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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the quarterly period ended: March 31, 2004
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 March 31, 2004
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Common Stock, $.01 Par Value 835,084,057
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Page 1 of 33
Exhibit Index on Page 33
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
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ITEM 1. Financial Statements
Condensed Consolidated Financial Statements ............. 3
Condensed Consolidated Balance Sheets ................... 3
Condensed Consolidated Statements of Operations ......... 5
Condensed Consolidated Statements of Cash Flows ......... 6
Notes to Condensed Consolidated Financial Statements .... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 17
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk ............................................. 29
ITEM 4. Controls and Procedures ................................. 30
PART II OTHER INFORMATION .......................................... 31
ITEM 1. Legal Proceedings ....................................... 31
ITEM 6. Exhibits and Reports on Form 8-K ........................ 31
SIGNATURES ............................................................... 32
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PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
MARCH 31, DECEMBER 31,
in millions, except share data 2004 2003
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ASSETS
Current assets:
Cash and cash equivalents $ 615 $ 671
Trade accounts receivable, net 675 542
Inventories 302 281
Other current assets 397 386
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Total current assets 1,989 1,880
Property, plant and equipment 1,403 1,337
Less: accumulated depreciation 616 593
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787 744
Goodwill 1,278 1,275
Technology - core, net 554 556
Technology - developed, net 178 188
Patents, net 330 333
Other intangible assets, net 125 109
Investments 527 558
Other assets 76 56
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$ 5,844 $ 5,699
=========================
See notes to the unaudited condensed consolidated financial statements.
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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
MARCH 31, DECEMBER 31,
in millions, except share data 2004 2003
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ 546 $ 547
Notes payable and current maturities of
long-term debt 518 6
Accounts payable and accrued expenses 570 675
Income taxes payable 20 85
Other current liabilities 89 80
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Total current liabilities 1,743 1,393
Long-term debt 611 1,172
Other long-term liabilities 271 272
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, 835,084,057 shares issued
at March 31, 2004; 829,764,826 shares issued at
December 31, 2003 8 8
Additional paid-in capital 1,355 1,225
Treasury stock, at cost - 3,502,850 shares at
December 31, 2003 (111)
Retained earnings 1,928 1,789
Accumulated other comprehensive loss (72) (49)
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Total stockholders' equity 3,219 2,862
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$ 5,844 $ 5,699
=========================
See notes to the unaudited condensed consolidated financial statements.
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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
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in millions, except per share data 2004 2003
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Net sales $ 1,082 $ 807
Cost of products sold 292 226
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Gross profit 790 581
Selling, general and administrative expenses 348 271
Amortization expense 22 20
Royalties 22 12
Research and development expenses 134 103
Purchased research and development 13
Litigation-related charges 7
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526 426
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Operating income 264 155
Other income (expense):
Interest expense (11) (11)
Other, net 2 (4)
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Income before income taxes 255 140
Income taxes 61 43
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Net income $ 194 $ 97
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Net income per common share - basic $ 0.23 $ 0.12
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Net income per common share - assuming dilution $ 0.23 $ 0.11
=========================
See notes to the unaudited condensed consolidated financial statements.
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BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
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in millions 2004 2003
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Cash provided by operating activities $ 42 $ 109
Investing activities:
Purchases of property, plant and equipment, net (82) (35)
Purchases of held-to-maturity short-term investments (44) (8)
Maturities of held-to-maturity short-term investments 48 8
Purchases of available-for-sale securities (4) (5)
Sales of available-for-sale securities 20
Sales of privately held equity securities 14
Acquisitions of businesses, net of cash acquired (13)
Payments related to prior year acquisitions (68) (196)
Payments for acquisitions of and/or investments in
certain technologies, net (31) (40)
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Cash used for investing activities (147) (289)
Financing activities:
Net (decrease) increase in commercial paper (57) 333
Net proceeds from (payments on) revolving
borrowings, notes payable, capital leases and
long-term borrowings 8 (17)
Purchases of common stock for treasury (189)
Proceeds from issuances of shares of common stock 98 68
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Cash provided by financing activities 49 195
Effect of foreign exchange rates on cash 2
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Net (decrease) increase in cash and cash equivalents (56) 17
Cash and cash equivalents at beginning of period 671 260
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Cash and cash equivalents at end of period $ 615 $ 277
=========================
See notes to the unaudited condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
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 months ended March 31, 2004 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2004. For
further information, refer to the consolidated financial statements and
footnotes thereto incorporated by reference in Boston Scientific's Annual Report
on Form 10-K for the year ended December 31, 2003.
Certain prior year's amounts have been reclassified to conform to the current
year presentation.
NOTE B - 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
MARCH 31,
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(in millions, except per share data) 2004 2003
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Net income, as reported $ 194 $ 97
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (15) (14)
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Pro forma net income $ 179 $ 83
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Net income per common share -
Basic:
Reported $ 0.23 $ 0.12
Pro forma $ 0.22 $ 0.10
Assuming dilution:
Reported $ 0.23 $ 0.11
Pro forma $ 0.21 $ 0.10
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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 option pricing model.
NOTE C - COMPREHENSIVE INCOME
For the three months ended March 31, 2004 and 2003, the Company reported
comprehensive income of $171 million and $106 million, respectively.
Comprehensive income was less than reported net income for the three months
ended March 31, 2004 due primarily to unfavorable foreign currency fluctuations
of $19 million.
NOTE D - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
THREE MONTHS ENDED
MARCH 31,
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(in millions, except per share data) 2004 2003
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Basic:
Net income $ 194 $ 97
Weighted average shares outstanding 831.2 822.0
Net income per common share $ 0.23 $ 0.12
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Assuming dilution:
Net income $ 194 $ 97
Weighted average shares outstanding 831.2 822.0
Net effect of dilutive stock-based compensation 24.0 22.0
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Total 855.2 844.0
Net income per common share $ 0.23 $ 0.11
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NOTE E - BORROWINGS AND CREDIT ARRANGEMENTS
At March 31, 2004, the Company's revolving credit facilities totaled $1,265
million, consisting of a $645 million 364-day credit facility that terminates in
May 2004 and contains an option to convert into a one-year term loan expiring in
May 2005, a $600 million credit facility that terminates in August 2006, and a
$20 million uncommitted credit facility. In January 2004, the Company increased
its 364-day credit facility from $600 million to $645 million. Use of the
borrowings is unrestricted and the borrowings are unsecured.
The revolving credit facilities provide borrowing capacity and support the
Company's commercial paper. The Company had approximately $946 million and
$1,003 million of
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commercial paper outstanding at March 31, 2004 and December 31, 2003,
respectively, at weighted average interest rates of 1.13 percent and 1.20
percent, respectively.
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 $199 million and $194 million of borrowings outstanding under
its revolving credit and security facility at March 31, 2004 and December 31,
2003, respectively, at interest rates of 1.39 percent and 1.44 percent,
respectively.
The Company has the ability and intent to refinance a portion of its short-term
debt on a long-term basis through its revolving credit facilities. At March 31,
2004, the Company expects that a minimum of $600 million of its short-term
obligations will remain outstanding beyond the next twelve months and,
accordingly, has classified this portion as long-term borrowings, as compared to
$650 million of short-term bank obligations classified as long-term at December
31, 2003.
The Company had $500 million of senior notes (the Notes) outstanding at March
31, 2004 and December 31, 2003, which are registered securities. 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. The
Company classified the Notes as a current liability at March 31, 2004.
NOTE F - INVENTORIES
The components of inventory consist of the following:
MARCH 31, DECEMBER 31,
(in millions) 2004 2003
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Finished goods $ 207 $ 175
Work-in-process 52 63
Raw materials 43 43
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$ 302 $ 281
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NOTE G - NEW ACCOUNTING STANDARD
During the first quarter of 2004, the Company adopted FASB Interpretation No.
46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES. Interpretation No. 46 clarifies
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
by a company that bears the majority of the risk of loss from the variable
interest entity's activities or is entitled to receive the majority of the
variable interest entity's residual returns. The Company's adoption of
Interpretation No. 46 had no material impact on the Company's consolidated
financial statements.
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NOTE H - COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings, including patent
infringement and product liability suits, from time to time in the normal course
of business. In management's opinion, the Company is not currently involved in
any legal proceeding other than those specifically identified in this Quarterly
Report and the Company's Annual Report on Form 10-K for the year ended December
31, 2003, which, individually or in the aggregate, could have a material effect
on the financial condition, operations and/or cash flows of the Company.
LITIGATION WITH JOHNSON & JOHNSON
On March 13, 1997, the Company (through its subsidiaries) filed suits against
Johnson & Johnson (through its subsidiaries) in The Netherlands and Belgium, and
on March 17, 1997, filed suit in France, seeking a declaration of
noninfringement for the NIR(R) stent relative to two European patents licensed
to Ethicon, Inc. (Ethicon), a Johnson & Johnson subsidiary, as well as a
declaration of invalidity with respect to those patents. On October 28, 1998,
the Company's motion for a declaration of noninfringement in France was
dismissed for failure to satisfy statutory requirements; the French invalidity
suits were not affected. On January 16, 2002, the French Court found one of the
patents to be valid and the other to be invalid and the parties appealed the
Court's decision. An appeal hearing was held on April 26, 2004, and a decision
is expected on June 9, 2004. On March 21, 1997, the Company (through its
subsidiaries) filed a suit against Johnson & Johnson (through its subsidiaries)
in Italy seeking a declaration of noninfringement for the NIR(R) stent relative
to one of the European patents licensed to Ethicon and a declaration of
invalidity. A technical expert was appointed by the Court and a hearing was held
on January 30, 2002. Both parties have had an opportunity to comment on the
expert report. On May 8, 2002, the Court closed the evidentiary phase of the
case and a hearing was held on April 29, 2004.
On February 14, 2002, the Company and certain of its subsidiaries filed suit for
patent infringement against Johnson & Johnson and Cordis Corporation (Cordis), a
subsidiary of Johnson & Johnson, alleging certain balloon catheters, stent
delivery systems, and guide catheters sold by Johnson & Johnson and Cordis
infringe five U.S. patents owned by the Company. The complaint was filed in the
U.S. District Court for the Northern District of California seeking monetary and
injunctive relief. On October 15, 2002, Cordis filed a counterclaim alleging
certain balloon catheters and stent delivery systems sold by the Company
infringe three U.S. patents owned by Cordis and seeking monetary and injunctive
relief. On December 6, 2002, the Company filed an amended complaint alleging two
additional patents owned by the Company are infringed by the Cordis products. A
summary judgment hearing was held on April 9, 2004, and Cordis' motions for
summary judgment were denied. A Markman hearing was held on April 27, 2004, and
a trial is expected to begin in January 2005.
On January 13, 2003, Cordis filed suit for patent infringement against the
Company and SCIMED Life Systems, Inc. (SCIMED), a subsidiary of the Company,
alleging the Company's Express(2)(TM) coronary stent infringes a U.S. patent
owned by Cordis. The
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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. 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 and on November 21, 2003, the Court
denied the motion for a preliminary injunction. Cordis appealed the denial of
its motion and an appeal hearing was held in April 2004. The trial is scheduled
to begin June 13, 2005.
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 drug-eluting stent in the
United States. Cordis answered the complaint, denying the allegations, and filed
a counterclaim against the Company alleging that the patent is not valid and is
unenforceable. 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 and, on November 21, 2003,
the Court denied the motion for a preliminary injunction. Following the
announcement on February 23, 2004 by Guidant Corporation (Guidant) of an
agreement with Johnson & Johnson and Cordis to sell the Cypher drug-eluting
stent, the Company moved to amend its complaint on February 25, 2004 to include
Guidant and certain of its subsidiaries as co-defendants. The trial on the first
patent is scheduled to begin on June 13, 2005. The trial on the remaining two
patents is scheduled for October 2005.
On December 15, 2003, the Company and SCIMED filed suit for patent infringement
against Cordis and Johnson & Johnson alleging Cordis' Cypher drug-eluting stent
coating infringes two U.S. patents owned by the Company. The suit was filed in
the District Court of Delaware seeking monetary and injunctive relief. Following
the announcement on February 23, 2004 by Guidant of an agreement with Johnson &
Johnson and Cordis to sell the Cypher drug-eluting stent, the Company moved to
amend its complaint on February 25, 2004 to include Guidant and certain of its
subsidiaries as co-defendants. A trial is scheduled to begin in October 2005.
On December 24, 2003, the Company (through its subsidiary Schneider Europe GmbH)
filed suit against the Belgian subsidiaries of Johnson & Johnson, Cordis and
Janssen Pharmaceutica alleging that Cordis' Bx Velocity(R) stent, Bx Sonic(R)
stent, Cypher stent, Cypher Select stent, Aqua T3(TM) balloon and U-Pass balloon
infringe one of the Company's European patents. The suit was filed in the
District Court of Brussels, Belgium seeking cross-border, injunctive and
monetary relief. A separate suit was filed in the District Court of Brussels,
Belgium against nine additional Johnson & Johnson subsidiaries. On February 9,
2004, the Belgium Court linked all Johnson & Johnson entities into a single
action. A hearing is scheduled for June 7, 2004.
LITIGATION WITH MEDTRONIC, INC.
On March 10, 1999, the Company (through its subsidiary Schneider (Europe) AG)
filed suit against Medtronic AVE, Inc. (Medtronic AVE), a subsidiary of
Medtronic, Inc.
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(Medtronic), alleging that Medtronic AVE's AVE GFX, AVE GFX2, AVE LTX, CALYPSO
RELY(TM), PRONTO SAMBA(TM) and SAMBA RELY(TM) rapid exchange catheters and stent
delivery systems infringe one of the Company's German patents. The suit was
filed in the District Court of Dusseldorf, Germany seeking injunctive and
monetary relief. An expert's report was submitted to the Court on November 6,
2001 and a hearing was held on May 2, 2002. On June 11, 2002, the Court ruled
that the Medtronic AVE products infringed the Company's patents. Medtronic AVE
filed an appeal. Medtronic AVE is obligated to dismiss its appeal pursuant to a
Settlement Agreement between the parties dated September 18, 2002. A hearing was
held on January 8, 2004, and the appeal was dismissed.
On April 6, 1999, Medtronic AVE filed suit against SCIMED and another subsidiary
of the Company alleging that the Company's NIR(R) stent infringes one of
Medtronic AVE's European patents. The suit was filed in the District Court of
Dusseldorf, Germany seeking injunctive and monetary relief. A hearing was held
in Germany on September 23, 1999, and on November 4, 1999, the Court dismissed
the complaint. On December 21, 1999, Medtronic AVE appealed the dismissal. The
appeal has been stayed pending the outcome of a related nullity action. On March
31, 2004, the Court found the patent to be invalid and the suit will be
dismissed.
On August 13, 1998, Medtronic AVE filed a suit for patent infringement against
the Company and SCIMED alleging that the Company's NIR(R) stent infringes two
patents owned by 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. A hearing
on the Company's motion for summary judgment of non-infringement was held August
11, 2003. Trial is expected to begin during the first quarter of 2005.
On January 15, 2004, Medtronic Vascular, Inc. (Medtronic Vascular), a subsidiary
of Medtronic, filed suit against the Company and SCIMED alleging the Company's
Express(R) coronary stent and Express (2)(TM) coronary stents infringe four U.S.
patents owned by Medtronic Vascular. The suit was filed in the District Court of
Delaware seeking monetary and injunctive relief. The Company has answered,
denying the allegations of the complaint. Trial is expected to begin during the
first quarter of 2005.
LITIGATION WITH GUIDANT CORPORATION
On February 20, 2004, the Company and Guidant entered into an agreement to
settle all of the outstanding then-pending litigation between the two companies.
In addition, the parties agreed to a cross-license of patents in certain
specified technology areas. All then-pending disputes have been dismissed with
prejudice.
On October 15, 2002, Advanced Cardiovascular Systems, Inc. (ACS), a subsidiary
of Guidant, 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
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declaration of invalidity, noninfringement and enforceability. Pursuant to the
settlement agreement, the case was dismissed with prejudice.
On December 3, 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 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. Pursuant to the settlement agreement, the
case was dismissed with prejudice.
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. Pursuant to the settlement agreement, the case was
dismissed with prejudice.
On December 30, 2002, the Company and certain of its subsidiaries filed suit for
patent infringement against Guidant, Guidant Sales Corporation and ACS alleging
that certain stent delivery systems (Multi-Link Zeta(R) Stent and Multi-Link
Penta(R) Stent) and balloon catheter products (AGILTRAC(TM) catheter) sold by
Guidant and ACS infringe nine U.S. patents owned by the Company. The complaint
was filed in the U.S. District Court for the Northern District of California
seeking monetary and injunctive relief. On February 21, 2003, Guidant filed an
answer denying the allegations of the complaint and filed a counterclaim seeking
declaratory judgment of patent invalidity and noninfringement and alleging that
certain Company products infringe patents owned by ACS. Pursuant to the
settlement agreement, the case was dismissed with prejudice.
LITIGATION RELATING TO COOK, INC.
On September 10, 2001, the Company delivered a Notice of Dispute to Cook, Inc.
(Cook) asserting that Cook breached the terms of a certain License Agreement
among Angiotech Pharmaceuticals, Inc. (Angiotech), Cook and the Company (the
Agreement) relating to an improper arrangement between Cook and Guidant. On
December 13, 2001, Cook filed suit in the U.S. District Court for the Northern
District of Illinois seeking declaratory and injunctive relief. The Company
answered the complaint on December 26, 2001, denying the allegations and filed
counterclaims seeking declaratory and injunctive relief. On June 27, 2002, the
Court found in favor of the Company, ruling that Cook breached the Agreement. On
October 1, 2002, the Court granted the Company's request for a permanent
injunction prohibiting certain activities under the Agreement and enjoining the
use of the clinical data and technologies developed by Cook or Guidant in
violation of the Agreement. Cook appealed the decision to the U.S. Court of
Appeals for the Seventh Circuit. On June 19, 2003, the Court of Appeals affirmed
the District Court's decision. The Court of Appeals modified the District
Court's injunction by deleting language that would have prohibited the use of
clinical
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data to obtain regulatory approval, but continued to enjoin the sale of
products. On February 19, 2004, Cook filed a motion to dissolve the Court's
injunction, or in the alternative to modify the injunction to permit Cook to use
clinical data previously obtained to pursue regulatory approval to market a
paclitaxel-eluting stent. A hearing was held on March 1, 2004, followed by the
Court's request that both parties brief the issue. On April 15, 2004, the Court
denied Cook's motion to dissolve the injunction.
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. On March 26, 2004, Dr.
Bonzel filed a similar complaint against the Company, certain of its
subsidiaries and Pfizer in the Federal District Court for the District of
Minnesota. The Company and its subsidiaries have not yet answered, but intend to
vigorously deny the allegations of the complaint.
On January 21, 2003, Dendron GmbH, EV3 Ltd., EV3 International, Inc., Microvena
Corporation and Micro Therapeutics, Inc. (the EV3 Parties) filed suit against
The Regents of the University of California in the United Kingdom seeking a
declaration that certain of the EV3 Parties' detachable coil and microcatheter
products do not infringe a patent licensed by the Company from The Regents of
the University of California and revocation of the patent. The Company has
answered, denying the allegations of the complaint and filed a counterclaim
against the EV3 Parties alleging that the products infringe a patent licensed to
the Company and owned by the University. Trial is expected to begin in February
2005.
On December 16, 2003, The Regents of the University of California (The Regents)
filed suit against Micro Therapeutics, Inc. (Micro Therapeutics) and Dendron
GmbH (Dendron) alleging Micro Therapeutics' Sapphire (TM) detachable coil
delivery systems infringe twelve patents licensed by the Company and owned by
The Regents. The complaint was filed in the U.S. District Court for the Northern
District of California seeking monetary and injunctive relief. On January 8,
2004, Micro Therapeutics and Dendron filed a third party complaint to include
the Company and Target Therapeutics, Inc., a subsidiary of the Company, as third
party defendants. On February 17, 2004, the Company, as a third party defendant,
filed a motion to dismiss the Company from the case.
LITIGATION WITH MEDINOL LTD.
On April 22, 2002, 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
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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 to begin in
January 2005. On March 31, 2004, the European Patent Office declared the patent
invalid.
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. The
Company appealed the German Court's decision. On March 31, 2004, the European
Patent Office declared the patent invalid. The decision is final and not
appealable. Medinol has withdrawn its motion seeking a preliminary injunction.
On January 21, 2004, 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(R) stent infringes four
European patents owned by Medinol. A hearing was held on October 10, 2003, and a
decision was rendered on December 17, 2003 finding the Company infringes one
patent. The Court, however, granted no cross-border relief. The Company has
appealed the finding. The Company has filed nullity actions against one of the
patents in Ireland, France, Italy, Spain, Sweden, Portugal, and Switzerland. On
March 31, 2004, the European Patent Office declared this patent invalid. The
Court's injunction and damages order have been dismissed.
NOTE I - SEGMENT REPORTING
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 2003
has been restated based on the Company's standard foreign exchange rates used
for 2004. 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 March 31, 2004
Net sales $ 576 $ 212 $ 151 $ 111 $1,050
Operating income allocated to
reportable segments 211 106 91 51 459
Three months ended March 31, 2003
Net sales $ 479 $ 150 $ 136 $ 62 $ 827
Operating income allocated to
reportable segments 187 66 78 21 352
-15-
A reconciliation of the totals reported for the reportable segments to the
applicable line items in the condensed consolidated financial statements is as
follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
(in millions) 2004 2003
- -------------------------------------------------------------------------------
Net sales:
Total net sales allocated to reportable
segments $ 1,050 $ 827
Foreign exchange 32 (20)
---------- ----------
$ 1,082 $ 807
========== ==========
Income before income taxes:
Total operating income allocated to
reportable segments $ 459 $ 352
Manufacturing operations (82) (71)
Corporate expenses and foreign exchange (113) (106)
Purchased research and development (13)
Litigation-related charges (7)
---------- ----------
264 155
Other expense, net (9) (15)
---------- ----------
$ 255 $ 140
========== ==========
-16-
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
FINANCIAL SUMMARY
Net sales for the first quarter of 2004 were $1,082 million as compared to $807
million in the first quarter of 2003, an increase of 34 percent. Excluding the
favorable impact of $58 million of foreign currency fluctuations, net sales
increased 27 percent. The reported net income for the first quarter of 2004 was
$194 million, or $0.23 per diluted share, as compared to $97 million, or $0.11
per diluted share, in the first quarter of 2003. The reported results for the
first quarter of 2003 included after-tax charges of $20 million consisting of
$13 million of purchased research and development costs primarily attributable
to an acquisition and a $7 million charge related to litigation.
NET SALES
During the first quarter of 2004, United States (U.S.) revenues increased
approximately 20 percent to $576 million as compared to the first quarter of
2003. U.S. revenues increased primarily due to $98 million in sales of the TAXUS
(TM) Express2 paclitaxel-eluting coronary stent system. The Company commenced
its tiered U.S. launch of the TAXUS stent system late in the first quarter of
2004. At March 31, 2004, the Company was shipping the TAXUS stent system to
approximately 850 customer accounts out of an estimated 1,200 to 1,300 total
accounts. The increase was offset by a decline in bare metal stent revenue of
approximately $47 million, as physicians continued to convert interventional
procedures to drug-eluting stent technology, including the TAXUS stent system.
Sales from other Cardiology products, including the FilterWire EX(TM) embolic
protection device that was launched in June of 2003, also increased by
approximately $20 million during the first quarter of 2004. The remainder of the
increase in U.S. revenues was related to sales growth in each of the other five
U.S. divisions.
-17-
International revenues increased approximately 54 percent to $506 million as
compared to the first quarter of 2003, or approximately 37 percent on a constant
currency basis. The increase was primarily due to $118 million in sales of the
TAXUS stent system in the Company's Europe and Inter-Continental markets for the
first quarter of 2004 as compared to $7 million for the first quarter of 2003.
The TAXUS stent system was launched in these markets late in the first quarter
of 2003. The increase in international revenues was also attributable to revenue
growth of approximately $29 million, or 23 percent, in Japan following the
launch of the Express2 coronary stent system in the first quarter of 2004.
Worldwide coronary stent sales increased by approximately $169 million, or 147
percent, to $284 million as compared to the first quarter of 2003. The increase
was primarily due to growth of $209 million in sales of the TAXUS stent system,
offset by declines in bare metal stent revenue of approximately $40 million to
approximately $68 million for the first quarter of 2004 as physicians converted
interventional procedures to drug-eluting stent technology, including the TAXUS
stent system. The Company estimates that, as of March 31, 2004, physicians have
converted approximately 70 percent of the stents used in interventional
procedures in the U.S. from bare metal stent systems to drug-eluting stent
systems, as compared to 50 percent at December 31, 2003.
The following table provides worldwide sales by region and relative change on an
as reported and constant currency basis for the three months ended March 31,
2004 and 2003, respectively.
Three Months Ended Change
March 31, As Reported At Constant
(in millions) 2004 2003 Currency Basis Currency Basis
------ ------ -------------- --------------
United States $ 576 $ 479 20% 20%
Europe 235 145 62% 41%
Japan 155 126 23% 12%
Inter-Continental 116 57 104% 79%
------ ------ ----- -----
International $ 506 $ 328 54% 37%
Worldwide $1,082 $ 807 34% 27%
====== ====== ===== =====
-18-
The following table provides worldwide sales by division and relative change on
an as reported and constant currency basis for the three months ended March 31,
2004 and 2003, respectively.
Three Months Ended Change
March 31, As Reported At Constant
(in millions) 2004 2003 Currency Basis Currency Basis
------ ------ -------------- --------------
Cardiovascular $ 723 $ 502 44% 36%
Electrophysiology 32 27 19% 11%
Neurovascular 64 51 25% 18%
------ ------ ----- -----
Cardiovascular Group $ 819 $ 580 41% 33%
Oncology $ 46 $ 38 21% 14%
Endoscopy 158 138 14% 10%
Urology 59 51 16% 12%
------ ------ ----- -----
Endosurgery Group $ 263 $ 227 16% 11%
------ ------ ----- -----
Worldwide $1,082 $ 807 34% 27%
====== ====== ===== =====
The Company's international operating regions and divisions are managed on a
constant currency basis, while market risk from changes in currency exchange
rates is managed at the corporate level.
GROSS PROFIT
Gross profit increased to $790 million in the first quarter of 2004 from $581
million in the first quarter of 2003. As a percentage of net sales, gross profit
increased by 100 basis points to 73.0 percent in the first quarter of 2004 from
72.0 percent in the first quarter of 2003. Gross profit increased by
approximately 310 basis points as a result of shifts in the Company's product
sales mix toward higher margin products, primarily coronary stents. This
increase was offset by approximately 130 basis points related to an inventory
charge of $14 million to write-down TAXUS inventory primarily as a result of
current shelf-life dating. In addition, gross profit as a percentage of net
sales was reduced by approximately 60 basis points due to certain of the
Company's hedging activity, offset by foreign currency fluctuations.
-19-
OPERATING EXPENSES
The following is a summary of certain operating expenses for the three months
ended March 31, 2004 and 2003:
Three Months Ended
March 31,
-------------------------------
2004 2003
--------------- ---------------
% of % of
(in millions) $ Net Sales $ Net Sales
------------------------------------------- ----- --------- ----- ---------
Selling, general and administrative
expenses 348 32.2 271 33.6
------------------------------------------- ----- --------- ----- ---------
Amortization expense 22 2.0 20 2.5
------------------------------------------- ----- --------- ----- ---------
Royalties 22 2.0 12 1.5
------------------------------------------- ----- --------- ----- ---------
Research and development expenses 134 12.4 103 12.8
---------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
The increase in SG&A expenses in the first quarter of 2004 as compared to the
first quarter of 2003 primarily related to approximately $30 million in
additional marketing programs, increased headcount and higher employee
compensation, primarily attributable to the TAXUS stent program, and, to a
lesser degree, to support the Company's other product franchises; and
approximately $15 million in increased expense due to foreign currency
fluctuations. The Company also experienced increases in general and
administrative expenses of approximately $20 million in the first quarter of
2004 as compared to the first quarter of 2003 that were individually
insignificant. The decrease in SG&A expenses as a percentage of net sales was
primarily attributable to the Company's efforts to grow SG&A spending at a
slower rate than revenue.
AMORTIZATION EXPENSE
There were no material changes to amortization expense in the first quarter of
2004 as compared to the first quarter of 2003.
ROYALTIES
The increase in royalties was due to increased sales of royalty-bearing
products, primarily the Company's TAXUS stent system. The Company expects that
its royalties will continue to increase as sales of its TAXUS stent system
increase.
RESEARCH AND DEVELOPMENT EXPENSES
The investment in research and development dollars reflects spending on new
product development programs as well as regulatory compliance and clinical
research. During the first quarter of 2004, the Company continued to invest
heavily in its research and development efforts. The growth in dollar spending
reflects investment across multiple programs and divisions.
-20-
INTEREST EXPENSE AND OTHER, NET
Interest expense was $11 million for the first quarter of 2004 and 2003.
Interest expense remained consistent primarily due to the increase in average
debt levels during the first quarter of 2004 being offset by a decrease in
average interest rates. Other, net was income of $2 million and expense of $4
million for the first quarter of 2004 and 2003, respectively. Included in other,
net were realized gains of $15 million related to sales of investments and
write-downs of $15 million related to a reduction in book value of certain
investments in privately held entities. The Company does not believe that the
write-down of these assets will have a material impact on future operations.
TAX RATE
The Company's reported tax rate was 24 percent and 31 percent for the first
quarter of 2004 and 2003, respectively. The decrease in the Company's reported
tax rate was due primarily to more revenue being generated from products
manufactured in lower tax jurisdictions during the first quarter of 2004 as
compared to the first quarter of 2003. The decrease was also due in part to
there being no purchased research and development charges, which are not
deductible for tax purposes, in the first quarter of 2004 as compared to $13
million in purchased research and development charges in the first quarter of
2003. Management currently estimates that the 2004 effective tax rate will
remain at approximately 24 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.
PURCHASED RESEARCH AND DEVELOPMENT
The Company's research and development projects acquired in connection with its
prior year business combinations are generally progressing in line with the
estimates set forth in the Company's 2003 Annual Report on Form 10-K. The
Company expects to continue to pursue these research and development efforts and
believes it has a reasonable chance of completing the projects.
OUTLOOK
The Company expects to significantly increase revenue, earnings and cash flow
throughout 2004, primarily driven by its TAXUS stent system that was approved
for sale in the U.S. on March 4, 2004. 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 more than $5
billion in 2005. The Company believes it will continue 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 results of
its TAXUS clinical program, the sustained success of the TAXUS stent system in
the Company's Europe and Inter-Continental markets where the product was
launched during 2003 and the initial success of the product in the U.S. market,
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 has made significant
investments in its sales, clinical, marketing and manufacturing capabilities.
-21-
Although the Company's drug-eluting stent system is currently one of only two
products in the U.S. market, uncertainties exist about the rate of development
and potential size of the drug-eluting stent market, and the Company's share of
the market. The most significant variables that contribute to this uncertainty
include the adoption rate of drug-eluting stent technology, the average number
of stents used per procedure, the average selling prices of drug-eluting stent
systems and the timing of new competitive launches.
Recognizing the promise of drug-eluting stents and the benefits of the TAXUS
stent system, physicians are expected to continue to adopt rapidly this new
technology in the U.S. The Company believes that the more gradual adoption rates
in Europe as compared to the U.S. are primarily due to the timing of local
reimbursement and funding levels. However, adoption rates in these markets are
slowly but steadily increasing and the Company expects this trend to continue
throughout 2004. 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.
The worldwide coronary stent market is dynamic and highly competitive with
significant market share volatility. The Company expects its share of the
drug-eluting stent market as well as unit prices to be adversely impacted as
additional competitors enter the drug-eluting stent market, which the Company
anticipates during 2004 and 2005 internationally and during 2006 in the U.S. In
February of 2004, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson, and Guidant Corporation entered an alliance to co-promote Cordis'
drug-eluting stent system, which may result in further uncertainty. In addition,
during the first quarter of 2004, one of the Company's competitors received
approval to market its drug-eluting stent in Japan. Until the Company launches
its drug-eluting stent in Japan in late 2005 or early 2006, it is likely that
its Japan coronary stent business will be subject to significant share pressure.
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 or product performance,
third-party intellectual property, continued physician acceptance, the outcome
of litigation and the availability of inventory to meet customer demand.
Inconsistent clinical data from ongoing or future trials conducted by the
Company, or additional clinical data presented by the Company's competitors, may
impact the Company's position in and share of the drug-eluting stent market. The
Company is currently reviewing a limited number of reports related to balloon
withdrawal difficulty during TAXUS angioplasty procedures.
The manufacture of the TAXUS stent system involves the integration of multiple
technologies and complex processes. During the first quarter of 2004, the
Company increased the amount of TAXUS inventory on hand to meet the forecasted
demand for the product. Expected inventory levels may be impacted by significant
favorable or unfavorable changes in forecasted demand and disruptions associated
with the TAXUS manufacturing process. In addition, variability in expected
demand, product mix and
-22-
shelf-life may result in excess or expired inventory positions and additional
future inventory charges.
Further, 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, Medtronic
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 its
objectives in the market. See the notes to the unaudited condensed consolidated
financial statements contained in this Quarterly Report and the 2003 Annual
Report filed on Form 10-K for a description of these legal proceedings.
Since early 2001, the Company has consummated eleven business acquisitions.
Management believes it has developed a sound plan to integrate these businesses.
The failure to successfully integrate these businesses could impair the
Company's ability to realize the strategic and financial objectives of these
transactions. In connection with these acquisitions and other strategic
alliances, 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.
In addition, the Company has 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. However, the full
benefit of these alliances is often dependent on the strength of the other
companies' underlying technology. As such, the inability to achieve regulatory
approvals, competitive product offerings, or litigation related to this
technology may, among other factors, prevent the Company from realizing the
benefit of these alliances. 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.
The Company expects to continue to invest heavily in its drug-eluting stent
program to achieve sustained worldwide market leadership positions. In addition,
the Company anticipates increasing its focus and spending on internal research
and development and other programs not associated with its TAXUS drug-eluting
stent technology. Further, the Company will continue to seek market
opportunities and growth through investments in strategic alliances and
acquisitions. Potential future acquisitions may be dilutive to the Company's
earnings and may require additional financing, depending on their size and
nature.
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
-23-
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. 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.
In addition, the Company is required to renew regulatory approvals in certain
international jurisdictions, which may require additional testing and
documentation. A decision not to dedicate sufficient resources, or the failure
to timely renew these approvals may limit the Company's ability to market its
full line of existing products within these jurisdictions.
These factors may impact the rate at which the Company can grow. However,
management believes that it continues to position the Company to take advantage
of opportunities that exist in the markets it serves.
-24-
LIQUIDITY AND CAPITAL RESOURCES
Key performance indicators used by management to assess the liquidity of the
Company are as follows:
- ------------------------------------------- -------------------------
THREE MONTHS ENDED
- ------------------------------------------- -------------------------
MARCH 31,
- ------------------------------------------- -------------------------
(IN MILLIONS) 2004 2003
- ------------------------------------------- ------------ ------------
Cash provided by operating activities $42 $109
- ------------------------------------------- ------------ ------------
Cash used for investing activities (147) (289)
- ------------------------------------------- ------------ ------------
Cash provided by financing activities 49 195
- ------------------------------------------- ------------ ------------
EBITDA(1) $320 $193
- ---------------------------------------------------------------------
EBITDA for the first quarter of 2003 included pre-tax charges of $20 million.
OPERATING ACTIVITIES
The decrease in cash generated by operating activities was primarily
attributable to changes in operating assets and liabilities offset by the
increase in EBITDA. Significant cash flow effects from operating assets and
liabilities in the first quarter of 2004 included decreases in cash flow of
approximately $135 million attributable to accounts receivable; $35 million
attributable to accounts payable and accrued expenses; $25 million attributable
to inventories; and $25 million attributable to other assets. The increase in
trade accounts receivable was primarily due to the U.S. launch of the TAXUS
stent system in March, where the Company does not expect to receive cash from
these sales until the second quarter of 2004. The decrease in accounts payable
and accrued expenses was primarily due to the annual bonus payment and a
semi-annual interest payment made during the first quarter. The increase in
inventories was a result of the accumulation of TAXUS stent inventory to support
the U.S. launch. The increase in other
- --------------------
(1) The following represents a reconciliation between EBITDA and net income:
- ------------------------------------------- -------------------------
THREE MONTHS ENDED
- ------------------------------------------- -------------------------
MARCH 31,
- ------------------------------------------- -------------------------
(IN MILLIONS) 2004 2003
- ------------------------------------------- ------------ ------------
Net income $194 $97
- ------------------------------------------- ------------ ------------
Income taxes 61 43
- ------------------------------------------- ------------ ------------
Interest expense 11 11
- ------------------------------------------- ------------ ------------
Interest income (1) (1)
- ------------------------------------------- ------------ ------------
Depreciation and amortization 55 43
- ------------------------------------------- ------------ ------------
EBITDA $320 $193
- ---------------------------------------------------------------------
Management uses EBITDA to assess operating performance and believes it may
assist users of the financial statements in analyzing the underlying trends in
the Company's business over time. Users of the financial statements should
consider this non-GAAP financial information in addition to, not as a substitute
for, or as superior to, financial information prepared in accordance with GAAP.
-25-
assets was a result of increases in certain prepaid expenses and non-trade
receivables, none of which were individually significant.
The increase in EBITDA in the first quarter of 2004 as compared to the first
quarter of 2003 was primarily due to the first quarter launch of the TAXUS stent
system in the U.S. and sales of the TAXUS stent system in the Company's Europe
and Inter-Continental markets. A portion of the cash generated from these
markets was invested in the Company's sales, clinical and manufacturing
capabilities and in other research and development projects.
INVESTING ACTIVITIES
The Company made capital expenditures of $82 million during the first quarter of
2004 as compared to $35 million during the first quarter of 2003. The increase
was primarily due to a $45 million purchase of an office complex in the U.S. The
Company expects to incur capital expenditures of approximately $225 million
during the remainder of 2004, which includes additional investments in the
Company's facility network both in the U.S. and abroad.
During 2004, the Company continued to invest in short-term securities with
maturity dates that exceeded 90 days to benefit from higher returns. During the
first quarter of 2004, the Company purchased approximately $44 million of these
short-term investments and approximately $48 million of these investments
matured. The Company's investing activities during the first quarter of 2004
also included $34 million of cash proceeds from sales of privately held and
publicly traded equity securities; $68 million of acquisition-related payments
primarily associated with Embolic Protection, Inc. (EPI); and $35 million of
payments for strategic alliances with both privately held and publicly traded
entities.
In April 2004, the Company acquired Precision Vascular Systems, Inc. (PVS), a
manufacturer of guidewires and microcatheters, for approximately $75 million in
cash plus additional future consideration that is contingent upon PVS achieving
certain milestones.
FINANCING ACTIVITIES
During the first quarter of 2004, the Company repaid $49 million of outstanding
borrowings. The Company's net debt (borrowings less cash, cash equivalents and
short-term investments) was $984 million and $973 million at March 31, 2004 and
December 31, 2003, respectively.In addition, during the first quarter of 2004,
the Company received proceeds of $98 million in connection with the issuance of
shares pursuant to its stock option and employee stock purchase plans as
compared to $68 million during the first quarter of 2003.
The Company's cash and cash equivalents primarily relate to 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 2003, the Company determined that it is likely to repatriate
cash from certain non-U.S. operations; the repatriated cash available for use
will be net of the related provisions for taxes.
BORROWINGS AND CREDIT ARRANGEMENTS
At March 31, 2004, the Company's revolving credit facilities totaled $1,265
million, consisting of a $645 million 364-day credit facility that terminates in
May 2004 and contains an option to convert into a one-year term loan expiring in
May 2005; a $600 million credit facility that terminates in August 2006; and a
$20 million uncommitted credit facility. In January 2004, the Company increased
its 364-day credit facility from $600 million to $645 million. Use of the
borrowings is unrestricted and the borrowings are unsecured.
-26-
The revolving credit facilities provide borrowing capacity and support the
Company's commercial paper. The Company had approximately $946 million and
$1,003 million of commercial paper outstanding at March 31, 2004 and December
31, 2003, respectively, at weighted average interest rates of 1.13 percent and
1.20 percent, respectively.
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 $199 million and $194 million of borrowings outstanding under
its revolving credit and security facility at March 31, 2004 and December 31,
2003, respectively, at interest rates of 1.39 percent and 1.44 percent,
respectively.
The Company has the ability and intent to refinance a portion of its short-term
debt on a long-term basis through its revolving credit facilities. At March 31,
2004, the Company expects that a minimum of $600 million of its short-term
obligations will remain outstanding beyond the next twelve months and,
accordingly, has classified this portion as long-term borrowings, as compared to
$650 million of short-term bank obligations classified as long-term at December
31, 2003.
The Company had $500 million of senior notes (the Notes) outstanding at March
31, 2004 and December 31, 2003, which are registered securities. 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. The
Company classified the Notes as a current liability at March 31, 2004.
Due to favorable market conditions, the continued increase of non-U.S. cash
balances and to support the Company's strategic growth objectives, the Company
expects to refinance during the second quarter of 2004 its existing $1,245
million revolving credit facilities with new credit facilities of up to $2,000
million. The new revolving credit facilities are expected to consist of a $1,500
million credit facility expiring in May 2009 and a $500 million 364-day credit
facility that terminates in May 2005 and contains an option to convert into a
one-year term loan expiring in May 2006. In addition, the Company expects to
increase its borrowing capacity under its revolving credit and security facility
from $200 million to $400 million. Further, during 2004, the Company may also
seek to issue approximately $600 million in registered debt securities through a
public offering and approximately $500 million in other debt securities to
refinance the Notes.
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
-27-
advantage of the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements discussed in this report
include, but are not limited to, statements with respect to, and the Company's
performance may be affected by:
o volatility in the coronary stent market, competitive offerings and the
timing of receipt of regulatory approvals to market existing and
anticipated drug-eluting stent technology and other coronary and peripheral
stent platforms;
o the Company's ability to achieve significant growth in revenue, gross
profit, earnings and cash flow throughout 2004 following the launch of the
TAXUS drug-eluting stent system in the U.S., and to launch the TAXUS stent
system in Japan in late 2005 or early 2006;
o the Company's ability to prevent disruptions to its TAXUS manufacturing
processes and to maintain inventory levels consistent with forecasted
demand around the world;
o the overall rate of physician conversion to drug-eluting stents, the
expected slow but steady increase in drug-eluting stent adoption rates in
Europe;
o the impact of the introduction of drug-eluting stents and third-party
alliances on the size of the coronary stent market and distribution of
share within the coronary stent market in the U.S. and around the world;
o the overall performance of drug-eluting stents and the results of
drug-eluting stent clinical trials undertaken by the Company or its
competitors;
o the Company's ability to capitalize on the opportunity in the drug-eluting
stent market for significant growth in revenue and earnings and to achieve
sustained worldwide market leadership positions through reinvestment in the
Company's drug-eluting stent program;
o the Company's ability to take advantage of its position as one of two early
entrants in the U.S. drug-eluting stent market, to anticipate competitor
products as they enter the market and to take advantage of opportunities
that exist in the markets it serves;
o the Company's ability to manage research and development and other
operating expenses, including royalty obligations in light of significant
expected revenue growth;
o the ability of the Company to manage inventory levels, accounts receivable
and gross margins relating to the Company's TAXUS stent system and to react
effectively to worldwide economic and political conditions;
o the Company's ability to achieve benefits from its increased focus on
internal research and development and its ability to capitalize on
opportunities across its businesses;
o the Company's ability to integrate the acquisitions and other strategic
alliances consummated since early 2001;
o 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;
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o the timing, size and nature of strategic initiatives, market opportunities
and research and development platforms available to the Company and the
ultimate cost and success of these initiatives;
o the Company's ability to maintain a 24 percent effective tax rate,
excluding net special charges, during 2004;
o 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;
o the Company's ability to refinance its revolving credit facilities, to
increase its borrowing capacity under its revolving credit and security
facility and to issue debt securities on terms reasonably acceptable to the
Company;
o risks associated with international operations including compliance with
local legal and regulatory requirements;
o the potential effect of foreign currency fluctuations on revenues, expenses
and resulting margins;
o the effect of litigation, risk management practices and compliance
activities on the Company's loss contingency, legal provision and cash
flow; and
o 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's assessment of its sensitivity
to market risk since its presentation set forth in "Market Risk Disclosures" in
the Annual Report filed on Form 10-K for the year ended December 31, 2003.
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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 March 31, 2004. Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that as of March 31, 2004, 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 March 31, 2004.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note H - 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 Third Amendment to Credit and Security Agreement
dated March 26, 2004
10.2 Form of Revolving Credit Commitment Increase Supplement
dated January 12, 2004
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 Officer, 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 of President and Chief
Executive Officer
32.2 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 of Senior Vice President and
Chief Financial Officer
(b) Reports on Form 8-K
On March 9, 2004, the Company filed a current report on Form 8-K
with the Securities and Exchange Commission with respect to an
event dated March 4, 2004.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 7, 2004.
BOSTON SCIENTIFIC CORPORATION
By: /s/ Lawrence C. Best
-------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and
Senior Vice President - Finance
and Administration
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EXHIBIT INDEX
10.1 Form of Third Amendment to Credit and Security Agreement dated March 26,
2004
10.2 Form of Revolving Credit Commitment Increase Supplement dated January
12, 2004
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 Officer, 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
of President and Chief Executive Officer
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Senior Vice President and Chief Financial Officer
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