<PAGE>
Amortization expense was approximately $23 million and 4% of net sales during
the third quarter of 2000 as compared to $23 million and 3% of sales during the
third quarter of 1999. Amortization expense was approximately $69 million and 3%
of net sales during the nine months ended September 30, 2000 and 1999.
Amortization expense is primarily comprised of the amortization of intangibles
related to the purchase of Schneider Worldwide (Schneider).
Royalty expenses decreased approximately 17% from $12 million in the third
quarter of 1999 to $10 million in 2000. Royalty expenses decreased approximately
11% from $35 million in the nine months ended September 30, 1999 to $31 million
in the nine months ended September 30, 2000. The reduction in royalty expenses
is due to lower sales of royalty bearing products; additionally, the Company
made non-recurring payments of approximately $3 million in the second quarter of
1999. The Company continues to enter into strategic technological alliances,
some of which include royalty commitments.
Research and development expenses were approximately $48 million and 7% of net
sales during the third quarter of 2000 and 1999. Research and development
expenses were approximately $146 million and 7% of net sales during the nine
months ended September 30, 2000 and 1999. In the second quarter of 2000, the
brachytherapy project acquired in connection with the Schneider acquisition was
discontinued due to system performance issues. The Company's next generation
aortic aneurysmal disease research and development project is generally
progressing in line with cost estimates previously reported in the Company's
Annual Report filed on Form 10-K with the SEC for the year ended December 31,
1999. The investment in research and development dollars reflects spending on
new product development programs as well as regulatory compliance 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.
Interest expense decreased from $26 million in the third quarter of 1999 to $16
million in the third quarter of 2000. Interest expense decreased from $96
million during the nine months ended September 30, 1999 to $56 million during
the nine months ended September 30, 2000. The overall decrease in interest
expense is primarily attributable to a lower average debt balance.
Other income (expense), net, changed from expense of $5 million in the third
quarter of 1999 to income of $3 million in the third quarter of 2000. Other
income (expense), net, changed from expense of $10 million for the nine months
ended September 30, 1999 to income of $18 million during the same period of
2000. The increase for the three months ended September 30, 2000 as compared to
the same period in the prior year is primarily due to gains of approximately $5
million recognized on derivative financial instruments. The change for the nine
months ended September 30, 2000 as compared to the same period in the prior year
is primarily due to gains on derivative financial instruments and to net gains
recognized on sales of available-for-sale equity securities.
The Company's effective tax rate, excluding the impact of special charges,
decreased from approximately 34% during the nine months ended September 30, 1999
to 30% during the nine months ended September 30, 2000. The decrease is
primarily attributable to changes in the geographic mix of the Company's
business.
<PAGE>
Uncertainty remains with regard to future changes within the healthcare
industry. The trend toward managed care and economically motivated and more
sophisticated buyers in the U.S. may result in continued pressure on selling
prices of certain products and resulting compression on gross margins. In
addition to impacting selling prices, the trend to managed care in the U.S. has
also resulted in more complex billing and collection procedures. The Company's
ability to react effectively to the changing environment may impact its bad debt
and sales allowances in the future. Further, the U.S. marketplace is
increasingly characterized by consolidation among 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.
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.
Deterioration in the Japan and/or emerging markets economies may impact the
Company's ability to collect its outstanding receivables. Although these factors
may impact the rate at which Boston Scientific can grow, management believes
that it is positioning the Company to take advantage of opportunities that exist
in the markets it serves.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments totaled $50 million at September 30, 2000
compared to $78 million at December 31, 1999. Working capital increased from
current assets equaling current liabilities at December 31, 1999 to working
capital of $132 million at September 30, 2000. Cash proceeds during the nine
months ended September 30, 2000 were generated primarily from operating
activities. Cash proceeds during the period were offset by the net repayment of
approximately $410 million of outstanding debt obligations, purchases of the
Company's common stock of approximately $135 million and net capital
expenditures of approximately $51 million.
During the second quarter of 2000, the Company increased the multicurrency
borrowing sublimit under its $1.0 billion credit facility from $100 million to
$300 million. Also, during 2000, the Company increased the borrowing capacity
under its uncommitted Japanese credit facilities. These facilities provided for
borrowings and promissory notes discounting of up to 15.0 billion Japanese yen
(translated to approximately $139 million) and 11.5 billion Japanese yen
(translated to approximately $112 million) at September 30, 2000 and December
31, 1999, respectively.
During the third quarter of 2000, the Company extended the termination date of
its $600 million 364-day credit facility from September 2000 to September 2001
on similar terms and conditions. There were no borrowings outstanding under this
credit facility as of September 30, 2000.
The Company has the ability to refinance a portion of its short-term debt on a
long-term basis through its revolving credit facilities. The Company does not
expect that its short-term borrowings will remain outstanding beyond the next
twelve months, and, accordingly, the Company has not reclassified any of the
short-term borrowings as long-term at September 30, 2000, compared to $108
million of such reclassifications at December 31, 1999.
<PAGE>
The Company has recognized net deferred tax assets aggregating $227 million at
September 30, 2000, and $238 million at December 31, 1999. The assets relate
principally to the establishment of inventory and product related reserves and
purchased research and development. In light of the Company's historical
financial performance, the Company believes that these assets will be
substantially recovered.
The Company is authorized to purchase on the open market up to approximately 40
million shares of the Company's common stock. Stock repurchased under the
Company's systematic plan will be used to satisfy its obligations pursuant to
employee benefit and incentive plans. Under the authorization, the Company may
also repurchase shares outside of the Company's systematic plan. These
additional shares would also be used to satisfy the Company's obligations
pursuant to employee benefit and incentive plans. During the nine months ended
September 30, 2000, the Company repurchased approximately 6.7 million shares at
an aggregate cost of approximately $135 million. As of September 30, 2000,
approximately 33 million shares of the Company's common stock have been
repurchased.
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.
The Company expects to incur capital expenditures of approximately $30 million
during the remainder of 2000. Included in this estimate are capital expenditures
associated with the upgrade of the Company's global information system and cash
outlays for other information technology projects. The Company anticipates fully
implementing the global information system upgrade in the first half of 2001.
Further, the Company expects to make estimated tax payments in the fourth
quarter of 2000 of approximately $30 million. 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 restructuring and merger-related initiatives,
through the end of 2000.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates among existing sovereign currencies and the
euro. The participating countries agreed to adopt the euro as their common legal
currency on that date. Fixed conversion rates among the participating countries'
existing currencies (the legacy currencies) and the euro were established as of
that date. The legacy currencies are scheduled to remain legal tender as
denominations of the euro until at least January 1, 2002 (but not later than
July 1, 2002). During this transition period, parties may settle transactions
using either the euro or a participating country's legacy currency. The Company
has addressed and/or continues to address 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 conversion will not have a material
impact related to its overall business in Europe or elsewhere. The increased
price transparency resulting from the use of a single currency in the 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.
<PAGE>
LITIGATION
The Company is involved in various lawsuits, including patent infringement and
product liability suits, from time to time in the normal course of business. In
management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in the notes to the
condensed consolidated financial statements which, individually or in the
aggregate, could have a material effect on the financial condition, operations
and cash flows of the Company. Additionally, legal costs associated with
asserting the Company's patent portfolio and defending against claims that the
Company's products infringe the intellectual property of others are significant,
and legal costs associated with non-patent litigation and compliance activities
are rising. Depending upon the prevalence, significance and complexity of these
matters, the Company's legal provision could be adversely affected in the
future.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage that management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position.
CAUTIONARY 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 discussed in this report
include, but are not limited to, statements with respect to, and the Company's
performance may be affected by: (a) the Company's ability to timely implement
the global operations plan within its cost estimates, to retain employees as it
implements its plant optimization initiative and to achieve estimated operating
savings; (b) the Company's ability to achieve manufacturing cost declines, gross
margin benefits and inventory reductions; (c) the ability of the Company to
manage accounts receivable, manufacturing costs and inventory levels and mix and
to react effectively to changing managed care environment, reimbursement levels
and worldwide economic conditions; (d) the potential impacts of continued
consolidation among healthcare providers, trends towards managed care, disease
state management and economically motivated buyers, healthcare cost containment,
the financial viability of healthcare providers, more stringent regulatory
requirements and more vigorous enforcement activities; (e) management's ability
to position the Company to take advantage of opportunities that exist in the
markets it serves; (f) the Company's ability to retain its established sales
force; (g) 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; (h) 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; (i) the Company's ability to increase its investment in
research and development and to develop and launch products on a timely basis,
including products resulting from purchased research and development; (j) risks
associated with international operations; (k) the potential effect of foreign
<PAGE>
currency fluctuations on revenues, expenses and resulting margins and the trend
toward increasing sales and expenses denominated in foreign currencies; (l) the
Company's ability to maintain its effective tax rate at 30% for 2000 and to
substantially recover its net deferred tax assets; (m) the ability of the
Company to meet its projected cash needs through the end of 2000; (n) the
ability of the Company to manage its relationship with Medinol; (o) unforeseen
delays, stoppages or interruptions in the supply and/or mix of NIR(R) coronary
stent inventory, difficulties in managing inventory relating to new product
introductions and the Company's cost to purchase the NIR(R) coronary stent; (p)
NIR(R) coronary stent sales as a percentage of worldwide sales in 2000 and the
mix of coronary stent platforms; (q) volatility in the coronary stent market,
delays in development of new stent platforms and the timing of submission for
and receipt of regulatory approvals to market new coronary and peripheral stent
platforms; (r) the development of competing or technologically advanced products
by the Company's competitors; (s) the Company's ability to successfully
implement the global information system upgrade and its other information
technology projects; (t) the effect of litigation and compliance activities on
the Company's legal provision; (u) the impact of stockholder class action,
patent, product liability, Federal Trade Commission and other litigation, as
well as the outcome of the U.S. Department of Justice investigation, and the
adequacy of the Company's product liability insurance; (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 and research and development platforms available to the Company.
Several important factors, in addition to the specific factors discussed in
connection with such forward-looking statements individually, could affect the
future results and growth rates of the Company and could cause those results and
rates to differ materially from those expressed in the forward-looking
statements contained herein. Such additional factors include, among other
things, 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
In the normal course of business, the Company is exposed to market risk from
changes in interest rates and foreign currency exchange rates. The Company
addresses these risks through a risk management program that includes the use of
derivative financial instruments. The program is operated pursuant to documented
corporate risk management policies. The Company does not enter into any
derivative transactions for speculative purposes.
The Company's floating and fixed rate debt obligations are subject to interest
rate risk. As of September 30, 2000, a 100 basis point increase in interest
rates related to the Company's floating rate borrowings, assuming the amount
borrowed remains constant, would result in an annual increase in the Company's
then current interest expense of approximately $4 million. A 100 basis point
increase in interest rates related to the Company's fixed long-term debt would
not result in a material change in its fair value.
<PAGE>
The Company enters into forward foreign exchange contracts to hedge its net
recognized foreign currency transaction exposures for periods consistent with
commitments, generally one to six months. In addition, upon adoption of the
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", on January 1, 2000, the Company
initiated a program to hedge a portion of its forecasted intercompany and third
party transactions with forward foreign exchange contracts. Hedging activity is
intended to offset the impact of currency fluctuations on forecasted earnings
and cash flow. However, the Company may be impacted by changes in foreign
currency exchange rates related to the unhedged portion. The success of the
hedging program depends, in part, on forecasts of transaction activity in
various currencies (currently the Japanese yen and the euro). The Company may
experience unanticipated foreign currency exchange gains or losses to the extent
that there are timing differences between forecasted and actual activity during
periods of currency volatility. The Company had spot and forward foreign
exchange contracts outstanding in the total notional amount of $603 million at
September 30, 2000. As of September 30, 2000, the Company recorded approximately
$19 million of assets and $1 million of liabilities to recognize the fair value
of its contracts outstanding on September 30, 2000. Foreign exchange contracts
that hedge net recognized foreign currency transaction exposures should not
subject the Company's earnings and cash flow to material risk due to exchange
rate movements because gains and losses on these contracts should offset losses
and gains on the transactions being hedged. Hedges of anticipated transactions
may subject the income statement to volatility. Derivative instruments whose
cash flow hedge designation were removed effective July 1, 2000 may subject the
Company to risk from exchange rate movements as these contracts mature over the
next two months.
A sensitivity analysis of changes in the fair value of foreign currency exchange
contracts outstanding at September 30, 2000 indicates that, if the U.S. dollar
uniformly weakened by 10% against all currencies, the fair value of these
contracts would decrease by $45 million. While these hedging instruments are
subject to fluctuations in value, such fluctuations are generally offset by
changes in the value of the underlying exposures being hedged. As the Company
has expanded its international operations, its sales and expenses denominated in
foreign currencies have expanded and that trend is expected to continue.
Therefore, most international sales and expenses have been, and are expected to
be, subject to the effect of foreign currency fluctuations, and these
fluctuations may have an impact on margins. The Company's sensitivity analysis
of the effects of changes in foreign currency exchange rates does not factor in
a potential change in sales levels or local currency selling prices.
Although the Company engages in hedging transactions that may offset the effect
of fluctuations in foreign currency exchange rates on foreign currency
denominated assets, liabilities, earnings and cash flows, financial exposure may
nonetheless result, primarily from the timing of transactions, forecast
volatility and the movement of exchange rates.
<PAGE>
PART II
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 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 - Form of Second Amended and Restated Credit
Agreement among Boston Scientific Corporation,
The Several Lenders and The Chase Manhattan Bank
dated as of August 21, 2000.
(b) The following reports were filed during the quarter ended
September 30, 2000:
None.
<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 10, 2000.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
--------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and
Senior Vice President -
Finance and Administration
