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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, 2002
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 650-8000
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Shares Outstanding
Class as of June 30, 2002
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Common Stock, $.01 Par Value 406,882,942
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Page 1 of 35
Exhibit Index on Page 34
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk 33
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 34
ITEM 4. Submission of Matters to a Vote of Security Holders 34
ITEM 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
2
Part I
Financial Information
Item 1. Financial Statements
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
In millions, except share and per share data 2002 2001
- --------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 144 $ 180
Short-term investments 5
Trade accounts receivable, net 406 370
Inventories 283 303
Other current assets 241 248
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Total current assets 1,074 1,106
Property, plant and equipment 1,111 1,045
Less: accumulated depreciation 484 453
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627 592
Excess of cost over net assets acquired 968 928
Technology - core, net 557 541
Technology - developed, net 233 221
Patents, net 321 264
Trademarks and other intangibles, net 108 110
Other assets 229 212
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$ 4,117 $ 3,974
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See notes to unaudited condensed consolidated financial statements.
3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
June 30, December 31,
In millions, except share and per share data 2002 2001
- --------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Commercial paper $ 190 $ 99
Bank obligations 146 132
Accounts payable and accrued expenses 463 475
Payments due in connection with the purchase of BEI 95
Other current liabilities 165 125
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Total current liabilities 1,059 831
Long-term debt 835 973
Other long-term liabilities 126 155
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, 2002 and
December 31, 2001 4 4
Additional paid-in capital 1,222 1,225
Treasury stock, at cost - 8,039,108 shares at June 30, 2002 and
9,668,427 shares at December 31, 2001 (137) (173)
Deferred compensation (5) (10)
Retained earnings 1,133 1,031
Accumulated other comprehensive loss (120) (62)
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Total stockholders' equity 2,097 2,015
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$ 4,117 $ 3,974
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See notes to unaudited condensed consolidated financial statements.
4
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
In millions, except per share data 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $ 708 $ 672 $ 1,383 $ 1,326
Cost of products sold 225 268 432 490
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Gross profit 483 404 951 836
Selling, general and administrative expenses 246 230 487 455
Amortization expense 17 52 34 75
Royalties 8 9 17 18
Research and development expenses 85 71 161 127
Purchased research and development 45 188 45 267
Restructuring charges 4 4
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401 554 744 946
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Operating income (loss) 82 (150) 207 (110)
Other income (expense):
Interest expense (10) (16) (22) (30)
Other, net (18) (14) 1
----------------------------- -----------------------------
Income (loss) before income taxes 54 (166) 171 (139)
Income taxes 29 6 64 38
----------------------------- -----------------------------
Net income (loss) $ 25 $ (172) $ 107 $ (177)
============================= =============================
Net income (loss) per common share - basic $ 0.06 $ (0.43) $ 0.26 $ (0.44)
============================= =============================
Net income (loss) per common share - assuming dilution $ 0.06 $ (0.43) $ 0.26 $ (0.44)
============================= =============================
See notes to unaudited condensed consolidated financial statements.
5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30
In millions 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities $ 218 $ 214
Investing activities:
Purchases of property, plant and equipment, net (62) (67)
Acquisitions of businesses, net of cash acquired (44) (438)
Payments for acquisitions of and/or investments in certain technologies, net (144) (30)
Sales of available for sale securities 14 8
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Cash used for investing activities (236) (527)
Financing activities:
Net increase (decrease) in commercial paper 411 (56)
Net (payments of) proceeds from borrowings
on revolving credit facilities (412) 355
Proceeds from notes payable and long-term debt 2
Payments on notes payable, capital leases and long-term borrowings (46) (4)
Proceeds from issuances of shares of common stock 26 18
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Cash (used for) provided by financing activities (21) 315
Effect of foreign exchange rates on cash 3 (1)
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Net (decrease) increase in cash and cash equivalents (36) 1
Cash and cash equivalents at beginning of period 180 54
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Cash and cash equivalents at end of period $ 144 $ 55
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Supplemental Schedule of Noncash Investing and Financing Activities:
Payments due in connection with the purchase of BEI $ 95
See notes to unaudited condensed consolidated financial statements.
6
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2002
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 accounting principles generally accepted in the United States
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 accounting principles generally accepted
in the United States 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 months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. 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, 2001.
Note B - Comprehensive Income/Loss
For the three months ended June 30, 2002 and 2001, the Company reported a
comprehensive loss of $22 million and $179 million, respectively. For the six
months ended June 30, 2002 and 2001, the Company reported comprehensive income
of $49 million and a comprehensive loss of $175 million, respectively.
Comprehensive income/loss for the three and six months ended June 30, 2002 was
reduced relative to reported net income due to decreases in the Company's
unrealized gains on derivative financial instruments.
Note C - Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
Three Months Six Months
Ended June 30, Ended June 30,
(In millions, except share and per share data) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Basic:
Net income (loss) $ 25 $ (172) $ 107 $ (177)
Weighted average shares outstanding (in thousands) 406,028 400,438 405,654 399,812
Net income (loss) per common share $ 0.06 $ (0.43) $ 0.26 $ (0.44)
========= ========= ========= =========
Assuming dilution:
Net income (loss) $ 25 $ (172) $ 107 $ (177)
Weighted average shares outstanding (in thousands) 406,028 400,438 405,654 399,812
Net effect of dilutive stock-based compensation
(in thousands) 6,936 6,377
--------- --------- --------- ---------
Total (in thousands) 412,964 400,438 412,031 399,812
Net income (loss) per common share $ 0.06 $ (0.43) $ 0.26 $ (0.44)
========= ========= ========= =========
For the second quarter and the first half of 2001, approximately 4 million
potential common shares were not included in the computation of earnings per
share, assuming dilution, as they would have been anti-dilutive.
7
Note D - Business Combinations
On June 13, 2002, the Company completed its acquisition of the remaining 93
percent of the outstanding shares of Enteric Medical Technologies, Inc. (EMT) in
an all-cash transaction for an initial payment of approximately $50 million,
plus contingent payments upon achievement of certain milestones. EMT designs,
manufactures and markets Enteryx(TM), a liquid polymer technology for the
treatment of gastroesophageal reflux disease (GERD). The acquisition is intended
to expand the Company's Endosurgery product offerings in the GERD market.
On June 27, 2002, the Company completed its tender offer relating to its
acquisition of the outstanding shares of BEI Medical Systems Company, Inc. (BEI)
in an all-cash transaction for approximately $95 million. BEI designs,
manufactures and markets less-invasive technology used by gynecologists to treat
excessive uterine bleeding due to benign causes. The acquisition is intended to
expand the Company's product offerings in the area of women's health and will
become part of the Company's Endosurgery group.
The Company's acquisitions were accounted for using the purchase method of
accounting. The condensed consolidated financial statements include the
operating results for each acquired entity from its respective date of
acquisition. Pro forma information is not presented, as the acquired companies'
results of operations prior to their date of acquisition are not material,
individually or in the aggregate, to the Company. The EMT acquisition involves
potential earn-out payments based on the acquired company reaching certain
milestones. These payments would be allocated to specific intangible asset
categories with the remainder assigned to excess of cost over net assets
acquired as if the consideration had been paid as of the date of acquisition.
The aggregate purchase price for each acquisition has been allocated to the
assets acquired and liabilities assumed based on their fair values at the date
of acquisition. The estimated excess of purchase price over the fair value of
the net tangible assets acquired was allocated to identifiable intangible
assets, as valued by an independent appraiser using information and assumptions
provided by management. Based upon these valuations, the Company recorded a
charge of approximately $45 million to account for purchased research and
development related to EMT. The valuation of purchased research and development,
for which management is primarily responsible, represents the estimated fair
value at the date of acquisition related to in-process projects. As of the date
of acquisition, the in-process projects had not yet reached technological
feasibility and had no alternative future uses. The primary basis for
determining the technological feasibility of these projects is obtaining
regulatory approval. Accordingly, the value attributable to these projects,
which had not yet obtained regulatory approval, was expensed in conjunction with
the acquisition. If the projects are not successful or completed in a timely
manner, the Company may not realize the financial benefits expected for these
projects. Other intangible assets subject to amortization recorded in connection
with the EMT and BEI acquisitions are being amortized on a straight-line basis
ranging from 9 to 25 years.
8
The income approach was used to establish the fair values of purchased research
and development. This approach establishes fair value by estimating the
after-tax cash flows attributable to the in-process project over its useful life
and then discounting these after-tax cash flows back to a present value. Revenue
estimates were based on estimates of relevant market sizes, expected market
growth rates, expected trends in technology and expected product introductions
by competitors. In arriving at the value of the in-process research and
development projects, the Company considered, among other factors, the
in-process project's stage of completion, the complexity of the work completed
as of the acquisition date, the costs already incurred, the projected costs to
complete, the contribution of core technologies and other acquired assets, the
expected introduction date and the estimated useful life of the technology. The
discount rate used to arrive at a present value as of the date of acquisition
was based on the time value of money and medical technology investment risk
factors. For the purchased research and development programs acquired in
connection with the EMT acquisition, risk-adjusted discount rates ranging from
18 percent to 26 percent were utilized to discount the projected cash flows. The
Company believes that the estimated purchased research and development amounts
so determined represent the fair value at the date of acquisition and do not
exceed the amount a third party would pay for the projects.
The most significant project, relative to the purchased research and development
charge recorded in connection with the EMT acquisition, is the Enteryx(TM)
technology for the treatment of GERD, which represents approximately 87 percent
of the in-process value. Enteryx is a patented liquid polymer for the treatment
of GERD. As of the date of acquisition, the project was expected to be completed
and the product to be commercially available within one to two years, with an
estimated cost to complete of approximately $2 million.
The Company's research and development projects acquired in connection with its
2001 business combinations are generally progressing in line with the estimates
set forth in the Company's 2001 Annual Report on Form 10-K, with the exception
of the next-generation Infiltrator(R) transluminal drug-delivery catheter
project. Due to superior drug-delivery products available to the Company, the
Company has reduced its future revenue projections for this product. The Company
expects to continue to pursue this and other research and development projects
acquired in connection with its 2001 business combinations and believes it has a
reasonable chance of completing the projects.
Note E- Global Operations Strategy
During the second quarter of 2002, the Company substantially completed the plant
optimization initiative. The plant optimization initiative has created a better
allocation of the Company's resources by forming a more effective network of
manufacturing and research and development facilities. The Company's plan
resulted in the consolidation of manufacturing operations along product lines
and the shifting of significant amounts of production to the Company's
facilities in Miami and Ireland and to contract manufacturing. The Company's
plan included the discontinuation of manufacturing activities at three
facilities in the U.S., and included the planned displacement of
9
approximately 1,700 manufacturing, manufacturing support and management
employees. In addition, during the second quarter of 2002, the Company recorded
a $6 million pre-tax charge to cost of sales for severance and related costs
associated with its global operations strategy. The approximately 250 affected
employees include manufacturing, manufacturing support and management personnel.
The reductions result from the Company's continued achievement of operational
efficiencies within its plant network and its continued effort to reduce costs.
At June 30, 2002, the Company had approximately $19 million of accrued severance
and related costs associated with its global operations strategy. As of June 30,
2002, approximately $45 million had been charged against the restructuring
accrual for employees terminated pursuant to the plan.
Note F - Borrowings and Credit Arrangements
The Company had approximately $510 million and $99 million of commercial paper
outstanding at June 30, 2002 and December 31, 2001, respectively. In addition,
the Company had approximately $135 million and $547 million in revolving credit
facility borrowings outstanding at June 30, 2002 and December 31, 2001,
respectively. At June 30, 2002, the revolving credit facilities totaled
approximately $1.6 billion, consisting of a new $1 billion credit facility that
terminates in May 2003 and a $600 million credit facility that terminates in
August 2006. The new $1 billion credit facility replaces an existing $1 billion
credit facility that was shceduled to mature in June 2002 having similar terms
and conditions.
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 expects a
minimum of $320 million of its short-term borrowings will remain outstanding
beyond the next twelve months and, accordingly, has classified this portion as
long-term borrowings at June 30, 2002, compared to $471 million classified as
long-term at December 31, 2001.
During the first quarter of 2002, the Company repaid 6 billion Japanese yen
(translated to approximately $45 million at the date of repayment and $46
million at December 31, 2001) of borrowings outstanding with a syndicate of
Japanese banks.
Note G - Inventories
The components of inventory consist of the following:
June 30, December 31,
(In millions) 2002 2001
- ----------------------------------------------------------
Finished goods $166 $146
Work-in-process 55 69
Raw materials 62 88
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$283 $303
==== ====
The Company had approximately $29 million and $34 million of net NIR(R) coronary
stent inventory on hand at June 30, 2002 and December 31, 2001.
10
Note H - Goodwill and Other Intangible Assets
Effective July 1, 2001, the Company adopted the provisions of Financial
Accounting Standards Board (FASB) Statement No. 142, "Goodwill and Other
Intangible Assets," applicable to business combinations completed after June 30,
2001. Effective January 1, 2002, the Company adopted the additional provisions
of Statement No. 142 relating to business combinations completed prior to June
30, 2001. Statement No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. Intangible assets with definite useful lives will
continue to be amortized over their estimated useful lives. As a result of
adoption, the Company realized a pre-tax benefit of approximately $12 million
and $23 million of amortization reductions for goodwill and indefinite-lived
intangible assets in the second quarter and first half of 2002, respectively.
This benefit was partially offset by amortization of intangible assets related
to businesses acquired in 2001. During the second quarter of 2002, the Company
completed the initial impairment review required by Statement No. 142; the
Company did not recognize any impairment losses as a result of this review.
The following table provides comparative earnings and earnings per share had the
non-amortization provisions of Statement No. 142 been adopted for all periods
presented:
Three Months Six Months
Ended June 30, Ended June 30,
(In millions, except share and per share data) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Reported net income (loss) $ 25 $ (172) $ 107 $ (177)
Add back: goodwill amortization, net of tax 5 10
Add back: trademarks and
technology- core, net of tax 3 6
--------- --------- --------- ---------
Adjusted net income $ 25 $ (164) $ 107 $ (161)
========= ========= ========= =========
Basic:
Weighted average shares outstanding
(in thousands) 406,028 400,438 405,654 399,812
Net income (loss) per common share:
Reported $ 0.06 $ (0.43) $ 0.26 $ (0.44)
Adjusted $ (0.41) $ (0.40)
========= ========= ========= =========
Assuming dilution:
Weighted average shares outstanding
(in thousands) 406,028 400,438 405,654 399,812
Net effect of dilutive
stock-based compensation 6,936 6,377
(in thousands)
--------- --------- --------- ---------
Total (in thousands) 412,964 400,438 412,031 399,812
Net income (loss) per common share:
Reported $ 0.06 $ (0.43) $ 0.26 $ (0.44)
Adjusted $ (0.41) $ (0.40)
========= ========= ========= =========
The following table provides the gross carrying amount of all intangible assets
and the related accumulated amortization for intangible assets subject to
amortization at June 30, 2002.
11
Gross Carrying Accumulated
(In millions) Amount Amortization
- --------------------------------------------------------------
Amortized intangible
assets:
Technology- core 182 8
Technology- developed 345 112
Patents 418 97
Other intangibles 166 72
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Total 1,111 289
===== ===
Unamortized intangible
assets:
Excess of cost over net
assets acquired 968
Technology- core 383
Trademarks 14
-----
Total 1,365
=====
Total amortization expense for the three months ended June 30, 2002 was $17
million as compared to $52 million for the three months ended June 30, 2001.
Total amortization expense for the six months ended June 30, 2002 was $34
million as compared to $75 million for the six months ended June 30, 2001.
During the second quarter of 2001, the Company recorded a $24 million pre-tax
write-down of intangible assets related to discontinued technology platforms.
The following table provides estimated amortization expense for each of the five
succeeding fiscal years based upon the Company's intangible asset portfolio at
June 30, 2002.
Estimated
Fiscal Year Amortization Expense
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(In millions)
2002 71
2003 72
2004 71
2005 70
2006 70
The following table provides changes in the carrying amount of goodwill by
segment for the six months ended June 30, 2002.
United Inter-
(In millions) States Europe Japan Continental
- ----------------------------------------------------------------------------
Balance as of December 31, 2001 759 95 41 33
Purchase price adjustments (25) (1) (3)
Goodwill acquired 64 3
Foreign currency translation 2
---- ---- ---- ----
Balance as of June 30, 2002 798 99 38 33
==== ==== ==== ====
12
The purchase price adjustments relate primarily to adjustments to properly
reflect the fair value of deferred tax assets and liabilities acquired in
connection with the 2001 acquisitions.
Note I - New Accounting Standard
Effective in the first quarter of 2002, the Company adopted the provisions of
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". There was no material impact to the Company as a result of adoption of
Statement No. 144.
Note J - Commitments and Contingencies
The Company is involved in various legal proceedings, 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 below, in Note H
to the Company's quarterly report on Form 10-Q for the quarter ended March 31,
2002 and in the consolidated financial statements contained in the Company's
2001 Annual Report on Form 10-K which, individually or in the aggregate, could
have a material effect on the financial condition, operations and/or cash flows
of the Company. Additionally, legal costs associated with asserting the
Company's patent portfolio and defending against claims that the Company's
products infringe the intellectual property of others are significant, and legal
costs associated with non-patent litigation and compliance activities are
rising. Depending on the prevalence, significance and complexity of these
matters, the Company's legal provision could be adversely affected in the
future. As of June 30, 2002 the range of loss for reasonably possible
contingencies that can be estimated is $0 to $80 million plus interest.
13
LITIGATION WITH JOHNSON & JOHNSON
On October 22, 1997, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson filed a suit for patent infringement against the Company and Scimed Life
Systems, Inc. (SCIMED), a subsidiary of the Company, alleging that the
importation and use of the NIR(R) stent infringes two patents owned by Cordis.
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
additional patents owned by Cordis. The suits were 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. A trial on
both actions was held in late November through early December 2000. A jury found
that the NIR(R) stent does not infringe three Cordis patents, but does infringe
one claim of one Cordis patent and awarded damages of approximately $324 million
to Cordis. On March 28, 2002, the Court set aside the damage award, but upheld
the remainder of the verdict, and held that two of the four patents had been
obtained through inequitable conduct in the U.S. Patent and Trademark Office. On
May 16, 2002, in response to the Company's motion for reconsideration of the
liability verdict, the Court also set aside the verdict of infringement,
requiring a new trial. The case has been stayed pending the outcome of a related
case.
On March 24, 2000, the Company (through its subsidiaries) and Medinol Ltd.
(Medinol) filed a cross-border suit against Johnson & Johnson, Cordis and
certain of their foreign subsidiaries in The Netherlands alleging Cordis' BX
Velocity 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 was held January 12, 2001. On March 19, 2001, the
Company's request for preliminary injunction was denied by the Court. On May 11,
2001, the Company appealed this decision. A hearing on the appeal is expected to
be held February 6, 2003 before the Dutch Court of Appeals.
LITIGATION WITH MEDTRONIC, INC.
On March 28, 2000, the Company and certain subsidiaries filed suit for patent
infringement against Medtronic AVE, Inc. (Medtronic AVE), a subsidiary of
Medtronic, Inc. (Medtronic), alleging that Medtronic AVE's S670(TM) rapid
exchange coronary stent system infringes a patent exclusively licensed to the
Company. The suit was filed in the U.S. District Court for the Northern District
of California seeking monetary and injunctive relief. In July 2000, this matter
was sent to arbitration. An arbitration hearing was held in April 2001 to
determine whether Medtronic AVE's S670 and S660(TM) rapid exchange coronary
stent delivery systems and the R1 rapid exchange catheter are
14
licensed. On July 18, 2001, the arbitration panel determined that the accused
Medtronic AVE products sold in the United States willfully infringe the patent
exclusively licensed to the Company. The Company was awarded $169 million in
damages, as well as costs and attorneys' fees, and a permanent injunction
against Medtronic AVE's sales of its S670, S660 and BeStent 2(TM) stent delivery
systems and R1S rapid exchange catheter. On September 18, 2001, the U.S.
District Court for the Northern District of California confirmed the arbitration
decision. On October 17, 2001, Medtronic AVE appealed the confirmation of the
award and on July 10, 2002, Medtronic AVE's appeal was heard before the Court of
Appeals for the Federal Circuit.
On March 10, 1999, the Company (through its subsidiary Schneider (Europe) AG)
filed suit against Medtronic AVE, Inc. (Medtronic AVE), a subsidiary of
Medtronic, Inc. (Medtronic) alleging that Medtronic 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. An expert's report was submitted to the Court on
November 6, 2001 and a hearing was held on May 2, 2002. On June 11, 2002, the
Court ruled that the Medtronic products infringed the Company's patents.
Medtronic has filed an appeal.
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 Fourth District Court of
Minnesota seeking injunctive and monetary relief. The Company has answered,
denying allegations of the complaint. Trial is scheduled to begin in September
2002.
On February 14, 2002, SCIMED filed suit for patent infringement against
Medtronic and Medtronic AVE alleging Medtronic AVE's Guardwire Plus(TM) product
infringes one U.S. patent owned by the Company. The complaint was filed in the
U.S. District Court for the District of Delaware seeking monetary and injunctive
relief. Trial is scheduled to begin in April 2003.
On February 14, 2002, SCIMED and Corvita Corporation, a subsidiary of the
Company, filed suit for patent infringement against Medtronic and Medtronic AVE
alleging Medtronic's AneuRx product infringes seven U.S. patents owned by the
Company. The complaint was filed in the U.S. District Court for the District of
Delaware seeking monetary and injunctive relief. Trial is scheduled to begin in
June 2003.
LITIGATION WITH COOK, INC.
On September 10, 2001, the Company delivered a Notice of Dispute to Cook, Inc.
(Cook) asserting that Cook breached the terms of a certain License Agreement
among Angiotech Pharmaceuticals, Inc. (Angiotech), Cook and the Company (the
Agreement). On October 10, 2001, pursuant to the terms of the Agreement, the
Company filed a demand for arbitration with the American Arbitration
Association. On October 11, 2001, Guidant and its subsidiary, Advanced
Cardiovascular Systems, Inc. (ACS), and Cook filed suit against the Company
relating to the Agreement. The suit was filed in the U.S. District Court for the
Southern District of Indiana and sought declaratory and injunctive relief. The
parties subsequently negotiated an
15
agreement under which the dispute would be litigated on an expedited basis in
the Northern District of Illinois without Guidant or ACS as parties. On December
13, 2001, the Indiana case was dismissed and Cook filed a similar suit in the
U.S. District Court for the Northern District of Illinois seeking declaratory
and injunctive relief. The Company answered the complaint on December 26, 2001,
denying the allegations and filed counterclaims seeking declaratory and
injunctive relief. On February 28, 2002, the Court dismissed certain claims and
on June 27, 2002, found in favor of the Company ruling that Cook breached the
Agreement. On July 15, 2002, the Company filed a motion seeking a permanent
injunction prohibiting any activities under the Agreement, any future attempts
to circumvent the Agreement and to enjoin the use of the clinical data and
technologies developed by Cook or Guidant in violation of the Agreement.
Responsive briefing on this motion is scheduled to be completed through August
28, 2002.
On July 30, 2002, Guidant and Cook Group Incorporated, the parent of Cook,
announced their agreement to merge Cook Group Incorporated into a wholly-owned
subsidiary of Guidant. On the same day, Guidant filed suit against the Company
seeking a declaratory judgment that upon completion of the merger, the license
under the Agreement may be assigned or sublicensed by Cook to ACS and that ACS
is entitled to use the information, data or technology generated or gathered for
the purposes of obtaining regulatory approval for a coronary stent utilizing the
Angiotech technology. The Company has not yet answered the complaint.
OTHER PROCEEDINGS
On April 5, 2001, Medinol filed a complaint against the Company and certain of
its current and former employees alleging breaches of contract, fraud and other
claims. Medinol supplies NIR(R) stents exclusively to the Company. The suit was
filed in the U.S. District Court for the Southern District of New York seeking
monetary and injunctive relief. On April 26, 2001, Medinol amended its complaint
to add claims alleging misappropriation of trade secrets in relation to the
Company's Express(TM) stent development program. Medinol seeks monetary and
injunctive relief, as well as an end to the Company's right to distribute
Medinol stents and access to certain Company intellectual property. On April 30,
2001, the Company answered and countersued Medinol and its principals, charging
them with fraud, multiple breaches of contract, unfair and deceptive practices
and defamation. The Company seeks monetary and injunctive relief. During the
last quarter of 2001, the Court dismissed several of the individuals and claims
from the case. On February 28, 2002, the Company received from Medinol, a letter
purporting to terminate the supply agreement between the two companies alleging
breaches of the supply agreement by the Company. On June 19, 2002, the Company
amended its counterclaim and filed a third party claim asserting breach of
contract claims against Medinol relating to its sale of NIRFlex stent systems,
its purported termination of the supply agreement and its activities in
connection with drug coated stent research, and breach of contract claims
against its principals. A trial date has not yet been set.
On April 22, 2002, Medinol filed suit against Boston Scientific Medizintechnik
GmbH, a German subsidiary of the Company, alleging the Company's EXPRESS(TM)
stent infringes certain German patents and utility models owned by Medinol. The
suit was filed in Dusseldorf, Germany. On July 11, 2002, a default judgment was
entered against the subsidiary and on July 12, 2002, the subsidiary appealed the
judgment and requested that the case be heard on the merits. On August 1, 2002,
the Court agreed to hear the case.
On October 31, 2000, the Federal Trade Commission (FTC) filed suit against the
Company for alleged violations of a Consent Order dated May 5, 1995, pursuant to
which the Company had licensed certain intravascular ultrasound technology to
Hewlett-Packard Company (HP). The suit was filed in the U.S. District Court for
the District of Massachusetts seeking civil penalties and injunctive relief. The
Company filed a motion to dismiss the complaint and the FTC filed a motion for
summary judgment. On October 5, 2001, the Court dismissed three of the five
claims against the Company and granted summary judgment of liability in favor of
the FTC on the two remaining claims. A hearing on damages began on August 5,
2002.
16
Further, product liability claims against the Company may be asserted in the
future related to events not known to management at the present time. As a
result of current economic factors impacting the insurance industry, at the
beginning of the third quarter of 2002, the Company elected to become
substantially self-insured with respect to general and product liability claims.
Losses for claims in excess of the limits of purchased insurance would be
recorded at the time and to the extent they are probable and estimable.
Management believes that the Company's risk management practices, including
limited insurance coverage, are reasonably adequate to protect against
anticipated general and product liability losses. However, unanticipated
catastrophic losses could have a material adverse impact on the Company's
financial position, results of operations and liquidity.
Note K - 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 revenue
from the sale of minimally invasive medical devices. The reportable segments
represent an aggregate of operating divisions.
Sales and operating results of reportable segments are based on internally
derived standard foreign exchange rates, which may differ from year to year and
do not include inter-segment profits. The segment information presented for 2001
has been restated based on the Company's standard foreign exchange rates used
for 2002. 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.
United Inter-
(In millions) States Europe Japan Continental Total
- ------------------------------------------------------------------------------------------------------
Three months ended June 30, 2002
Net sales $ 420 $ 109 $ 122 $ 57 $ 708
Operating income excluding
special charges 144 38 69 16 267
Three months ended June 30, 2001
Net sales $ 403 $ 93 $ 130 $ 45 $ 671
Operating income excluding
special charges 141 25 77 3 246
Six months ended June 30, 2002
Net sales $ 825 $ 215 $ 244 $ 108 $1,392
Operating income excluding
special charges 280 74 141 28 523
Six months ended June 30, 2001
Net sales $ 794 $ 186 $ 250 $ 84 $1,314
Operating income excluding
special charges 288 52 146 2 488
17
A reconciliation of the totals reported for the reportable segments to the
applicable line items in the consolidated financial statements is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Net sales:
Total net sales for reportable segments $ 708 $ 671 $ 1,392 $ 1,314
Foreign exchange 1 (9) 12
------- ------- ------- -------
$ 708 $ 672 $ 1,383 $ 1,326
======= ======= ======= =======
Income before income taxes:
Total operating income for reportable segments
excluding purchased research and development $ 267 $ 246 $ 523 $ 488
Manufacturing operations (40) (23) (91) (50)
Corporate expenses and foreign exchange (100) (181) (180) (277)
Purchased research and development (45) (188) (45) (267)
Restructuring charges (4) (4)
------- ------- ------- -------
82 (150) 207 (110)
Other expense, net (28) (16) (36) (29)
------- ------- ------- -------
$ 54 $ (166) $ 171 $ (139)
======= ======= ======= =======
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Boston Scientific Corporation (the Company) is a worldwide developer,
manufacturer and marketer of medical devices that are used in a broad range of
interventional medical specialties. The Company's mission is to improve the
quality of patient care and the productivity of health care delivery through the
development and advocacy of less-invasive medical devices and procedures. This
is accomplished through the continuing refinement of existing products and
procedures and the investigation and development of new technologies that can
reduce risk, trauma, cost, procedure time and the need for aftercare. The
Company's approach to innovation combines internally developed products and
technologies with those obtained externally through strategic acquisitions and
alliances.
The Company's products are used in a broad range of interventional medical
specialties, including interventional cardiology, electrophysiology,
gastroenterology, neurovascular intervention, pulmonary medicine, interventional
radiology, oncology, urology, gynecology and vascular surgery.
RESULTS OF OPERATIONS
FINANCIAL SUMMARY
THREE MONTHS ENDED JUNE 30, 2002
Three Months Ended
June 30, 2002 June 30, 2001
(In millions) Net Income EPS Net Income EPS
---------- ----- ---------- ------
As reported $ 25 $0.06 $(172) $(0.43)
After-tax charges:
Purchased research and development 45 0.11 188 0.48
Global operations plan costs 13 0.03 13 0.03
Foundation contribution 12 0.03
Provision for excess NIR(R) stent
inventories 34 0.08
Write-down of intangible assets 17 0.04
----------------- ------------------
Subtotal: After-tax charges $ 70 $0.17 $ 252 $0.63
Excluding after-tax charges $ 95 $0.23 $ 80 $0.20
Net sales for the second quarter of 2002 were $708 million as compared to $672
million in the second quarter of 2001, an increase of 5 percent. There was no
material impact due to foreign currency fluctuations in the second quarter of
2002. The reported net income for the quarter ended June 30, 2002 was $25
million, or $0.06 per share (diluted), as compared to a reported net loss of
$172 million, or $0.43 per share, in the second quarter of 2001. The reported
results for the second quarter of 2002 include after-tax charges of $70 million,
which include costs associated with the Company's global operations plan,
purchased research and development primarily associated with the acquisition of
Enteric Medical Technologies, Inc. (EMT), and an endowment to fund a newly
created philanthropic foundation. The reported results for the second quarter of
2001 include
19
after-tax charges of $252 million, which include costs associated with the
Company's global operations plan, purchased research and development primarily
associated with the acquisition of Interventional Technologies, Inc. (IVT), a
write-down of intangible assets related to research and development programs
discontinued in the second quarter of 2001, and a provision for excess
inventories due to declining demand for the NIR(R) coronary stent technology.
Exclusive of these charges, net income for the second quarter of 2002 was $95
million, or $0.23 per share (diluted), as compared to net income of $80 million,
or $0.20 per share, in the second quarter of 2001.
SIX MONTHS ENDED JUNE 30, 2002
Six Months Ended
June 30, 2002 June 30,2001
(In millions) Net Income EPS Net Income EPS
---------- ----- ---------- ------
As reported $ 107 $0.26 $(177) $(0.44)
After-tax charges:
Purchased research and development 45 0.11 267 0.67
Global operations plan costs 20 0.05 22 0.05
Foundation contribution 12 0.03
Provision for excess NIR(R) stent
inventories 34 0.08
Write-down of intangible assets 17 0.04
----------------- ------------------
Subtotal: After-tax charges $ 77 $0.19 $ 340 $0.84
Excluding after-tax charges $ 184 $0.45 $ 163 $0.40
Net sales for the six months ended June 30, 2002 were $1,383 million as compared
to $1,326 million in the first half of 2001, an increase of 4 percent. Without
the adverse impact of $21 million due to foreign currency fluctuations, net
sales for the six months ended June 30, 2002 totaled $1,404 million, an increase
of 6 percent. The reported net income for the six months ended June 30, 2002 was
$107 million, or $0.26 per share (diluted), as compared to a reported net loss
of $177 million, or $0.44 per share, in the first half of 2001. The reported
results for the first half of 2002 include after-tax charges of $77 million,
which include costs associated with the Company's global operations plan,
purchased research and development primarily associated with the acquisition of
EMT, and an endowment to fund a newly created philanthropic foundation. The
reported results for the first half of 2001 include after-tax charges of $340
million, which include costs associated with the Company's global operations
plan, purchased research and development primarily associated with the
acquisition of IVT, a write-down of intangible assets related to research and
development programs discontinued in the second quarter of 2001, and a provision
for excess inventories due to declining demand for the NIR(R) coronary stent
technology. Exclusive of these charges, net income for the first half of 2002
was $184 million, or $0.45 per share (diluted), as compared to net income of
$163 million, or $0.40 per share, in the first half of 2001.
NET SALES
During the second quarter of 2002, United States (U.S.) revenues increased
approximately 4 percent relative to the second quarter of 2001 to $420 million,
while international revenues increased approximately 7 percent relative to the
second quarter of 2001 to $288 million. U.S. revenues increased due to revenue
growth in the Company's product lines other than coronary stents, including
revenue generated by
20
businesses acquired in 2001, offset by decreases in NIR(R) coronary stent sales.
Domestic NIR(R) coronary stent revenues were approximately $21 million and $46
million during the second quarter of 2002 and 2001, respectively. The increase
in international revenues was due to growth in the Company's product lines,
including acquired products, and the launch of the Company's internally
developed Express(TM) coronary stent in European and other international markets
offset by decreases in NIR(R) coronary stent sales in Japan.
During the six months ended June 30, 2002, U.S. revenues increased approximately
4 percent to $825 million and international revenues increased approximately 5
percent to $558 million compared to the same period in the prior year. U.S.
revenues increased due to revenue growth in the Company's product lines other
than coronary stents, including revenue generated by businesses acquired in
2001, offset by decreases in NIR(R) coronary stent sales. Domestic NIR(R)
coronary stent revenues were approximately $47 million and $97 million during
the first half of 2002 and 2001, respectively.
On a constant currency basis, international revenues increased approximately 9
percent relative to the first half of 2001 to $579 million. The increase in
international revenues was due to growth in the Company's product lines,
including acquired products, and the launch of the Company's internally
developed Express(TM) coronary stent in European and other international markets
offset by decreases in NIR(R) coronary stent sales in Japan.
The following table provides worldwide sales by region and relative change on an
actual and constant foreign currency basis for the three and six months ended
June 30, 2002 and 2001, respectively.
Three Months Ended Change
June 30, At Actual At Constant
(In millions) 2002 2001 Currency Basis Currency Basis
---- ---- -------------- --------------
United States $ 420 $ 403 4% 4%
Europe 111 90 23% 17%
Japan 120 133 (10)% (7)%
Intercontinental 57 46 24% 29%
------ ------ ----- -----
Worldwide $ 708 $ 672 5% 5%
====== ====== ===== =====
Six Months Ended Change
June 30, At Actual At Constant
(In millions) 2002 2001 Currency Basis Currency Basis
---- ---- -------------- --------------
United States $ 825 $ 794 4% 4%
Europe 214 184 16% 16%
Japan 236 260 (9)% (3)%
Intercontinental 108 88 23% 29%
------ ------ ----- -----
Worldwide $1,383 $1,326 4% 6%
====== ====== ===== =====
21
Worldwide Cardiovascular (which is comprised of the Company's Scimed, EPT and
Target divisions) revenues increased approximately 2 percent relative to the
second quarter of 2001 to $476 million, and increased approximately 2 percent
relative to the first half of 2001 to $933 million. On a constant currency
basis, Cardiovascular revenues increased 3 percent relative to both the second
quarter and first half of 2001. The increase is primarily due to growth in
revenue from product lines acquired in 2001 offset by declines in NIR(R)
coronary stent sales in the U.S. and Japan. Without coronary stents, worldwide
Cardiovascular revenues grew 11 percent and 13 percent on a constant currency
basis during the second quarter and first half of 2002, respectively. Worldwide
Endosurgery (which is comprised of the Company's Medi-tech, Endoscopy and
Urology divisions) revenues increased approximately 12 percent relative to the
second quarter of 2001 to $232 million, and increased approximately 11 percent
relative to the first half of 2001 to $450 million. On a constant currency
basis, Endosurgery revenues increased 12 percent relative to both the second
quarter and first half of 2001. The increase is primarily due to growth in sales
of the Company's Endoscopy products.
The following table provides worldwide sales by division and relative change on
an actual and constant foreign currency basis for the three and six months ended
June 30, 2002 and 2001, respectively.
Three Months Ended Change
June 30, At Actual At Constant
(In millions) 2002 2001 Currency Basis Currency Basis
---- ---- -------------- --------------
Scimed $ 408 $ 408 0% 0%
EPT 26 19 37% 38%
Target 42 38 11% 10%
------ ------ ----- -----
CARDIOVASCULAR $ 476 $ 465 2% 3%
Medi-tech $ 57 $ 53 8% 10%
Endoscopy 129 113 14% 13%
Urology 46 41 12% 12%
------ ------ ----- -----
ENDOSURGERY $ 232 $ 207 12% 12%
------ ------ ----- -----
Worldwide $ 708 $ 672 5% 5%
====== ====== ===== =====
Six Months Ended Change
June 30, At Actual At Constant
(In millions) 2002 2001 Currency Basis Currency Basis
---- ---- -------------- --------------
Scimed $ 802 $ 804 0% 2%
EPT 48 38 26% 28%
Target 83 77 8% 10%
------ ------ ----- -----
CARDIOVASCULAR $ 933 $ 919 2% 3%
Medi-tech $ 112 $ 105 7% 10%
Endoscopy 248 221 12% 13%
Urology 90 81 11% 11%
------ ------ ----- -----
ENDOSURGERY $ 450 $ 407 11% 12%
------ ------ ----- -----
Worldwide $1,383 $1,326 4% 6%
====== ====== ===== =====
22
GROSS PROFIT
Gross profit as a percentage of net sales increased to 68.2 percent in the
second quarter of 2002 from 60.1 percent in the second quarter of 2001, and
increased to 68.8 percent in the first half of 2002 from 63.0 percent in the
first half of 2001. Excluding charges in both years for expenses associated with
the global operations plan and a $49 million provision recorded in the second
quarter of 2001 for excess NIR(R) stent inventories, gross margins improved to
70.9 percent in the second quarter of 2002 from 69.6 percent in the second
quarter of 2001, and improved to 70.9 percent in the first half of 2002 from
68.9 percent in the first half of 2001. The increase in gross margin in 2002 is
primarily due to operational cost improvements achieved through the Company's
global operations plan and to shifts in the Company's product sales mix.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
SG&A expenses as a percentage of sales increased to 35 percent of sales in the
second quarter of 2002 from 34 percent in the second quarter of 2001 and
increased approximately $16 million to $246 million. SG&A expenses as a
percentage of sales increased to 35 percent of sales in the first half of 2002
from 34 percent in the first half of 2001 and increased approximately $32
million to $487 million. The increase in expenses in 2002 is primarily
attributable to costs associated with businesses acquired in 2001 and costs
incurred to expand and strengthen the Company's field sales force.
AMORTIZATION EXPENSE
Amortization expense decreased to $17 million in the second quarter of 2002 from
$52 million in the second quarter of 2001 and decreased as a percentage of sales
to 2 percent from 8 percent. Amortization expense decreased to $34 million in
the first half of 2002 from $75 million in the first half of 2001 and decreased
as a percentage of sales to 2 percent from 6 percent. The decrease in expense
dollars for the second quarter and first half of 2002 is primarily a result of a
$24 million pre-tax write-down of intangible assets related to discontinued
research and development programs in the second quarter of 2001 and the adoption
on January 1, 2002 of Financial Accounting Standards Board (FASB) Statement No.
142, "Goodwill and Other Intangible Assets". As a result of adoption of
Statement No. 142, the Company realized a pre-tax benefit of approximately $12
million and $23 million of amortization reductions for goodwill and
indefinite-lived intangible assets in the second quarter and first half of 2002,
respectively. This benefit was partially offset by amortization of intangible
assets related to businesses acquired in 2001. During the second quarter of
2002, the Company completed the initial impairment review required by Statement
No. 142; the Company did not recognize any impairment losses as a result of this
review.
ROYALTIES
Royalties decreased to $8 million in the second quarter of 2002 from $9 million
in the second quarter of 2001 and remained approximately 1 percent of sales.
Royalties decreased to $17 million during the six months ended June 30, 2002
from $18 million during the six months ended June 30, 2001. The Company
continues to enter into strategic technological alliances, some of which include
royalty commitments.
23
RESEARCH AND DEVELOPMENT (R&D) EXPENSE
R&D expense increased to $85 million in the second quarter of 2002 from $71
million in the second quarter of 2001 and increased as a percentage of sales to
12 percent from 11 percent. R&D expense increased to $161 million during the six
months ended June 30, 2002 from $127 million during the six months ended June
30, 2001 and increased as a percentage of sales to 12 percent from 10 percent.
The increase in research and development expense is primarily due to investment
in the Company's drug-eluting stent technology and in development programs
acquired in connection with the Company's business combinations consummated in
2001.
Throughout 2002, the Company expects to increase its investment in research and
development over 2001 levels to fund the development of new products and to
expand clinical trials, including the Company's TAXUS(TM) drug-eluting stent
program. The TAXUS program is a series of clinical studies designed to collect
data on Boston Scientific's proprietary paclitaxel-eluting stent technology for
reducing coronary restenosis, the growth of tissue within an artery after
angioplasty and stenting. Paclitaxel, the active component of a popular
chemotherapeutic agent, has demonstrated promising results in pre-clinical and
clinical studies for reducing the processes leading to restenosis. The
comprehensive TAXUS program positions Boston Scientific to launch
paclitaxel-eluting stents in European and other international markets in late
2002, in the U.S. in late 2003 and in Japan in early 2005, subject to regulatory
approvals.
The TAXUS I trial confirmed safety and reported zero thrombosis and zero
restenosis. The TAXUS II trial completed enrollment of 537 patients in January,
and the patients are now in the follow-up period. Preliminary safety data from
TAXUS II presented in March at the American College of Cardiology annual meeting
provided further support for the safety of paclitaxel-eluting stents. The TAXUS
III trial studied the treatment of in-stent restenosis and reported final
six-month results in May, with no stent thromboses and no deaths and an overall
binary restenosis rate of 16 percent. Actual performance within the
paclitaxel-eluting stent yielded a restenosis rate of 4 percent. The TAXUS IV
trial completed enrollment during the second quarter of 2002, and the patients
are now in the follow-up period. TAXUS IV is a pivotal study designed to collect
data to support regulatory filings for U.S. product commercialization. The
prospective, randomized, double-blind trial is designed to assess the safety and
efficacy of a slow-release dose formulation paclitaxel-eluting TAXUS stent
system. Boston Scientific has also initiated a transitional registry program
(WISDOM) in a number of countries as part of a limited commercial launch of its
TAXUS(TM) Express(TM) paclitaxel-eluting stent system.
INTEREST EXPENSE AND OTHER, NET
Interest expense decreased to $10 million in the second quarter of 2002 from $16
million in the second quarter of 2001 and decreased to $22 million during the
six months ended June 30, 2002 from $30 million during the six months ended June
30, 2001. The decrease in interest expense is primarily attributable to lower
average interest rates in the three and six month periods ended June 30, 2002 as
compared to the prior year. Other, net, decreased to an expense of $18 million
in the second quarter of 2002 from income of less than $1 million in the second
quarter of 2001, and decreased to an expense of $14 million during the first
half of 2002 from income of $1 million during the first half of 2001. The change
is primarily due to a charitable donation of $18 million to fund the newly
created
24
Boston Scientific Foundation during the second quarter of 2002. The Boston
Scientific Foundation is a philanthropic organization whose mission is to
improve the health of individuals and communities, and to enhance educational
opportunity.
EFFECTIVE TAX RATE
The Company's effective tax rate, excluding the impact of after-tax charges
related to the 2002 and 2001 acquisitions, was 30 percent in the first half of
2002 and 2001. Management currently estimates that the 2002 effective tax rate
will remain at approximately 30 percent. However, the effective tax rate could
be positively or negatively impacted by changes in the geographic mix of the
Company's income or by business acquisitions.
GLOBAL OPERATIONS STRATEGY
During 2000, the Company approved and committed to a global operations plan
consisting of a series of strategic initiatives designed 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.
During the second quarter of 2002, the Company substantially completed the plant
optimization initiative. The Company's plan resulted in the consolidation of
manufacturing operations along product lines and the shifting of significant
amounts of production to the Company's facilities in Miami and Ireland and to
contract manufacturing. The Company's plan included the discontinuation of
manufacturing activities at three facilities in the U.S., and included the
planned displacement of approximately 1,700 manufacturing, manufacturing support
and management employees. At June 30, 2002, the Company had approximately $13
million of accrued severance and related costs associated with the plant
optimization initiative. During the first half of 2002, the Company recorded
pre-tax expenses of $23 million as cost of sales primarily related to transition
costs associated with the plant optimization plan and to abnormal production
variances related to underutilized plant capacity. In addition, during the
second quarter of 2002, the Company recorded a $6 million pre-tax charge to cost
of sales for severance and related costs associated with its global operations
strategy. The approximately 250 affected employees include manufacturing,
manufacturing support and management personnel. The reductions result from the
Company's continued achievement of operational efficiencies within its plant
network and its continued effort to reduce costs. The Company continues to seek
opportunities within its operations network to increase productivity and reduce
costs.
The Company estimates that the global operations plan will achieve future
pre-tax operating savings, relative to the base year of 1999, of approximately
$220 million in 2002 and $250 million in annualized savings thereafter. These
savings will be realized primarily as reduced cost of sales. Additionally, the
Company intends to use a portion of these savings to fund its increased
investment in research and development.
PURCHASED RESEARCH AND DEVELOPMENT
On June 13, 2002, the Company completed its acquisition of the remaining 93
percent of the outstanding shares of EMT in an all-cash transaction for an
initial payment of approximately $50 million, plus contingent payments upon
achievement of certain milestones. EMT designs, manufactures and markets
Enteryx(TM), a liquid polymer technology for the treatment of
25
gastroesophageal reflux disease (GERD). The acquisition is intended to expand
the Company's Endosurgery product offerings in the GERD market.
On June 27, 2002, the Company completed its tender offer relating to its
acquisition of the outstanding shares of BEI Medical Systems Company, Inc. (BEI)
in an all-cash transaction for approximately $95 million. BEI designs,
manufactures and markets less-invasive technology used by gynecologists to treat
excessive uterine bleeding due to benign causes. The acquisition is intended to
expand the Company's product offerings in the area of women's health and will
become part of the Company's Endosurgery group.
The Company's acquisitions were accounted for using the purchase method of
accounting. The consolidated financial statements include the operating results
for each acquired entity from its respective date of acquisition. Pro forma
information is not presented, as the acquired companies' results of operations
prior to their date of acquisition are not material, individually or in the
aggregate, to the Company. The EMT acquisition involves potential earn-out
payments based on the acquired company reaching certain milestones. These
payments would be allocated to specific intangible asset categories with the
remainder assigned to excess of cost over net assets acquired as if the
consideration had been paid as of the date of acquisition.
The aggregate purchase price for each acquisition has been allocated to the
assets acquired and liabilities assumed based on their fair values at the date
of acquisition. The estimated excess of purchase price over the fair value of
the net tangible assets acquired was allocated to identifiable intangible
assets, as valued by an independent appraiser using information and assumptions
provided by management. Based upon these valuations, the Company recorded a
charge of approximately $45 million to account for purchased research and
development related to EMT. The valuation of purchased research and development,
for which management is primarily responsible, represents the estimated fair
value at the date of acquisition related to in-process projects. As of the date
of acquisition, the in-process projects had not yet reached technological
feasibility and had no alternative future uses. The primary basis for
determining the technological feasibility of these projects is obtaining
regulatory approval. Accordingly, the value attributable to these projects,
which had not yet obtained regulatory approval, was expensed in conjunction with
the acquisition. If the projects are not successful or completed in a timely
manner, the Company may not realize the financial benefits expected for these
projects. Other intangible assets subject to amortization recorded in connection
with the EMT and BEI acquisitions are being amortized on a straight-line basis
ranging from 9 to 25 years.
The income approach was used to establish the fair values of purchased research
and development. This approach establishes fair value by estimating the
after-tax cash flows attributable to the in-process project over its useful life
and then discounting these after-tax cash flows back to a present value. Revenue
estimates were based on estimates of relevant market sizes, expected market
growth rates, expected trends in technology and expected product introductions
by competitors. In arriving at the value of the in-process research and
development projects, the Company considered, among other factors, the
in-process project's stage of completion, the complexity of the work completed
as of the acquisition date, the costs already incurred, the projected costs
26
to complete, the contribution of core technologies and other acquired assets,
the expected introduction date and the estimated useful life of the technology.
The discount rate used to arrive at a present value as of the date of
acquisition was based on the time value of money and medical technology
investment risk factors. For the purchased research and development programs
acquired in connection with the EMT acquisition, risk-adjusted discount rates
ranging from 18 percent to 26 percent were utilized to discount the projected
cash flows. The Company believes that the estimated purchased research and
development amounts so determined represent the fair value at the date of
acquisition and do not exceed the amount a third party would pay for the
projects.
The most significant project, relative to the purchased research and development
charge recorded in connection with the EMT acquisition, is the Enteryx(TM)
technology for the treatment of GERD, which represents approximately 87 percent
of the in-process value. Enteryx is a patented liquid polymer for the treatment
of GERD. As of the date of acquisition, the project was expected to be completed
and the product to be commercially available within one to two years, with an
estimated cost to complete of approximately $2 million.
The Company's research and development projects acquired in connection with its
2001 business combinations are generally progressing in line with the estimates
set forth in the Company's 2001 Annual Report on Form 10-K, with the exception
of the next-generation Infiltrator(R) transluminal drug-delivery catheter
project. Due to superior drug-delivery products available to the Company, the
Company has reduced its future revenue projections for this product. The Company
expects to continue to pursue this and other research and development projects
acquired in connection with its 2001 business combinations and believes it has a
reasonable chance of completing the projects.
OUTLOOK
The worldwide coronary stent market is dynamic and highly competitive, with
significant market share volatility. Technology and competitive offerings,
particularly the earlier introduction of drug-eluting stents by the Company's
competitors, may negatively impact the Company's revenues. The Company
anticipates that its global NIR(R) coronary stent market share will continue to
decline during 2002 as physician acceptance of the NIR(R) coronary stent
platform continues to erode. However, during the fourth quarter of 2001, the
Company launched its Express coronary stent in European and other international
markets, significantly increasing its share of these coronary stent markets
following the launch. The Company anticipates launching the Express coronary
stent in the U.S. during the second half of 2002 and in Japan in 2003.
The Company believes that drug-eluting stents present a significant growth
opportunity for the Company. However, significant delays in the timing to launch
or the inability to launch a drug-eluting stent could adversely affect the
revenues and/or operating results of the Company. Additionally, the timing of
submission for and receipt of regulatory approvals to market the Express
coronary stents, drug-eluting stents and other coronary and peripheral stent
platforms in the U.S. and international markets may influence the Company's
ability to offer competitive stent products.
27
As the health care 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. During the first half of 2002
and during 2001, the Company consummated several business acquisitions and
strategic alliances. Management believes it is developing a sound plan to
integrate these businesses acquired in 2002 and 2001. The failure to
successfully integrate these businesses could impair the Company's ability to
realize the strategic and financial objectives of these transactions. In
connection with these and other acquisitions consummated during the last five
years, the Company has acquired numerous in-process research and development
platforms. As the Company continues to undertake strategic initiatives, it is
reasonable to assume that it will acquire additional in-process research and
development platforms.
Uncertainty remains with regard to future changes within the health care
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 compression of 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 health care providers and
purchasers of medical devices who 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 health care costs. The Company's profitability from its
international operations may be limited by risks and uncertainties related to
economic conditions in these regions, regulatory and reimbursement approvals,
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 competitive, political, regulatory,
reimbursement or economic environment where the Company conducts international
operations may have a material impact on revenues and profits, especially in
Japan, given its high profitability relative to its contribution to revenues.
Deterioration in the Japanese and/or emerging markets economies may impact the
Company's ability to grow its business and to collect its accounts receivable.
Additionally, the trend in countries around the world toward more stringent
regulatory requirements for product clearance, changing reimbursement rates and
more vigorous enforcement activities has generally caused or may cause medical
device manufacturers to experience more uncertainty, greater risk and higher
expenses.
These factors may impact the rate at which the Company can grow. However,
management believes that it is positioning the Company to take advantage of
opportunities that exist in the markets it serves.
28
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments totaled $144 million at June 30, 2002, compared
to $185 million at December 31, 2001. The Company had $15 million of working
capital at June 30, 2002, as compared to $275 million at December 31, 2001. The
decrease in working capital is primarily due to an increase in short-term
borrowings at June 30, 2002 and to an acquisition obligation recorded in
connection with the consummation of the BEI transaction, which was paid in July
of 2002. Cash generated by operating activities along with cash provided by the
Company's borrowings during the first half of 2002 were primarily used to fund
acquisitions, strategic alliances and capital expenditures during the period.
The Company had approximately $510 million and $99 million of commercial paper
outstanding at June 30, 2002 and December 31, 2001, respectively. In addition,
the Company had approximately $135 million and $547 million in revolving credit
facility borrowings outstanding at June 30, 2002 and December 31, 2001,
respectively. At June 30, 2002, the revolving credit facilities totaled
approximately $1.6 billion, consisting of a new $1 billion credit facility that
terminates in May 2003 and a $600 million credit facility that terminates in
August 2006. The new $1 billion credit facility replaces an existing $1 billion
credit facility that was scheduled to mature in June 2002 having similar terms
and conditions.
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 expects a
minimum of $320 million of its short-term borrowings will remain outstanding
beyond the next twelve months and, accordingly, has classified this portion as
long-term borrowings at June 30, 2002, compared to $471 million classified as
long-term at December 31, 2001.
During the first quarter of 2002, the Company repaid 6 billion Japanese yen
(translated to approximately $45 million at the date of repayment and $46
million at December 31, 2001) of borrowings outstanding with a syndicate of
Japanese banks.
The Company has recognized net deferred tax assets aggregating $195 million at
June 30, 2002 and $131 million at December 31, 2001. The assets relate
principally to the establishment of inventory and product-related reserves,
purchased research and development and net operating loss carryforwards. In
light of the Company's historical financial performance, the Company believes
that these assets will be substantially recovered.
As of June 30, 2002, the Company has made cash outlays of approximately $145
million for the plant optimization initiative. The Company anticipates that it
will make additional cash outlays of approximately $15 million related to the
initiative during the remainder of 2002. The Company anticipates that additional
cash outlays will be funded from cash flows from operating activities and from
the Company's borrowing capacity. The remaining cash outlays primarily relate to
severance costs.
Additionally, the Company expects to incur capital expenditures of approximately
$50 million during the remainder of 2002. The Company expects that its cash and
cash equivalents, marketable securities, cash flows from operating activities
and borrowing
29
capacity will be sufficient to meet its projected operating cash needs,
including anticipated capital expenditures, acquisition-related payments and
other strategic initiatives.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, 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 Note J to the
condensed consolidated financial statements contained herein, Note H to the
Company's quarterly report on Form 10-Q for the quarter ended March 31, 2002 and
the consolidated financial statements contained in the Company's 2001 Annual
Report on Form 10-K which, individually or in the aggregate, could have a
material effect on the financial condition, operations and/or cash flows of the
Company. Additionally, legal costs associated with asserting the Company's
patent portfolio and defending against claims that the Company's products
infringe the intellectual property of others are significant, and legal costs
associated with non-patent litigation and compliance activities are rising.
Depending on the prevalence, significance and complexity of these matters, the
Company's legal provision could be adversely affected in the future. As of June
30, 2002 the range of loss for reasonably possible contingencies that can be
estimated is $0 to $80 million plus interest.
Further, product liability claims against the Company may be asserted in the
future related to events not known to management at the present time. As a
result of current economic factors impacting the insurance industry, at the
beginning of the third quarter of 2002, the Company elected to become
substantially self-insured with respect to general and product liability claims.
Losses for claims in excess of the limits of purchased insurance would be
recorded at the time and to the extent they are probable and estimable.
Management believes that the Company's risk management practices, including
limited insurance coverage, are reasonably adequate to protect against
anticipated general and product liability losses. However, unanticipated
catastrophic losses could have a material adverse impact on the Company's
financial position, results of operations and liquidity.
On October 22, 1997, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson 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. 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 additional patents owned by Cordis. The suits were 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. A trial on both actions was held in late November through early
December 2000. A jury found that the NIR(R) stent does not infringe three Cordis
patents, but did infringe one claim of one Cordis patent and awarded damages of
approximately $324 million to Cordis. On March 28, 2002, the Court set aside the
damage award, but upheld the remainder of the verdict, and held that two of the
four patents had been obtained through inequitable conduct in the U.S. Patent
and Trademark Office. On May 16, 2002, in response to the Company's motion for
reconsideration of the liability verdict, the Court also set aside the verdict
of infringement, requiring a new trial. The case has been stayed pending the
outcome of a related case.
30
CAUTIONARY STATEMENTS 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:
o volatility in the coronary stent market, competitive offerings and the
timing of submission for and receipt of regulatory approvals to market
Express coronary stents, TAXUS drug-eluting stents and other coronary and
peripheral stent platforms;
o the Company's ability to timely launch the Express coronary stent in the
U.S. and Japanese markets and the TAXUS drug-eluting stent in the U.S. and
international markets;
o the continued decline in NIR(R) coronary stent sales and changes in the mix
of coronary stent platforms;
o the development and introduction of competing or technologically advanced
products by the Company's competitors;
o the Company's ability to achieve estimated operating savings from the
global operations plan within its cost estimates;
o the Company's ability to continue to increase productivity, achieve
manufacturing cost declines, gross margin benefits and inventory reductions
from its manufacturing process and supply chain programs;
o the ability of the Company to manage accounts receivable and gross margins
and to react effectively to the changing managed care environment,
reimbursement levels and worldwide economic and political conditions;
o the Company's ability to integrate and realize benefits from the BEI and
EMT acquisitions and the acquisitions consummated in 2001 and from the
Company's other strategic alliances;
o the Company's ability to increase its investment in research and
development, to successfully complete planned clinical trials and to
develop and launch products on a timely basis, including products resulting
from purchased research and development;
31
o the potential impacts of continued consolidation among health care
providers, trends toward managed care, disease state management and
economically motivated buyers, health care cost containment, the financial
viability of health care providers, more stringent regulatory requirements
and more vigorous enforcement activities;
o the Company's ability to take advantage of opportunities that exist in the
markets it serves;
o the timing, size and nature of strategic initiatives, market opportunities
and research and development platforms available to the Company;
o the Company's ability to maintain its effective tax rate for 2002 and to
substantially recover its net deferred tax assets;
o the ability of the Company to meet its projected cash needs;
o risks associated with international operations;
o the potential effect of foreign currency fluctuations on revenues, expenses
and resulting margins;
o the effect of litigation and compliance activities on the Company's loss
contingency, legal provision and cash flow; and
o the impact of stockholder, patent, product liability, Federal Trade
Commission, Medinol and other litigation, as well as the outcome of the
U.S. Department of Justice investigation.
Several important factors, in addition to the specific factors discussed in
connection with each forward-looking statement 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 in this report. These additional factors include, among
other things, future economic, competitive, reimbursement and regulatory
conditions, new product introductions, demographic trends, third-party
intellectual property, financial market conditions and future business decisions
of the Company and its competitors, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of the Company.
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. These 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 in this report.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had foreign currency derivative instruments outstanding in the
notional amounts of $1,033 million and $845 million as of June 30, 2002 and
December 31, 2001, respectively. The Company has recorded $10 million of assets
and $26 million of liabilities to recognize the fair value of these instruments
at June 30, 2002, compared to $76 million of assets at December 31, 2001. As of
June 30, 2002, a 10 percent increase in the U.S. dollar's value relative to the
hedged foreign currencies would increase the derivative instruments' fair value
by approximately $92 million. As of June 30, 2002, a 10 percent decrease in the
U.S. dollar's value relative to the hedged foreign currencies would decrease the
derivative instruments' fair value by approximately $94 million. Any increase or
decrease in the fair value of the Company's foreign exchange rate sensitive
derivative instruments would be substantially offset by a corresponding decrease
or increase in the fair value of the hedged underlying asset, liability or cash
flow.
The Company had interest rate swap contracts outstanding in the notional amount
of $563 million and $557 million at June 30, 2002 and December 31, 2001,
respectively. The Company has recorded approximately $3 million and $15 million
of other long-term liabilities to recognize the fair value of these instruments
at June 30, 2002 and December 31, 2001, respectively. As of June 30, 2002, a 100
basis point increase in global interest rates would decrease the derivative
instruments' fair value by $11 million. As of June 30, 2002, a 100 basis point
decrease in global interest rates would increase the derivative instruments'
fair value by $13 million. Any increase or decrease in the fair value of the
Company's interest rate sensitive derivative instruments would be substantially
offset by a corresponding decrease or increase in the fair value of the hedged
underlying liability.
33
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Note J -Commitments and Contingencies to the Company's unaudited
condensed consolidated financial statements contained elsewhere in
this Quarterly Report is incorporated herein by reference.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 7,
2002, to consider and vote upon the proposal to elect four Class I
Directors of the Company to hold office until the 2005 Annual
Meeting of Stockholders, one Class II Director of the Company to
hold office until the 2003 Annual Meeting of Stockholders and one
Class III Director to hold office until the 2004 Annual Meeting of
Stockholders of the Company, and until their respective successors
are chosen and qualified or until their earlier resignation, death
or removal. The stockholders elected the following Directors as
follows:
-------------------------------- --------------- -------------
NOMINEES FOR WITHHELD
-------------------------------- --------------- -------------
Class I
-------------------------------- --------------- -------------
Ray J. Groves 353,641,054 5,339,875
-------------------------------- --------------- -------------
Peter M. Nicholas 349,930,307 9,050,622
-------------------------------- --------------- -------------
Warren B. Rudman 351,598,765 7,382,163
-------------------------------- --------------- -------------
James R. Tobin 353,593,598 5,387,331
-------------------------------- --------------- -------------
Class II
-------------------------------- --------------- -------------
Uwe E. Reinhardt 353,611,638 5,369,290
-------------------------------- --------------- -------------
Class III
-------------------------------- --------------- -------------
Ursula M. Burns 353,592,545 5,388,383
-------------------------------- --------------- -------------
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Credit Agreement among Boston Scientific
Corporation and The Several Lenders dated as of May 31,
2002.
99.1 Certification by Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) The following current reports were filed during the quarter
ended June 30, 2002.
None.
34
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 9, 2002.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
--------------------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and Senior Vice
President - Finance and Administration
35