See
notes
to the unaudited condensed consolidated financial statements.
BOSTON
SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
Cash
provided by operating activities
|
|
$ |
152
|
|
|
$ |
999
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Net
purchases of property, plant and equipment
|
|
|
(186 |
) |
|
|
(129 |
) |
Proceeds
from maturities of marketable securities
|
|
|
|
|
|
|
159
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
Payments
for the Guidant acquisition
|
|
|
|
|
|
|
(15,393 |
) |
Cash
acquired from the Guidant acquisition, including proceeds
from Guidant’s
sale of its vascular intervention and endovascular solutions
businesses
|
|
|
|
|
|
|
6,740
|
|
Payments
for acquisitions of other businesses, net of cash acquired
|
|
|
(11 |
) |
|
|
|
|
Payments
relating to prior period acquisitions
|
|
|
(213 |
) |
|
|
(275 |
) |
Strategic
Alliances
|
|
|
|
|
|
|
|
|
Proceeds
from sales of privately held and publicly traded equity
securities
|
|
|
49
|
|
|
|
|
|
Payments
for investments in and acquisitions of certain
technologies
|
|
|
(41 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
Cash
used for investing activities
|
|
|
(402 |
) |
|
|
(8,934 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
Net
payments on commercial paper
|
|
|
|
|
|
|
(149 |
) |
Net
(payments on) proceeds from revolving borrowings, notes payable,
capital
leases and long-term borrowings
|
|
|
(4 |
) |
|
|
7,041
|
|
Equity
|
|
|
|
|
|
|
|
|
Proceeds
from issuances of shares of common stock to Abbott
Laboratories
|
|
|
|
|
|
|
1,400
|
|
Proceeds
from issuances of shares of common stock to option holders
|
|
|
98
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by financing activities
|
|
|
94
|
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rates on cash
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(154 |
) |
|
|
468
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,668
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
1,514
|
|
|
$ |
1,157
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
and stock equivalents issued for acquisitions
|
|
$ |
91
|
|
|
$ |
12,964
|
|
See
notes
to the unaudited condensed consolidated financial statements.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
A – BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of Boston
Scientific Corporation 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 fair presentation have been included. Operating results for the three
and six months ended June 30, 2007 are not necessarily indicative of the
results
that may be expected for the year ending December 31, 2007. For further
information, refer to the consolidated financial statements and footnotes
thereto incorporated by reference in our Annual Report on Form 10-K for
the year
ended December 31, 2006.
On
April
21, 2006, we consummated our acquisition of Guidant Corporation. Prior
to our
acquisition of Guidant, Abbott Laboratories acquired Guidant’s vascular
intervention and endovascular solutions businesses and agreed to share
the
drug-eluting technology it acquired from Guidant with
us. See our 2006 Annual Report filed on Form 10-K for
further details regarding these transactions.
NOTE
B – BUSINESS COMBINATIONS
In
June
2007, we signed a definitive agreement to acquire 100 percent of the fully
diluted equity of Remon Medical Technologies, Inc. Remon is a
development-stage company focused on creating communication technology
for
medical device applications. We expect the acquisition to close during
the third
quarter of 2007, subject to customary closing conditions and due diligence.
The
acquisition is intended to expand our sensor and wireless communication
technology portfolio, which will complement our existing Cardiac Rhythm
Management (CRM) product line.
In
June
2007, we executed an asset purchase agreement with Celsion Corporation
for the
purchase of its Prolieve®
Thermodilatation
System, used to treat benign prostatic hyperplasia
(BPH). The purchase was intended to expand our technology portfolio used
to treat urologic conditions.
In
January 2007, we acquired 100 percent of the fully diluted equity of EndoTex
Interventional Systems, Inc., a developer of stents used in the treatment
of
stenotic lesions in the carotid arteries. In conjunction with the acquisition
of
EndoTex, we paid $102 million, which included five million shares of our
common
stock valued at $91 million and cash of $11 million, in addition to our
previous
investments and notes issued of approximately $40 million, plus future
consideration
that is contingent upon EndoTex achieving certain performance-related
milestones. The acquisition was intended to expand our carotid artery disease
technology portfolio.
In
addition, during the first half of 2007, we paid $213 million of contingent
consideration, primarily payments to the former shareholders of Advanced
Bionics
Corporation, which was accrued for at December 31, 2006. Certain of our
business
combinations involve the payment of contingent consideration, some of which
are
based on multiples of the acquired company’s revenue during the earn-out period.
Consequently, we cannot currently determine the total payments; however,
we have
developed an estimate of the maximum potential contingent consideration
for each
of our acquisitions with an outstanding earn-out obligation. At June 30,
2007,
the estimated maximum potential amount of future contingent consideration
(undiscounted) that we could be required to make associated with our business
combinations is approximately $3 billion, some of which may be payable in
common stock, and which includes approximately $2 billion of estimated
payments
to Advanced Bionics. At June 30, 2007, our total expected payments of future
contingent consideration (undiscounted) is approximately $2 billion. The
milestones associated with the contingent consideration must be reached
in
certain future periods ranging from 2007 through 2016. The estimated cumulative
specified revenue level associated with these maximum future contingent
payments
is approximately $9 billion, which includes approximately $6 billion for
Advanced Bionics.
During
2006, we paid $28.4 billion to acquire Guidant through a combination of
cash,
common stock, and fully vested stock options. The purchase price was based
upon
estimates of the fair value of assets acquired and liabilities
assumed.
The
following summarizes the Guidant purchase price allocation at June 30,
2007:
(in
millions)
|
|
|
|
|
Cash
|
|
$ |
6,708
|
|
|
Intangible
assets subject to amortization
|
|
|
7,719
|
|
|
Goodwill
|
|
|
12,522
|
|
|
Other
assets
|
|
|
2,271
|
|
|
Purchased
research and development
|
|
|
4,169
|
|
|
Current
liabilities
|
|
|
(1,964 |
) |
|
Net
deferred income taxes
|
|
|
(2,475 |
) |
|
Other
long-term liabilities
|
|
|
(592 |
) |
|
|
|
$ |
28,358
|
|
|
Adjustments
to the Guidant purchase price allocation during the first half of 2007
consisted
primarily of changes in our estimates for the costs associated with product
liability claims and litigation, changes in the liability for unrecognized
tax
benefits resulting from the adoption of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, as well as changes in our
estimate for Guidant-related exit costs, as described below.
Costs
Associated with Exit Activities
Included
in the Guidant purchase price allocation at June 30, 2007 is an accrual
for $70
million in acquisition-related costs that includes approximately $54 million
for
involuntary terminations, change-in-control payments, relocation and related
costs, and approximately $16 million of estimated costs to cancel contractual
commitments.
As
of the
acquisition date, management began to assess and formulate plans to exit
certain
Guidant activities. As a result of these exit plans, we continue to
make severance, relocation and change-in-control payments. The majority
of the
exit cost accrual relates to our first quarter 2007 reduction of the
acquired CRM workforce by approximately 400 employees. The affected
workforce included primarily research and development employees, although
employees within sales and marketing and certain other functions were also
impacted. We also made smaller workforce reductions internationally
across multiple functions in order to eliminate duplicate facilities and
rationalize our distribution network in certain countries. During the
first half of 2007, we reduced our estimate for Guidant-related exit costs
in
conjunction with finalizing the purchase price allocation and recorded
an
adjustment to goodwill to reflect the change in estimate. We expect
that substantially all of the amounts accrued at June 30, 2007 will be
paid
prior to December 31, 2008.
The
components of our accrual for Guidant-related exit and other costs are
as
follows:
(in
millions)
|
|
Balance
at
December
31, 2006
|
|
|
Purchase
Price Adjustments
|
|
|
Charges
Utilized
|
|
|
Balance
at
June
30, 2007
|
|
Workforce
reductions
|
|
$ |
163
|
|
|
$ |
(46 |
) |
|
$ |
(68 |
) |
|
$ |
49
|
|
Relocation
costs
|
|
|
10
|
|
|
|
|
|
|
|
(5 |
) |
|
|
5
|
|
Contractual
commitments
|
|
|
25
|
|
|
|
(6 |
) |
|
|
(3 |
) |
|
|
16
|
|
|
|
$ |
198
|
|
|
$ |
(52 |
) |
|
$ |
(76 |
) |
|
$ |
70
|
|
Pro
Forma Results of Operations
The
following unaudited pro forma information presents a summary of consolidated
results of our operations and Guidant, as if the acquisition, the Abbott
transaction and the financing for the acquisition had occurred at the beginning
of each of the periods presented. We have adjusted the historical consolidated
financial information to give effect to pro forma events that are
(i) directly attributable to the acquisition and (ii) factually
supportable. We present the pro forma unaudited condensed consolidated
financial
information for informational purposes only. The pro forma information
is not
necessarily indicative of what the financial position or results of operations
actually would have been had the acquisition, the sale of the Guidant vascular
intervention and endovascular solutions businesses to Abbott and the financing
transactions with Abbott and other lenders been completed at the beginning
of
each of the periods presented. Pro forma adjustments are tax-effected at
our effective tax rate.
|
|
Three
Months
Ended
|
|
|
|
Six
Months
Ended
|
|
(in
millions, except per share data)
|
|
June
30, 2006
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,213
|
|
|
$ |
4,442
|
|
Net
loss
|
|
|
(4,410 |
) |
|
|
(4,334
|
) |
|
|
|
|
|
|
|
|
|
Net
loss per share - basic
|
|
$ |
(2.99 |
) |
|
$ |
(2.94
|
) |
Net
loss per share - assuming dilution
|
|
$ |
(2.99 |
) |
|
$ |
(2.94
|
)
|
The
unaudited pro forma net loss for second quarter of 2006 includes $120 million
for the amortization of purchased intangible assets. The unaudited pro
forma net
loss for the first half of 2006 includes $240 million for the amortization
of
purchased intangible assets. The unaudited pro forma financial information
for
each period presented also includes the following non-recurring charges:
purchased research and development of $4.169 billion obtained as part of
the
Guidant acquisition; a charge to step-up the value of acquired inventory
sold of
$224 million for the second quarter of 2006 and $267 million for the first
half
of 2006; a tax charge for the drug-eluting stent license right obtained
from
Abbott; and an $87 million fair value adjustment related to the sharing
of
proceeds feature of the Abbott stock purchase.
NOTE
C – INVESTMENTS
We
account for our publicly traded investments as available-for-sale securities
and
record unrealized gains and losses as a separate component of stockholders’
equity. During the second quarter of 2007, we decided to monetize the majority
of our $535 million investment portfolio. According to Emerging Issues
Task
Force (EITF) Topic No. D-44, Recognition of Other-Than-Temporary Impairment
Upon the Planned Sale of a Security Whose Cost Exceeds Fair Value, once a
company decides to sell an available-for-sale security whose fair value
is less
than its cost basis and the company does not expect the fair value of the
security to recover prior to the expected time of sale, it must write down
the
value of the investment. This reduced value becomes the new cost basis for
the investment and any unrealized gains are not recognized in earnings
until
realized. As a result of the application of Topic No. D-44, we recognized
a $20 million impairment loss in the second quarter of 2007 associated
with our
publicly held investments for which an other-than-temporary loss was determined
to exist. Certain other publicly held investments at June 30, 2007 had
unrealized gains totaling $40 million as of that date.
We
recorded other-than-temporary impairments of $11 million in the second
quarter
of 2007 associated with the decline in value of certain of our privately
held investments. We recorded other-than-temporary impairments of $67
million for the second quarter of 2006 and $105 million for the first half
of
2006 related to technological delays and financial deterioration of certain
of
our vascular sealing and gene therapy portfolio companies.
In
June
2007, we terminated our Product Development Agreement with Aspect Medical
Systems relating to brain monitoring technology that Aspect had been developing
to aid the
diagnosis
and treatment of depression, Alzheimer’s disease and other neurological
conditions. As a result, we recognized a credit to purchased research and
development of approximately $15 million during the second quarter of 2007,
representing future payments that we would have previously been obligated
to
make prior to the termination of the agreement. In June 2007, Aspect repurchased
two million shares of its stock from us for $32 million and, as a result,
we
recognized a gain of $8 million during the second quarter of 2007. In July
2007,
Aspect exercised its option to purchase an additional 2.5 million shares
from us
for $38 million. Aspect may exercise its option to repurchase our remaining
holdings of 1.5 million shares through December 2007.
NOTE
D – COMPREHENSIVE INCOME
The
following table provides a summary of our comprehensive income
(loss):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income (loss)
|
|
$ |
115
|
|
|
$ |
(4,262 |
) |
|
$ |
235
|
|
|
$ |
(3,930 |
) |
Foreign
currency translation adjustment
|
|
|
26
|
|
|
|
32
|
|
|
|
25
|
|
|
|
46
|
|
Net
change in derivative financial instruments
|
|
|
(4 |
) |
|
|
(18 |
) |
|
|
(4 |
) |
|
|
(20 |
) |
Net
change in equity investments
|
|
|
14
|
|
|
|
(6 |
) |
|
|
9
|
|
|
|
(20 |
) |
Comprehensive
income (loss)
|
|
$ |
151
|
|
|
$ |
(4,254 |
) |
|
$ |
265
|
|
|
$ |
(3,924 |
) |
NOTE
E – WEIGHTED AVERAGE SHARES OUTSTANDING
The
following is a reconciliation of weighted average shares for basic and
diluted
income (loss) per share computations:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic
weighted average shares outstanding
|
|
|
1,485.4
|
|
|
|
1,326.8
|
|
|
|
1,483.4
|
|
|
|
1,074.0
|
|
Net
effect of common stock equivalents
|
|
|
14.5
|
|
|
|
|
|
|
|
15.5
|
|
|
|
|
|
Weighted
average shares outstanding, assuming dilution
|
|
|
1,499.9
|
|
|
|
1,326.8
|
|
|
|
1,498.9
|
|
|
|
1,074.0
|
|
The
net
effect of common stock equivalents excludes the impact of 40.8 million
stock
options for the second quarter of 2007, 24.8 million for the second quarter
of
2006, 39.2 million for the first half of 2007, and 21.2 million for the
first
half of 2006 due to the exercise prices of these stock options being greater
than the average market price of our common stock during those
periods.
Additionally,
weighted average shares outstanding, assuming dilution excludes the net
effect
of common stock equivalents of 19.8 million for the second quarter of 2006
and
14.5 million for the first half of 2006 due to our net loss position in
those
periods.
NOTE
F – STOCK-BASED COMPENSATION
The
following presents the impact of stock-based compensation expense on our
unaudited condensed consolidated statements of operations:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cost
of products sold
|
|
$ |
4
|
|
|
$ |
2
|
|
|
$ |
8
|
|
|
$ |
8
|
|
Selling,
general and administrative expenses
|
|
|
21
|
|
|
|
23
|
|
|
|
44
|
|
|
|
43
|
|
Research
and development expenses
|
|
|
7
|
|
|
|
6
|
|
|
|
14
|
|
|
|
12
|
|
|
|
|
32
|
|
|
|
31
|
|
|
|
66
|
|
|
|
63
|
|
Income
tax benefit
|
|
|
9
|
|
|
|
8
|
|
|
|
19
|
|
|
|
18
|
|
|
|
$ |
23
|
|
|
$ |
23
|
|
|
$ |
47
|
|
|
$ |
45
|
|
On
May
22, 2007, we extended an offer to our non-director and non-executive employees
to exchange certain outstanding stock options for deferred stock units
(DSUs).
Stock options previously granted under our stock plans with an exercise
price of
$25 or more per share were exchangeable for a smaller number of DSUs, based
on
exchange ratios derived from the exercise prices of the surrendered
options. On June 20, 2007, following the expiration of the offer, our
employees exchanged approximately 6.6 million options for approximately
1.1
million DSUs, which were subject to additional vesting restrictions. We
did not
record incremental stock compensation expense because the fair values of
the
options exchanged equaled the fair values of the DSUs issued.
NOTE
G – SUPPLEMENTAL
BALANCE SHEET INFORMATION
The
components of inventory consist of the following:
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
486
|
|
|
$ |
447
|
|
Work-in-process
|
|
|
180
|
|
|
|
145
|
|
Raw
materials
|
|
|
171
|
|
|
|
157
|
|
|
|
$ |
837
|
|
|
$ |
749
|
|
The
components of property, plant and equipment consist of the
following:
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$ |
2,910
|
|
|
$ |
2,717
|
|
Less:
accumulated depreciation
|
|
|
1,131
|
|
|
|
991
|
|
|
|
$ |
1,779
|
|
|
$ |
1,726
|
|
The
components of intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
14,959
|
|
|
$ |
14,628
|
|
Technology
- core
|
|
|
7,351
|
|
|
|
7,265
|
|
Other
intangible assets
|
|
|
2,940
|
|
|
|
2,900
|
|
|
|
$ |
25,250
|
|
|
$ |
24,793
|
|
Less:
accumulated amortization
|
|
|
1,434
|
|
|
|
1,157
|
|
|
|
$ |
23,816
|
|
|
$ |
23,636
|
|
Our
accrual for warranty liabilities was $63 million at June 30, 2007 and $53
million at December 31, 2006.
NOTE
H – BORROWINGS AND CREDIT ARRANGEMENTS
We
had
outstanding borrowings of $8.904 billion at June 30, 2007 at a weighted
average
interest rate of 6.50 percent, as compared to outstanding borrowings of
$8.902 billion at December 31, 2006 at a weighted average interest
rate of 6.03 percent. Our borrowings at June 30, 2007 consist of unsecured
subsidiary indebtedness including our senior $5.0 billion term loan and our
subordinated $900 million loan from Abbott, and unsecured senior corporate
notes
of $3.05 billion.
Our
revolving credit facility and term loan agreement requires that we maintain
a
ratio of debt to pro forma EBITDA, as defined by the agreement, of less
than or
equal to 4.5 to 1.0 through December 31, 2007, and 3.5 to 1.0 thereafter.
The
agreement also requires that we maintain a ratio of pro forma EBITDA, as
defined
by the agreement, to interest expense of greater than or equal to 3.0 to
1.0. As
of June 30, 2007, we were in compliance with both of these debt covenants.
Exiting the quarter, our ratio of debt to pro forma EBITDA was 4.0 to 1.0
and
our ratio of pro forma EBITDA to interest expense was 3.9 to 1.0. Our
inability to maintain these covenants could require us to seek to renegotiate
the terms of our credit facilities or seek waivers from compliance with
these
covenants, both of which could result in additional borrowing
costs.
We
continue to review our cost structure and operations in order to identify
sustainable cost improvement measures that will better align operating
expenses with expected revenue levels and reallocate resources to better
support
our growth initiatives and meet the financial covenants required by our
credit
facilities. These cost improvement measures include an expense and headcount
restructuring plan that is currently in development. Our goal is to reduce
expenses while preserving needed investments in critical research and
development
projects
to help ensure that we achieve our longer-term sales goals. In addition,
we have
the flexibility to sell certain non-strategic assets and implement other
strategic initiatives, including our intention to monetize the majority
of our
investment portfolio, which should increase cash available for debt repayment.
In July 2007, we announced our intent to explore the sale of our fluid
management business, formerly North American Medical Instruments Corp.
We are in
the early stages of discussions with several potential acquirers and expect
the
exploration process to take a number of months. These and other strategic
initiatives should increase cash available for debt repayment or reduce
future
contingent payments. Additionally, these initiatives may result in significant
one-time charges and initial cash expenditures in order to obtain the benefit
of
these actions.
At
June
30, 2007 and December 31, 2006, our revolving credit facility totaled $2.0
billion. In addition, we maintain a $350 million credit and security facility
secured by our U.S. trade receivables. During the third quarter of 2007,
we
extended the maturity of our credit and security facility to August 2008.
There
were no amounts outstanding under our $2.350 billion of available credit
lines
at June 30, 2007 and December 31, 2006.
In
August
2007, our credit ratings from Standard & Poor’s Rating Services (S&P)
and Fitch Ratings were downgraded to BB+, a non-investment grade rating,
and in
July 2007, our credit rating from Moody’s Investor Service was downgraded to
Ba1, a non-investment grade rating. Additionally, S&P put our credit ratings
on credit watch with negative implications. The ratings outlook by Moody’s and
Fitch is currently negative. Credit rating changes may impact our borrowing
cost, but do not require the repayment of borrowings. We do not expect that
these credit rating changes will materially increase our cost of
borrowing.
NOTE
I – COMMITMENTS AND CONTINGENCIES
The
medical device market in which we primarily participate
is largely technology driven. Physician customers, particularly in
interventional cardiology, have historically moved quickly to new products
and
new technologies. As a result, intellectual property rights, particularly
patents and trade secrets, play a significant role in product development
and
differentiation. However, intellectual property litigation to defend or
create
market advantage is inherently complex and unpredictable. Furthermore,
appellate
courts frequently overturn lower court patent decisions.
In
addition, competing parties frequently file multiple suits to leverage
patent
portfolios across product lines, technologies and geographies and to balance
risk and exposure between the parties. In some cases, several competitors
are
parties in the same proceeding, or in a series of related proceedings,
or
litigate multiple features of a single class of devices. These forces frequently
drive settlement not only of individual cases, but also of a series of
pending
and potentially related and unrelated cases. In addition, although monetary
and
injunctive relief is typically sought, remedies and restitution are generally
not determined until the conclusion of the proceedings and are frequently
modified on appeal. Accordingly, the outcomes of individual cases are difficult
to time, predict or quantify and are often dependent upon the outcomes
of other
cases in other geographies.
Several
third parties have asserted that our current and former stent systems infringe
patents owned or licensed by them. We have similarly asserted that stent
systems
or other products sold by these companies infringe patents owned or licensed
by
us. Adverse outcomes in one or more of the proceedings against us could
limit
our ability to sell certain stent products in certain jurisdictions, or
reduce
our operating margin on the sale of these products and could have a material
adverse effect on our financial position, results of operations or
liquidity.
We
are
substantially self-insured with respect to general, product liability and
securities claims. In the normal course of business, product liability
and
securities claims are asserted against us. Product liability and securities
claims against us may be asserted in the future related to events not known
to
management at the present time. The absence of significant third-party
insurance
coverage increases our potential exposure to unanticipated claims or adverse
decisions. Product liability claims, product recalls, securities litigation
and
other litigation in the future, regardless of their outcome, could have
a
material adverse effect on our financial position, results of operations
or
liquidity.
We
accrue
anticipated costs of settlement and damages and, under certain conditions,
costs
of defense, based on historical experience or to the extent specific losses
are
probable and estimable. We record losses for claims in excess of the limits
of
purchased insurance in earnings at the time and to the extent they are
probable
and estimable. If the estimate of a probable loss is a range and no amount
within the range is more likely, we accrue the minimum amount of the range.
In
connection with our acquisition of Guidant, the number of legal claims
against
us, including product liability, private securities and shareholder derivative
claims, significantly increased. Our accrual for legal matters that are
probable
and estimable was $706 million at June 30, 2007 and $485 million at
December 31, 2006, and includes costs of settlement, damages
and defense. The amounts accrued relate primarily to Guidant litigation
and claims recorded as part of the purchase price. We continue to assess
certain litigation and claims to determine the amounts that
management believes will be paid as a result of such claims and litigation
and, therefore, additional losses may be accrued in the future, which could
adversely impact our operating results, cash flows and our ability to comply
with our debt covenants.
In
management’s opinion, we are not currently involved in any legal proceedings
other than those specifically identified below, which, individually or
in the
aggregate, could have a material effect on our financial condition, operations
and/or cash flows. Unless included in our legal accrual or otherwise indicated
below, a range of loss associated with any individual material legal proceeding
can not be estimated.
Except
as
disclosed below, there have been no material developments with regards
to any
matters of litigation or other proceedings disclosed in our 2006 Annual
Report
on Form 10-K.
Litigation
with Johnson & Johnson
On
October 22, 1997, Cordis Corporation, a subsidiary of Johnson &
Johnson, filed a suit for patent infringement against us and SCIMED Life
Systems, Inc., our wholly owned subsidiary, alleging that the importation
and use of the NIR® stent infringes two patents owned by Cordis. On
April 13, 1998, Cordis filed a suit for patent infringement against us and
SCIMED alleging that our NIR® 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® 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 27, 2005, Cordis filed an appeal on those two patents and an appeal
hearing
was held on May 3, 2006. The Court of Appeals remanded the case back to
the trial court for further briefing and fact-finding by the Court.
On May 16, 2002, the Court also set aside the verdict of infringement,
requiring a new trial. On March 24, 2005, in a second trial, a jury found
that a single claim of the Cordis patent was valid and infringed. The jury
determined liability only; any monetary damages will be determined at a
later
trial. On March 27, 2006, the judge entered judgment in favor of Cordis,
and on
April 26, 2006, we filed an appeal. A hearing on the appeal has not yet
been
scheduled. Even though it is reasonably possible that we may incur a
liability associated with this case, we do not believe that a loss is probable
or estimable. Therefore, we have not accrued for any losses associated
with this
case.
On
April 2, 1997, Ethicon and other Johnson & Johnson subsidiaries
filed a cross-border proceeding in The Netherlands alleging that the NIR® stent
infringes a European patent licensed to Ethicon. In this action, the
Johnson & Johnson entities requested relief, including provisional
relief (a preliminary injunction). In October 1997, Johnson &
Johnson’s request for provisional cross-border relief on the patent was denied
by the Dutch Court, on the ground that it is “very likely” that the NIR® stent
will be found not to infringe the patent. Johnson & Johnson’s appeal of
this decision was denied. In January 1999, Johnson & Johnson
amended the claims of the patent and changed the action from a cross-border
case
to a Dutch national action. On June 23, 1999, the Dutch Court affirmed that
there were no remaining infringement claims with respect to the patent
and also
asked the Dutch Patent Office for technical advice about the validity of
the
amended patent. In late 1999, Johnson & Johnson appealed this decision.
On March 11, 2004, the Court of Appeals nullified the Dutch Court’s
June 23, 1999 decision and the proceedings have been returned to the Dutch
Court. In accordance with its 1999 decision, the Dutch Court asked the
Dutch
Patent Office for technical advice on the validity of the amended patent.
On
August 31, 2005, the Dutch Patent Office issued its technical advice that
the amended patent was valid but left certain legal issues for the Dutch
Court
to resolve. A hearing has been scheduled for December 21, 2007.
On
August 22, 1997, Johnson & Johnson filed a suit for patent
infringement against us alleging that the sale of the NIR® stent infringes
certain Canadian patents owned by Johnson & Johnson. Suit was filed in
the federal court of Canada seeking a declaration of infringement, monetary
damages and injunctive relief. On December 2, 2004, the Court dismissed the
case, finding all patents to be invalid. On December 6, 2004,
Johnson & Johnson appealed the Court’s decision, and in May 2006, the
Court reinstated the patent. In August 2006, we appealed the Court’s decision to
the Supreme Court. On January 18, 2007, the Supreme Court denied review.
A trial
has been scheduled for January 21, 2008.
On
March 26, 2002, we and Target Therapeutics, Inc., our wholly owned
subsidiary, filed suit for patent infringement against Cordis alleging
that
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. In 2004, the Court granted summary judgment
in
our favor finding infringement of one of the patents. On November 14,
2005, the Court denied Cordis’ summary judgment motions with respect to the
validity of the patent. Cordis filed a motion for reconsideration and a
hearing
was held on October 26, 2006. The Court ruled on Cordis’ motion for
reconsideration by modifying its claim construction order. On February
9, 2007,
Cordis filed a motion for summary judgment of non-infringement with respect
to
one of the patents and a hearing on Cordis’ motion was held on May 4, 2007. A
trial has not yet been scheduled.
On
January 13, 2003, Cordis filed suit for patent infringement against us and
SCIMED alleging that our Express 2™
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.
We
answered the complaint, denying the allegations and filed a counterclaim
alleging that certain Cordis products infringe a patent owned by us. On
August 4, 2004, the Court granted a Cordis motion to add our Liberté™
coronary stent and two additional patents to the complaint. On June 21,
2005, a jury found that our TAXUS® Express2™, Express2,
Express™ Biliary,
and Liberté stents infringe a Johnson & Johnson patent and that the
Liberté stent infringes a second Johnson & Johnson patent. The juries
only determined liability; monetary damages will be determined at a later
trial.
We filed a motion to set aside the verdict and enter judgment in its favor
as a
matter of law. On May 11, 2006, our motion was denied. With respect to
our
counterclaim, a jury found on July 1, 2005 that Johnson &
Johnson’s Cypher®, Bx Velocity®, Bx Sonic™ and Genesis™ stents infringe our
patent. Johnson & Johnson filed a motion to set aside the verdict and
enter judgment in its favor as a matter of law. On May 11, 2006, the Court
denied Johnson & Johnson’s motion. Johnson & Johnson’s motion for
reconsideration was denied on March 27, 2007. On April 17, 2007, Johnson
&
Johnson filed a second motion to set aside the verdict and enter judgment
as a
matter of law or, in the alternative, a new trial on infringement. Even
though
it is reasonably possible that we will incur a liability associated with
this
case, we do not believe that a loss is probable or estimable. Therefore,
we have
not accrued for any losses associated with this case.
On
March 13, 2003, we and Boston Scientific Scimed, Inc., filed suit for
patent infringement against Johnson & Johnson and Cordis, alleging that
its Cypher drug-eluting stent infringes one of our patents. The suit was
filed
in the U.S. District Court for the District of Delaware seeking monetary
and
injunctive relief. Cordis answered the complaint, denying the allegations,
and
filed a counterclaim against us alleging that the patent is not valid and
is
unenforceable. We subsequently filed amended and new complaints in the
U.S.
District Court for the District of Delaware alleging that the Cypher
drug-eluting stent infringes four of our additional patents (Additional
Patents). Following the announcement on February 23, 2004 by Guidant
Corporation of an agreement with Johnson & Johnson and Cordis to sell
the Cypher drug-eluting stent, we amended our complaint to include Guidant
and
certain of its subsidiaries as co-defendants as to certain patents in
suit. We may replace Abbott Laboratories for Guidant as a party in
the suit as a result of Abbott’s purchase of Guidant’s vascular intervention and
endovascular solutions businesses. In March 2005, we filed a
stipulated dismissal as to three of the four Additional Patents. On July 1,
2005, a jury found that Johnson & Johnson’s Cypher drug-eluting stent
infringes one of our patents and upheld the validity of the patent. The
jury
determined
liability only; any monetary damages will be determined at a later trial.
Johnson & Johnson filed a motion to set aside the verdict and enter judgment
in its favor as a matter of law. On June 15, 2006, the Court denied Johnson
& Johnson’s motion. Johnson & Johnson has moved for reconsideration of
the Court’s decision. A summary judgment hearing as to the remaining patent was
held on June 14, 2006. On April 4, 2007, the Court granted summary judgment
of
non-infringement of the remaining patent and the parties entered a stipulated
dismissal as to the claim of that patent on May 11, 2007. An oral hearing
on the
reconsideration motion is set for August 10, 2007.
On
December 24, 2003, we (through our subsidiary Schneider Europe GmbH) filed
suit against the Belgian subsidiaries of Johnson & Johnson, Cordis and
Janssen Pharmaceutica alleging that Cordis’ Bx Velocity stent, Bx Sonic stent,
Cypher stent, Cypher Select stent, Aqua T3™ balloon and U-Pass balloon infringe
one of our European patents. The suit was filed in the District Court of
Brussels, Belgium seeking preliminary cross-border, injunctive and monetary
relief and sought an expedited review of the claims by the Court. A separate
suit was filed in the District Court of Brussels, Belgium against nine
additional Johnson & Johnson subsidiaries. The Belgium Court linked all
Johnson & Johnson entities into a single action but dismissed the case
for failure to satisfy the requirements for expedited review without commenting
on the merits of the claims. On August 5, 2004, we refiled the suit on the
merits against the same Johnson & Johnson subsidiaries in the District
Court of Brussels, Belgium seeking injunctive and monetary relief for
infringement of the same European patent. A hearing is scheduled for September
20, 2007. In December 2005, the Johnson & Johnson subsidiaries
filed a nullity action in France and, in January 2006, the same
Johnson & Johnson subsidiaries filed nullity actions in Italy and
Germany. We have filed a counterclaim infringement action in Italy.
On
May 12, 2004, we filed suit against two of Johnson &
Johnson’s Dutch subsidiaries, alleging that Cordis’ Bx Velocity stent, Bx Sonic
stent, Cypher stent, Cypher Select stent, and Aqua T3 balloon delivery
systems
for those stents, and U-Pass angioplasty balloon catheters infringe one
of our
European patents. The suit was filed in the District Court of The Hague
in The
Netherlands seeking injunctive and monetary relief. On June 8, 2005, the
Court found the Johnson & Johnson products infringe our patent and
granted injunctive relief. On June 23, 2005, the District Court in Assen,
The Netherlands stayed enforcement of the injunction. On October 12, 2005,
a Dutch Court of Appeals overturned the Assen court’s ruling and reinstated the
injunction against the manufacture, use and sale of the Cordis products
in The
Netherlands. Damages for Cordis’ infringing acts in The Netherlands will be
determined at a later date. Cordis appealed the validity and infringement
ruling
by The Hague Court. A hearing on this appeal was held on November 2, 2006
and a
decision was received on March 15, 2007 finding the patent valid but not
infringed. We have filed an appeal. A hearing is expected during the fourth
quarter of 2008.
On
September 27, 2004, our wholly owned subsidiary, Boston Scientific
Scimed, Inc., filed suit against a German subsidiary of Johnson &
Johnson alleging the Cypher drug-eluting stent infringes one of our European
patents. The suit was filed in Mannheim, Germany seeking monetary and injunctive
relief. A hearing was held on April 1, 2005 and on July 15, 2005, the
Court indicated that it would appoint a technical expert. The expert’s opinion
was submitted to the Court on September 19, 2006. A hearing has been
scheduled for September 21, 2007 in Mannheim, Germany.
On
October 15, 2004, our wholly owned subsidiary, Boston Scientific
Scimed, Inc., filed suit against a German subsidiary of Johnson &
Johnson alleging the Cypher drug-eluting stent infringes one of our German
utility models. The suit was filed in Mannheim, Germany seeking monetary
and
injunctive relief. A hearing was held on April 1, 2005 and on July 15,
2005, the Court indicated that it would appoint a technical expert. The
expert’s
opinion was submitted to the Court on September 19, 2006. A hearing has
been
scheduled for September 21, 2007 in Mannheim, Germany.
On
September 25, 2006, Johnson & Johnson filed a lawsuit against us, Guidant
and Abbott in the U.S. District Court for the Southern District of New
York. The
complaint alleges that Guidant breached certain provisions of the amended
merger
agreement between Johnson & Johnson and Guidant (Merger Agreement) as well
as the implied duty of good faith and fair dealing. The complaint further
alleges that we and Abbott tortiously interfered with the Merger Agreement
by
inducing Guidant’s breach. The complaint seeks certain factual findings, damages
in an amount no less than $5.5 billion and attorneys’ fees and costs. We and
Guidant filed a motion to dismiss the complaint on November 15, 2006. Johnson
& Johnson filed its opposition to the motion on January 9, 2007, and
defendants filed their reply on January 31, 2007. A hearing on the motion
to
dismiss was held on February 28, 2007. The judge took the matter under
advisement, and stayed discovery pending his decision on the
motion.
On
February 1, 2005, we and Angiotech Pharmaceuticals, Inc. filed suit
against Conor Medsystems, Inc., a subsidiary of Johnson and Johnson, in The
Hague, The Netherlands seeking a declaration that Conor’s drug-eluting stent
products infringe patents owned by Angiotech and licensed to us. A hearing
was
held on October 27, 2006, and a decision was rendered on January 17, 2007
in
favor of Angiotech and us. The Court granted an injunction against Conor,
prohibiting it from selling its paclitaxel-eluting stent in The Netherlands,
and
also ordered Conor to pay damages. On April 17, 2007, Conor appealed this
decision and on July 19, 2007, we
filed our defense to Conor’s appeal.
On
November 8, 2005, we and Scimed filed suit against Conor alleging that
certain of Conor’s
stent and
drug-coated stent products infringe a patent owned by us. The complaint
was
filed in the U.S. District Court for the District of Delaware seeking
monetary
and injunctive relief. On December 30, 2005, Conor answered the complaint,
denying the allegations. A Joint Stipulation to dismiss without
prejudice was filed on June 7, 2007.
On
May
25, 2007, we and Boston Scientific Scimed, Inc. filed suit against Johnson
&
Johnson and Cordis in the U.S. District Court for the District of Delaware
seeking a declaratory judgment of invalidity of a U.S. patent owned by
them and
of non-infringement by our PROMUS™ coronary stent system of the
patent.
On
June
1, 2007, we and Boston Scientific Scimed, Inc. filed a suit against Johnson
& Johnson and Cordis in the U.S. District Court for the District of
Delaware seeking a declaratory judgment of invalidity of a U.S. patent
owned by
them and of non-infringement by our PROMUS coronary stent system of the
patent.
On
June
22, 2007, we and Boston Scientific Scimed, Inc. filed a suit against Johnson
& Johnson and Cordis in the U.S. District Court for the District of
Delaware seeking a declaratory judgment of invalidity of a U.S. patent
owned by
them and of non-infringement by our PROMUS coronary stent system of the
patent.
Litigation
with Medtronic, Inc.
On
July
25, 2007, the U.S. District Court for the Northern District of California
granted our motion to intervene in an action filed February 15, 2006 by
Medtronic Vascular, Inc. and certain of its affiliates against Advanced
Cardiovascular Systems, Inc. and Abbott Laboratories. As a counterclaim
plaintiff in this litigation, we are seeking a declaratory judgment of
patent
invalidity and of non-infringement by the PROMUS coronary stent system
relating
to two U.S. patents owned by Medtronic.
Litigation
Relating to St. Jude Medical, Inc.
On
February 2, 2004, Guidant, Guidant Sales Corp. (GSC), Cardiac Pacemakers,
Inc. (CPI) and Mirowski Family Ventures LLC filed a declaratory judgment
action
in the District Court for Delaware against St. Jude Medical and Pacesetter
Inc., a subsidiary of St. Jude Medical, alleging that their Epic HF, Atlas
HF
and Frontier 3x2 devices infringe a patent exclusively licensed to Guidant.
Pursuant to a Settlement Agreement dated July 29, 2006 between us and St.
Jude
Medical, the parties have agreed to limit the scope and available remedies
of
this case. On June 26, 2007, the parties reached an agreement to settle
this
litigation and the case has been dismissed.
Guidant
Sales Corp., Cardiac Pacemakers, Inc. (CPI) and Mirowski Family Ventures
LLC are
plaintiffs in a patent infringement suit originally filed against St. Jude
Medical and its affiliates in November 1996 in the District Court in
Indianapolis. In July 2001, a jury found that a patent licensed to CPI
and
expired in December 2003, was valid but not infringed by certain of St.
Jude
Medical’s defibrillator products. In February 2002, the District Court reversed
the jury’s finding of validity. In August 2004, the Federal Circuit Court of
Appeals, among other things, reinstated the jury verdict of validity and
remanded the matter for a new trial on infringement and damages. The case
was
sent back to the District Court for further proceedings. Pursuant to a
Settlement Agreement dated July 29, 2006 between us and St. Jude Medical,
the
parties agreed to limit the scope and available remedies of this case.
On March
26, 2007, the District Court issued a ruling invalidating the patent. We
have appealed the Court's ruling.
Litigation
with Medinol Ltd.
On
September 25, 2002, we filed suit against Medinol alleging Medinol’s
NIRFlex™ and NIRFlex™ Royal products infringe a patent owned by us. The suit was
filed in the District Court of The Hague, The Netherlands seeking cross-border,
monetary and injunctive relief. On September 10, 2003, the Dutch Court
ruled that the patent was invalid. We appealed the Court’s decision in
December 2003. A hearing on the appeal was held on August 17, 2006. On
December 14, 2006, a decision was rendered upholding the trial court ruling.
We
appealed the Court’s decision on March 14, 2007. On May 25, 2007, Medinol moved
to dismiss our appeal.
On
January 26, 2007, Medinol filed a Vindication Action against us in the
German
District Court of Munich, Germany. The complaint alleges, and seeks a ruling,
that Medinol be deemed the owner of one of our European patents covering
coronary stent designs. On May 31, 2007, we responded to the action, denying
Medinol’s allegations that it is owner of the patent.
On
August
3, 2007, Medinol submitted a request for arbitration against us, and
our wholly
owned subsidiaries Boston Scientific Ltd. and Boston Scientific
Scimed, Inc., under the Arbitration Rules of the World Intellectual
Property Organization pursuant to a settlement agreement between Medinol
and us
dated September 21, 2005. The request for arbitration alleges that our
PROMUS coronary stent system infringes five U.S. patents, three European
patents
and two German Patents owned by Medinol. Medinol is seeking to have the
patents
declared valid and enforceable and a reasonable royalty. The September
2005
settlement agreement provides, among other things, that Medinol may only
seek
reasonable royalties and is specifically precluded from seeking injunctive
relief. As a result, we do not expect the outcome of this proceeding
to have a
material impact on the continued sale of the PROMUS stent system internationally
or the launch of the PROMUS stent system in the United States. We plan
to defend
against Medinol's claims vigorously.
Other
Patent Litigation
On
September 12, 2002, ev3 Inc. filed suit against The Regents of the
University of California and a subsidiary of ours in the District Court
of The
Hague, The Netherlands, seeking a declaration that ev3’s EDC II and VDS embolic
coil products do not infringe three patents licensed to us from The Regents.
On
October 22, 2003, the Court ruled that the ev3 products infringe three
patents licensed to us. On December 18, 2003, ev3 appealed the Court’s
ruling. A hearing on the appeal has not yet been scheduled. A damages hearing
originally scheduled for June 15, 2007 has been postponed and not yet
rescheduled.
On
July 28, 2000, Dr. Tassilo Bonzel filed a complaint naming certain
of our Schneider Worldwide subsidiaries and Pfizer Inc. 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® balloon catheter technology. The suit was filed in the U.S. District
Court for the District of Minnesota seeking monetary relief. On
September 26, 2001, we reached a contingent settlement with
Dr. Bonzel involving all but one claim asserted in the complaint. The
contingency was satisfied and the settlement is 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 us,
certain of our subsidiaries and Pfizer in the Federal District Court for
the District of Minnesota. We answered, denying the allegations of the
complaint. We filed a motion to dismiss the case, and the case was
dismissed with prejudice on November 2, 2004. On February 7,
2005, Dr. Bonzel appealed the Court’s decision. On March 2, 2006, the
Federal District Court dismissed the appeal and affirmed the lower court’s
decision. On April 24, 2007, we received a letter from Dr. Bonzel’s
counsel alleging that the 1995 license agreement with Dr. Bonzel may have
been invalid under German law. On May 11, 2007, we
responded to Dr. Bonzel’s counsel’s letter asserting the validity of the 1995
license agreement.
On
December 16, 2003, The Regents of the University of
California filed suit against Micro Therapeutics, Inc., a subsidiary
of ev3, and Dendron GmbH alleging that Micro Therapeutics’ Sapphire™ detachable
coil delivery systems infringe twelve patents licensed to us 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 us and Target as third-party defendants seeking a
declaratory judgment of invalidity and noninfringement with respect to
the
patents and antitrust violations. On February 17, 2004, we, as a
third-party defendant, filed a motion to dismiss us from the case. On
July 9, 2004, the Court granted our motion in part and dismissed us and
Target from the claims relating only to patent infringement, while denying
dismissal of an antitrust claim. On April 7, 2006, the Court denied Micro
Therapeutics’ motion seeking unenforceability of The Regents’ patent and denied
The Regents’ cross-motion for summary judgment of unenforceability. A summary
judgment hearing was held on July 31, 2007 relating to the antitrust claim.
The Court took the motions
under
advisement. A
trial is scheduled for October 16, 2007.
On
May 19, 2005, G. David Jang, M.D. filed suit against us alleging breach of
contract relating to certain patent rights covering stent technology. The
suit
was filed in the U.S. District Court, Central District of California seeking
monetary damages and rescission of the contract. On
June 24,
2005, we answered, denying the allegations, and filed a counterclaim. After
a
Markman ruling relating to the Jang patent rights, Dr. Jang stipulated
to the
dismissal of certain claims alleged in the complaint with a right to appeal.
In
February 2007, the parties agreed to settle the other claims of the case.
On May
23, 2007, Jang filed an appeal with respect to the remaining patent
claims.
On
April
4, 2007, SciCo Tec GmbH filed suit against us alleging certain of our balloon
catheters infringe a U.S. patent owned by SciCo Tec GmbH. The suit
was filed in the U. S. District Court for the Eastern District of Texas
seeking
monetary and injunctive relief. On May 10, 2007, SciCo Tec filed an amended
complaint based on similar allegations as those pled in the original complaint
and alleging certain additional balloon catheters and stent delivery systems
infringe the same patent. On May 14, 2007 we answered, denying the allegations
of the first complaint. On May 29, 2007, we responded to the amended complaint
and filed a counterclaim seeking declaratory judgment of invalidity and
non-infringement with respect to the patent at issue. A trial has
been scheduled for November 10, 2008.
On
April
19, 2007, SciCo Tec GmbH, filed suit against us and our subsidiary, Boston
Scientific Nedizintechnik GmbH, alleging certain balloon catheters infringe
a
German patent owned by SciCo Tec GmbH. The suit was filed in
Mannheim, Germany. We will answer the complaint, denying the
allegations.
In
February 2003, Boston Scientific completed its acquisition of Inflow Dynamics,
Inc. pursuant to an Agreement and Plan of Merger dated December 2, 2002,
among
Boston Scientific, Inflow Dynamics, the stockholders of Inflow Dynamics
and
Eckard Alt, Donald Green and Jerry Griffin, acting in each case solely
as
members of the Stockholder Representative Committee (the “Merger Agreement”). On
September 21, 2006, the Stockholder Representative Committee made a demand
for
arbitration pursuant to the terms of the Merger Agreement seeking contingent
payments with respect to the sales of our Liberté™
stent
system and
TAXUS Liberté stent system. A hearing was held July 11 and 12, 2007, and a
decision is expected September 13, 2007.
Other
Proceedings
On
January 10, 2002 and January 15, 2002, Alan Schuster and Antoinette
Loeffler, respectively, putatively initiated shareholder derivative lawsuits
for
and on our behalf in the U.S. District Court for the Southern District
of New
York against our then current directors and us as nominal defendant. Both
complaints allege, among other things, that with regard to our relationship
with
Medinol, the defendants breached their fiduciary duties to us and our
shareholders in our management and affairs, and in the use and preservation
of
our assets. The suits seek a declaration of the directors’ alleged breach,
damages sustained by us as a result of the alleged breach and monetary
and
injunctive relief. On October 18, 2002, the plaintiffs filed a consolidated
amended complaint naming two senior officials as defendants and us as nominal
defendant. The action was stayed in February 2003 pending resolution of a
separate lawsuit brought by Medinol against us. After the resolution of
the
Medinol lawsuit, plaintiffs, on May 1, 2006, were permitted to file an
amended
complaint to supplement the allegations in the prior consolidated amended
complaint based mainly on events that occurred subsequent to the parties’
agreement to stay the action. The defendants filed a motion to dismiss
the
amended
complaint
on or about June 30, 2006. The motion was denied without prejudice on October
18, 2006, and the Court ordered that the amended complaint be deemed a
demand
for our Board of Directors to consider taking action in connection with
the
allegations of the amended complaint. On February 20, 2007, the Board of
Directors responded, rejecting plaintiffs’ demand. Defendants filed a
renewed motion to dismiss the amended complaint on March 13, 2007. The
Court
granted Defendants’ renewed motion and dismissed the amended complaint on June
13, 2007.
On
September 8, 2005, the Laborers Local 100 and 397 Pension Fund initiated a
putative shareholder derivative lawsuit on our behalf in the Commonwealth
of
Massachusetts Superior Court Department for Middlesex County against our
directors, certain of our current and former officers, and us as nominal
defendant. The complaint alleged, among other things, that with regard
to
certain matters of regulatory compliance, the defendants breached their
fiduciary duties to us and our shareholders in the management and affairs
of our
business and in the use and preservation of our assets. The complaint also
alleged that as a result of the alleged misconduct and the purported failure
to
publicly disclose material information, certain directors and officers
sold our
stock at inflated prices in violation of their fiduciary duties and were
unjustly enriched. The suits sought a declaration of the directors’ and
officers’ alleged breaches, unspecified damages sustained by us as a result of
the alleged breaches and other unspecified equitable and injunctive relief.
On
September 15, 2005, Benjamin Roussey also initiated a putative shareholder
derivative lawsuit in the same Court alleging similar misconduct and seeking
similar relief. Following consolidation of the cases, the defendants filed
a
motion to dismiss the consolidated derivative complaint. Our motion to
dismiss
was granted without leave to amend on September 11, 2006. On September
21, 2006,
plaintiff Laborers Local 100 and 397 Pension Fund filed a motion to alter
or
amend judgment and for leave to file an amended complaint which was denied
on
October 19, 2006. The Board of Directors thereafter received two letters
from
the Laborers Local 100 and 397 Pension Fund dated February 21,
2007. One letter demanded that the Board of Directors investigate and
commence action against the defendants named in the original complaint
in
connection with the matters alleged in the original complaint. The second
letter
(as well as subsequent letters from the Pension Fund) made a demand for
an
inspection of certain books and records for the purpose of, among other
things,
the investigation of possible breaches of fiduciary duty, misappropriation
of
information, abuse of control, gross mismanagement, waste of corporate
assets
and unjust enrichment. On March 21, 2007, we rejected the request to inspect
books and records on the ground that Laborers Local 100 and 397 Pension
Fund had
not established a proper purpose for the request.
On
September 23, 2005, Srinivasan Shankar, on behalf of himself and all others
similarly situated, filed a purported securities class action suit in the
U.S.
District Court for the District of Massachusetts on behalf of those who
purchased or otherwise acquired our securities during the period March 31,
2003 through August 23, 2005, alleging that we and certain of our officers
violated certain sections of the Securities Exchange Act of 1934. On
September 28, 2005, October 27, 2005, November 2, 2005 and
November 3, 2005, Jack Yopp, Robert L. Garber, Betty C. Meyer and John
Ryan, respectively, on behalf of themselves and all others similarly situated,
filed additional purported securities class action suits in the same Court
on
behalf of the same purported class. On February 15, 2006, the Court
ordered that the five class actions be consolidated and appointed the
Mississippi Public Employee Retirement System Group as lead
plaintiff.
A consolidated amended complaint was filed on April 17, 2006. The consolidated
amended complaint alleges that we made material misstatements and omissions
by
failing to disclose the supposed merit of the Medinol litigation and DOJ
investigation relating to the 1998 NIR ON® Ranger with Sox stent recall,
problems with the TAXUS® drug-eluting coronary stent systems that led to product
recalls, and our ability to satisfy FDA regulations concerning medical
device
quality. The consolidated amended complaint seeks unspecified damages,
interest,
and attorneys’ fees. The defendants filed a motion to dismiss the consolidated
amended complaint on June 8, 2006 which was granted by the Court on March
30,
2007. On April 27, 2007, plaintiffs appealed the Court’s decision.
On
January 19, 2006, George Larson, on behalf of himself and all others
similarly situated, filed a purported class action complaint in the U.S.
District Court for the District of Massachusetts on behalf of participants
and
beneficiaries of our 401(k) Retirement Savings Plan (401(k) Plan) and GESOP
(together the Plans) alleging that we and certain of our officers and employees
violated certain provisions under the Employee Retirement Income Security
Act of
1974, as amended (ERISA) and Department of Labor Regulations. On
January 26, 2006, February 8, 2006, February 14, 2006,
February 23, 2006 and March 3, 2006, Robert Hochstadt, Jeff Klunke, Kirk
Harvey, Michael Lowe and Douglas Fletcher, respectively, on behalf of themselves
and others similarly situated, filed purported class action complaints
in the
same Court on behalf of the participants and beneficiaries in our Plans
alleging
similar misconduct and seeking similar relief as in the Larson lawsuit.
On April
3, 2006, the Court issued an order consolidating the actions and appointing
Jeffrey Klunke and Michael Lowe as interim lead plaintiffs. On August 23,
2006,
plaintiffs filed a consolidated complaint that purports to bring a class
action
on behalf of all participants and beneficiaries of our 401(k) Plan during
the
period May 7, 2004 through January 26, 2006 alleging that we, our 401(k)
Administrative and Investment Committee (the Committee), members of the
Committee, and certain directors violated certain provisions of ERISA.
The
complaint alleges, among other things, that the defendants breached their
fiduciary duties to the 401(k) Plan’s participants. The complaint seeks
equitable and monetary relief. Defendants filed a motion to dismiss on
October
10, 2006. Plaintiffs filed their opposition memorandum on December 15,
2006, and defendants filed their reply on January 16, 2007. A hearing on
the motion to dismiss was held on August 8, 2007.
We
have
been a defendant in two lawsuits involving the TAXUS Express2 paclitaxel-eluting
coronary stent system in which the plaintiffs are seeking class certification.
On November 16, 2006, Michael Seaburn and Beatriz Seaburn filed suit in
the U.S.
District Court for the Southern District of Florida on behalf of themselves
and
a purported class of plaintiffs resident in the United States. This suit
was
voluntarily dismissed by Plaintiffs on June 6, 2007. On January 23, 2007,
Ronald
E. and Tammy Coterill filed suit in the U.S. District Court for the District
of
Idaho on behalf of themselves and a purported class of plaintiffs resident
in
the state of Idaho or any contiguous state. The complaint seeks certification
of
class status and also compensatory damages for personal injury, restitution
of
the purchase price, disgorgement of our profits associated with the sale
of
TAXUS stent systems, and injunctive relief in the form of medical monitoring.
We
have answered the complaint and intend to vigorously defend against each
of the
allegations.
On
June 12, 2003, Guidant announced that its subsidiary, EndoVascular
Technologies, Inc. (EVT), had entered into a plea agreement with the U.S.
Department of Justice relating to a
previously
disclosed investigation regarding the ANCURE ENDOGRAFT System for the treatment
of abdominal aortic aneurysms. At the time of the EVT plea, Guidant had
outstanding fourteen suits alleging product liability related causes of
action
relating to the ANCURE System. Subsequent to the EVT plea, Guidant was
notified
of additional claims and served with additional complaints. From time to
time,
Guidant has settled certain of the individual claims and suits for amounts
that
were not material to Guidant. Currently, Guidant has 16 filed lawsuits
outstanding, and more suits may be filed. Additionally, Guidant has been
notified of more than 130 unfiled claims that are pending. The cases generally
allege the plaintiffs suffered injuries, and in certain cases died, as
a result
of purported defects in the device or the accompanying warnings and labeling.
The complaints seek damages, including punitive damages.
Although
insurance may reduce Guidant’s exposure with respect to ANCURE System claims,
one of Guidant’s carriers, Allianz Insurance Company (Allianz), filed suit in
the Circuit Court, State of Illinois, County of DuPage, seeking to rescind
or
otherwise deny coverage and alleging fraud. Additional carriers have
intervened in the case and Guidant affiliates, including EVT, are also
named as
defendants. Guidant and its affiliates also initiated suit against certain
of their insurers, including Allianz, in the Superior Court, State of
Indiana, County of Marion, in order to preserve Guidant’s rights to coverage.
The lawsuits are virtually identical and proceeding in both state courts.
A
trial has not yet been scheduled in either case. On March 23, 2007, the
Court in the Indiana lawsuit granted Guidant and its affiliates’ motion for
partial summary judgment regarding Allianz’s duty to defend, finding that
Allianz breached its duty to defend 41 ANCURE lawsuits. On April 19,
2007, Allianz filed a notice of appeal of that ruling. On July 11, 2007,
the
Illinois court entered a partial summary judgment ruling in favor of
Allianz.
Shareholder
derivative suits relating to the ANCURE System are currently pending in
the
Southern District of Indiana and in the Superior Court of the State of
Indiana,
County of Marion. The suits, purportedly filed on behalf of Guidant, initially
alleged that Guidant’s directors breached their fiduciary duties by taking
improper steps or failing to take steps to prevent the ANCURE and EVT related
matters described above. The complaints seek damages and other equitable
relief.
The state court derivative suits have been stayed in favor of the federal
derivative action. On March 9, 2007, the Superior Court granted the parties’
joint motion to dismiss the complaint with prejudice for lack of standing
in one
of the pending state derivative actions. The plaintiff in the federal derivative
case filed an amended complaint in December 2005, adding allegations regarding
defibrillator and pacemaker products and Guidant’s proposed merger with
Johnson & Johnson. On January 23, 2006, Guidant and its directors
moved to dismiss the amended complaint. On March 17, 2006, a second amended
complaint in the federal derivative case was filed. On May 1, 2006, the
defendants moved to dismiss the second amended complaint. This motion remains
pending.
In
July
2005, a purported class action complaint was filed on behalf of participants
in
Guidant’s employee pension benefit plans. This action was filed in the U.S.
District Court for the Southern District of Indiana against Guidant and
its
directors. The complaint alleges breaches of fiduciary duty under the Employee
Retirement Income Security Act (ERISA), 29 U.S.C. § 1132.
Specifically, the complaint alleges that Guidant fiduciaries concealed
adverse
information about Guidant’s defibrillators and imprudently made contributions to
Guidant’s 401(k) plan and
employee
stock ownership plan in the form of Guidant stock. The complaint seeks
class
certification, declaratory and injunctive relief, monetary damages, the
imposition of a constructive trust, and costs and attorneys’ fees. A second,
similar complaint was filed and consolidated with the initial complaint.
A
consolidated, amended complaint was filed on February 8, 2006. The
defendants moved to dismiss the consolidated complaint, and on September
15,
2006, the Court dismissed the complaint for lack of jurisdiction. In October
2006, the Plaintiffs appealed the Court’s decision to the United States Court of
Appeals for the Seventh Circuit. A hearing was held on April 10, 2007.
In June
2007, the Seventh Circuit vacated the dismissal and remanded the case to
the
District Court. The Seventh Circuit specifically instructed the District
Court
to consider potential problems with the Plaintiffs’ ability to prove damages or
a breach of fiduciary duty.
Approximately
75 product liability class action lawsuits and more than 2,000 individual
lawsuits involving approximately 5,320 individual plaintiffs are pending
in
various state and federal jurisdictions against Guidant alleging personal
injuries associated with defibrillators or pacemakers involved in the 2005
and
2006 product communications. The majority of the cases in the United States
are pending in federal court but 198 cases are currently pending in state
courts. On November 7, 2005, the Judicial Panel on Multi-District
Litigation established MDL-1708 (MDL) in the United States District Court
for
the District of Minnesota and appointed a single judge to preside over
all the
cases in the MDL. In April 2006, the personal injury plaintiffs and certain
third-party payors served a Master Complaint in the MDL asserting claims
for
class action certification, alleging claims of strict liability, negligence,
fraud, breach of warranty and other common law and/or statutory claims
and
seeking punitive damages. The majority of claimants allege no physical
injury,
but are suing for medical monitoring and anxiety. On July 13, 2007,
we reached an agreement to settle certain claims associated with the 2005
and
2006 product communications. Subject to certain conditions, we will
pay a total of $195 million. The agreement includes approximately
4,000 claims of individuals that have been consolidated in the MDL, as
well as
an undetermined number, but not all, of additional similar claims throughout
the
country. To date, Guidant has also been informed of over 3,100 other claims
of
individuals that may or may not mature into filed suits.
An
additional seventeen lawsuits are pending internationally. Nine suits are
pending in Canada, six of which are putative class actions and three are
individual lawsuits. On June 13, 2006, the Minnesota Supreme Court appointed
a
single judge to preside over all Minnesota state court lawsuits involving
cases
arising from the recent product communications. The first state court trial
has
been scheduled in Minnesota for January 28, 2008.
Guidant
has received requests for information in the form of Civil Investigative
Demands
(CID) from the attorneys general of Arizona, California, Oregon, Illinois,
Vermont and Louisiana. These attorneys general advise that approximately
twenty-nine other states and the District of Columbia are cooperating in
these
CID demands. The CIDs pertain to whether Guidant violated any applicable
state
laws, primarily state consumer protection laws, in connection with the
sale and
promotion of certain of its implantable defibrillators. Guidant is cooperating
with these investigations.
On
November 2, 2005, the Attorney General of the State of New York filed a
civil complaint against Guidant pursuant to the New York’s Consumer Protection
Law (N.Y. Executive Law §
63(12)).
In the complaint, the Attorney General alleges that Guidant concealed from
physicians and patients a design flaw in its PRIZM 1861 defibrillator from
approximately February of 2002 until May 23, 2005. The complaint further
alleges that due to Guidant’s concealment of this information, Guidant has
engaged in repeated and persistent fraudulent conduct in violation of N.Y.
Executive Law § 63(12). The Attorney General is seeking permanent injunctive
relief, restitution for patients in whom a PRIZM 1861 defibrillator manufactured
before April 2002 was implanted, disgorgement of profits, and all other
proper
relief. This case is currently pending in the MDL in the United States
District
Court for the District of Minnesota.
Sixty-nine
former employees filed charges against Guidant with the U.S. Equal Employment
Opportunity Commission (EEOC) alleging that Guidant discriminated against
the
former employees on the basis of their age when Guidant terminated their
employment in the fall of 2004 as part of a reduction in force. In September
2006, the EEOC found probable cause to support the allegations in the charges
pending before it. Separately, in April 2006, sixty-one of these former
employees also sued Guidant in federal district court for the District
of
Minnesota, again alleging that Guidant discriminated against the former
employees on the basis of their age when it terminated their employment
in the
Fall of 2004 as part of a reduction in force. All but one of the plaintiffs
in
the federal court action signed a full and complete release of claims that
included any claim based on age discrimination, shortly after their employments
ended in 2004. The parties conducted discovery in the Fall of 2006 regarding
the
issue of the validity of those releases and have since filed cross motions
for
summary judgment on this issue. A hearing on the summary judgment motions
was
held on February 21, 2007, and on April 4, 2007, the Court issued a decision
in
which it held that the releases did not bar the plaintiffs from pursuing
their
claims of age discrimination against Guidant. On April 30, 2007, Guidant
moved
the District Court for permission to appeal this decision to the United
States
Court of Appeals for the Eighth Circuit but on July 18, 2007, the Eighth
Circuit
Court of Appeals declined to accept our appeal. Counsel for the plaintiffs
voluntarily dismissed two of their clients from the case, leaving a total
of
fifty-nine individual plaintiffs, and have moved the District Court for
preliminary certification of the matter as a class action. A hearing
on the preliminary class certification motion is scheduled for August 30,
2007.
Guidant
is a defendant in two separate complaints in which plaintiffs allege a
right of
recovery under the Medicare secondary payer (or MSP) private right of action,
as
well as related claims. Plaintiffs claim as damages double the amount paid
by
Medicare in connection with devices that were the subject of recent voluntary
field actions. Both of these cases were pending in the MDL in the United
States
District Court for the District of Minnesota. We moved to dismiss one of
the
suits and the plaintiff filed an opposition to this motion. The Court
held a hearing on the motion to dismiss the MSP claim on March 6, 2007
which was
granted on April 16, 2007. Plaintiffs appealed this dismissal to the Eighth
Circuit Court of Appeals. Guidant moved to dismiss the appeal for
lack of appellate jurisdiction. The Eighth Circuit granted Guidant’s
motion, and dismissed the MSP appeal, which the MSP plaintiffs now seek
to have
certified by the District Court for interlocutory appeal. The
District Court, however, has stayed this motion and others like it due
to the
recent announcement of the MDL settlement. Guidant expects to oppose plaintiffs’
motion for interlocutory certification if, and when, the court lifts the
stay. Guidant expects to file a motion to dismiss the second MSP claim
based on the Court’s recent ruling relating to the first MSP claim once the
District Court indicates a willingness to hear these motions.
Guidant
or its affiliates are defendants in four separate actions brought by private
third-party providers of health benefits or health insurance (TPPs). In
these
cases, plaintiffs allege various theories of recovery, including derivative
tort
claims, subrogation, violation of consumer protection statutes and unjust
enrichment, for the cost of healthcare benefits they allegedly paid for
in
connection with the devices that have been the subject of Guidant’s voluntary
field actions.
Two
of
these actions were pending in the multi-district litigation in the federal
district court in Minnesota (MDL) as part of a single ‘master
complaint,’
filed on April 24, 2006, which also includes other types of claims by other
plaintiffs. The two named TPP plaintiffs in the master complaint claim
to
represent a putative nationwide class of TPPs. These two TPP plaintiffs
had previously filed separate complaints against
Guidant. Guidant moved to dismiss the MDL TPP claims in the master
complaint for lack of standing and for failure to state a claim. A
hearing was held on March 6, 2007, and on April 16, 2007, the MDL Court
granted
Guidant’s motion to dismiss, dismissing the claims of both TPP plaintiffs in the
MDL. While most of the claims were dismissed with prejudice, the
subrogation claims brought by the TPP plaintiffs were dismissed without
prejudice and may later be reasserted. The TPP plaintiffs have filed an
appeal
of that ruling in the Eighth Circuit and have moved the District Court
for
certification of that ruling for interlocutory appeal. Guidant has
filed a motion to dismiss plaintiffs appeal.
The
other
two TPP actions are pending in state court in Minnesota, and are part of
the coordinated state court proceeding ordered by the Minnesota Supreme
Court.
The plaintiffs in one of these cases are a number of Blue Cross & Blue
Shield plans, while the plaintiffs in the other case are a national health
insurer and its affiliates. The complaints in these cases were served
on Guidant on May 18 and June 25, 2006, respectively. Guidant has moved to
dismiss both cases. A hearing was held on June 18, 2007.
In
January 2006, Guidant was served with a civil False Claims Act qui tam
lawsuit filed in the U.S. District Court for the Middle District of
Tennessee in September 2003 by Robert Fry, a former employee alleged to
have worked for Guidant from 1981 to 1997. The lawsuit claims that Guidant
violated federal law and the laws of the States of Tennessee, Florida and
California, by allegedly concealing limited warranty and other credits
for
upgraded or replacement medical devices, thereby allegedly causing hospitals
to
file reimbursement claims with federal and state healthcare programs for
amounts
that did not reflect the providers’ true costs for the devices. On April 25,
2006, the Court denied Guidant’s motion to dismiss the complaint, but ordered
the relator to file a second amended complaint. On May 4, 2006, the relator
filed a second amended complaint. On May 24, 2006, Guidant moved to dismiss
that
complaint, which motion was denied by the Court on September 13, 2006.
On
October 16, 2006, the United States filed a motion to intervene in this
action,
which was approved by the Court on November 2, 2006. To date, no state
has
intervened in this case.
In
2005,
the Securities and Exchange Commission began a formal inquiry into issues
related to certain of Guidant’s product disclosures and trading in Guidant
stock. Guidant has cooperated with the inquiry.
On
November 3, 2005, a securities class action complaint was filed on behalf
of purchasers of Guidant stock between December 1, 2004 and October 18,
2005 in
the U.S. District Court for the
Southern
District of Indiana, against Guidant and several of its officers and directors.
The complaint alleges that the defendants concealed adverse information
about
Guidant’s defibrillators and pacemakers and sold stock in violation of federal
securities laws. The complaint seeks a declaration that the lawsuit can
be
maintained as a class action, monetary damages, and injunctive relief.
Several
additional, related securities class actions were filed in November 2005
and
January 2006, and were consolidated with the initial complaint filed on
November 3, 2005. The Court issued an order consolidating the complaints
and appointed the Iron Workers of Western Pennsylvania Pension Plan and
David
Fannon as lead plaintiffs. Lead plaintiffs filed a consolidated amended
complaint. In August 2006, the defendants moved to dismiss the complaint.
That
motion remains pending.
In
October 2005, Guidant received administrative subpoenas from the U.S. Department
of Justice U.S. Attorney’s offices in Boston and Minneapolis, issued under
the Health Insurance Portability & Accountability Act of 1996. The
subpoena from the U.S. Attorney’s office in Boston requests documents concerning
marketing practices for pacemakers, implantable cardioverter defibrillators,
leads and related products. The subpoena from the U.S. Attorney’s office in
Minneapolis requests documents relating to Guidant’s VENTAK PRIZM 2 and CONTAK
RENEWAL and CONTAK RENEWAL 2 devices. Guidant is cooperating in these
matters.
On
May 3,
2006, Emergency Care Research Institute (ECRI) filed a complaint against
Guidant
in the U.S. District Court for the Eastern District of Pennsylvania generally
seeking a declaration that ECRI may publish confidential pricing information
about Guidant’s medical devices. The complaint seeks, on constitutional and
other grounds, a declaration that confidentiality clauses contained in
contracts
between Guidant and its customers are not binding and that ECRI does not
tortiously interfere with Guidant’s contractual relations by obtaining and
publishing Guidant pricing information. Guidant’s motion to transfer the matter
to Minnesota was denied and discovery is proceeding in the Eastern District
of
Pennsylvania. A trial is expected to be scheduled in late 2007 or early
2008.
On
July
17, 2006, Carla Woods and Jeffrey Goldberg, as Trustees of the Bionics
Trust and
Stockholders’ Representative, filed a lawsuit against us in the U.S. District
Court for the Southern District of New York. The complaint alleges that
we
breached the Agreement and Plan of Merger among us, Advanced Bionics
Corporation, the Bionics Trust, Alfred E. Mann, Jeffrey H. Greiner, and
David
MacCallum, collectively in their capacity as Stockholders’ Representative, and
others dated May 28, 2004 (the Merger Agreement) or, alternatively, the
covenant
of good faith and fair dealing. The complaint seeks injunctive and other
relief.
On February 20, 2007, the district court entered a preliminary injunction
prohibiting us from taking certain actions until we complete specific actions
described in the Merger Agreement. We appealed the preliminary injunction
order
on March 16, 2007. On April 17, 2007, the district court issued a permanent
injunction. On May 7, 2007, we appealed the permanent injunction
order. A hearing on the appeal was held on July 13, 2007.
On
January 16, 2007, the French Conseil de la Concurrence (one of the bodies
responsible for the enforcement of antitrust/competition law in France)
issued a
Statement of Objections alleging that Guidant had agreed with the four
other
main suppliers of ICDs in France to collectively refrain from responding
to a
2001 tender for ICDs conducted by a group of seventeen University Hospital
Centers in France. This alleged collusion is said to be contrary to the
French
Commercial
Code and Article 81 of the European Community Treaty. Guidant France filed
a
response to the Statement of Objections on March 29, 2007. On June 25,
2007, a
further report was issued addressing the defendants’ response and recommending
that the Conseil pursue the alleged violation of competition law. Guidant
France
will file its full defense with the Conseil on or before August 28,
2007.
On
February 28, 2007, we received a letter from the Congressional Committee
on
Oversight and Government Reform requesting information relating to our
TAXUS
stent systems. The Committee’s request expressly related to concerns
about the safety and off-label use of drug-eluting stents raised by a recent
FDA
panel. We are one of two device companies asked to provide information
about research and marketing activities relating to drug-eluting
stents. We are cooperating with the Committee regarding its
request.
FDA
Warning Letters
On
December 23, 2005, Guidant received an FDA warning letter citing certain
deficiencies with respect to its manufacturing quality systems and
record-keeping procedures in its CRM facility in St. Paul, Minnesota. In
2007,
following FDA reinspections of our CRM facilities, we resolved the warning
letter and all associated restrictions were removed.
On
January 26, 2006, legacy Boston Scientific received a corporate warning
letter from the FDA, notifying us of serious regulatory problems at three
facilities and advising us that our corrective action plan relating to
three site-specific warning letters issued to us in 2005 was inadequate. As
also stated in this FDA warning letter, the FDA may not grant our requests
for
exportation certificates to foreign governments or approve pre-market approval
applications for class III devices to which the quality control or
current good manufacturing practices deficiencies described in the letter
are
reasonably related until the deficiencies have been corrected.
NOTE
J – INCOME TAXES
The
following table provides a summary of our reported tax rate:
|
|
Three
Months Ended
|
|
|
Percentage
|
|
|
|
June
30,
|
|
|
Point
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
|
Reported
tax rate
|
|
|
8.7%
|
|
|
|
(1.8%)
|
|
|
|
10.5%
|
|
Impact
of certain charges*
|
|
|
12.3%
|
|
|
|
24.8%
|
|
|
|
(12.5%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
June
30,
|
|
|
Percentage
Point
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
|
Reported
tax rate
|
|
|
17.8%
|
|
|
|
(4.7%)
|
|
|
|
22.5%
|
|
Impact
of certain charges*
|
|
|
3.2%
|
|
|
|
27.7%
|
|
|
|
(24.5%)
|
|
*These
charges are taxed at different rates than our effective tax
rate.
The
increase in our reported tax rate for the second quarter of 2007 and the
first
half of 2007 as compared to the same periods in the prior year related
primarily
to the impact of certain charges that are taxed at different rates than
our
effective tax rate. In 2007, these charges included certain investment
portfolio
activity and discrete tax items associated with the resolution of various
tax
matters related to prior periods. In 2006, these charges included purchased
research and development associated with the acquisition of Guidant; a
charge to
step-up the value of acquired inventory sold during the quarter; a tax
charge
for the drug-eluting stent license right obtained from Abbott; the fair
value
adjustment related to the sharing of proceeds feature of the Abbott stock
purchase; and the net reserve increase resulting from tax audit settlements
and new tax reserve items that originated in the quarter. In addition,
our
effective tax rate for 2007 decreased by approximately two percentage points
as
compared to the prior year due primarily to our decision at the end of
2006 to
indefinitely reinvest earnings in foreign operations in order to repay
debt
obligations associated with the Guidant acquisition.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. As a result of the
implementation of Interpretation No. 48, we recognized an approximately
$128 million increase in our liability for unrecognized tax benefits.
Approximately $28 million of this increase was reflected as a reduction
to the
January 1, 2007 balance of retained earnings. Substantially all of
the remaining increase related to pre-acquisition uncertain tax liabilities
related to Guidant and was recorded as an increase to goodwill in accordance
with EITF Issue No. 93-7, Uncertainties Related to Income Taxes in a
Purchase Business Combination. At the adoption date of January
1, 2007, we had $1.155 billion of gross unrecognized tax benefits, $360
million
of which, if recognized, would affect our effective tax rate. At June
30, 2007, we had $1.132 billion of gross unrecognized tax benefits, $394
million
of which, if recognized, would affect our effective tax rate.
We
are
subject to U.S. federal income tax as well as income tax of multiple state
and
foreign jurisdictions. We have concluded all U.S. federal income tax
matters through 1997. Substantially all material state, local, and
foreign income tax matters have been concluded for all years through
2001.
During
the second quarter of 2007, we settled several audits, obtained an Advance
Pricing Agreement between the U.S. and Japan, and received a favorable
appellate
court decision on a previously outstanding Japan matter with respect to
the 1995
to 1998 tax periods. As a result of settlement of these matters, net of
payments, we decreased our reserve for uncertain tax positions by $67 million,
inclusive of $16 million of interest and penalties. Of this amount,
we treated $53 million as a reduction in goodwill in accordance with Issue
No. 93-7, and we reversed the remaining $14 million to earnings. It is
reasonably possible that within the next 12 months we will resolve multiple
issues with taxing authorities, including matters presently under consideration
at Appeals related to Guidant’s acquisition of Intermedics, in which case
we could record a reduction in our balance of unrecognized tax benefits
of up to
approximately $140 million.
Our
historical practice was and continues to be to recognize interest and penalties
related to income tax matters in income tax expense. We had $221
million accrued for interest and penalties at adoption of Interpretation
No. 48 and $237 million at June 30, 2007. The total amount of interest
and
penalties recognized in the unaudited condensed consolidated statements
of
earnings was $11 million for the second quarter of 2007 and $32 million
for the
first half of 2007.
NOTE
K – SEGMENT REPORTING
We
have
four reportable operating segments based on geographic regions: the United
States, Europe, Japan and Inter-Continental. Each of our reportable segments
generates revenues from the sale of medical devices. The reportable segments
represent an aggregate of all operating divisions within each segment.
We
measure and evaluate our reportable segments based on segment income. This
segment income excludes certain corporate and manufacturing expenses associated
with divisions that do not meet the definition of a segment, as defined
by FASB
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. In addition, certain transactions or adjustments that our
chief operating decision maker considers to be non-recurring and/or
non-operational, as well as stock-based compensation and amortization
expense, are excluded from segment income. Although we exclude these
amounts from segment income, they are included in reported consolidated
net
income (loss) and are included in the reconciliation below.
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 intersegment profits. We have restated the segment information
for 2006
net sales and operating results based on our standard foreign exchange
rates
used for 2007. 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.
We base
enterprise-wide information on actual foreign exchange rates used in our
unaudited condensed consolidated financial statements. A reconciliation
of the
totals reported for the reportable segments to the applicable line items
in our
consolidated financial statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
1,220
|
|
|
$ |
1,315
|
|
|
$ |
2,490
|
|
|
$ |
2,306
|
|
Europe
|
|
|
411
|
|
|
|
419
|
|
|
|
843
|
|
|
|
739
|
|
Japan
|
|
|
209
|
|
|
|
155
|
|
|
|
379
|
|
|
|
297
|
|
Inter-Continental
|
|
|
190
|
|
|
|
208
|
|
|
|
375
|
|
|
|
384
|
|
Net
sales allocated to reportable segments
|
|
$ |
2,030
|
|
|
$ |
2,097
|
|
|
$ |
4,087
|
|
|
$ |
3,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
41
|
|
|
|
13
|
|
|
|
70
|
|
|
|
4
|
|
|
|
$ |
2,071
|
|
|
$ |
2,110
|
|
|
$ |
4,157
|
|
|
$ |
3,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
378
|
|
|
$ |
508
|
|
|
$ |
768
|
|
|
$ |
971
|
|
Europe
|
|
|
193
|
|
|
|
208
|
|
|
|
417
|
|
|
|
388
|
|
Japan
|
|
|
123
|
|
|
|
81
|
|
|
|
219
|
|
|
|
161
|
|
Inter-Continental
|
|
|
92
|
|
|
|
101
|
|
|
|
179
|
|
|
|
189
|
|
Operating
income allocated to reportable segments
|
|
$ |
786
|
|
|
$ |
898
|
|
|
$ |
1,583
|
|
|
$ |
1,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
operations
|
|
|
(159 |
) |
|
|
(115 |
) |
|
|
(320 |
) |
|
|
(241 |
) |
Corporate
expenses and foreign exchange
|
|
|
(153 |
) |
|
|
(146 |
) |
|
|
(301 |
) |
|
|
(264 |
) |
Acquisition-related
and other costs
|
|
|
(4 |
) |
|
|
(4,366 |
) |
|
|
(21 |
) |
|
|
(4,366 |
) |
Amortization
and stock-based compensation expense
|
|
|
(190 |
) |
|
|
(196 |
) |
|
|
(378 |
) |
|
|
(266 |
) |
|
|
|
280
|
|
|
|
(3,925 |
) |
|
|
563
|
|
|
|
(3,428 |
) |
Other
income (expense)
|
|
|
(154 |
) |
|
|
(261 |
) |
|
|
(277 |
) |
|
|
(327 |
) |
|
|
$ |
126
|
|
|
$ |
(4,186 |
) |
|
$ |
286
|
|
|
$ |
(3,755 |
) |
NOTE
L – NEW ACCOUNTING PRONOUNCEMENTS
Statement
No. 159
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities, including an amendment
of FASB
Statement No. 115, which allows an entity to elect to record financial
assets and liabilities at fair value upon their initial recognition on
a
contract-by-contract basis. Subsequent changes in fair value would be recognized
in earnings as the changes occur. Statement No. 159 also establishes additional
disclosure requirements for these items stated at fair value. Statement
No. 159
is effective for our 2008 fiscal year, with early adoption permitted, provided
that we also adopt Statement No. 157, Fair Value Measurements. We
are currently evaluating the impact that the adoption of Statement No.
159 will
have on our consolidated financial statements.
Issue
No. 06-3
In
June
2006, the FASB ratified EITF Issue No. 06−3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented
in the
Income Statement (That Is, Gross versus Net Presentation). The scope of
this consensus includes any taxes assessed by a governmental authority
that are
directly imposed on a revenue producing transaction between
a
seller
and a customer and may include, but are not limited to: sales, use, value-added,
and some excise taxes. Per the consensus, the presentation of these taxes
on
either a gross (included in revenues and costs) or a net (excluded from
revenues) basis is an accounting policy decision that should be disclosed.
We
present sales net of sales taxes in our unaudited condensed consolidated
statements of operations. Issue No. 06−3 is effective for interim and annual
reporting periods beginning after December 15, 2006. No change of presentation
has resulted from our adoption of Issue No. 06−3.