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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the quarterly period ended: June 30, 2000
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Boston Scientific Place, Natick, Massachusetts 01760-1537
-------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
--------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
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, 2000
----- -------------------
Common Stock, $.01 Par Value 406,411,393
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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>
June 30, December 31,
In millions, except share and per share data 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 44 $ 64
Short-term investments 14
Trade accounts receivable, net 417 445
Inventories 334 376
Other current assets 164 156
-----------------------------------------
Total current assets 959 1,055
Property, plant and equipment 938 940
Less: accumulated depreciation 352 336
-----------------------------------------
586 604
Excess of cost over net assets acquired, net 827 840
Technology - core and developed, net 551 570
Patents, trademarks and other intangibles, net 335 316
Investments 90 55
Other assets 135 132
-----------------------------------------
$ 3,483 $ 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>
June 30, December 31,
In millions, except share and per share data 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Commercial paper $ 249 $ 277
Bank obligations 194 323
Accounts payable and accrued expenses 361 410
Income taxes payable 123 42
Other current liabilities 5 3
-----------------------------------
Total current liabilities 932 1,055
Long-term debt 567 678
Other long-term liabilities 116 115
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 June 30, 2000 and
December 31, 1999 4 4
Additional paid-in capital 1,212 1,210
Treasury stock, at cost - 8,510,657 shares at June 30, 2000 and
5,872,857 shares at December 31, 1999 (182) (126)
Deferred compensation (20)
Retained earnings 976 752
Accumulated other comprehensive loss (122) (116)
-----------------------------------
Total stockholders' equity 1,868 1,724
-----------------------------------
$ 3,483 $ 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 Six months ended
June 30, June 30,
In millions, except per share data 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 695 $ 726 $1,374 $1,434
Cost of products sold 217 235 430 465
----------------------------- ---------------------------
Gross profit 478 491 944 969
Selling, general and administrative expenses 214 204 428 411
Amortization expense 23 23 46 46
Royalties 10 13 21 23
Research and development expenses 49 49 98 98
----------------------------- ---------------------------
296 289 593 578
----------------------------- ---------------------------
Operating income 182 202 351 391
Other income (expense):
Interest expense (19) (35) (40) (70)
Other, net 7 (2) 15 (5)
----------------------------- ---------------------------
Income before income taxes 170 165 326 316
Income taxes 48 56 98 107
----------------------------- ---------------------------
Net income $ 122 $ 109 $ 228 $ 209
============================= ===========================
Net income per common share - basic $ 0.30 $ 0.27 $ 0.56 $ 0.53
============================= ===========================
Net income per common share - assuming dilution $ 0.30 $ 0.27 $ 0.55 $ 0.52
============================= ===========================
</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 Six Months Ended June 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 228 228
Foreign currency translation adjustment (15) (15)
Issuance of common stock (3) 21 (4) 14
Issuance of restricted stock 2 24 $(26)
Cancellation of restricted stock (2) 2
Purchases of common stock for treasury (99) (99)
Tax benefit relating to incentive stock
option and employee stock purchase plans 3 3
Amortization of deferred compensation 4 4
Unrealized gains on derivative
financial instruments, net 4 4
Unrealized gains on equity investments, net 5 5
----------------------------------------------------------------------------------------
Balance at June 30, 2000 414,922 $4 $1,212 $(182) $(20) $976 $(122) $1,868
========================================================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
In millions 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 384 $ 323
Investing activities:
Purchases of property, plant and equipment, net (33) (42)
Payments related to 1998 acquisition (128)
Sales of available-for-sale securities 15
Payments for acquisitions of and/or investments
in certain technologies, net (41)
Other, net (2)
---------------------------
Cash used for investing activities (59) (172)
Financing activities:
Net decrease in commercial paper (28) (1,816)
Net (payments on) proceeds from borrowings
on revolving credit facilities (244) 992
Proceeds from issuances of shares of common stock,
net of tax benefits 17 674
Acquisitions of treasury stock (99)
Other, net 12 (1)
---------------------------
Cash used for financing activities (342) (151)
Effect of foreign exchange rates on cash (3) (1)
---------------------------
Net decrease in cash and cash equivalents (20) (1)
Cash and cash equivalents at beginning of period 64 70
---------------------------
Cash and cash equivalents at end of period $ 44 $ 69
===========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 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 six month periods ended June
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 June 30, 2000 and 1999, the Company's comprehensive
income was $120 million and $93 million, respectively. For the six months ended
June 30, 2000 and 1999, the Company's comprehensive income was $222 million and
$163 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 Six Months
Ended June 30, Ended June 30,
(In millions, except share and per share data) 2000 1999 2000 1999
-------------------------------------------------------------------------- ------------- ------------- -------------- -------------
Basic:
<S> <C> <C> <C> <C>
Net income $ 122 $ 109 $ 228 $ 209
------------- ------------- -------------- -------------
Weighted average shares outstanding (in thousands) 406,573 397,684 407,376 396,228
------------- ------------- -------------- -------------
Net income per common share $0.30 $0.27 $0.56 $0.53
============= ============= ============== =============
</TABLE>
<PAGE>
<TABLE><CAPTION>
Assuming dilution:
<S> <C> <C> <C> <C>
Net income $122 $109 $228 $209
------------- ------------- -------------- -------------
Weighted average shares outstanding (in thousands) 406,573 397,684 407,376 396,228
Net effect of dilutive stock-based compensation (in thousands) 3,909 9,061 3,544 8,045
------------- ------------- -------------- -------------
Total (in thousands) 410,482 406,745 410,920 404,273
------------- ------------- -------------- -------------
Net income per common share $0.30 $0.27 $0.55 $0.52
============= ============= ============== =============
</TABLE>
Note D - Change in Estimated Effective Tax Rate
The Company changed its estimate of its 2000 effective tax rate 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 cumulative effect of this reduction resulted in an increase in the
Company's net income during the second quarter of approximately $7 million, or
$0.02 per share (diluted), of which approximately $3 million, or $0.01 per
share, represents the impact for the first quarter of 2000.
Note E - Restructuring and Merger-Related Charges
At June 30, 2000, the Company had an accrual for restructuring and
merger-related charges of $21 million. The details and activity of the accrual
during the six months ended June 30, 2000 is summarized in the following table:
<TABLE><CAPTION>
Balance at Charges Balance at
December 31, Utilized in June 30,
(In millions) 1999 2000 2000
------------------------------------------------------------------------------------------
1995 AND 1996 RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
<S> <C> <C> <C>
Facilities $ 3 $ 3
Workforce reductions 4 4
Other costs 3 3
----------------- --------------- ----------------
$10 $10
================= =============== ================
1998 SCHNEIDER PURCHASE PRICE
ADJUSTMENTS:
Workforce reductions $13 $(10) $3
Contractual commitments 6 (1) 5
----------------- --------------- ----------------
$19 $(11) $8
================= =============== ================
</TABLE>
<PAGE>
<TABLE><CAPTION>
1998 RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
<S> <C> <C> <C>
Workforce reductions $2 $(1) $1
Asset write-downs 4 (3) 1
Other costs 1 1
----------------- --------------- ----------------
$7 $(4) $3
================= =============== ================
TOTAL :
Facilities $ 3 $ 3
Workforce reductions 19 $(11) 8
Contractual commitments 6 (1) 5
Asset write-downs 4 (3) 1
Other costs 4 4
----------------- --------------- ----------------
$36 $(15) $21
================= =============== ================
</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.
Note F - Borrowings and Credit Arrangements
On June 20, 2000, the Company increased the multicurrency borrowing sublimit
under its $1.0 billion credit facility that expires in June 2002 from $100
million to $300 million. As a result of the increase, at June 30, 2000, the
Company refinanced approximately $100 million of additional U.S. dollar credit
facility borrowings to euro and Japanese yen denominated borrowings at lower
interest rates. During 2000, the Company increased its 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 $141 million) and 11.5 billion Japanese yen
(translated to approximately $112 million) at June 30, 2000 and December 31,
1999, respectively.
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 June 30, 2000, compared to $108 million of
such reclassifications at December 31, 1999.
Note G - Inventories
The components of inventory consist of the following:
<PAGE>
June 30, December 31,
(In millions) 2000 1999
------------------------------------------------
Finished goods $ 157 $194
Work-in-process 54 60
Raw materials 123 122
--------------------------
$ 334 $376
==========================
At June 30, 2000, the Company had approximately $129 million of net NIR(R)
coronary stent inventory, which is supplied by Medinol Ltd. (Medinol), and was
committed to purchase approximately $53 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. During the first half of 2000, the Company
repurchased approximately 4.8 million shares at an aggregate cost of
approximately $99 million under its systematic plan. As of June 30, 2000,
approximately 31 million shares of the Company's common stock have been
repurchased under the plan. 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.
On January 3, 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 $4 million for the three and six months ended June
30, 2000, respectively. During the six months ended June 30, 2000, approximately
85,000 shares of restricted stock were forfeited.
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.
<PAGE>
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 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, to 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 will be 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 any
material gains or losses resulting from either hedge ineffectiveness or changes
in forecast probability during the six months ended June 30, 2000.
The Company recognized a net gain of approximately $2 million and $3 million in
earnings from derivative instruments designated as cash flow hedges of
forecasted transactions during the three and six month periods ended June 30,
2000, respectively. All of the derivative instruments, designated as cash flow
hedges, outstanding at June 30, 2000 mature within the subsequent 24-month
period. As of June 30, 2000, approximately $4 million of unrealized net gains
have been recorded in AOCI, net of tax, to recognize the fair value of
derivative instruments that are designated as cash flow hedges. Of this amount,
a gain of approximately $3 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
assets and liabilities 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. Since these derivative instruments
hedge recorded assets and liabilities that are denominated in foreign
currencies, the contracts do not qualify for hedge accounting under SFAS 133.
These derivative instruments do not subject the Company to material balance
sheet risk due to exchange rate movements because gains and losses on these
derivatives offset losses and gains on the assets and liabilities being hedged.
These forward foreign exchange contracts are entered into for periods consistent
with commitments, generally one to six months.
In June, 2000, the FASB issued certain interpretations of SFAS 133 that affect
the accounting for cash flow hedges of forecasted intercompany transactions in a
manner which is not consistent with the intended accounting under the Company's
current 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 over the next five months.
Additionally, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133", which the Company will be required to adopt in the third
quarter of 2000. The Company is in the process of determining the effect of
adoption of SFAS 138 on its consolidated financial statements and related
disclosures.
<PAGE>
Note J - New Accounting Standard
In December 1999, the Securities and Exchange Commission (SEC) 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.
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.
<PAGE>
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.
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.
<PAGE>
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 and a hearing is
expected in late 2000.
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
<PAGE>
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
May 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 is seeking a preliminary injunction,
and a hearing was held on August 3, 2000.
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 on January 7, 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
<PAGE>
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 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 dilatation catheters
infringe one of AVE's European patents. In this action, AVE requested
preliminary relief covering The Netherlands, Germany, the United Kingdom, France
and Spain. The Company answered, denying the allegations of the complaint. On
February 16, 2000, the court denied AVE's request for preliminary relief. On May
30, 2000, the case was dismissed following the revocation of AVE's European
patent by the European Patent Office.
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 the Company and SCIMED alleging that
the Company's NIR(R) stent infringes one of AVE's European patents. The suit was
filed in the District Court of Dusseldorf, Germany seeking injunctive and
monetary relief. A hearing was held in Germany on September 23, 1999, and on
November 4, 1999, the court dismissed the complaint. On December 21, 1999, AVE
appealed the dismissal and a hearing is scheduled for October 5, 2000.
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 June 2001.
<PAGE>
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. The Company is seeking a preliminary injunction. AVE has
filed a motion to compel arbitration of the dispute and on July 19, 2000, the
motion was granted.
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.
The Company has filed a petition for a rehearing. 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. 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 is 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
<PAGE>
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. A hearing on the Company's request for a preliminary injunction is
expected in September 2000.
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.
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.
The U.S. Federal Trade Commission (FTC) is investigating the Company's
compliance with a Consent Order dated May 5, 1995, pursuant to which the Company
licensed certain intravascular ultrasound technology to Hewlett-Packard Company
(HP). The Company has been advised that the FTC staff has recommended to the FTC
that suit be brought against the Company for alleged violations of the Consent
Order. The Company does not believe any violation of the Consent Order has
occurred, and has met with the Commission of the FTC to advise them of its
position. 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. The
Company has answered, denying the allegations of 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 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 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
<PAGE>
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. The Company has not yet answered, but intends to
vigorously defend the complaint.
The Company is aware that the U.S. Department of Justice is conducting an
investigation of matters that include the Company's NIR ON(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 June 30, 2000, the potential
exposure for litigation-related accruable costs is estimated to range from $35
million to $50 million. The Company's total accrual as of June 30, 2000 for
litigation-related reserves was approximately $35 million. As of June 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
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
-------------------------------------------------- --------- ---------- -------- -------------- ---------
Three months ended June 30, 2000
<S> <C> <C> <C> <C> <C>
Net sales $414 $104 $138 $44 $ 700
Operating income 166 35 89 3 293
Three months ended June 30, 1999
Net sales $455 $110 $129 $42 $ 736
Operating income 183 34 75 7 299
Six months ended June 30, 2000
Net sales $805 $211 $276 $87 $1,379
Operating income 318 73 181 6 578
Six months ended June 30, 1999
Net sales $896 $216 $254 $78 $1,444
Operating income 350 64 152 12 578
</TABLE>
<PAGE>
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 Six months ended
June 30, June 30,
-------------------------------------------------------------------------------------------------------------
( In millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
Net sales:
<S> <C> <C> <C> <C>
Total net sales for reportable segments $700 $736 $1,379 $1,444
Foreign exchange (5) (10) (5) (10)
-----------------------------------------------------
$695 $726 $1,374 $1,434
Income before income taxes:
Total operating income for reportable
segments $293 $299 $ 578 $ 578
Corporate expenses and foreign exchange (111) (97) (227) (187)
-----------------------------------------------------
182 202 351 391
Other expense, net (12) (37) (25) (75)
-----------------------------------------------------
$170 $165 $ 326 $ 316
=====================================================
</TABLE>
Note M - Subsequent Event
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.
Based upon preliminary estimates, the plant optimization initiative is expected
to result in pre-tax charges of approximately $70 million ($45 million
after-tax) in 2000. As the Company has now announced the plan, a more detailed
assessment of costs and savings is being performed.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the second quarter were $695 million as compared to $726 million
in the second quarter of 1999, a decline of 4%. Net income for the second
quarter increased 12% to $122 million as compared to $109 million reported in
the second quarter of 1999. Earnings per share for the second quarter were $0.30
per share (diluted) compared to $0.27 per share in the second quarter of 1999.
Net sales for the six months ended June 30, 2000 were $1,374 million as compared
to $1,434 million in the first half of 1999, a decline of 4%. Net income for the
six months ended June 30, 2000 increased 9% to $228 million, or $0.55 per share
(diluted). This compares to net income of $209 million, or $0.52 per share,
reported in the first half of 1999. The increase in net income is due primarily
to an improvement in gross margins, a decrease in interest expense as the
Company continues to pay down its debt obligations, and a reduction in the
Company's effective tax rate.
During the second quarter of 2000, United States (U.S.) revenues decreased
approximately 9% to $414 million, while international revenues increased
approximately 4% to $281 million compared to the same period in the prior year.
Worldwide vascular sales decreased 6% and 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 in the U.S. during the second quarter of 2000. U.S.
coronary stent revenues and worldwide coronary stent revenues, primarily sales
of the NIR(R) stent, were approximately $78 million and $123 million,
respectively, during the second quarter of 2000, compared to $106 million and
$155 million, respectively, during the second quarter of 1999. Worldwide NIR(R)
coronary stent sales as a percentage of worldwide sales were approximately 17%
and 20% during the second quarters of 2000 and 1999, respectively.
U.S. revenues decreased approximately 10% to $805 million during the six months
ended June 30, 2000, while international revenues increased approximately 6% to
$569 million compared to the same period in the prior year. Worldwide vascular
sales decreased 6% and worldwide nonvascular sales increased 12% 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 in the U.S. during the first half of 2000. U.S. coronary stent revenues
and worldwide coronary stent revenues, primarily sales of the NIR(R) stent, were
approximately $141 million and $236 million, respectively, during the six months
ended June 30, 2000, compared to $210 million and $305 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
first half of 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 Company's reduction in
coronary stent revenues in the U.S. throughout the first half of 2000 reflects
this volatility. Stent revenues for 2000 and beyond will be impacted by the
timing of receipt of regulatory approvals to market several new coronary and
peripheral stent platforms in the U.S. and international markets.
The Company expects that net sales during the second half of 2000 will be
relatively flat as compared to those of 1999.
<PAGE>
Gross profit as a percentage of net sales increased from 67.6% in the second
quarter of 1999 to 68.8% in the second quarter of 2000, and increased from 67.6%
in the first half of 1999 to 68.7% in the first half of 2000. The increase in
the Company's gross margin percentage is primarily due to benefits that the
Company realized through its ability to better manage inventory and lower
product costs, and from favorable foreign exchange rate movements. These
benefits were partially offset by a shift in the Company's product sales mix.
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. 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 and the impact of the timing
of 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. Furthermore, the
purchase price of NIR(R) coronary stents, the amount of NIR(R) coronary stent
sales as a percentage of worldwide sales and the mix of coronary stent platforms
could significantly impact gross margins. 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,
the Company expects that its gross margin percentages will be negatively
impacted as the Company launches more expensive gold-coated stents and stents
with higher costing delivery systems. At June 30, 2000, the Company had
approximately $129 million of net NIR(R) coronary stent inventory and was
committed to purchase approximately $53 million of NIR(R) stents from Medinol.
The Company's ability to manage its relationship with Medinol could impact the
future operating results of the Company.
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 manufacturing process and supply chain
programs are designed to lower inventory levels and the cost of manufacturing,
improve absorption 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
research and development facilities. It will consolidate manufacturing
operations along product lines, shifting significant amounts of production to
company facilities in Miami and Ireland and to contract manufacturing. It will
also concentrate research and development activities in a smaller number of
specialized facilities. Based upon preliminary estimates, the plant optimization
initiative is expected to result in pre-tax charges of approximately $70 million
($45 million after-tax) in 2000. The estimated charges are expected to be
recorded as $50 million in special charges and $20 million as cost of sales. The
Company expects that it will make cash outlays related to the initiative of
approximately $15 million during the second half of 2000, which the Company
anticipates will be funded from cash flows from operating activities. The
Company's objective is to complete all significant
<PAGE>
actions related to the plant optimization initiative within 18 months. The
success of the initiative may be dependent on the Company's ability to retain
employees during the transition period.
The global operations plan is estimated to achieve pre-tax operating savings of
$110 million ($70 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. The Company intends to use a portion of these savings that are
generated to increase its investment in research and development.
The amounts discussed above relating to the Company's global operations plan,
including those relating to the plant optimization initiative, are estimates. As
the Company has now announced the plan, a more detailed assessment of costs and
savings is being performed. The Company anticipates that this assessment will be
completed and approved by the appropriate levels of management by the end of the
third quarter.
Selling, general and administrative expenses increased as a percentage of net
sales from 28% in the second quarter of 1999 to 31% in the second quarter of
2000 and increased approximately $10 million from the second quarter of 1999 to
$214 million. Selling, general and administrative expenses increased as a
percentage of net sales from 29% in the first half of 1999 to 31% in the first
half of 2000 and increased approximately $17 million from the first half of 1999
to $428 million. The increase as a percent of net sales is primarily
attributable to the reduction in sales combined with an increase in selling
expenses. The increase in expense dollars is primarily attributable to increased
costs to strengthen the Company's domestic field sales force and to expand its
direct sales presence in international regions. Additionally, in light of the
Company's flat sales forecasted for the second half of 2000 and the current
competitive economic environment, the Company's ability to retain its
established sales force, particularly in the U.S., and control operating
expenses may impact the operating results of the Company.
Amortization expense was approximately $23 million and 3% of net sales during
the second quarter of 2000 and 1999. Amortization expense was approximately $46
million and 3% of net sales during the six months ended June 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 23% from $13 million in the second
quarter of 1999 to $10 million in 2000. Royalty expenses decreased approximately
9% from $23 million in the six months ended June 30, 1999 to $21 million in the
six months ended June 30, 2000. The decrease in royalty expenses is primarily
due to non-recurring payments of approximately $3 million, which the Company
made 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 $49 million and 7% of net
sales during the second quarter of 2000 and 1999. Research and development
expenses were approximately $98 million and 7% of net sales and during the first
half of 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
<PAGE>
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 $35 million in the second quarter of 1999 to $19
million in the second quarter of 2000. Interest expense decreased from $70
million during the six months ended June 30, 1999 to $40 million during the six
months ended June 30, 2000. The overall decrease in interest expense is
primarily attributable to a lower average debt balance as the Company continues
to repay outstanding debt.
Other income (expense), net, changed from expense of $2 million in the second
quarter of 1999 to income of $7 million in the first quarter of 2000. Other
income (expense), net, changed from expense of $5 million in the first half of
1999 to income of $15 million in the first half of 2000. The change is primarily
attributable to net gains recognized on sales of available-for-sale equity
securities. During the second quarter of 2000, and during the first half of
2000, the Company recognized gains on available-for-sale securities of
approximately $7 million and $14 million, respectively.
The Company's effective tax rate decreased from approximately 34% in the first
half of 1999 to 30% in the first half of 2000. The decrease is primarily
attributable to changes in the geographic mix of the Company's business.
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, the Company believes
that it is well positioned to take advantage of opportunities that exist in the
markets it serves.
LIQUIDITY AND CAPITAL RESOURCES
<PAGE>
Cash and short-term investments totaled $44 million at June 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 $27
million at June 30, 2000. Cash proceeds during the first half of 2000 were
generated primarily from operating activities. Cash proceeds during the period
were offset by the net repayment of approximately $265 million of outstanding
debt obligations, purchases of the Company's common stock under its systematic
plan of approximately $99 million, payments for acquisitions of and investments
in certain technologies of approximately $41 million and capital expenditures of
approximately $35 million.
On June 20, 2000, the Company increased the multicurrency borrowing sublimit
under its $1.0 billion credit facility that expires in June 2002 from $100
million to $300 million. As a result of the increase, at June 30, 2000, the
Company refinanced approximately $100 million of additional U.S. dollar credit
facility borrowings to euro and Japanese yen denominated borrowings at lower
interest rates. During 2000, the Company increased its 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 $141 million) and 11.5 billion
Japanese yen (translated to approximately $112 million) at June 30, 2000 and
December 31, 1999, respectively.
The Company has a $600 million 364-day credit facility that expires in September
2000. The Company is in the process of seeking an extension of this facility for
another 364 days. The Company believes that it will be successful in obtaining
the extension in the near term.
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 June 30, 2000, compared to $108 million of
such reclassifications at December 31, 1999.
The Company has recognized net deferred tax assets aggregating $234 million at
June 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. During the first half of 2000, the Company
repurchased approximately 4.8 million shares at an aggregate cost of
approximately $99 million under its systematic plan. As of June 30, 2000,
approximately 31 million shares of the Company's common stock have been
repurchased under the plan. Under the authorization, the Company may also
repurchase shares
<PAGE>
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.
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 $55 million
during the remainder of 2000 and to make estimated tax payments in the second
half of 2000 of approximately $50 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 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 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 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.
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 increasing.
Similarly, legal costs associated with non-patent litigation
<PAGE>
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.
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(R) Ranger(TM) with Sox(TM) coronary stent in the U.S. The
Company is cooperating fully in the investigation.
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,
more stringent regulatory requirements and more vigorous enforcement activities;
(e) the Company's belief that it is well positioned to take advantage of
opportunities that exist in the markets it serves, although the Company expects
that net sales during the second half of 2000 will be relatively flat as
compared to those of 1999; (f) the Company's ability to retain its established
sales force and control operating expenses; (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 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 Company's ability to leverage its
infrastructure; (o) the ability of the Company to manage its relationship with
Medinol; (p) 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; (q) NIR(R) coronary stent sales as a percentage of
worldwide sales in 2000 and the mix of coronary stent platforms; (r) volatility
in the coronary stent market and the timing of regulatory approvals to market
new coronary and peripheral stent platforms; (s) the development of competing or
technologically advanced products by our competitors; (t) the effect of
litigation and compliance activities on the Company's legal provision; (u) the
impact of stockholder class action, patent,
<PAGE>
product liability and other litigation, the outcome of the U.S. Department of
Justice and Federal Trade Commission investigations, 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;
(w) the Company's expectation that it will renew its $600 million revolving
credit facility; and (x) the timing, size and nature of strategic initiatives
and research and development platforms available to the Company.
Several important factors, in addition to the specific factors discussed in
connection with such forward-looking statements individually, could affect the
future results and growth rates of the Company and could cause those results and
rates to differ materially from those expressed in the forward-looking
statements contained herein. Such additional factors include, among other
things, 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 June 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 $5 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.
The Company enters into forward foreign exchange contracts to hedge its net
recognized foreign currency assets and liabilities 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 hedged assets,
liabilities and forecasted cash flows denominated in foreign currencies.
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
<PAGE>
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 $634 million at June 30, 2000. As of June 30, 2000, the
Company had recorded approximately $7 million of assets and $2 million of
liabilities to recognize the fair value of its contracts outstanding on June 30,
2000. Foreign exchange contracts that hedge net recognized foreign currency
assets and liabilities should not subject the Company to material risk due to
exchange rate movements because gains and losses on these contracts should
offset losses and gains on the assets and liabilities being hedged. 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 five months.
A sensitivity analysis of changes in the fair value of foreign currency exchange
contracts outstanding at June 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 $56 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 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 are 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 9, 2000, to consider and vote upon proposals to (i) elect
three Class II Directors of the Company to hold office until
the 2003 Annual Meeting of Stockholders of the Company, and
until their respective successors are chosen and qualified or
until their earlier resignation, death or removal, and (ii) to
approve and adopt the Company's 2000 Long-Term Incentive Plan.
John E. Abele, Joel L. Fleishman and Lawrence L. Horsch were
elected as Class II Directors of the Company by a vote of
342,131,178, 342,084,788, and 342,143,683 for, respectively,
and 4,846,464, 4,892,854 and 4,833,959 withheld, respectively.
The Company's 2000 Long-Term Incentive Plan was approved and
adopted by a vote of 277,991,690 for, 67,453,937 against and
1,532,015 abstained.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Second Amendment to the Second Amended and
Restated Credit Agreement among Boston Scientific
Corporation, The Several Lenders and The Chase
Manhattan Bank dated as of June 20, 2000.
(b) The following reports were filed during the quarter ended
June 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 August 14, 2000.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
-------------------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and Senior Vice
President - Finance and Administration
