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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: September 30, 2003
Commission file number: 1-11083
BOSTON SCIENTIFIC CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2695240
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(State or other jurisdiction of (I.R.S. Employer
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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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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 September 30, 2003
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Common Stock, $.01 Par Value 819,155,786
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Page 1 of 40
Exhibit Index on Page 40
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1. Condensed Consolidated Financial Statements ................ 3
Condensed Consolidated Balance Sheets ...................... 3-4
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.. 36
ITEM 4. Controls and Procedures .................................... 37
PART II OTHER INFORMATION .......................................... 38
ITEM 1. Legal Proceedings .......................................... 38
ITEM 6. Exhibits and Reports on Form 8-K ........................... 38
SIGNATURE ................................................................ 39
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
In millions, except share and per share data 2003 2002
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Assets
Current assets:
Cash and cash equivalents $ 537 $ 277
Trade accounts receivable, net 508 435
Inventories 247 243
Other current assets 218 253
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Total current assets 1,510 1,208
Property, plant and equipment 1,251 1,117
Less: accumulated depreciation 559 481
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692 636
Excess of cost over net assets acquired 1,267 1,168
Technology - core, net 558 553
Technology - developed, net 201 217
Patents, net 334 316
Licenses and other intangibles, net 111 113
Investments 469 210
Other assets 61 29
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$ 5,203 $ 4,450
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See notes to unaudited condensed consolidated financial statements.
3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
September 30, December 31,
In millions, except share and per share data 2003 2002
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Liabilities and Stockholders' Equity
Current liabilities:
Commercial paper $ 654 $ 88
Bank obligations 9
Accounts payable 73 66
Accrued expenses 551 639
Other current liabilities 153 130
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Total current liabilities 1,440 923
Long-term debt 977 847
Other long-term liabilities 211 213
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 1,200,000,000 shares,
829,764,826 shares issued at September 30, 2003 and December 31, 2002 8 8
Additional paid-in capital 1,238 1,250
Treasury stock, at cost - 10,609,040 shares at September 30, 2003 and
6,980,902 shares at December 31, 2002 (332) (54)
Deferred compensation (1)
Retained earnings 1,725 1,390
Accumulated other comprehensive loss (63) (127)
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Total stockholders' equity 2,575 2,467
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$ 5,203 $ 4,450
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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 Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
In millions, except per share data 2003 2002 2003 2002
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Net sales $ 876 $ 722 $ 2,537 $ 2,105
Cost of products sold 243 211 704 643
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Gross profit 633 511 1,833 1,462
Selling, general and administrative expenses 295 249 858 736
Amortization expense 21 19 62 53
Royalties 15 9 40 26
Research and development expenses 113 87 324 248
Purchased research and development 8 33 45
Litigation-related charges (credits), net 8 (99) 15 (99)
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460 265 1,332 1,009
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Operating income 173 246 501 453
Other income (expense):
Interest expense (12) (10) (35) (32)
Other, net (3) (1) (7) (15)
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Income before income taxes 158 235 459 406
Income taxes 34 74 124 138
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Net income $ 124 $ 161 $ 335 $ 268
================================= =================================
Net income per common share - basic $ 0.15 $ 0.20 $ 0.41 $ 0.33
================================= =================================
Net income per common share - assuming dilution $ 0.15 $ 0.19 $ 0.40 $ 0.32
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See notes to unaudited condensed consolidated financial statements.
5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
In millions 2003 2002
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Cash provided by operating activities $ 553 $ 540
Investing activities:
Purchases of property, plant and equipment, net (117) (87)
Proceeds from sales of available for sale securities 20
Acquisitions of businesses, net of cash acquired (13) (136)
Payments related to prior year acquisitions (252)
Payments for acquisitions of and/or investments in certain technologies, net (238) (175)
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Cash used for investing activities (620) (378)
Financing activities:
Net increase in commercial paper 827 188
Net payments on revolving borrowings (121) (263)
Proceeds from (payments on) notes payable, capital leases and long-term borrowings 1 (54)
Purchases of common stock for treasury (570)
Proceeds from issuances of shares of common stock 184 43
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Cash provided by (used for) financing activities 321 (86)
Effect of foreign exchange rates on cash 6 3
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Net increase in cash and cash equivalents 260 79
Cash and cash equivalents at beginning of period 277 180
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Cash and cash equivalents at end of period $ 537 $ 259
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Supplemental Schedule of Noncash Investing and Financing Activities:
Payments due in connection with prior year acquisitions $ 84
See notes to unaudited condensed consolidated financial statements.
6
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and footnotes thereto (unadjusted for the stock split; see Note B for
details) incorporated by reference in Boston Scientific's Annual Report on Form
10-K for the year ended December 31, 2002.
Certain prior year's amounts have been reclassified to conform to the current
year presentation.
NOTE B - STOCK SPLIT
On July 29, 2003, the Company announced that its Board of Directors approved a
two-for-one common stock split, to be effected in the form of a 100 percent
stock dividend. On October 6, 2003, the Company announced that its stockholders
had approved an amendment to the Company's certificate of incorporation
increasing the Company's authorized common stock from 600,000,000 shares to
1,200,000,000 shares, which provides sufficient shares to fund the stock split.
The stock dividend was paid on November 5, 2003 to stockholders of record as of
October 15, 2003. The Company's number of shares and per share amounts of common
stock have been restated to reflect the stock split for each period presented.
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NOTE C - STOCK COMPENSATION ARRANGEMENTS
The Company accounts for its stock compensation arrangements under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations. The
Company has adopted the disclosure-only provisions of Financial Accounting
Standards Board (FASB) Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION.
If the Company had elected to recognize compensation expense for the granting of
options under stock option plans based on the fair values at the grant dates
consistent with the methodology prescribed by Statement No. 123, net income and
net income per share would have been reported as the following pro forma
amounts:
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions, except per share data) 2003 2002 2003 2002
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Net income, as reported $ 124 $ 161 $ 335 $ 268
Add: Stock-based employee compensation
expense included in net income, net of related 2 1 5
tax effects
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effect (13) (12) (39) (34)
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Pro forma net income $ 111 $ 151 $ 297 $ 239
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Net income per common share -
Basic:
Reported $ 0.15 $ 0.20 $ 0.41 $ 0.33
Pro forma $ 0.14 $ 0.19 $ 0.36 $ 0.29
Assuming dilution:
Reported $ 0.15 $ 0.19 $ 0.40 $ 0.32
Pro forma $ 0.13 $ 0.18 $ 0.35 $ 0.29
The fair value of the stock compensation used to calculate the pro forma net
income and earnings per share amounts above was estimated using the
Black-Scholes options pricing model.
NOTE D - COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2003, the Company reported
comprehensive income of $148 million and $399 million, respectively, compared to
comprehensive income of $167 million and $216 million for the same period in
prior year. Comprehensive income for the three and nine months ended September
30, 2003 was greater than reported net income primarily due to favorable foreign
currency fluctuations of $16 million and $42 million and unrealized gains on the
Company's equity investments of $28 million and $47 million, respectively,
offset by unrealized losses on derivative financial instruments of $20 million
and $25 million, respectively. For the third quarter of 2002, comprehensive
income and net income were not materially different. Comprehensive income for
the nine months ended September 30, 2002 was reduced relative to reported net
income primarily due to unrealized
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losses on derivative financial instruments and on the Company's equity
investments of $41 million and $19 million, respectively, offset by favorable
foreign currency fluctuations of $8 million.
NOTE E - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions, except share and per share data) 2003 2002 2003 2002
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Basic:
Net income $ 124 $ 161 $ 335 $ 268
Weighted average shares outstanding (in thousands) 818,870 814,426 820,466 812,348
Net income per common share $ 0.15 $ 0.20 $ 0.41 $ 0.33
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Assuming dilution:
Net income $ 124 $ 161 $ 335 $ 268
Weighted average shares outstanding (in thousands) 818,870 814,426 820,466 812,348
Net effect of dilutive stock-based compensation
(in thousands) 26,538 15,390 24,268 13,632
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Total(in thousands) 845,408 829,816 844,734 825,980
Net income per common share $ 0.15 $ 0.19 $ 0.40 $ 0.32
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NOTE F -TAX RATE
The Company, during the third quarter, changed its estimate of its 2003
effective tax rate, excluding the impact of after-tax special charges and
credits, to 25 percent from 27 percent. The decrease was primarily attributable
to geographic changes in the manufacturing of products sold by the Company. The
cumulative effect of this reduction resulted in a $10 million increase in the
Company's net income for the nine months ended September 30, 2003, or $0.01 per
share (diluted), of which approximately $7 million represents the impact for the
first half of 2003.
The Company operates within multiple taxing jurisdictions and is subject to
audit in these jurisdictions. These audits can involve complex issues, which may
require an extended period of time to resolve and may cover multiple years. The
Company had several tax audit settlements during the quarter. The Company
adjusted its previous estimate for accrued taxes by approximately $100 million
to reflect the resolution of these audits. In addition, the Company expects to
settle some of the remaining audits during the fourth quarter of 2003. As these
audits are settled, the Company will adjust previous estimates for accrued
taxes.
During the third quarter of 2003, the Company determined that it is likely to
repatriate cash from certain non-U.S. operations. The Company established tax
liabilities that management believes are adequate to provide for the tax impact
of these transactions. These amounts substantially offset the adjustments of
accrued taxes related to the tax audit settlements.
NOTE G - BUSINESS COMBINATIONS
On February 12, 2003, the Company completed its acquisition of InFlow Dynamics
Inc. (InFlow) for approximately $13 million in cash plus contingent payments. In
addition, the
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Company recorded approximately $13 million of acquisition-related obligations at
the date of acquisition. InFlow is a stent technology development company that
focuses on reducing the rate of restenosis, improving the visibility of stents
during procedures and enhancing the overall vascular compatibility of the stent.
The acquisition was intended to provide the Company with an expanded stent
technology and intellectual property portfolio.
The condensed consolidated financial statements include InFlow's operating
results from the date of acquisition. Pro forma information is not presented, as
InFlow's results of operations prior to its date of acquisition are not material
to the Company. The aggregate purchase price for InFlow 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, including purchased research and development, as valued by an
independent appraiser using information and assumptions provided by management.
Certain of the Company's business combinations involve contingent consideration.
These payments, when and if made, are allocated to specific intangible asset
categories, including purchased research and development, with the remainder
assigned to goodwill as if the consideration had been paid as of the date of
acquisition. Payment of the additional consideration is generally contingent
upon the acquired companies' reaching certain performance milestones, including
achieving specified revenue levels, product development targets or regulatory
approvals. At September 30, 2003, the Company had an accrual for
acquisition-related obligations of approximately $84 million. These accruals
were recorded primarily as an adjustment to goodwill and purchased research and
development. In addition, during the second quarter of 2003, the Company made an
acquisition-related payment of approximately $46 million associated with Enteric
Medical Technologies, Inc. (EMT), which was recorded as an adjustment to
goodwill. At September 30, 2003, the maximum potential amount of future
contingent consideration (undiscounted) that the Company could be required to
make associated with its business combinations is approximately $520 million,
some of which may be payable in the Company's common stock. The milestones
associated with the contingent consideration must be reached in certain future
periods ranging from 2003 through 2013. The specified cumulative revenue level
associated with the maximum future contingent payments is approximately $1,300
million.
NOTE H - BORROWINGS AND CREDIT ARRANGEMENTS
At September 30, 2003, the Company's revolving credit facilities totaled $1,200
million, consisting of a $600 million credit facility that terminates in May
2004 and a $600 million credit facility that terminates in August 2006. As of
December 31, 2002, the Company had short term borrowing capacity in excess of
its outstanding borrowings of approximately $1,400 million; therefore, during
the second quarter, the Company reduced its 364-day credit facility from $1,000
million to $600 million. The new credit facility contains substantially similar
terms to the expired credit facility; however, the new credit facility contains
an option to convert credit facility borrowings into a one-year term loan
expiring in May 2005, provided that certain conditions are satisfied.
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The revolving credit facilities provide borrowing capacity and support the
Company's commercial paper. The Company had approximately $915 million and $88
million of commercial paper outstanding at September 30, 2003 and December 31,
2002, respectively, at weighted average interest rates of 1.21 percent and 1.50
percent, respectively. The Company had no outstanding revolving credit facility
borrowings at September 30, 2003 compared to $113 million at December 31, 2002,
at a weighted average interest rate of 0.58 percent.
In addition, the Company had a revolving credit and security facility, which is
secured by the Company's domestic trade receivables, that provides an additional
$200 million of borrowing capacity and terminates in August 2004. The Company
had approximately $189 million and $197 million of borrowings outstanding under
its revolving credit and security facility at September 30, 2003 and December
31, 2002, respectively. The borrowings bore interest rates of 1.42 percent and
1.89 percent at September 30, 2003 and December 31, 2002, respectively.
The Company has the ability to refinance a portion of its short-term debt on a
long-term basis through its revolving credit facilities. The Company expects
that a minimum of $450 million of its short-term obligations, including $261
million of commercial paper and $189 million of revolving credit and security
facility borrowings, will remain outstanding beyond the next twelve months and,
accordingly, has classified this portion as long-term borrowings at September
30, 2003, compared to $320 million of short-term bank obligations classified as
long-term at December 31, 2002.
The Company had $500 million of senior notes (the Notes) outstanding at
September 30, 2003 and December 31, 2002. The Notes mature in March 2005, bear a
semi-annual coupon of 6.625 percent, and are not redeemable prior to maturity or
subject to any sinking fund requirements. During the third quarter of 2003, the
Company entered a fixed to floating interest rate swap to hedge changes in the
fair value of the Notes. The Company recorded changes in the fair value of the
Notes since the inception of the interest rate swap. Interest payments made or
received under the interest rate swap agreement are recorded as interest
expense. As of September 30, 2003, approximately $4 million of unrealized gains
were recorded as other long-term assets to recognize the fair value of the
interest rate swap. The carrying amount of the Notes was approximately $512
million and $511 million at September 30, 2003 and December 31, 2002,
respectively.
NOTE I - INVENTORIES
The components of inventory consist of the following:
September 30, December 31,
(In millions) 2003 2002
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Finished goods $166 $145
Work-in-process 43 48
Raw materials 38 50
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$247 $243
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NOTE J - NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, to clarify the conditions under which the assets,
liabilities, and activities of another entity should be consolidated into the
financial statements of a company. Interpretation No. 46 requires the
consolidation of a variable interest entity (VIE) by a company that bears the
majority of the risk of loss from the VIE's activities or is entitled to receive
the majority of the VIE's residual returns. In October 2003, the FASB issued
FASB Staff Position No. 46-6 (FSP FIN 46-6), deferring the effective date for
applying the provisions of Interpretation 46 to interests held by public
entities in variable interest entities or potential variable interest entities
created before February 1, 2003. Under FSP FIN 46-6, the Company must apply the
provisions of Interpretation 46 to all interests held in variable interest
entities during the fourth quarter of 2003. The Company is in the process of
evaluating the effect of adoption of Interpretation No. 46, but does not believe
it will materially impact the Company's consolidated financial statements.
The Company has entered strategic alliances with a number of privately held and
publicly traded companies. Many of these alliances involve equity investments by
the Company. The Company enters these strategic alliances to broaden its product
technology portfolio and to strengthen and expand the Company's reach into
existing and new markets. Many of these companies are in the developmental stage
and have not yet commenced their principal operations. The Company's exposure to
loss related to its strategic alliances is generally limited to its equity
investments, notes receivable and intangible assets associated with these
alliances.
In April 2003, the FASB issued Statement No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which the Company adopted in the
third quarter of 2003. Statement No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. The Company's
adoption of Statement No. 149 had no material impact on the Company's
consolidated financial statements.
In May 2003, the FASB issued Statement No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, which the
Company adopted in the third quarter of 2003. Statement No. 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as
liabilities in statements of financial position. The Company's adoption of
Statement No. 150 had no material impact on the Company's consolidated financial
statements.
NOTE K - 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 some cases, the claimants seek damages, as well as other relief,
which, if granted, could require significant expenditures. The Company accrues
costs of settlement, damages and, under certain conditions, costs of defense
when such costs are probable and estimable. Otherwise, such costs are expensed
as incurred. As of September 30, 2003, the range for litigation-related costs
that
12
can be estimated is $18 million to $21 million, which includes an $8 million
reserve for product liability settlements. If the estimate of a probable loss is
a range, and no amount within the range is a better estimate, the minimum amount
of the range is accrued. The Company's total accrual for litigation-related
costs as of September 30, 2003 and December 31, 2002 was approximately $18
million and $4 million, respectively.
In management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in this Quarterly Report,
the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003 and
June 30, 2003 and the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, 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; legal costs
associated with non-patent litigation and compliance activities continue to be
substantial. Depending on the prevalence, significance and complexity of these
matters, the Company's legal provision could be adversely affected in the
future.
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 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, the Court also
set aside the verdict of infringement, requiring a new trial. The case had been
stayed until October 10, 2003, pending the outcome of a related case. On October
14, 2003, Cordis filed a motion to revise and vacate the Court's decision to
grant the Company a new trial and asked the Court to enter judgement against the
Company. The Company filed an opposition to Cordis' motion. A hearing has not
yet been scheduled.
On January 13, 2003, Cordis filed suit for patent infringement against the
Company and SCIMED alleging the Company's Express(2)(TM) coronary stent
infringes a U.S. patent owned by Cordis. The suit was filed in the U.S. District
Court for the District of Delaware seeking monetary and injunctive relief. On
February 14, 2003, Cordis filed a motion requesting a preliminary injunction. On
March 5, 2003, the Company answered the complaint, denying the allegations, and
filed a counterclaim against Cordis, alleging that certain products sold by
Cordis infringe a patent owned by the Company. A hearing on the preliminary
injunction motion was held on July 21, 22, and 23, 2003, with post-hearing
briefs filed in September 2003.
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On March 13, 2003, the Company and Boston Scientific Scimed, Inc. filed suit for
patent infringement against Johnson & Johnson and Cordis, alleging that its
Cypher(TM) drug-eluting stent infringes a patent owned by the Company. The suit
was filed in the District Court of Delaware seeking monetary and injunctive
relief. On March 20, 2003, the Company filed a motion seeking a preliminary
injunction with respect to the sale of the Cypher stent in the United States. On
April 7, 2003, Cordis answered the complaint, denying the allegations, and filed
a counterclaim against the Company alleging that the patent is not valid and is
unenforceable. On July 8, 2003, the Company filed an amended complaint alleging
that the Cypher drug-eluting stent infringes two additional patents owned by the
Company. A hearing on the preliminary injunction motion was held on July 21, 22
and 23, 2003, with post-hearing briefs filed in September 2003.
On March 26, 2002, the Company and Target Therapeutics, Inc. (Target), a wholly
owned subsidiary of the Company, filed suit for patent infringement against
Cordis alleging certain detachable coil delivery systems and/or pushable coil
vascular occlusion systems (coil delivery systems) infringe three U.S. patents,
owned by or exclusively licensed to Target. The complaint was filed in the U.S.
District Court for the Northern District of California seeking monetary and
injunctive relief. A trial originally scheduled to begin in June 2004 has been
rescheduled for October 2004.
LITIGATION WITH MEDINOL LTD.
On April 22, 2002, Medinol Ltd. (Medinol) filed suit against Boston Scientific
Medizintechnik GmbH (GmbH), a German subsidiary of the Company, alleging the
Company's Express stent infringes certain German patents and utility models
owned by Medinol. The suit was filed in Dusseldorf, Germany. Hearings were held
in May 2003, and on June 24, 2003, the German court found that the Express stent
infringes one German patent and one utility model asserted by Medinol and
enjoined sales in Germany. The Company has appealed and a hearing on the appeal
is scheduled for September 24, 2004.
On July 2, 2003, Medinol filed a motion against the Company seeking a
preliminary injunction with respect to the sale of the Express stent in Germany.
The German Court granted Medinol's motion effective September 23, 2003.
On January 21, 2003, Medinol filed suit against several of the Company's
international subsidiaries in the District Court of The Hague, Netherlands
seeking cross-border, monetary and injunctive relief covering The Netherlands,
Austria, Belgium, United Kingdom, Ireland, Switzerland, Sweden, Spain, France,
Portugal and Italy, alleging the Company's Express(TM) stent infringes four
European patents owned by Medinol. A hearing was held on October 10, 2003, and a
decision is expected on December 10, 2003. The Company has filed nullity actions
against one of the patents in Ireland, France, Italy, Spain, Sweden, Portugal,
and Switzerland.
On September 10, 2002, the Company filed suit against Medinol alleging Medinol's
NIRFlex(TM) and NIRFlex(TM) Royal products infringe two patents owned by the
Company. The suit was filed in Dusseldorf, Germany seeking monetary and
injunctive relief. A hearing
14
was held on September 23, 2003. On October 28, 2003, the German Court found that
Medinol infringes one of the two patents owned by the Company.
On September 25, 2002, the Company filed suit against Medinol alleging Medinol's
NIRFlex(TM) and NIRFlex(TM) Royal products infringe a patent owned by the
Company. The suit was filed in the District Court of The Hague, Netherlands
seeking cross-border, monetary and injunctive relief. On September 10, 2003, the
Dutch Court ruled that the patent was invalid. The Company plans to appeal the
Court's decision.
LITIGATION WITH MEDTRONIC, INC.
On August 13, 1998, Medtronic AVE, Inc. (Medtronic AVE), a subsidiary of
Medtronic, Inc. (Medtronic ) filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's NIR(R) stent infringes two
patents owned by Medtronic AVE. The suit was filed in the U.S. District Court
for the District of Delaware seeking injunctive and monetary relief. On May 25,
2000, Medtronic AVE amended the complaint to include a third patent. The Company
and SCIMED have answered denying the allegations of the complaint. A hearing on
the Company's motion for summary judgment of non-infringement was held August
11, 2003. Trial is expected in 2005.
LITIGATION WITH GUIDANT CORPORATION
On December 3, 2002, Advanced Cardiovascular Systems, Inc. (ACS), a subsidiary
of Guidant Corporation (Guidant), filed suit for patent infringement against the
Company and SCIMED alleging the Company's Express(R) stent infringes a U.S.
patent owned by ACS. The suit was filed in the U.S. District Court for the
Northern District of California seeking monetary and injunctive relief. On
January 30, 2003, the Company filed an answer denying allegations of the
complaint and concurrently filed a counterclaim seeking declaratory judgment of
patent invalidity and noninfringement and alleging that certain ACS products
infringe five U.S. patents owned by the Company. The Company seeks monetary and
injunctive relief. On March 17, 2003, ACS filed an amended complaint alleging an
additional patent is infringed by the Company's product. On July 2, 2003 the
Court granted the Company's motion to compel arbitration.
On January 28, 2003, ACS filed suit for patent infringement against the Company
and SCIMED alleging the Company's Express stent infringes a U.S. patent owned by
ACS. The suit was filed in the U.S. District Court for the Northern District of
California seeking monetary and injunctive relief. On August 13, 2003, ACS filed
an amended complaint alleging the Company's Express stent infringes a second
U.S. patent owned by ACS. The Company has answered denying the allegations of
the complaint.
On October 15, 2002, ACS filed suit for patent infringement against the Company
and SCIMED alleging the Company's Express stent infringes a U.S. patent owned by
ACS. The suit was filed in the U.S. District Court for the Northern District of
California seeking monetary damages and injunctive relief. On December 6, 2002,
the Company answered, denying allegations of the complaint and counterclaimed
seeking a declaration of invalidity, noninfringement and
15
enforceability. On August 18, 2003, the court granted the Company's motion to
compel arbitration.
LITIGATION RELATING TO COOK, INC.
On March 18, 1999, Cook, Inc. (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 answered, denying the
allegations of the complaint. On September 8, 2003, the parties settled and the
case was dismissed on September 12, 2003.
LITIGATION WITH EV3 INC.
On September 12, 2002, EV3 Inc.(EV3) filed suit against The Regents of the
University of California and a subsidiary of the Company in the District Court
of The Hague, Netherlands, seeking a declaration that EV3's EDC II and VDS
embolic coil products do not infringe three patents licensed by the Company from
The Regents of the University of California. On October 22, 2003, the Court
ruled that the EV3 products infringe three patents licensed by the Company.
On July 21, 2003, EV3 Inc., Micro Therapeutics, Inc., and Dendron GmbH (the EV3
Parties) filed suit against the Company and The Regents of the University of
California in the U. S. District Court for the Western District of Wisconsin
seeking a declaration that certain of the EV3 Parties' embolic coil products do
not infringe three U.S. patents licensed by the Company from The Regents of the
University of California, and further seeks a declaration of invalidity of all
three patents. The University of California filed a motion to dismiss the case;
the motion was granted on October 24, 2003.
OTHER PATENT LITIGATION
On July 28, 2000, Dr. Tassilo Bonzel filed a complaint naming certain of the
Company's Schneider Worldwide subsidiaries and Pfizer Inc. (Pfizer) and certain
of its affiliates as defendants, alleging that Pfizer failed to pay Dr. Bonzel
amounts owed under a license agreement involving Dr. Bonzel's patented
Monorail(TM) technology. The suit was filed in the District Court for the State
of Minnesota seeking monetary relief. On September 26, 2001, Dr. Bonzel and the
Company reached a contingent settlement involving all but one claim asserted in
the complaint. The contingency has been satisfied and the settlement is now
final. On December 17, 2001, the remaining claim was dismissed without prejudice
with leave to refile the suit in Germany. Dr. Bonzel filed an appeal of the
dismissal of the remaining claim. On July 29, 2003, the Appellate Court affirmed
the lower court's dismissal, and on October 24, 2003, the Minnesota Supreme
Court denied Dr. Bonzel's petition for further review.
16
DEPARTMENT OF JUSTICE INVESTIGATION
In October 1998, the Company recalled its NIR ON(R) Ranger(TM) with Sox(TM)
coronary stent delivery system following reports of balloon leaks. Since
November 1998, the U.S. Department of Justice has been conducting an
investigation primarily regarding: the shipment, sale and subsequent recall of
the NIR ON(R) Ranger(TM) with Sox(TM) stent delivery system; aspects of the
Company's relationship with Medinol, the vendor of the stent; and related
events. The Company and two senior officials have been advised that they are
targets of the federal grand jury investigation, but that no final decision has
been made as to whether any potential charges would be brought. Although the
Company has contested certain procedural matters related to the conduct of the
investigation, the Company and the two senior officials have agreed to extend
the applicable statute of limitations, which may result in the investigation
continuing beyond year-end. There can be no assurance that the investigation
will result in an outcome favorable to the Company, that charges would not be
brought, or that the Company would not agree to a further extension of the
statute. The Company believes that it will ultimately be demonstrated that the
Company and its officials acted responsibly and appropriately.
The Company is substantially self-insured with respect to general and product
liability claims. Losses for claims in excess of the limits of purchased
insurance would be reflected in the Statement of Operations 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. Product liability claims against the Company may be asserted in the
future related to events not known to management at the present time. However,
unanticipated catastrophic losses could have a material adverse impact on the
Company's financial position, results of operations and liquidity.
17
NOTE L - SEGMENT REPORTING
Boston Scientific is a worldwide developer, manufacturer and marketer of medical
devices for less-invasive procedures. The Company has four reportable operating
segments based on geographic regions: the United States, Europe, Japan and
Inter-Continental. Each of the Company's reportable segments generates 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 2002
has been restated based on the Company's standard foreign exchange rates used
for 2003. 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 September 30, 2003:
Net sales $ 481 $ 150 $ 128 $ 83 $ 842
Operating income for reportable segments 173 71 72 33 349
Three months ended September 30, 2002:
Net sales $ 431 $ 113 $ 120 $ 51 $ 715
Operating income for reportable segments 156 49 69 15 289
Nine months ended September 30, 2003:
Net sales $1,442 $ 433 $ 375 $ 202 $2,452
Operating income for reportable segments 538 197 213 73 1,021
Nine months ended September 30, 2002:
Net sales $1,256 $ 357 $ 364 $ 148 $2,125
Operating income for reportable segments 444 148 210 39 841
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 Nine Months Ended
September 30, September 30,
(In millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Net sales:
Total net sales for reportable segments $ 842 $ 715 $ 2,452 $ 2,125
Foreign exchange 34 7 85 (20)
-------- -------- -------- --------
$ 876 $ 722 $ 2,537 $ 2,105
======== ======== ======== ========
Income before income taxes:
Total operating income for reportable segments $ 349 $ 289 $ 1,021 $ 841
Manufacturing operations (70) (61) (204) (190)
Corporate expenses and foreign exchange (90) (81) (268) (252)
Purchased research and development (8) (33) (45)
Litigation-related (charges) credits, net (8) 99 (15) 99
-------- -------- -------- --------
173 246 501 453
Other expense, net (15) (11) (42) (47)
-------- -------- -------- --------
$ 158 $ 235 $ 459 $ 406
======== ======== ======== ========
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Boston Scientific Corporation (Boston Scientific or 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, peripheral interventions,
vascular surgery, neurovascular intervention, electrophysiology, endoscopy,
oncology, urology, and gynecology.
RESULTS OF OPERATIONS
All references in this Item and in the unaudited condensed consolidated
financial statements to common shares, share prices, and per share amounts have
been retroactively restated for the two-for-one common stock split that was
effected in the form of a 100 percent stock dividend on November 5, 2003. See
Note B to the unaudited condensed consolidated financial statements for details.
FINANCIAL SUMMARY
THREE MONTHS ENDED SEPTEMBER 30, 2003
Net sales for the three months ended September 30, 2003 were $876 million as
compared to $722 million for the three months ended September 30, 2002, an
increase of 21 percent. Excluding the favorable impact of $27 million of foreign
currency fluctuations, net sales increased 18 percent. The reported net income
for the three months ended September 30, 2003 was $124 million, or $0.15 per
share (diluted), as compared to $161 million, or $0.19 per share, for the three
months ended September 30, 2002. The reported results for the three months ended
September 30, 2003 include after-tax charges of $13 million, or $0.02 per share,
consisting of $8 million in purchased research and development costs
attributable to acquisitions, and a $5 million charge related to product
liability settlements. The reported results for the three months ended September
30, 2002 include an after-tax credit of $62 million, or $0.07 per share, for net
amounts received in connection with litigation settlements related to rapid
exchange catheter technology.
19
NINE MONTHS ENDED SEPTEMBER 30, 2003
Net sales for the nine months ended September 30, 2003 were $2,537 million as
compared to $2,105 million for the nine months ended September 30, 2002, an
increase of 21 percent. Excluding the favorable impact of $105 million of
foreign currency fluctuations, net sales increased approximately 16 percent. The
reported net income for the nine months ended September 30, 2003 was $335
million, or $0.40 per share (diluted), as compared to reported net income of
$268 million, or $0.32 per share, for the nine months ended September 30, 2002.
The reported results for the nine months ended September 30, 2003 include
after-tax charges of $45 million, or $0.05 per share, consisting of purchased
research and development costs of $33 million attributable to acquisitions, and
$12 million in charges related to litigation with the Federal Trade Commission
and product liability settlements. The reported results for the nine months
ended September 30, 2002 include net after-tax charges of $15 million, or $0.02
per share, consisting of purchased research and development costs of $45 million
primarily attributable to the acquisition of Enteric Medical Technologies, Inc.
(EMT), $20 million in costs associated with the Company's global operations
plan, and $12 million for an endowment to fund a newly created philanthropic
foundation. The after-tax charges in 2002 were partially offset by a $62 million
net settlement related to rapid exchange catheter technology.
NET SALES
United States (U.S.) revenues for the three and nine months ended September 30,
2003 were $481 million and $1,442 million, respectively, representing increases
of 12 percent and 15 percent compared to the same periods in the prior year. The
increase was primarily due to sales of the Company's internally developed
Express2(TM) coronary stent and its Maverick(TM) line of coronary angioplasty
balloons. The U.S. revenue increase was also due to growth in the Company's
Endosurgery product lines.
International revenues for the three and nine months ended September 30, 2003
were $395 million and $1,095 million, respectively, representing increases of 36
percent and 29 percent compared to the same periods in the prior year. On a
constant currency basis, international revenues increased 26 percent and 17
percent for the three and nine months ended September 30, 2003, respectively,
compared to the same periods in the prior year. The increase for the three and
nine months ended September 30, 2003 was primarily due to sales of $64 million
and $103 million, respectively, of the TAXUS(TM) Express2 paclitaxel-eluting
coronary stent system, which the Company launched in its Europe and
Inter-Continental markets during the first quarter of 2003. The increase in
international revenues was also due to growth in the Company's Endosurgery
product lines.
Worldwide coronary stent sales increased 100 percent to $136 million during the
three months ended September 30, 2003 compared to the same period in the prior
year. During the nine months ended September 30, 2003, worldwide coronary stent
sales increased approximately 95 percent to $374 million compared to the same
period in the prior year. The increase was primarily due to increased sales of
the Express2 coronary stent system in the U.S. relative to the same period in
the prior year and sales of the TAXUS stent system in the Company's Europe and
Inter-Continental markets. The
20
Company's U.S. bare metal stent revenue, which approximated $45 million for the
three months ended September 30, 2003, has been declining throughout the year
following the introduction of a competitor's drug-eluting stent as physicians
converted many procedures to the new technology. The Company estimates that, as
of September 30, 2003, approximately 50 percent of the stents used in
interventional stenting procedures in the U.S. have converted from bare metal
stents to drug eluting stents. Until the Company launches its drug-eluting stent
product in the U.S., it is likely that its U.S. coronary stent business will
continue to decline.
The following tables provide worldwide net sales by region and relative change
on an actual and constant foreign currency basis for the three and nine months
ended September 30, 2003 and 2002, respectively.
Three Months Ended Change
September 30, At Actual Foreign At Constant Foreign
(In millions) 2003 2002 Currency Basis Currency Basis
---- ---- -------------- --------------
United States $ 481 $ 431 12% 12%
Europe 166 111 50% 32%
Japan 136 126 8% 6%
Inter-Continental 93 54 72% 60%
------ ------ ----- -----
Worldwide $ 876 $ 722 21% 18%
====== ====== ===== =====
Nine Months Ended Change
September 30, At Actual Foreign At Constant Foreign
(In millions) 2003 2002 Currency Basis Currency Basis
---- ---- -------------- --------------
United States $1,442 $1,256 15% 15%
Europe 476 332 43% 22%
Japan 396 362 9% 3%
Inter-Continental 223 155 44% 37%
------ ------ ----- -----
Worldwide $2,537 $2,105 21% 16%
====== ====== ===== =====
21
The following tables provide worldwide net sales by division and relative change
on an actual and constant foreign currency basis for the three and nine months
ended September 30, 2003 and 2002, respectively.
Three Months Ended Change
September 30 At Actual Foreign At Constant Foreign
(In millions) 2003 2002 Currency Basis Currency Basis
---- ---- -------------- --------------
Cardiovascular $ 544 $ 436 25% 21%
Electrophysiology 27 26 4% 2%
Neurovascular 55 40 38% 31%
------ ------ ----- -----
CARDIOVASCULAR 626 502 25% 20%
Oncology $ 43 $ 38 13% 12%
Endoscopy 147 130 13% 10%
Urology 60 52 15% 12%
------ ------ ----- -----
ENDOSURGERY 250 220 14% 11%
------ ------ ----- -----
Worldwide 876 $ 722 21% 18%
====== ====== ===== =====
Nine Months Ended Change
September 30, At Actual Foreign At Constant Foreign
(In millions) 2003 2002 Currency Basis Currency Basis
---- ---- -------------- --------------
Cardiovascular $1,578 $1,283 23% 18%
Electrophysiology 82 74 11% 7%
Neurovascular 161 123 31% 23%
------ ------ ----- -----
CARDIOVASCULAR 1,821 1,480 23% 17%
Oncology 122 105 16% 13%
Endoscopy 429 378 13% 9%
Urology 165 142 16% 13%
------ ------ ----- -----
ENDOSURGERY 716 625 15% 10%
------ ------ ----- -----
Worldwide $2,537 $2,105 21% 16%
====== ====== ===== =====
22
GROSS PROFIT
Gross profit increased to $633 million, or 72.3 percent of net sales, during the
three months ended September 30, 2003 from $511 million, or 70.8 percent of net
sales, for the same period in the prior year. The increase in gross profit as a
percentage of net sales was primarily due to shifts in the Company's product
sales mix toward higher margin products, primarily coronary stents, and
operational cost improvements, partially offset by reductions in hedging gains
on foreign currency contracts.
Gross profit increased to $1,833 million, or 72.3 percent of net sales, for the
nine months ended September 30, 2003, from $1,462 million, or 69.5 percent of
net sales, for the same period in the prior year. The increase in gross profit
as a percentage of net sales was primarily due to shifts in the Company's
product sales mix toward higher margin products, primarily coronary stents,
operational cost improvements and the reductions of costs associated with the
Company's global operations strategy, partially offset by reductions in hedging
gains on foreign currency contracts.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
SG&A expenses increased to $295 million from $249 million and increased to $858
million from $736 million during the three and nine months ended September 30,
2003, respectively, compared to the same periods in the prior year. SG&A
expenses were 34 percent of net sales for the three and nine months ended
September 30, 2003 compared to 34 percent and 35 percent during the same periods
in the prior year. The increase in expense dollars was attributable to
unfavorable foreign currency fluctuations, market development for the Company's
drug-eluting stent business, and an increase in selling expenses due to sales
force expansion.
AMORTIZATION EXPENSE
Amortization expense increased to $21 million from $19 million and increased to
$62 million from $53 million during the three and nine months ended September
30, 2003, respectively, compared to the same periods in the prior year. This
represents a decrease as a percentage of net sales to two percent from three
percent. The increase in expense dollars was primarily the result of
amortization of intangible assets acquired during 2002 and 2003.
ROYALTIES
Royalties increased to $15 million from $9 million and increased to $40 million
from $26 million during the three and nine months ended September 30, 2003,
respectively, compared to the same periods in the prior year. This represents an
increase as a percentage of net sales to two percent from one percent. The
increase in royalties was due to increased sales of royalty-bearing products,
including royalties payable on sales of the Company's TAXUS stent system and
certain nitinol products. The Company expects that its royalty expenses will
continue to increase as sales of its TAXUS stent system increase. In addition,
the Company continues to enter strategic technological alliances, some of which
include royalty commitments.
23
RESEARCH AND DEVELOPMENT (R&D) EXPENSES
R&D expense increased to $113 million from $87 million and increased to $324
million from $248 million during the three and nine months ended September 30,
2003, respectively, compared to the same periods in the prior year. This
represents an increase as a percentage of net sales to 13 percent from 12
percent. The increase in research and development expenses was primarily
attributable to investment in the development of, and clinical trials relating
to, the Company's TAXUS stent program and certain other cardiovascular projects,
as well as continued spending on projects obtained through acquisitions. The
Company expects research and development expenses to range from 13 percent to 14
percent of net sales during the fourth quarter of 2003.
The TAXUS clinical program is a series of studies designed to collect data on
Boston Scientific's proprietary polymer-based, paclitaxel-eluting stent
technology for reducing coronary restenosis, the growth of neointimal tissue
within an artery after angioplasty and stenting. Paclitaxel is a multifunctional
microtubular inhibitor that controls platelets, smooth muscle cells and white
blood cells, all of which are believed to contribute to restenosis. The
proprietary polymer on the stent allows for controlled delivery of paclitaxel.
The Company initiated the TAXUS program in 1997. In the second quarter of 2003,
the Company submitted the fifth and final module of its application for
Pre-Market Approval (PMA) to the U.S. Food and Drug Administration (FDA) to sell
the product in the U.S.
On September 15, 2003, the Company released nine month results from its pivotal
TAXUS IV clinical trial, which enrolled 1,326 patients at 73 sites in the United
States, assessing the safety and efficacy of a slow release formulation
paclitaxel-eluting stent system. The study's primary endpoint was target vessel
revascularization (TVR) at nine months. The TVR rate of 4.7 percent in the TAXUS
group was significantly lower than the control rate of 12 percent for the
Express bare metal stent. The study reported a target lesion revascularization
(TLR) rate, or retreatment rate, of 3.0 percent in the TAXUS group. The study
also reported an in-segment binary restenosis rate of 7.9 percent and in-stent
binary restenosis rate of 5.5 percent in the TAXUS group. The diabetic patients
in the TAXUS group had an in-segment (stented vessel segment plus 5 mm beyond
each end of the stent) binary restenosis rate of 6.4 percent and a TLR rate of
5.2 percent. The nine month results from the TAXUS IV study supported safety as
demonstrated by low rates of Major Adverse Cardiac Events (MACE), indicating
comparable safety of drug-eluting stents and bare metal stents. On November 10,
2003, the Company announced twelve month data from its TAXUS IV clinical trial.
The benefits reported at nine months-for patients who received a
paclitaxel-eluting stent compared to patients who received a bare metal stent-
were maintained at twelve months. The FDA has scheduled a special panel to
review the TAXUS PMA on November 20, 2003.
INTEREST EXPENSE AND OTHER, NET
Interest expense increased to $12 million from $10 million and increased to $35
million from $32 million during the three and nine months ended September 30,
2003, respectively, compared to the same periods in the prior year. The increase
in interest expense for the three months and nine months ended September 30,
2003 was primarily due to an increase in average debt levels. Other, net, was
expense of $3 million and $7 million for the three and nine months ended
September 30, 2003, compared to expense of $1 million and $15 million in the
comparable period in 2002. The change was primarily due to a charitable donation
made during the second quarter of 2002 to fund the Boston Scientific Foundation,
partially offset by realized gains in 2002 on sales of available-for-sale
securities.
24
TAX RATE
The Company's reported tax rate was 22 percent and 31 percent for the three
months ended September 30, 2003 and 2002, respectively, and 27 percent and 34
percent for the nine months ended September 30, 2003 and 2002, respectively. The
decrease in the reported tax rate was, among other things, due to the change in
the level of special charges and credits during the three and nine months ended
September 30, 2003 compared to the same periods in the prior year. The special
charges and credits included purchased research and development costs,
litigation-related items, and costs associated with the Company's global
operations strategy that was completed in 2002. These amounts are either not
deductible for income tax purposes or are taxed at rates that vary from the
Company's blended effective tax rate.
In addition, during the third quarter of 2003, the Company changed its estimate
of its 2003 effective tax rate, excluding the impact of after-tax special
charges and credits, to 25 percent from 27 percent. The decrease was primarily
attributable to geographic changes in the manufacturing of products sold by the
Company. The cumulative effect of this reduction resulted in a $10 million
increase in the Company's net income for the nine months ended September 30,
2003, or $0.01 per share (diluted), of which approximately $7 million represents
the impact for the first half of 2003. Management currently estimates that the
2003 effective tax rate will remain at approximately 25 percent. However, the
effective tax rate could be impacted positively or negatively by geographic
changes in the manufacturing of products sold by the Company or by business
acquisitions.
The Company operates within multiple taxing jurisdictions and is subject to
audit in these jurisdictions. These audits can involve complex issues, which may
require an extended period of time to resolve and may cover multiple years. The
Company had several tax audit settlements during the quarter. The Company
adjusted its previous estimate for accrued taxes by approximately $100 million
to reflect the resolution of these audits. In addition, the Company expects to
settle some of the remaining audits during the fourth quarter of 2003. As these
audits are settled, the Company will adjust previous estimates for accrued
taxes.
During the third quarter of 2003, the Company determined that it is likely to
repatriate cash from certain non-U.S. operations. The Company established tax
liabilities that management believes are adequate to provide for the tax impact
of these transactions. These amounts substantially offset the adjustments of
accrued taxes related to the tax audit settlements. The Company anticipates that
the repatriated cash will primarily be used to fund research and development
initiatives, and additional acquisitions and strategic alliances.
The Company has recognized net deferred tax assets aggregating $60 million at
September 30, 2003 and $68 million at December 31, 2002. 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.
25
LITIGATION-RELATED ITEMS
During the third quarter of 2003, the Company agreed to settle a number of
outstanding product liability cases. The cost of settlement in excess of the
Company's available insurance limits was approximately $8 million, which was
recorded as a charge to operating income.
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. On March
28, 2003, the U.S. District Court for the District of Massachusetts entered a
judgment against the Company for approximately $7 million. The Company recorded
this amount as a charge to operating income in the first quarter of 2003.
During the third quarter of 2002, the Company recorded a $99 million credit for
net amounts received in connection with litigation settlements related to rapid
exchange catheter technology.
PURCHASED RESEARCH AND DEVELOPMENT
The Company's purchased research and development charges recorded during the
nine months ended September 30, 2003 primarily relate to certain prior years'
acquisitions and the acquisition of InFlow Dynamics, Inc. (Inflow) in 2003. The
purchased research and development associated with the prior years' acquisitions
results from consideration that was contingent at the date of acquisition, but
was earned during the nine months ended September 30, 2003, primarily related to
Embolic Protection, Inc. (EPI).
The Company completed its acquisition of InFlow on February 12, 2003, for
approximately $13 million in cash plus contingent payments. In addition, the
Company recorded approximately $13 million of acquisition-related obligations at
the date of acquisition. InFlow is a stent technology development company that
focuses on reducing the rate of restenosis, improving the visibility of stents
during procedures and enhancing the overall vascular compatibility of the stent.
The acquisition was intended to provide the Company with an expanded stent
technology and intellectual property portfolio.
The condensed consolidated financial statements include InFlow's operating
results from the date of acquisition. Pro forma information is not presented, as
InFlow's results of operations prior to its date of acquisition are not material
to the Company. The aggregate purchase price for InFlow 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, including purchased research and development, as valued by an
independent appraiser using information and assumptions provided by management.
26
The most significant in-process projects acquired in connection with the
Company's 2002 acquisitions include EMT's Enteryx(TM) technology for the
treatment of gastroesophageal reflux disease (GERD) and Smart Therapeutics,
Inc.'s (Smart) atherosclerosis stent, which collectively represent approximately
82 percent of the 2002 in-process value. During the second quarter of 2003, the
Company completed the Enteryx in-process project and received FDA approval for
this technology. The total cost to complete the project was approximately $6
million. The Company continues to pursue the development of Smart's
atherosclerosis stent and believes it has a reasonable chance of completing the
project. The Company has spent approximately $2 million on this project as of
September 30, 2003 and estimates costs of approximately $2 million to complete
the project.
The most significant in-process projects acquired in connection with the
Company's 2001 acquisitions include Interventional Technologies, Inc.'s (IVT)
next-generation Cutting Balloon(R), IVT's next-generation Infiltrator(R)
transluminal drug-delivery catheter and EPI's next-generation embolic protection
devices, which collectively represent approximately 63 percent of the 2001
in-process value. The Company continues to pursue the development of IVT's
next-generation Cutting Balloon and believes it has a reasonable chance of
completing the project. The Company has spent approximately $2 million on this
project as of September 30, 2003 and estimates costs of approximately $3 million
to complete the project. During the second quarter of 2002, due to alternative
drug-delivery products available to the Company, the Company substantially
canceled the future development of the Infiltrator project. During the second
quarter of 2003, the Company completed EPI's FilterWire EX(TM) in-process
project and received FDA approval for this technology. The total cost to
complete the project was approximately $20 million.
OUTLOOK
The worldwide coronary stent market is dynamic and highly competitive with
significant market share volatility. The introduction of drug-eluting stents is
increasingly having a significant impact on the market size for coronary stents
and on the distribution of market share across the industry. The Company
believes drug-eluting stent technology represents one of the largest market
opportunities in the history of the medical device industry. It is estimated
that the annual worldwide market for coronary stents, including drug-eluting
stents, may grow to approximately $5 billion by 2005. Although the Company
believes it is positioned to be one of only two early entrants in the U.S.
market, uncertainties exist about the rate of development and size of this new
market.
The Company believes it is poised to take advantage of the drug-eluting stent
opportunity for a variety of reasons, including its more than six years of
scientifically rigorous research and development, the clinical results of its
TAXUS program, the success of the TAXUS stent system in Europe and
Inter-Continental markets where the product has been launched, the combined
strength of the components of its technology, its overall market leadership, and
its sizeable interventional cardiology sales force. In addition, in order to
capitalize on this opportunity, the Company is making significant investments in
its sales, clinical and manufacturing capabilities.
27
Recognizing the promise and benefits of drug-eluting stents, physicians are
expected to continue to adopt rapidly this new technology in the U.S. In
addition, initial reimbursement rates have already been set in the U.S. However,
certain international markets are still in the process of setting reimbursement
levels, which has delayed physician adoption rates in these markets.
The Company's success with drug-eluting stents, and its ability to improve
operating margins, could be adversely affected by more gradual physician
adoption rates, changes in reimbursement policies, delayed or limited regulatory
approvals, unexpected variations in clinical results, third-party intellectual
property, the outcome of litigation and the availability of inventory to meet
customer demand. A more gradual physician adoption rate may limit the number of
procedures in which the technology may be used and the price at which
institutions may be willing to purchase the technology. Together, these and
other factors contribute to the uncertainty surrounding the evolution of the
drug-eluting stent market and the Company's position in it.
In the second quarter of 2003, the Company submitted the fifth and final module
of its PMA for its TAXUS stent system to the FDA. The FDA has scheduled a
special panel to review the TAXUS PMA on November 20, 2003. In conjunction with
the FDA review of the PMA submission, the FDA will conduct inspections of the
TAXUS manufacturing facilities located in the U.S. and Ireland. The Company
anticipates the launch of the TAXUS stent system in the U.S. in the first
quarter of 2004 and in Japan in mid-2005, subject to regulatory approvals. FDA
approval will depend on the recommendations of the special panel, and the timing
and results of the inspections.
The manufacture of the TAXUS drug-eluting stent system involves the integration
of multiple technologies and complex manufacturing processes. The Company
continues to refine its TAXUS manufacturing and analytical processes to
establish sufficient inventory levels to meet customer demand in Europe and
Inter-Continental markets and to be poised for the U.S. launch. In preparation
for the U.S. launch, the Company intends to increase significantly its inventory
levels starting in the fourth quarter of 2003. However, expected inventory
levels may be impacted by significant changes in forecasted demand, timing of
FDA approval, and disruptions associated with the TAXUS manufacturing process.
During the second quarter of 2003, one of the Company's competitors launched a
drug-eluting stent into the U.S. market. In addition, several of the Company's
competitors launched bare metal stent products into the U.S. market during 2003.
Until the Company launches its drug-eluting stent product, it is likely that its
U.S. coronary stent business will continue to decline. Additionally, the Company
expects to increase spending in preparation for the launch of its TAXUS stent
system in the U.S. As a result of these factors, the Company's operating profit
may be adversely impacted.
In addition, there continues to be significant intellectual property litigation
in the coronary stent market. The Company is currently involved in a number of
legal proceedings with its competitors, including Johnson & Johnson, Guidant
Corporation,
28
Medtronic, Inc. and Medinol Ltd. There can be no assurance that an adverse
outcome in one or more of these proceedings would not impact the Company's
ability to meet it's objectives in the market. See Note K - Commitments and
Contingencies in the Notes to the Unaudited Condensed Consolidated Financial
Statements contained in this Quarterly Report for a description of these legal
proceedings.
As the health care environment continues to undergo rapid change, management
expects that it will continue to focus on strategic initiatives and make
additional investments in existing relationships. Since early 2001, the Company
has consummated several business acquisitions. Management believes it has
developed a sound plan to integrate these businesses. The failure to integrate
successfully these businesses could impair the Company's ability to realize the
strategic and financial objectives of these transactions. In connection with
these acquisitions, 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.
The Company has also entered a significant number of strategic alliances with
privately held and publicly traded companies. Many of these alliances involve
equity investments by the Company. The Company enters these strategic alliances
to broaden its product technology portfolio and to strengthen and expand the
Company's reach into existing and new markets. Many of these companies are in
the developmental stage and have not yet commenced their principal operations.
The Company regularly reviews its investments to determine whether these
investments are impaired. If so, the carrying value is written down to fair
value in the period identified. The Company's exposure to loss related to its
strategic alliances is generally limited to its equity investments, notes
receivable and intangible assets associated with these alliances.
Uncertainty continues to exist concerning 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. 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.
The Company's Japan business is expected to be under continued pressure,
29
particularly in coronary stents, due to competitive product offerings and the
lack of physician acceptance of the NIR(R) coronary stent platform. The Company
currently anticipates the launch of its Express2 coronary stent system in Japan
in the first quarter of 2004. Deterioration in the Japanese or emerging markets
economies may influence the Company's ability to grow its business and to
collect its accounts receivable in international markets. Further, the trend in
countries around the world, including Japan, toward more stringent regulatory
requirements for product clearance, changing reimbursement models 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $537 million and $277 million at
September 30, 2003 and December 31, 2002, respectively. The increase in cash is
primarily due to growth in cash balances of non-U.S. operations. The
repatriation of cash balances from certain of the Company's non-U.S. operations
could have adverse tax consequences; however, those balances are generally
available without legal restrictions to fund ordinary business operations.
During the third quarter of 2003, the Company determined that it is likely to
repatriate cash from certain non-U.S. operations. Cash generated by operating
activities continues to provide a major source of funds for investing in the
Company's growth and increased to $553 million for the nine months ended
September 30, 2003 from $540 million for the comparable period in 2002, which
includes cash received from litigation settlements.
The Company made capital expenditures of $117 million during the nine months
ended September 30, 2003 as compared to $87 million during the nine months ended
September 30, 2002. The increase was primarily due to capital spending to
enhance the Company's manufacturing capability in preparation for the global
launch of the TAXUS stent system. The Company expects to incur capital
expenditures of approximately $90 million during the fourth quarter of 2003,
which includes $30 million for the planned purchase of a manufacturing facility
in the U.S. that the Company is currently leasing. The Company's investing
activities during the nine months ended September 30, 2003 also included a $13
million payment to acquire Inflow; approximately $252 million of
acquisition-related payments primarily associated with IVT and EMT; and $238
million of payments for strategic alliances.
The Company's cash flows from financing activities reflect proceeds from stock
issuances related to the Company's equity incentive programs, payments for stock
repurchases and fluctuations in the Company's borrowings. During the nine months
ended September 30, 2003, the Company received proceeds of $184 million in
connection with the issuance of shares pursuant to its stock option and employee
stock purchase
30
plans compared to $43 million in the same period in the prior year. Proceeds
from the exercise of employee stock options will vary from period to period
based upon, among other factors, fluctuations in the market value of the
Company's stock relative to the exercise price of employee stock options.
The Company repurchased 22 million shares at an aggregate cost of approximately
$570 million during the nine months ended September 30, 2003. The Company is
authorized to purchase on the open market and in private transactions up to
approximately 120 million shares of the Company's common stock. Stock
repurchased is principally used to satisfy the Company's obligations pursuant to
its equity incentive plans, but may also be used for general corporate purposes,
including acquisitions. As of September 30, 2003, approximately 97 million
shares of the Company's common stock had been repurchased under its
authorization.
The Company received net proceeds of $707 million during the nine months ended
September 30, 2003 from increased borrowings. Proceeds from debt were used to
fund cash outlays associated with the Company's TAXUS program, to pay for
acquisition-related obligations and strategic alliances, and to repurchase
Company stock on the open market. The Company's net debt (borrowings less cash
and cash equivalents) was $1,103 million and $658 million at September 30, 2003
and December 31, 2002, respectively. As of September 30, 2003, net debt
represented 26 percent of capital (total stockholders' equity plus total debt),
as compared to 19 percent at December 31, 2002.
At September 30, 2003, the Company's revolving credit facilities totaled $1,200
million, consisting of a $600 million credit facility that terminates in May
2004 and a $600 million credit facility that terminates in August 2006. As of
December 31, 2002, the Company had short term borrowing capacity in excess of
its outstanding borrowings of approximately $1,400 million; therefore, during
the second quarter, the Company reduced its 364-day credit facility from $1,000
million to $600 million. The new credit facility contains substantially similar
terms to the expired credit facility; however, the new credit facility contains
an option to convert credit facility borrowings into a one-year term loan
expiring in May 2005, provided that certain conditions are satisfied.
The revolving credit facilities provide borrowing capacity and support the
Company's commercial paper. The Company had approximately $915 million and $88
million of commercial paper outstanding at September 30, 2003 and December 31,
2002, respectively, at weighted average interest rates of 1.21 percent and 1.50
percent, respectively. The Company had no outstanding revolving credit facility
borrowings at September 30, 2003 compared to $113 million at December 31, 2002,
at a weighted average interest rate of 0.58 percent.
In addition, the Company had a revolving credit and security facility, which is
secured by the Company's domestic trade receivables, that provides an additional
$200 million of borrowing capacity and terminates in August 2004. The Company
had approximately $189 million and $197 million of borrowings outstanding under
its revolving credit and security facility at September 30, 2003 and December
31, 2002, respectively. The borrowings bore interest rates of 1.42 percent and
1.89 percent at September 30, 2003 and December 31, 2002, respectively.
31
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
that a minimum of $450 million of its short-term obligations, including $261
million of commercial paper and $189 million of revolving credit and security
facility borrowings, will remain outstanding beyond the next twelve months and,
accordingly, has classified this portion as long-term borrowings at September
30, 2003, compared to $320 million of short-term bank obligations classified as
long-term at December 31, 2002.
The Company had $500 million of senior notes (the Notes) outstanding at
September 30, 2003 and December 31, 2002. The Notes mature in March 2005, bear a
semi-annual coupon of 6.625 percent, and are not redeemable prior to maturity or
subject to any sinking fund requirements. During the third quarter of 2003, the
Company entered a fixed to floating interest rate swap to hedge changes in the
fair value of the Notes. The Company recorded changes in the fair value of the
Notes since the inception of the interest rate swap. Interest payments made or
received under the interest rate swap agreement are recorded as interest
expense. As of September 30, 2003, approximately $4 million of unrealized gains
were recorded as other long-term assets to recognize the fair value of the
interest rate swap. The carrying amount of the Notes was $512 million and $511
million at September 30, 2003 and December 31, 2002, respectively.
Certain of the Company's business combinations involve contingent consideration.
These payments, when and if made, are allocated to specific intangible asset
categories, including purchased research and development, with the remainder
assigned to goodwill as if the consideration had been paid as of the date of
acquisition. Payment of the additional consideration is generally contingent
upon the acquired companies' reaching certain performance milestones, including
achieving specified revenue levels, product development targets or regulatory
approvals. At September 30, 2003, the Company had an accrual for
acquisition-related obligations of approximately $84 million. These accruals
were recorded primarily as an adjustment to goodwill and purchased research and
development. At September 30, 2003, the maximum potential amount of future
contingent consideration (undiscounted) that the Company could be required to
make associated with its business combinations is approximately $520 million,
some of which may be payable in the Company's common stock. The milestones
associated with the contingent consideration must be reached in certain future
periods ranging from 2003 through 2013. The specified cumulative revenue level
associated with the maximum future contingent payments is approximately $1,300
million.
The Company expects that its cash and cash equivalents, marketable securities,
cash flows from operating activities and borrowing capacity will be sufficient
to meet its projected operating cash needs over the next twelve months,
including anticipated capital expenditures, additional share repurchases,
acquisition-related payments and other strategic initiatives.
32
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 some cases, the claimants seek damages, as well as other relief,
which, if granted, could require significant expenditures. The Company accrues
costs of settlement, damages, and, under certain conditions, costs of defense
when such costs are probable and estimable. Otherwise, such costs are expensed
as incurred. As of September 30, 2003, the range for litigation-related costs
that can be estimated is $18 million to $21 million, which includes an $8
million reserve for product liability settlements. If the estimate of a probable
loss is a range, and no amount within the range is a better estimate, the
minimum amount of the range is accrued. The Company's total accrual for
litigation-related costs as of September 30, 2003 and December 31, 2002 was
approximately $18 million and $4 million, respectively.
In management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in this Quarterly Report,
the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003 and
June 30, 2003 and the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, 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; legal costs
associated with non-patent litigation and compliance activities continue to be
substantial. Depending on the prevalence, significance, and complexity of these
matters, the Company's legal provision could be adversely affected in the
future.
The Company is substantially self-insured with respect to general and product
liability claims. Losses for claims in excess of the limits of purchased
insurance would be reflected in the Statement of Operations 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. Product liability claims against the Company may be asserted in the
future related to events not known to management at the present time. However,
unanticipated catastrophic losses could have a material adverse impact on the
Company's financial position, results of operations and liquidity.
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
33
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:
- - volatility in the coronary stent market, competitive offerings and the
timing of receipt of regulatory approvals to market TAXUS drug-eluting
stents and other coronary and peripheral stent platforms;
- - the Company's ability to launch the Express2 coronary stent in the Japanese
market in the first quarter of 2004 and the TAXUS drug-eluting stent in the
U.S. in the first quarter of 2004 and in Japan in mid-2005;
- - the recommendations of the special panel, and the timing and results of the
FDA inspections with respect to approval of the Company's TAXUS stent
system in the U.S.;
- - the Company's ability to refine its TAXUS manufacturing and analytical
processes to establish inventory levels sufficient to meet customer demand
in Europe and Inter-Continental markets and for the product launch in the
U.S.;
- - Declining bare metal stent sales as the market for drug-eluting stents
continues to expand and competitive products enter the market;
- - the impact of the introduction of drug-eluting stents on the size and
distribution of share within the coronary stent market in the U.S. and
around the world;
- - the Company's ability to capitalize on the opportunity in the drug-eluting
stent market for significant growth in revenue and earnings;
- - the Company's ability to position itself as one of two early entrants in
the U.S. drug-eluting stent market and to take advantage of opportunities
that exist in the markets it serves;
- - the continued decline in NIR(R) coronary stent sales in Japan and changes
in the mix of the Company's coronary stent platforms;
- - the Company's ability to manage research and development expenses and
increasing royalty obligations;
- - the ability of the Company to manage accounts receivable and gross margins
and to react effectively to the changing managed care environment,
reimbursement models and worldwide economic and political conditions;
- - the Company's ability to integrate the acquisitions and other strategic
alliances consummated since early 2001; - the Company's ability to
successfully complete planned clinical trials and to develop and launch
products on a timely basis within cost estimates, including products
resulting from purchased research and development;
- - the timing, size and nature of strategic initiatives, market opportunities
and research and development platforms available to the Company and the
ultimate success of these initiatives;
- - the Company's ability to maintain a 25 percent effective tax rate,
excluding net special charges, during the fourth quarter of 2003 and to
substantially recover its net deferred tax assets;
- - the ability of the Company to meet its projected cash needs over the next
twelve months, to maintain borrowing flexibility and to refinance its
borrowings beyond the next twelve months;
- - risks associated with international operations;
34
- - the potential effect of foreign currency fluctuations on revenues, expenses
and resulting margins;
- - the effect of litigation, risk management practices and compliance
activities on the Company's loss contingency, legal provision and cash
flow; and
- - the impact of stockholder, patent, product liability, Medinol Ltd. and
other litigation, as well as the ultimate 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.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had currency derivative instruments outstanding in notional amounts
of $1,236 million and $1,318 million as of September 30, 2003 and December 31,
2002, respectively. The Company recorded $9 million of assets and $58 million of
liabilities to recognize the fair value of these instruments at September 30,
2003, compared to $15 million of assets and $27 million of liabilities at
December 31, 2002. A 10 percent appreciation in the U.S. dollar's value relative
to the hedged foreign currencies would increase the fair value of the derivative
instruments by approximately $72 million as of September 30, 2003. A 10 percent
depreciation in the U.S. dollar's value relative to the hedged foreign
currencies would decrease the fair value of the derivative instruments by
approximately $88 million as of September 30, 2003. 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 asset, liability, net investment in
certain subsidiaries, or cash flow.
The Company had interest rate derivative instruments outstanding in notional
amounts of $500 million and $63 million at September 30, 2003 and December 31,
2002, respectively. The Company recorded $4 million of assets to recognize the
fair value of these instruments at September 30, 2003, compared to an immaterial
amount at December 31, 2002. At September 30, 2003, a 100 basis point increase
in interest rates would decrease the derivative instruments' fair value by $7
million, whereas a 100 basis point decrease in interest rates would increase the
derivative instruments' fair value by $7 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 liability.
36
ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's President and
Chief Executive Officer and Senior Vice President - Finance & Administration and
Chief Financial Officer, evaluated the design and operation of the Company's
disclosure controls and procedures as of September 30, 2003. Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that as of September 30, 2003, the Company's disclosure controls and
procedures are effective in ensuring that material information relating to the
Company required to be included in the Company's periodic SEC filings was made
known to them on a timely basis. It should be noted that any system of controls
is designed to provide reasonable, but not absolute, assurances that the system
will achieve its stated goals under all potential circumstances.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no significant changes in the Company's internal controls over
financial reporting, or to the Company's knowledge, in other factors that could
significantly affect the Company's internal controls over financial reporting
subsequent to September 30, 2003.
37
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Note K - Commitments and Contingencies to the Company's unaudited condensed
consolidated financial statements contained elsewhere in this Quarterly Report
is incorporated herein by reference.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Amendment to Credit and Security Agreement dated
August 15, 2003
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Office pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, President and Chief Executive
Officer
32.2 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, Senior Vice President and
Chief Financial Officer
(b) Reports on Form 8-K
On July 3, 2003, the Company furnished a current report on Form
8-K to the Securities and Exchange Commission with respect to
the Company's preliminary, unaudited financial results for the
second quarter, as well as estimates for net sales and earnings
per share for the third quarter, the fourth quarter and the
year.
On July 22, 2003, the Company furnished a current report on
Form 8-K to the Securities and Exchange Commission with respect
to the Company's earnings release dated July 22, 2003.
On September 16, 2003, the Company filed a current report on
Form 8-K with the Securities and Exchange Commission with
respect to an event dated September 15, 2003.
38
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 13, 2003.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer
and Senior Vice President -
Finance and Administration
39
EXHIBIT INDEX
-------------
10.1 Form of Amendment to Credit and Security Agreement dated August
15, 2003
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Office pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, President and Chief Executive Officer
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, Senior Vice President and Chief Financial Officer
40