<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended: March 31, 2000
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Boston Scientific Place, Natick, Massachusetts 01760-1537
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
<TABLE>
<CAPTION>
Shares Outstanding
Class as of March 31, 2000
----- --------------------
<S> <C>
Common Stock, $.01 Par Value 407,700,921
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
In millions, except share and per share data 2000 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 56 $ 64
Short-term investments 23 14
Trade accounts receivable, net 423 445
Inventories 355 376
Other current assets 158 156
---------------------------
Total current assets 1,015 1,055
Property, plant and equipment 945 940
Less: accumulated depreciation 352 336
---------------------------
593 604
Excess of cost over net assets acquired, net 833 840
Technology - core and developed, net 560 570
Patents, trademarks and other intangibles, net 316 316
Other assets 197 187
---------------------------
$ 3,514 $ 3,572
===========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
In millions, except share and per share data 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
<S> <C> <C>
Commercial paper $ 399 $ 277
Bank obligations 213 323
Accounts payable and accrued expenses 343 410
Income taxes payable 77 42
Other current liabilities 12 3
---------------------------
Total current liabilities 1,044 1,055
Long-term debt 570 678
Other long-term liabilities 120 115
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 March 31, 2000 and
December 31, 1999 4 4
Additional paid-in capital 1,211 1,210
Treasury stock, at cost - 7,221,129 shares at
March 31, 2000 and 5,872,857 shares at
December 31, 1999 (149) (126)
Deferred compensation (24)
Retained earnings 858 752
Accumulated other comprehensive loss (120) (116)
---------------------------
Total stockholders' equity 1,780 1,724
---------------------------
$ 3,514 $ 3,572
===========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 4
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
In millions, except per share data 2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 679 $ 708
Cost of products sold 213 230
-----------------------
Gross profit 466 478
Selling, general and administrative expenses 214 207
Amortization expense 23 23
Royalties 11 10
Research and development expenses 49 49
-----------------------
297 289
-----------------------
Operating income 169 189
Other income (expense):
Interest expense (21) (35)
Other, net 8 (3)
-----------------------
Income before income taxes 156 151
Income taxes 50 51
-----------------------
Net income $ 106 $ 100
=======================
Net income per common share - basic $ 0.26 $ 0.25
========================
Net income per common share - assuming dilution $ 0.26 $ 0.25
========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
In millions, except share data Three Months Ended March 31, 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 106 106
Foreign currency
translation adjustment (7) (7)
Issuance of common
stock (2) 10 8
Issuance of restricted
stock 2 24 $(26)
Purchase of common
stock for treasury (57) (57)
Tax benefit relating to
incentive stock option
and employee stock
purchase plans 1 1
Amortization of deferred
compensation 2 2
Unrealized losses on
derivative financial
instruments, net (7) (7)
Unrealized gains on
equity investments, net 10 10
------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 414,922 $4 $1,211 $(149) $(24) $858 $(120) $1,780
======================================================================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 6
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
In millions 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 147 $ 137
Investing activities:
Purchases of property, plant, and equipment, net (16) (27)
Other, net 4 2
-------------------------
Cash used for investing activities (12) (25)
Financing activities:
Net increase (decrease) in commercial paper 122 (1,816)
Net proceeds from (payments on) borrowings
on revolving credit facilities (220) 1,717
Proceeds from issuances of shares of common stock,
net of tax benefits 9 30
Acquisition of treasury stock (57)
Other, net 5
-------------------------
Cash used for financing activities (141) (69)
Effect of foreign exchange rates on cash (2) (3)
-------------------------
Net increase (decrease) in cash and cash equivalents (8) 40
Cash and cash equivalents at beginning of period 64 70
-------------------------
Cash and cash equivalents at end of period $ 56 $ 110
=========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 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-month period
ended March 31, 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 Corporation'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
The Company had comprehensive income of $102 million and $70 million for the
three months ended March 31, 2000 and 1999, respectively.
Note C - Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
(In millions, except share and per share data) 2000 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
Basic:
Net income $106 $100
--------- -------------
Weighted average shares outstanding (in thousands) 408,178 394,772
--------- -------------
Net income per common share $0.26 $0.25
========= =============
Assuming dilution:
Net income $106 $100
--------- -------------
</TABLE>
1
<PAGE> 8
<TABLE>
<S> <C> <C>
Weighted average shares outstanding (in thousands) 408,178 394,772
Net effect of dilutive stock-based compensation
(in thousands) 3,179 7,030
--------- ---------
Total (in thousands) 411,357 401,802
--------- ---------
Net income per common share $0.26 $0.25
========= =========
</TABLE>
Note D - Restructuring and Merger-Related Charges
At March 31, 2000, the Company had an accrual for restructuring and
merger-related charges of $27 million, which is comprised of $11 million of
accrued severance and related costs primarily associated with integrating
Schneider (acquired in September 1998) and streamlining manufacturing
operations, $6 million related to the cost of canceling contractual commitments
recorded in connection with the Schneider acquisition and $10 million of
accruals remaining from 1996 and prior mergers (primarily costs associated with
rationalized facilities and statutory benefits that are subject to litigation).
The activity impacting the accrual related to restructuring and merger-related
charges during the three months ended March 31, 2000 is summarized in the
following table:
<TABLE>
<CAPTION>
Balance at Charges Balance at
December 31, Utilized in March 31, 2000
(In millions) 1999 2000
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
1995 AND 1996 RESTRUCTURING AND MERGER-RELATED
INITIATIVES:
Facilities $ 3 $ 3
Workforce reductions 4 4
Contractual commitments 1 1
Direct transaction and other costs 2 2
--------------------------------------------------
$10 $10
==================================================
1998 SCHNEIDER PURCHASE PRICE ADJUSTMENTS:
Workforce reductions $13 $(7) $ 6
Contractual commitments 6 6
--------------------------------------------------
$19 $(7) $12
==================================================
1998 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Workforce reductions $ 2 $(1) $ 1
Asset write-downs 4 (1) 3
Direct transaction and other costs 1 1
--------------------------------------------------
$ 7 $(2) $ 5
==================================================
TOTAL :
Facilities $ 3 $ 3
Workforce reductions 19 $(8) 11
Contractual commitments 7 7
Asset write-downs 4 (1) 3
Direct transaction and other costs 3 3
--------------------------------------------------
$36 $(9) $27
==================================================
</TABLE>
The Company expects that substantially all restructuring and merger-related
payments will be made during 2000.
Note E - Borrowings and Credit Arrangements
At March 31, 2000, the Company had approximately $201 million in revolving
credit facility borrowings outstanding at a weighted-average interest rate of
6.06% compared to approximately $421 million of outstanding revolving credit
facility borrowings at a weighted-average interest rate of 6.66% at December 31,
1999. In addition, the Company had approximately $399 million of commercial
paper outstanding at a weighted-average interest rate of 6.39% at March 31, 2000
compared to approximately $277 million of commercial paper outstanding at a
weighted-average interest rate of 6.70% at December 31, 1999.
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 March 31, 2000, compared to $108 million
of such reclassifications at December 31, 1999.
During the first quarter of 2000, the Company increased its borrowing capacity
by 2.5 billion Japanese yen under its uncommitted Japanese credit facilities.
The total of these uncommitted Japanese credit facilities provide for borrowings
and promissory notes discounting of up to 14.0 billion Japanese yen (translated
to approximately $136 million) at March 31, 2000 and 11.5 billion Japanese yen
(translated to approximately $112 million) at December 31, 1999.
Note F - Inventories
The components of inventory consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
(In millions) 2000 1999
- ------------------------- ----------- ------------
<S> <C> <C>
Finished goods $175 $194
Work-in-process 59 60
Raw materials 121 122
----------- ------------
$355 $376
=========== ============
</TABLE>
At March 31, 2000, the Company had approximately $139 million of net NIR(R)
coronary stent inventory, which is supplied by Medinol Ltd. ("Medinol"), and was
committed to purchase approximately $26 million of NIR(R) stents from Medinol.
Delays, stoppages, or interruptions in the supply and/or mix of NIR(R) stent
inventory or revenues could adversely affect the operating results of the
Company.
2
<PAGE> 9
Note G - 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 quarter of 2000, the
Company repurchased under its systematic plan approximately 3.0 million shares
at an aggregate cost of $57 million. As of March 31, 2000, approximately 28.9
million shares of the Company's common stock had been repurchased under the
plan. The Company may also repurchase within its authorization 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 restricted shares of its common stock
to certain employees. The purpose of the program was to help retain key
employees. The market value of these shares was approximately $26 million 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 during the first quarter
of 2000.
Note H - New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). 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. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. 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 transactions with forward foreign exchange
contracts. These contracts are entered into to reduce the risk that the
Company's cash flows resulting from forecasted intercompany 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). 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.
Changes in the fair value of the derivative instruments, designated as cash flow
hedges, are recorded in accumulated comprehensive income/(loss) until the
underlying forecasted transaction occurs. Once the underlying forecasted
transaction occurs, the related gain or loss on the cash flow hedge is
reclassified from accumulated other comprehensive income/(loss) to earnings. In
the event the underlying forecasted 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 accumulated other comprehensive income/(loss) 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 are highly effective in offsetting changes in the expected
cash
3
<PAGE> 10
flows from the forecasted transaction. The Company did not recognize any gains
or losses resulting from either hedge ineffectiveness or changes in forecast
probability during the first quarter of 2000.
The Company recognized a net gain of approximately $1 million in earnings from
derivative instruments designated as cash flow hedges of forecasted intercompany
transactions during the first quarter of 2000. All of the derivative
instruments, designated as cash flow hedges, outstanding at March 31, 2000
mature within the subsequent 24-month period. As of March 31, 2000,
approximately $7 million of unrealized net losses have been recorded in
accumulated other comprehensive income/(loss), net of tax, to recognize the fair
value of derivative instruments that are designated as cash flow hedges. Of this
amount, a loss of approximately $4 million, net of tax, relates to cash flow
hedges of forecasted intercompany transactions expected to occur 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 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 second 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
but does not believe that the impact will be significant.
Note I - Commitments and Contingencies
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a subsidiary of the
Company, filed a suit for patent infringement against Advanced Cardiovascular
Systems, Inc. (ACS), alleging willful infringement of two of SCIMED's U.S.
patents by ACS's RX ELIPSE(TM) PTCA catheter. The suit was filed in the U.S.
District Court for the Northern District of California seeking monetary and
injunctive relief. In January 1998, the Company added the ACS RX MULTILINK(TM)
stent delivery system to its complaint. On June 6, 1999, the Court granted
summary judgment in favor of ACS affirming that SCIMED's patents were not
infringed. SCIMED has appealed the judgment.
On December 29, 1998, the Company and SCIMED filed a cross-border suit against
Advanced Cardiovascular Systems, Inc. (ACS), Guidant Corporation (Guidant) and
various foreign subsidiaries in The Netherlands alleging ACS's MULTILINK(TM), RX
ELIPSE, RX MULTILINK HP(TM) and RX DUET(TM) catheters and stent delivery systems
infringe one of the Company's European patents. In this action, the Company
requested relief covering The Netherlands, the United Kingdom, France, Germany
and Italy. A hearing on the merits was held on November 5, 1999. The court has
delayed its decision pending
4
<PAGE> 11
advice from the Dutch Patent Office.
On January 13, 1999, SCIMED filed a suit for patent infringement against ACS,
Guidant and Guidant Sales Corporation alleging willful infringement of two of
SCIMED's U.S. patents by ACS's RX MULTILINK HP and RX DUET stent delivery
systems and one of SCIMED's U.S. patents by ACS's RX MULTILINK stent delivery
system. The suit was filed in the U.S. District Court for the Northern District
of California seeking monetary and injunctive relief. ACS has answered, denying
the allegations of the complaint. A trial date has not yet been set.
On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,
alleging willful infringement by SCIMED's EXPRESS PLUS(TM) and EXPRESS PLUS
II(TM) PTCA catheters of four U.S. patents licensed to ACS. Suit was filed in
the U.S. District Court for the Northern District of California and seeks
monetary and injunctive relief. SCIMED has answered, denying the allegations of
the complaint. A trial date is scheduled for December 2000.
On March 12, 1996, ACS filed two suits for patent infringement against SCIMED,
alleging in one case the willful infringement of a U.S. patent by SCIMED's
EXPRESS PLUS, EXPRESS PLUS II and LEAP(R) EXPRESS PLUS PTCA catheters, and in
the other case the willful infringement of a U.S. patent by SCIMED's BANDIT(TM)
PTCA catheter. The suits were filed in the U.S. District Court for the Northern
District of California and seek monetary and injunctive relief. On June 24,
1999, in the case involving the BANDIT PTCA catheter, the Court granted ACS's
motions for summary judgment on the validity (with respect to certain issues)
and infringement of ACS's patent. A trial date on the remaining issues with
respect to the BANDIT PTCA catheter is set for May 2000. A trial date with
respect to the EXPRESS PLUS catheters is set for December 2000.
On September 16, 1997, ACS filed a suit for patent infringement against the
Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter infringes two
U.S. patents licensed to ACS and one U.S. patent owned by ACS. Suit was filed in
the U.S. District Court for the Northern District of California seeking monetary
damages, injunctive relief and that the patents be adjudged valid, enforceable
and infringed. The Company and SCIMED have answered, denying the allegations of
the complaint. A trial date has not yet been set.
On August 12, 1998, ACS and an affiliate of ACS filed suit for patent
infringement against the Company and SCIMED alleging that the Company's NIR(R)
stent infringes five patents owned by ACS. The suit was filed in the U.S.
District Court for the Southern District of Indiana seeking injunctive and
monetary relief. The Company and SCIMED have answered, denying the allegations
of the complaint. The trial, which had been set for February 22, 2000, has been
postponed pending the court's consideration of the Company's motion to dismiss.
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.
5
<PAGE> 12
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 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 late 2000.
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 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'
6
<PAGE> 13
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.
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 is scheduled for 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. The Company and SCIMED have answered, denying
the allegations of the complaint. Trial is expected to begin in March 2001.
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 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 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.
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.
7
<PAGE> 14
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.
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 a hearing on that
motion is scheduled for June 16, 2000.
On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District
Court for the District of Delaware alleging that certain Company products,
including the Company's MaxForce TTS(TM) catheter, infringe a patent assigned to
Bard. Following a trial and jury verdict, on February 3, 1999 the court entered
a judgment that the Company infringed the Bard patent and awarded damages to
Bard in the amount of $10.8 million. The Company was also enjoined from selling
the product found to be infringing. The Company had appealed the judgment to the
Court of Appeals for the Federal Circuit and is awaiting the Court's decision.
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 scheduled
for May 4, 2000.
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 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 incontence. Both parties are seeking monetary damages and injunctive
relief. 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 uninary 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 intends to answer, 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
8
<PAGE> 15
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.
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 March 31, 2000, the potential
exposure for litigation-related accruable costs is estimated to range from $41
million to $51 million. The Company's total accrual as of March 31, 2000
for litigation-related reserves was approximately $41 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 J - Segment Reporting
Boston Scientific is a worldwide developer, manufacturer and marketer of medical
devices for less invasive procedures. The Company has four reportable operating
segments based on geographic regions: the United States, Europe, Japan and
Inter-Continental. Each of the Company's reportable segments generates revenues
from the sale of minimally invasive medical devices. The reportable segments
represent an aggregate of operating divisions.
Sales and operating results of reportable segments are based on internally 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.
9
<PAGE> 16
<TABLE>
<CAPTION>
United Emerging
(In millions) States Europe Japan Markets Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months ended March 31, 2000
Net sales $391 $107 $138 $43 $679
Operating income 152 38 92 3 285
Three months ended March 31, 1999
Net sales $441 $106 $125 $36 $708
Operating income 166 30 77 5 278
</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
March 31,
- -------------------------------------------------------------------------------
(In millions) 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Income before income taxes:
Total operating income for reportable
segments $285 $278
Corporate expenses and foreign exchange (116) (89)
----------------------
169 189
Other expense, net (13) (38)
----------------------
$156 $151
======================
</TABLE>
10
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the first quarter were $679 million as compared to $708 million in
the first quarter of 1999, a decline of 4%. Net income for the first quarter
increased 6% to $106 million as compared $100 million reported in the first
quarter of 1999. Earnings per share for the first quarter were $0.26 per share
(diluted) compared to $0.25 per share in the first quarter of 1999.
During the first quarter of 2000, United States (U.S.) revenues decreased
approximately 11% to $391 million, while international revenues increased
approximately 8% to $288 million. 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 quarter of 2000. U.S. coronary stent revenues and
worldwide coronary stent revenues, primarily sales of the NIR(R) stent, were
approximately $63 million and $113 million, respectively, during the first
quarter of 2000, compared to $105 million and $150 million, respectively, during
the first quarter of 1999. Worldwide NIR(R) coronary stent sales as a percentage
of worldwide sales were approximately 15% and 20% during the first quarter 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. during the first quarter of 2000 reflects
this volatility. Stent revenues for 2000 will be impacted by the timing of
receipt of FDA approvals to market several new coronary and peripheral stent
platforms in the U.S. The Company expects 2000 sales growth to be below the
Company's historical rates.
Gross profit as a percentage of net sales increased from 67.5% in the first
quarter of 1999 to 68.6% in the first quarter of 2000. The increase in gross
margin is primarily due to the Company's improvement in its supply chain
management. During 1998, the Company initiated a program to focus on supply
chain optimization, and, during 1999, the program was expanded to include a
review of manufacturing processes. The program is designed to lower inventory
levels and the cost of manufacturing, improve absorption and minimize inventory
write-downs. The infrastructure related to the supply chain aspect of the
program is substantially in place. During the first quarter of 2000, the Company
began to realize some benefits associated with its ability to better manage
inventory and lower product costs, resulting in an improved gross margin
percentage. However, continued gross margin benefits will not be fully realized
until manufacturing processes are addressed, the program has time to develop and
until historical inventories are sold. The Company continues to assess its plant
network strategy.
Medinol Ltd. (Medinol) supplies the NIR(R) coronary stent, and unforeseen
delays, stoppages or interruptions in the supply and/or mix of the NIR(R) stent
could adversely affect future operating results 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
FDA approvals to market new coronary stent platforms could negatively impact
the Company's ability to effectively transition its stent inventory.
Furthermore, the purchase
<PAGE> 18
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. At March 31,
2000, the Company had approximately $139 million of net NIR(R) coronary stent
inventory and was committed to purchase approximately $26 million of NIR(R)
stents from Medinol.
Selling, general and administrative expenses increased as a percentage of net
sales from 29% in the first quarter of 1999 to 32% in the first quarter of 2000
and increased approximately $7 million from the first quarter of 1999 to $214
million. The increase as a percent of net sales is primarily attributable to the
reduction in U.S. coronary stent 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.
Amortization expense was approximately $23 million and 3% of net sales during
the first quarter of 2000 and 1999. Amortization expense is primarily comprised
of the amortization of intangibles related to the purchase of Schneider
Worldwide (Schneider).
Royalty expenses increased approximately 10% from $10 million in the first
quarter of 1999 to $11 million in 2000. 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% percent
of net sales during the first quarter of 2000 and 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 Company's research and
development projects acquired in connection with the Schneider acquisition are
generally progressing in line with cost estimates previously reported in the
Company's Annual Report for the year ended December 31, 1999 filed on Form 10-K
with the SEC. 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 first quarter of 1999 to $21
million in the first quarter of 2000. The overall decrease in interest expense
is primarily attributable to a lower average debt balance as the Company
continues to repay its outstanding debt.
Other income (expense), net, changed from expense of $3 million in the first
quarter of 1999 to income of $8 million in the first quarter of 2000. The change
is primarily attributable to a net gain of approximately $7 million recognized
on sales of available-for-sale equity securities recorded in the first quarter
of 2000.
<PAGE> 19
The Company's effective tax rate decreased from approximately 34% in the first
quarter of 1999 to 32% in the first quarter 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. A
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 for growth that
exist in the markets it serves.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments totaled $79 million at March 31, 2000 compared
to $78 million at December 31, 1999. Working capital decreased from current
assets equaling current liabilities at December 31, 1999 to current liabilities
exceeding current assets by $29 million at March 31, 2000. Cash proceeds during
the first quarter of 2000 were generated primarily from operating activities.
Cash provided by operating activities increased from $137 million during the
first quarter of 1999 to $147 million during the first quarter of 2000. The
improvement is primarily attributable to reductions in accounts receivable and
inventory. Cash proceeds during the period were offset by the net repayment of
approximately $96 million of outstanding debt obligations, purchases of the
Company's stock under its systematic plan for approximately $57 million and
capital expenditures of approximately $16 million.
At March 31, 2000, the Company had approximately $201 million in revolving
credit facility borrowings outstanding at a weighted-average interest rate of
6.06% compared to approximately $421 million of outstanding revolving credit
facility borrowings at a weighted-average interest rate of 6.66% at December 31,
1999. In addition, the Company had approximately $399 million
<PAGE> 20
of commercial paper outstanding at a weighted-average interest rate of 6.39% at
March 31, 2000 compared to approximately $277 million of commercial paper
outstanding at a weighted-average interest rate of 6.70% at December 31, 1999.
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 March 31, 2000, compared to $108 million
of such reclassifications at December 31, 1999.
During the first quarter of 2000, the Company increased its borrowing capacity
by 2.5 billion Japanese yen under its uncommitted Japanese credit facilities.
The total of these uncommitted Japanese credit facilities provide for borrowings
and promissory notes discounting of up to 14.0 billion Japanese yen (translated
to approximately $136 million) at March 31, 2000 and 11.5 billion Japanese yen
(translated to approximately $112 million) at December 31, 1999.
The Company has recognized net deferred tax assets aggregating $237 million at
March 31, 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 quarter of 2000, the
Company repurchased under its systematic plan approximately 3.0 million shares
at an aggregate cost of $57 million. As of March 31, 2000, approximately 28.9
million shares of the Company's common stock had been repurchased under the
plan. The Company may also repurchase within its authorization 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.
Since early 1995, the Company has entered into several transactions involving
acquisitions and alliances, certain of which have involved equity investments.
As the healthcare environment continues to undergo rapid change, management
expects that it will continue to focus on strategic initiatives and/or make
additional investments in existing relationships. In connection with these
acquisitions, the Company has acquired numerous in-process research and
development projects. As the Company continues to build its research base in
future years, it is reasonable to assume that it will acquire additional
research and development platforms. The Company expects that substantially all
restructuring and merger-related payments will be made during 2000.
The Company expects to make estimated tax payments in the second quarter of 2000
of approximately $48 million, and to incur capital expenditures of approximately
$80 million during the remainder of 2000. The Company expects that its cash and
cash equivalents, marketable securities, cash flows from operating activities
and borrowing capacity will be sufficient to meet its projected operating cash
needs through the end of 2000.
<PAGE> 21
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
is addressing the potential impact resulting from the euro conversion, including
adaptation of information technology systems, competitive implications related
to pricing and foreign currency considerations.
Management currently believes that the euro will not have a material impact
related to its information technology systems or foreign currency exposures. The
increased price transparency resulting from the use of a single currency in the
eleven participating countries may affect the ability of the Company to price
its products differently in the various European markets. A possible result of
this is price harmonization at lower average prices for products sold in some
markets. However, uncertainty exists as to the effects the euro will have on the
marketplace.
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 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
<PAGE> 22
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 obtain future
benefits from its rationalization plans, including purchased research and
development; (b) the process, outlays and plan for the integration of businesses
acquired by the Company; (c) the successful implementation of the Company's
supply chain and manufacturing process initiatives and the Company's ability to
achieve manufacturing cost declines, gross margin benefits and inventory
reductions; (d) 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; (e) 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; (f) the
Company's belief that it is well positioned to take advantage of opportunities
for growth that exist in the markets it serves, although the Company expects
2000 sales growth to be below the Company's historical rates; (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 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 belief that its net deferred tax assets will be substantially
recovered; (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) unforeseen delays, stoppages or interruptions in the supply
and/or mix of the NIR(R) coronary stent, 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 and the timing of regulatory approvals to market
new coronary and peripheral stent platforms; (r) the development of competing or
technologically advanced products by our competitors; (s) the effect of
litigation and compliance activities on the Company's legal provision; (t) the
impact of stockholder class action, patent, 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; (u) the potential impact resulting from the euro conversion,
including adaptation of information technology systems, competitive implications
related to pricing and foreign currency considerations; and (v) 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
<PAGE> 23
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. 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 $6 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
transactions with forward foreign exchange contracts. The 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). 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
$548 million at March 31, 2000. As of March 31, 2000, the Company had recorded
approximately $14 million of liabilities to recognize the net fair value of
<PAGE> 24
its contracts outstanding on March 31, 2000. The Company's foreign exchange
contracts 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, liabilities and cash flow transactions being hedged.
A sensitivity analysis of changes in the fair value of foreign currency exchange
contracts outstanding at March 31, 2000 indicates that, if the U.S. dollar
uniformly weakened by 10% against all currencies, the fair value of these
contracts would decrease by $58 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. In addition,
unhedged foreign currency balance sheet exposures as of March 31, 2000 are not
expected to result in a significant loss of earnings or cash flows. 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> 25
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Note I Commitments and Contingencies to the Company's unaudited
condensed consolidated financial statements contained elsewhere
in this Quarterly Report is incorporated herein by reference.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) The following reports were filed during the quarter ended March
31, 2000:
None.
<PAGE> 26
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 May 15, 2000.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
-----------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and Senior
Vice President - Finance and
Administration
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