<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-K/A2
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File No. 1-11083
--------------------------------------
BOSTON SCIENTIFIC CORPORATION
(Exact name of Company as specified in its charter)
DELAWARE 04-2695240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537
(Address, including zip code, of principal executive offices)
(508) 650-8000
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
--------------------------------------
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
<PAGE> 2
The aggregate market value of Common Stock held by non-affiliates (persons other
than directors, executive officers, and related family entities) of the Company
was approximately $9.2 billion based on the closing price of the Common Stock on
March 15, 1999.
The number of shares outstanding of the Company's Common Stock as of March 15,
1999 was 394,872,509.
INTRODUCTION
This Amended Annual Report on Form 10-K/A2 for the year ended December 31, 1998
supplements the disclosure under Management's Discussion and Analysis of
Financial Condition and Results of Operations and the notes to the consolidated
financial statements of the Company and its subsidiaries contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. No
modifications were made to Parts I and III of the Company's 1998 Annual Report
on Form 10-K or to the results reported in the financial statements that are
attached hereto as Exhibit 13.1 and incorporated herein.
<PAGE> 3
PART II
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ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information set forth under the caption "Market for the Company's Common
Stock and Related Matters" included in the Company's 1998 Consolidated Financial
Information (Exhibit 13.1 filed herewith) is incorporated herein by reference.
The closing price of the Company's Common Stock on March 15, 1999 was $33.75.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Five-Year Selected Financial Data"
included in the Company's 1998 Consolidated Financial Information (Exhibit 13.1
filed herewith) is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements and information set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's 1998 Consolidated Financial Information (Exhibit 13.1
filed herewith) are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the subcaption "Market Risk Disclosures"
contained under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Company's 1998 Consolidated
Financial Information (Exhibit 13.1 filed herewith) is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries
included in the Company's 1998 Consolidated Financial Information (Exhibit 13.1
filed herewith) are incorporated herein by reference.
The statements and information set forth under the caption "Quarterly Results of
Operations" included in the Company's 1998 Consolidated Financial Information
(Exhibit 13.1 filed herewith) are incorporated herein by reference.
<PAGE> 4
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE> 5
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements.
The response to this portion of Item 14 is set forth under Item 8.
(a)(2) Financial Schedules.
The response to this portion of Item 14 is filed herewith as a
separate attachment to this report.
(a)(3) Exhibits (* documents filed herewith).
EXHIBIT
NO. TITLE
------- -----
3.1 Second Restated Certificate of Incorporation of the Company
(Exhibit 3.1, Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 1-11083).
3.2 Certificate of Amendment of the Second Restated Certificate
of Incorporation of the Registrant (Exhibit 3.2, Annual
Report on Form 10-K for the year ended December 31, 1994,
File No. 1-11083).
3.3 Certificate of Second Amendment of the Second Restated
Certificate of Incorporation of the Registrant (Exhibit
3.3, Annual Report on Form 10-K for the year ended
December 31, 1998, File No. 1-11083).
3.4 Restated By-laws of the Company (Exhibit 3.2, Registration
No. 33- 46980).
4.1 Specimen Certificate for shares of the Company's Common
Stock (Exhibit 4.1, Registration No. 33-46980).
4.2 Description of Capital Stock contained in Exhibits 3.1,
3.2, 3.3 and 3.4.
4.3 Form of Debt Securities Indenture (Exhibit 4.4,
Registration Statement on Form S-3 of the Company, BSC
Capital Trust, BSC Capital Trust II and BSC Capital Trust
III, File No. 333-64887)
10.1 Boston Scientific Corporation 1992 Long-Term Incentive
Plan, as amended (Exhibit 10.1, Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-11083).
10.2 Boston Scientific Corporation 1992 Non-Employee Directors'
Stock Option Plan, as amended (Exhibit 10.2, Annual Report
on Form 10-K for the year ended December 31, 1996, File No.
1-11083).
10.3 Boston Scientific Corporation 1995 Long-Term Incentive
Plan, as amended (Exhibit 10.3, Annual Report on Form 10-K
for the year ended December 31, 1996, File No. 1-11083).
<PAGE> 6
EXHIBIT
NO. TITLE
------- -----
10.4 SCIMED Life Systems, Inc. 1987 Non-Qualified Stock Option
Plan, amended and restated (Exhibit 4.3, Registration No.
33-89772 which was incorporated by reference to Exhibit A
to SCIMED's Proxy Statement dated May 23, 1991 for its 1991
Annual Meeting of Shareholders, Commission File No.
0-9301).
10.5 SCIMED Life Systems, Inc. 1991 Directors Stock Option Plan,
as amended (Exhibit 4.2, Registration No. 33-89772 which
was incorporated by reference to Exhibit A to SCIMED's
Proxy Statement dated June 8, 1994 for its 1994 Annual
Meeting of Shareholders, Commission File No. 0- 9301).
10.6 SCIMED Life Systems, Inc. 1992 Stock Option Plan (Exhibit
4.1, Registration No. 33-89772 which was incorporated by
reference to Exhibit A to SCIMED's Proxy Statement dated
May 26, 1992 for its 1992 Annual Meeting of Shareholders,
Commission File No. 0-9301).
10.7 Heart Technology, Inc. Restated 1989 Stock Option Plan
(Exhibit 4.5, Registration No. 33-99766 which was
incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-1 of Heart Technology,
Registration No. 33-45203).
10.8 Heart Technology, Inc. 1992 Stock Option Plan for
Non-Employee Directors (Exhibit 4.6, Registration No.
33-99766 which was incorporated by reference to Exhibit
10.5 to the Registration Statement on Form S-1 of Heart
Technology, Registration No. 33-45203).
10.9 Heart Technology, Inc. 1995 Stock and Incentive Plan
(Exhibit 4.7, Registration No. 33-99766 which was
incorporated by reference to Exhibit 10.4 to the Quarterly
Report on 10-Q/A of Heart Technology for its fiscal quarter
ended June 30, 1995, filed on August 30, 1995, File No.
0-19812).
10.10 Cardiovascular Imaging Systems, Inc. 1987 Incentive Stock
Option Plan, as amended (Exhibit 4.2, Registration No.
33-93790 which was incorporated by reference to CVIS's
Registration Statement on Form S-1 filed on March 11, 1992,
Registration No. 33-46330).
10.11 EP Technologies, Inc. 1988 Stock Plan (Exhibit 4.7,
Registration No. 33- 80265 which was incorporated by
reference to EPT's Registration Statement on Form S-8, File
No. 33-67020).
10.12 EP Technologies, Inc. 1991 Stock Option/Stock Issuance Plan
(Exhibit 4.6, Registration No. 33-80265 which was
incorporated by reference to EPT's Registration Statement
on Form S-8, File No. 33-82140).
10.13 EP Technologies, Inc. 1992 Stock Option Grant to Dr. Terry
E. Spraker, (Exhibit 4.8, Registration No. 33-80265 which
was incorporated by reference to Exhibit 10.15 to the
Annual Report on Form 10-K of EPT for the 1994 Fiscal Year,
File No. 0-22060).
10.14 EP Technologies, Inc. 1993 Stock Option/Stock Issuance
Plan, (Exhibit 4.5, Registration No. 33-80265 which was
incorporated by reference to EPT's Registration Statement
on Form S-8, File No. 33-93196).
<PAGE> 7
EXHIBIT
NO. TITLE
------- -----
10.15 Target Therapeutics, Inc. 1988 Stock Option Plan,
incorporated by reference to Exhibit 10.2 to Target
Therapeutics, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (File No. 0-19801).
10.16 Target Therapeutics, Inc. 1988 Stock Option Plan,
incorporated by reference to Exhibit 10.3 to Target
Therapeutics, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (File No. 0-19801).
10.17 Boston Scientific Corporation 401(k) Savings Plan, Amended
and Restated, Effective January 1, 1997 (Exhibit 10.17,
Annual Report on Form 10-K for the year ended December 31,
1997, File No. 1-11083).
10.18 Boston Scientific Corporation Global Employee Stock
Ownership Plan, as Amended and Restated (Exhibit 10.18,
Annual Report on Form 10-K for the year ended December 31,
1997, File No. 1-11083).
10.19 Boston Scientific Corporation Deferred Compensation Plan,
Effective January 1, 1996 (Exhibit 10.17, Annual Report on
Form 10-K for the year ended December 31, 1996, File No.
1-11083).
10.20 Form of Second Amended and Restated Credit Agreement, dated
September 4, 1998 among the Company, The Several Lenders
and certain other parties (Exhibit 10.1 to the Company's
Current Report on Form 8-K dated September 25, 1998, File
No. 1-11083).
10.21 Form of Amendment dated February 23, 1999 to Second Amended
and Restated Credit Agreement dated September 4, 1998 among
the Company, The Several Lenders and certain other parties
(Exhibit 10.21, Annual Report on Form 10-K for the year
ended December 31, 1998, File No. 1-11083).
10.22 Form of Credit Agreement dated September 4, 1998 among
Boston Scientific Corporation, The Several Lenders and
certain other parties (Exhibit 10.2 to the Company's
Current Report on Form 8-K dated September 25, 1998, File
No. 1-11083).
10.23 Form of Amendment dated February 23, 1999 to the Credit
Agreement dated September 4, 1998 among the Company, The
Several Lenders and certain other parties (Exhibit 10.23,
Annual Report on Form 10-K for the year ended December 31,
1998, File No. 1-11083).
10.24 Form of Credit Agreement dated September 9, 1998 among the
Company, The Several Lenders and Merrill Lynch Capital
Corporation (Exhibit 10.3 to the Company's Current Report
on Form 8-K dated September 25, 1998, File No. 1-11083).
10.25 Form of Amendment No. 1 dated October 22, 1998 to the
Credit Agreement dated September 9, 1998 among the Company,
The Several Lenders and Merrill Lynch Capital Corporation
(Exhibit 10.25, Annual Report on Form 10-K for the year
ended December 31, 1998, File No. 1-11083).
10.26 Form of Amendment No. 2 dated February 23, 1999 to the
Credit Agreement dated September 9, 1998 among the Company,
The Several Lenders and Merrill Lynch Capital Corporation
(Exhibit 10.26, Annual Report on Form 10-K for the year
ended December 31, 1998, File No. 1-11083).
10.27 Form of Indemnification Agreement between the Company and
certain Directors and Officers (Exhibit 10.16, Registration
No. 33-46980).
<PAGE> 8
10.28 Letter Agreement, dated June 22, 1992, between the Company
and Lawrence C. Best (Exhibit 10.11, Annual Report on Form
10-K for the year ended December 31, 1993, File No.
1-11083).
10.29 Employment Agreement, dated as of November 8, 1995, among
the Company, SCIMED and Dale A. Spencer (Exhibit 10,
Registration No. 33- 88648), as amended by Amendment No. 1,
dated as of November 22, 1995, to that certain Employment
Agreement (Exhibit 10.19, Annual Report on Form 10-K for
the year ended December 31, 1995, File No. 1-11083).
10.30 Amendment No. 2 to Employment Agreement, dated October 21,
1997, to the Employment Agreement, dated as of November 8,
1995, as amended, among the Company, SCIMED and Dale A.
Spencer (Exhibit 10.24, Annual Report on Form 10-K for the
year ended December 31, 1997, File No. 1-11083).
10.31 Form of Retention Agreement between the Company and certain
Executive Officers (Exhibit 10.23, Annual Report on Form
10-K for the year ended December 31, 1996, File No.
1-11083).
10.32 Agreement and General Release of All Claims dated as of
December 30, 1998 by and between James M. Corbett and the
Company (Exhibit 10.32, Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 1-11083).
10.33 Agreement and General Release of All Claims dated as of
January 4, 1999 by and between Charles M. Mabrey and the
Company (Exhibit 10.33, Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 1-11083).
10.34 Letter Agreement dated March 17, 1999, between the Company
and James R. Tobin (Exhibit 10.34, Annual Report on Form
10-K for the year ended December 31, 1998, File No.
1-11083).
10.35 Agreement Containing Consent Decree, dated as of February
23, 1995, between the Company and the Federal Trade
Commission (Exhibit 10.16, Annual Report on Form 10-K for
the year ended December 31, 1994, File No. 1-11083).
10.36 6.625% Promissory Notes due March 15, 2005 issued by the
Company in the aggregate principal amount of $500 million,
each dated as of March 10, 1998 (Exhibit Nos. 4.1, 4.2 and
4.3 to the Company's Current Report on Form 8-K dated March
10, 1998, File No. 1-11083).
11. Statement regarding computation of per share earnings
(included in the Company's 1998 Consolidated Financial
Information, filed as Exhibit 13.1 herewith).
12.1 Statement regarding computation of ratios of earnings to
fixed charges (Exhibit 12.1, Annual Report on Form 10-K for
the year ended December 31, 1998, File No. 1-11083).
*13.1 The Company's 1998 Consolidated Financial Information.
13.2 Report of Independent Auditors, Ernst & Young LLP (included
in the Company's 1998 Consolidated Financial Information,
filed as Exhibit 13.1 herewith).
21. List of the Company's subsidiaries as of March 15, 1999.
Each subsidiary does business under the corporate name
indicated (Exhibit 21, Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 1-11083).
*23.1 Consent of Independent Auditors, Ernst & Young LLP.
27.1 Financial Data Schedule, fiscal year ended December 31,
1998 (Exhibit 27.1, Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 1-11083).
<PAGE> 9
(b) Reports on Form 8-K.
Current Reports on Form 8-K/A and Form 8-K/A2, amending and supplementing the
Company's Current Report on Form 8-K filed on September 25, 1998 with respect to
the Item described below, were filed during the period covering the quarter
ended December 31, 1998 and the quarter ended March 31, 1999:
ITEM EVENT DATE DESCRIPTION
- ---- ---------- -----------
7 September 10, 1998 Schneider Worldwide Combined Financial
Statements for the Years Ended December 31,
1997, 1996 and 1995 and Independent
Auditor's Report; Schneider Worldwide
Unaudited Combined Financial Statements for
the Nine Months Ended September 10, 1998 and
September 14, 1997; Unaudited Pro Forma
Combined Condensed Statements of Operations
of the Company and Schneider Worldwide for
the year ended December 31, 1997 and the
nine months ended September 30, 1998.
<PAGE> 10
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act") and Rule 12b-15 promulgated by the Securities
and Exchange Commission under the Exchange Act, the Company has duly caused this
amended report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: June 1, 1999
BOSTON SCIENTIFIC CORPORATION
By: /s/ LAWRENCE C. BEST
------------------------------------------------
Lawrence C. Best
Senior Vice President--Finance and
Administration and Chief Financial Officer
<PAGE> 11
FINANCIAL STATEMENT SCHEDULE
The following additional consolidated financial statement schedule should be
considered in conjunction with the Company's 1998 Consolidated Financial
Statements (contained in the Company's 1998 Consolidated Financial Information
and included in Exhibit 13.1 filed herewith):
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present or not sufficiently material to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or the notes thereto.
<PAGE> 12
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
-----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible
amounts and sales returns.................... $30,479 15,024 15,774 (1) 12,126 (2) $49,151
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible
amounts and sales returns.................... $14,850 10,718 7,356 (1) 2,445 (2) $30,479
YEAR ENDED DECEMBER 31, 1996
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible
amounts and sales returns.................... $7,870 4,881 2,214 (1) 115 (2) $14,850
</TABLE>
(1) Charges for sales return allowances, net of actual sales returns
(2) Uncollectible accounts written off.
Certain prior years' amounts have been reclassified to conform to the
current years' presentation.
<PAGE> 1
Exhibit 13.1
BOSTON SCIENTIFIC CORPORATION
1998 Consolidated Financial Information
<PAGE> 2
BOSTON SCIENTIFIC CORPORATION
AND SUBSIDIARIES
1998
CONSOLIDATED FINANCIAL STATEMENTS
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FINANCIAL TABLE OF CONTENTS
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<TABLE>
<CAPTION>
<S> <C>
Financial Highlights F-1
Management's Discussion and Analysis of F-2
Financial Condition and Results of Operations
Consolidated Statements of Operations F-11
Consolidated Balance Sheets F-12
Consolidated Statements of Stockholders' Equity F-14
Consolidated Statements of Cash Flows F-15
Notes to Consolidated Financial Statements F-16
Report of Independent Auditors F-36
Five-Year Selected Financial Data F-37
Quarterly Results of Operations F-38
Market for the Company's Common Stock F-39
and Related Matters
</TABLE>
<PAGE> 3
FINANCIAL HIGHLIGHTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,233,576 $1,830,778 $1,551,238
Gross profit 1,498,735 1,285,237 1,123,400
Operating income (loss) (207,435) 225,455 313,171
Net income (loss) (264,369) 110,400 167,094
Net income (loss) per common share - basic $ (0.68) $ 0.28 $ 0.43
Net income (loss) per common share - assuming dilution (0.68) 0.28 0.42
</TABLE>
The above amounts include special charges of $667 million ($527 million, net of
tax), $206 million ($156 million, net of tax) and $142 million ($128 million,
net of tax) recorded in 1998, 1997 and 1996, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-1
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------
RESULTS OF OPERATIONS
On September 10, 1998, the Company consummated its acquisition of Schneider
Worldwide (Schneider), formerly a member of the Medical Technology Group of
Pfizer Inc., for $2.1 billion in cash. The acquisition was accounted for using
the purchase method of accounting. The consolidated financial statements include
Schneider's operating results from the date of acquisition.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net sales increased 22% in 1998 to $2,234 million from $1,831 million in 1997.
Without the impact of foreign currency exchange rates on translation of
international revenues, net sales for 1998 increased 25%. International sales
during 1998 were negatively impacted compared to 1997 by approximately $47
million of unfavorable exchange rate movements caused primarily by the
strengthening of the United States (U.S.) dollar versus the Japanese yen. Net
income for the year ended December 31, 1998, excluding merger-related and
special charges, was $262 million or $0.66 per share (diluted) compared to $266
million or $0.67 per share in 1997. The Company for 1998 reported a net loss of
$264 million or $0.68 per share (diluted), including merger-related and special
charges of $527 million, net of tax, as compared to 1997 net income of $110
million, or $0.28 per share, including merger-related and special charges of
$156 million, net of tax.
U.S. revenues increased approximately 30% from 1997 to $1,394 million in 1998,
while international revenues increased approximately 11% from 1997 to $840
million in 1998. U.S. sales as a percentage of worldwide sales increased from
59% in 1997 to 62% in 1998. Worldwide vascular and nonvascular sales increased
25% and 13%, respectively, from 1997 to 1998. The increases in U.S. sales as a
percentage of worldwide sales and in vascular sales were primarily attributable
to the Company's 1998 third quarter introduction of U.S. coronary stents. U.S.
coronary stent revenues, primarily sales of the NIR(R) stent, were approximately
$211 million during the second half of 1998. Worldwide NIR(R) coronary stent
sales as a percentage of worldwide sales were approximately 13% in 1998 and
could exceed 20% during 1999. The NIR(R) coronary stent is supplied by Medinol
Ltd. (Medinol) and unforeseen delays, stoppages or interruptions in the supply
and/or mix of the NIR(R) stent could adversely affect the operating results of
the Company.
On November 3, 1998, the Company announced it had detected the occurrence of
business irregularities in the operations of its Japanese subsidiary. The
irregularities detected involved shipments of products that were improperly
recorded as sales to the subsidiary's dealer network in Japan. The Company has
recently completed its investigation of the irregularities and believes that the
irregularities were limited to the operations of the Japan subsidiary. The
Company's financial statements reflect management's estimate of the timing and
impact of the Japan business irregularities.
Gross profit as a percentage of net sales was approximately 67.1% and 70.2%
during 1998 and 1997, respectively. As a result of multiple acquisitions, the
Company's supply chain has been weakened and there has been continued pressure
on gross margins, including write-downs for excess and obsolete inventory and
high manufacturing costs. During 1998, the Company initiated a full time global
program to focus on supply chain optimization. The program is designed to lower
inventory levels and the cost of manufacturing, improve absorption and minimize
inventory write-downs. By addressing the entire supply chain, including
application of lean manufacturing techniques, the Company seeks to return gross
margins to more acceptable levels and to improve working capital. The program
should be completed by the end of 1999.
The decrease in gross margins during 1998 compared to 1997 was also attributable
to a decline in average selling prices due to continuing pressure on healthcare
costs and increased competition, and the significant increase in sales of the
NIR(R) coronary stent which have lower gross margins than the corporate average.
As average selling prices for the NIR(R) stents fluctuate, the Company's cost to
purchase the stents will change because cost is based on a constant percentage
of average selling prices. In the third quarter of 1998, the Company provided
$31 million ($21 million, net of tax) for costs associated with the Company's
decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary
stent system in the U.S.
Success of the global supply chain initiative is critical to realizing improved
gross margins. In addition, gross margins could be significantly impacted by the
purchase price of NIR(R) coronary stents and the amount of NIR(R) coronary stent
sales as a percentage of worldwide sales.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-2
<PAGE> 5
Selling, general and administrative expenses as a percentage of net sales
decreased from 36% in 1997 to 34% in 1998, while increasing approximately $92
million from $663 million in 1997 to $755 million in 1998. The decrease as a
percent of sales is primarily attributable to the increase in net sales related
to the launch of coronary stents in the U.S. In addition, during the past three
years, the Company has expanded its direct sales presence in Europe and Emerging
Markets so as to be in a position to take advantage of market opportunities in
those regions. The costs of expansion have negatively impacted the Company's
operating margins. During the second half of 1998, the Company's rate of
investment slowed and the Company has begun to realize improved returns in
certain geographic regions. The Company believes that, during 1999, it will
continue to leverage its direct sales infrastructure.
Approximately $17 million of the 1998 increase in expense dollars is
attributable to results of Schneider operations from the date of acquisition
through December 31, 1998. In addition, the increase in expense dollars reflects
costs to operate the Company's new global information system and increased costs
of domestic distribution.
Amortization expense increased 63% from $32 million in 1997 to $53 million in
1998 and increased as a percentage of sales from 1.8% to 2.4% of net sales. The
increase is primarily a result of the amortization of intangibles related to the
purchase of Schneider from the date of acquisition through December 31, 1998.
Royalty expenses remained at approximately 1% of net sales while increasing 41%
from $22 million in 1997 to $31 million in 1998. The Company continues to enter
into strategic technological alliances, some of which include royalty
commitments.
Research and development expenses remained at 9% of net sales while increasing
20% from $167 million in 1997 to $200 million in 1998. Approximately $7 million
of the increase in 1998 is attributable to research and development of Schneider
from the date of acquisition through December 31, 1998. The increase in research
and development reflects increased spending on new product development programs
and regulatory and clinical research, and reflects the Company's continued
commitment to refine existing products and procedures and to develop new
technologies that provide simpler, less traumatic, less costly and more
efficient diagnosis and treatment. The trend in countries around the world
toward more stringent regulatory requirements for product clearance and more
vigorous enforcement activities has generally caused or may cause medical device
manufacturers to experience more uncertainty, greater risk and higher expenses.
The aggregate purchase price of the Schneider acquisition has been allocated on
a preliminary basis to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The estimated excess of
purchase price over the fair value of the net tangible assets acquired was
allocated to specific intangible asset categories with the remainder assigned to
excess of cost over net assets acquired. Core technology, developed technology,
assembled workforce, trademarks and patents are being amortized on a straight
line basis over periods ranging from 9 to 25 years. The Company is amortizing
the value assigned to customer lists (relationships) over 25 years because it
has been the Company's experience that physician and hospital relationships are
built for the long term and fundamental to the Company's business of bringing
innovative products to market. The Company realizes that maintaining these and
similar relationships will require ongoing efforts. However, both Schneider and
the Company have over a 20 year history of working closely with
interventionalists and their institutions for both vascular and nonvascular
applications and management believes these relationships will continue to
benefit the Company. In addition, after considering the long term prospects for
the less invasive medical device industry and the fundamental role of
catheter-based interventional medicine, as well as Schneider's competitive
position within the industry, management has concluded that it is appropriate to
amortize the excess of the Schneider purchase price over the fair value of the
assets acquired over 40 years. Finally, the Company recorded a $671 million
charge ($524 million, net-of-tax) to account for purchased research and
development acquired. The valuation of purchased research and development
represents the estimated fair value related to incomplete projects. At the date
of the acquisition, the development of these projects had not reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the date
of acquisition.
The income approach was used to establish the fair values of the intangible
assets. This approach establishes the fair value of an asset by estimating the
after-tax cash flows attributable to the asset over its useful life and then
discounting these after-tax cash flows back to a present value. The discounting
process uses a rate of return commensurate with the time value of money and
investment risk factors. Accordingly, for the purpose of establishing the fair
value of each asset in the Schneider analysis, revenues for each future period
were estimated, along with costs, expenses, taxes and other charges. Revenue
estimates were based on estimates of relevant market sizes and growth factors,
expected trends in technology, and the nature and expected timing of new product
introductions by the Company and its competitors. With respect to the value of
purchased research and development, the Company considered, among other factors,
the research and development project's stage of completion, the complexity of
the work completed to date, the costs already incurred, the projected costs to
complete, the contribution of core technologies and other acquired assets, the
projected product introduction date and the estimated useful life of the
technology. The respective after-tax cash flows were then discounted back to
present value using a risk-adjusted discount rate. The discount rates used in
the Schneider analysis ranged from 16%-28% depending upon the risk profile of
the particular asset.
The Company believes that the assumptions used in the forecasts were reasonable
at the time of the acquisition. No assurance can be given, however, that the
underlying assumptions used to estimate expected project revenues, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. For these reasons, among others, actual results may vary
from the projected results.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
The in-process technology acquired in the Schneider acquisition consisted of 20
significant research and development projects, ranging in stage of completion
from 46% to 95%. One project reached completion in late 1998, while the others
are expected to reach completion in 1999, 2000 and 2001. New in-process
technologies include brachytherapy for the prevention of restenosis, devices for
the treatment of carotid disease, devices for the treatment of coronary artery
disease, devices for peripheral vascular disease, devices for aneurysmal disease
and devices for nonvascular disease. Remaining efforts to complete the projects
include product validation, the successful completion of clinical trials and
governmental regulatory approvals. Through the acquisition date, approximately
$65 million had been spent by Schneider on the in-process research and
development projects. The Company intends to incur in excess of $50 million,
related primarily to salaries, materials, clinical trials and regulatory costs,
to develop the in-process technology into commercially viable projects over the
next three years. The value assigned to in-process research and development is
reasonable in light of the amounts invested to date and expected to be incurred
because the Company believes that the technologies associated with the purchased
research and development are well positioned in high potential, high growth
markets that are highly valued in the medical device industry. The degree of
uncertainty regarding the future benefits of the acquired in-process research
and development was lessened because of the advanced state of the projects at
the date of acquisition. The Company also believes that the amount invested as
of the acquisition date and/or the amount needed to complete the projects do not
bear directly on the fair value of the underlying technologies. The Company
expects to begin to realize significant revenue and cash flows from the
in-process technology beginning in 1999.
The most significant purchased research and development projects that were
in-process at the date of acquisition were brachytherapy, devices for aneurysmal
disease and coronary stents which in the aggregate represent over 60% of the
in-process value. The brachytherapy project represents approximately 26% of the
purchased research and development value. Key assumptions used in the analysis
of brachytherapy included gross margins excluding depreciation of approximately
87% and a discount rate of 28%. The brachytherapy system is an intravascular
radiation system designed to reduce clinical restenosis after PTCA and/or
stenting. The system consists of a computer controlled afterloader, beta
radiation source, centering catheter, source delivery wire and dummy wire. As of
the date of acquisition, the project was expected to be completed and the
products commercially available in the U.S. within two to three years, with an
estimated cost to complete of approximately $5 to $10 million.
The coronary stent projects represent approximately 16% of the purchased
research and development value. Key assumptions used in the analysis of coronary
stents included gross margins excluding depreciation of approximately 87% and a
discount rate of 28%. Projects underway at the date of acquisition were stent
systems for native coronary artery disease, saphenous vein graft disease, and
versions with novel delivery systems. The stent systems in-process are designed
to conform to the arterial anatomy resulting in remodeling of the vessel. An
atraumatic tip reduces vessel trauma and enhances trackability, while position
markers together with a high degree of stent radiopacity facilitate proper
placement. The stent systems also use a unique reconstrainable delivery system.
The Company believes that the stent systems will be especially helpful in the
treatment of saphenous vein graft disease. As of the date of acquisition, the
projects were expected to be completed and the products commercially available
for sale in the U.S. within one year with an estimated cost to complete of
approximately $1 to $3 million.
The aneurysmal disease projects represent approximately 20% of the purchased
research and development value. Key assumptions used in the analysis of the
aneurysmal disease projects included gross margins excluding depreciation of
approximately 86% and a discount rate of 28%. The objective of the projects is
to develop endoluminal grafts for the treatment of late stage vascular aneurysms
and occlusions. The most significant of the projects in this category at the
date of acquisition was the endoluminal graft for the treatment of abdominal
aortic aneurysms. The device consists of an endoluminal graft trunk where the
lumen is formed into two sockets which, after placement of the trunk in the
proximal neck of the aneurysm, accepts two endoluminal graft legs which extend
to the iliac arteries. Valuable elements of the abdominal aortic device at the
date of acquisition include the spun Corethane(R) graft covering, the
self-expanding scaffold design, and the delivery systems. Other projects in this
category included the endoluminal graft for thoracic aortic aneurysmal disease,
which is a tubular endoluminal graft to be used in the aorta distal to the
aortic arch. As of the date of acquisition, the projects were expected to be
completed and the products commercially available in the U.S. within two to
three years, with an estimated cost to complete of approximately $10 to $15
million.
Management expects to continue supporting these research and development efforts
and believes the Company has a reasonable chance of completing the in-process
technology. However, the development of the in-process technology is subject to
risks and uncertainties. These include the inherent difficulties in completing
the projects on a timely basis, potential changes in future target markets,
technology and governmental regulation, third party intellectual property, and
product introductions or other actions by competitors. If the projects are not
successfully developed, the Company may not realize the value assigned to the
in-process technology. In addition, the value of the other acquired intangible
assets may also become impaired.
The Company is in the process of implementing a rationalization plan established
in conjunction with the consummation of the Schneider acquisition. The
rationalization plan takes into consideration duplicate capacity and
opportunities for further leveraging of cost and technology platforms. The
Company's actions approved and committed to in the fourth quarter of 1998 will
result in the displacement in 1999 of approximately 2,000 current positions,
over half of which are manufacturing positions. The Company has decided to close
five Schneider facilities, as well as transition the manufacturing of selected
Boston Scientific product lines to different sites. The Company expects that
approximately 1,000 positions will be added in 1999 as a result of the
transition plan. In addition, the Company will continue to challenge its plant
network strategy during 1999. The Company estimates that the costs associated
with these activities, excluding transition costs, will be approximately $62
million, most of which represent severance and related costs. Approximately $36
million of the total has been capitalized as part of the purchase price of
Schneider. The remaining $26 million ($17 million, net of tax) has been charged
to operations. The rationalization plan also resulted in the decision to expand,
not close, certain Target Therapeutics, Inc. (Target) facilities originally
provided for in a 1997 merger-related charge and to relocate other product lines
to these Target facilities. These actions are anticipated to result in
annualized cost savings of approximately $50 to $75 million. In the fourth
quarter of 1998, the Company reversed $21 million ($14 million, net of tax) of
previously recorded merger-related charges of which approximately $4 million
related to facility costs and which also included revised estimates of
contractual commitment payments, associated legal costs and other asset
write-downs originally provided for in a 1997 merger-related charge.
In the second quarter of 1998, the Company realigned its operating units and
decided to operate Target independently instead of as a part of its vascular
division as was planned at the date of the Target acquisition. Management
believed that an independent Target would allow the business unit to develop its
technologies and markets more effectively than it would as part of the vascular
division. As a result of this decision, in the second quarter of 1998, the
Company reversed $20 million ($13 million, net of tax) of 1997 Target
merger-related charges primarily related to revised estimates for costs of
workforce reductions and costs of cancelling contractual commitments. In
addition, in the second quarter of 1998, the Company recorded purchased research
and development of approximately $11 million in connection with another
acquisition consummated during 1998 and in the fourth quarter of 1998, the
Company recorded $30 million ($20 million, net of tax) of year-end adjustments
related primarily to write-downs of assets no longer deemed to be strategic. The
assets relate primarily to inventory, long lived and intangible assets that the
Company does not believe will be sold or realized, respectively, because of
revisions to and terminations of strategic alliances. The provisions have been
recorded as costs of sales ($12 million), selling, general and administrative
expenses ($12 million), amortization expenses ($2 million), royalties ($2
million), research and development expenses ($1 million) and other expenses ($1
million).
As discussed previously, results for the year ended December 31, 1998 include a
provision of $31 million for costs associated with the Company's decision to
voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent system
in the U.S. The Company is aware that the U.S. Department of Justice is
conducting an investigation of matters that include this recall. The Company is
cooperating fully in the investigation.
During 1997, the Company recorded merger-related charges of $146 million ($106
million, net of tax) primarily related to the Company's acquisition of Target,
purchased research and development of $29 million, net of tax, in conjunction
with accounting for its additional investment in Medinol and other strategic
investments, and a charge of $31 million ($21 million, net of tax) to reflect
the impact of implementing a new accounting standard. 1997 results also include
provisions related to inventory write-downs of $19 million ($13 million, net of
tax) and litigation-related reserves of $34 million ($23 million, net of tax).
The Company's Target merger-related charges reflect estimated costs to integrate
all aspects of the Target business into the vascular business, and include those
costs typical in a merging of operations, such as rationalization of facilities,
workforce reductions, unwinding of various contractual commitments, asset
writedowns and other integration costs. The Target restructuring plan was
initiated to gain expanded market opportunities and reduce costs. The Company
planned to integrate the Target business into its vascular business, terminate
the Target distributors in countries where the Company had a direct sales
presence, move the Target manufacturing and research and development operations
to Ireland and other vascular facilities, and manage Target's administrative and
corporate activities at the Company's headquarters. Specifically, the Company
planned to exit Target's leased headquarters, manufacturing and research
locations in California, as well as terminate Target's sales offices in Germany,
Japan and the United Kingdom. The lease terminations were planned to begin
during 1997 and to be completed by the end of 1998. In conjunction with the exit
plan, the Company planned to terminate approximately 500 people, of which
approximately 100 were corporate/administrative, 300 were manufacturing and 100
were research and development personnel. At the date of the Target acquisition,
the Company also provided for the excess cost over fair market value of selected
Target leasehold improvements, machinery and computer equipment, and other
assets ($8 million). As discussed above, the Company reversed its decision to
integrate the Target business into the vascular division in the second quarter
of 1998. The merger and integration activities, including the reversal of
previously recorded charges related to the integration of Target into the
vascular division were substantially completed during 1998. The most significant
costs (approximately $50 million) relate to estimated costs to cancel
contractual obligations with distributors. During 1996 and 1997, the Company
expanded its direct sales presence outside the United States so as to be in
position to take advantage of expanded market opportunities and the cancellation
of Target distributor contractual obligations is consistent with this strategy.
Benefits from the strategy began to be realized in 1998 as the Company was able
to eliminate duplicate sales infrastructure and to transition the businesses to
a seasoned sales force. In the second quarter of 1997, the Company decided not
to reintroduce a vascular product that had been previously withdrawn from the
European market. As a result, the Company determined that there would be no
future sales of the product, thus no projected cash flows. The Company wrote
off the intellectual property ($8 million) associated with the product as a
result of this analysis. Finally, in conjunction with the implementation of a
global information system, the Company provided for the estimated residual value
of its legacy systems ($8 million), based on the date which the systems were
planned to be removed from service. During 1996, the Company recorded
merger-related and other unusual charges of approximately $32 million. Charges
include estimated direct transaction costs ($5 million) of the merger with EP
Technologies, Inc. (EPT) and estimated costs to be incurred in merging EPT with
subsidiaries of the Company ($12 million). Estimated costs include those typical
in merging of operations and relate to, among other things, rationalization of
facilities, workforce reductions, unwinding of various contractual commitments,
asset writedowns and other integration costs. The EPT restructuring plan was
initiated to gain expanded market opportunities and reduce overhead related
costs and the plan was substantially complete in 1997. The remaining $15
million, which is primarily nondeductible for tax purposes, represents primarily
a change in prior year estimates of merger related charges ($7 million), and a
provision related to costs associated with a joint venture arrangement ($8
million). Due to the revised estimates for costs of workforce reductions
discussed previously, the number of Target employees actually displaced was
approximately 40 (approximately 35 of whom were terminated in 1997 and the
remainder subsequent to 1997) as compared to the original estimate of 500
employees. Less than 10 employees were terminated under the EPT plan.
In 1996, the Company acquired Symbiosis Corporation (Symbiosis), an original
equipment manufacturer and formerly a wholly-owned subsidiary of American Home
Products Corporation, for approximately $153 million. In 1996, the Company also
purchased the assets of Endotech/Mintec for approximately $72 million. Both
acquisitions were cash transactions and were accounted for using the purchase
method of accounting. Accordingly, the aggregate purchase prices have been
allocated among the assets acquired based on their estimated fair values at the
date of acquisition. The allocations of the purchase prices resulted in
provision for in-process research and development of $39 million and $57
million, respectively.
The valuations of the purchased research and development represent the estimated
fair value related to incomplete projects at the dates of acquisition. At the
dates of acquisition, in management's opinion, the development of these projects
had not reached technological feasibility and the research and development in
process had no alternative future uses. Accordingly, these costs were expensed
at date of acquisition. The valuations of in-process research and development
projects for both acquisitions were performed using the income approach. Each
project's expected cash flows were evaluated separately and discounted back to
the present at risk-adjusted discount rates.
The most significant project valued for the Symbiosis acquisition related to a
guidewire project (approximately 80% of the in-process value). Key assumptions
used in the analysis of the guidewire project included gross margins excluding
depreciation of approximately 65% and a discount rate of 18%. Other expenses
were based on estimated costs to complete the project. Symbiosis' historical
pricing, margin and expense levels were adjusted to reflect end user market
rates. As of the date of acquisition, the Company expected to continue
development of the Symbiosis guidewire project through the balance of 1996 at a
cost of an additional $3 million. Product commercialization was anticipated in
1997. Delays have occurred which have lengthened the development period and
increased the completion costs by approximately $1 million. Product launch is
now expected to occur sometime in late 1999.
The most significant Endotech/Mintec project related to an abdominal aortic
aneurysm repair device (approximately 90% of the in-process value). Key
assumptions used in the analysis of the project were gross margins excluding
depreciation of approximately 80% and discount rates of 20-23%. Other expenses
were based on estimated costs to complete the project. Endotech/Mintec was a
start-up operation at the date of acquisition, thus, the valuation used
estimated end user market prices. Initial market availability of the device was
anticipated by the Company in Europe in 1996, Japan in 1999, and the U.S. in
2000. The staggered timing reflected the need to conduct clinical evaluations
and receive regulatory approvals in the respective countries. Expected aggregate
cost for completion was $17 million to be spent between 1996 and 2000. The
Endotech/MinTec product provided a proprietary technology, however, additional
development and clinical work was still necessary to address and improve product
components, product performance and clinical efficacy. Product offering in
Europe commenced approximately a year from the date of the acquisition. The
timeline for product availability in the U.S. and Japan has slipped by
approximately one year due to technology issues. Estimated costs to date have
been approximately $11 million and total costs to complete the project are
uncertain.
Interest expense increased from $14 million in 1997 to $68 million in 1998. The
overall increase in interest expense is primarily attributable to a higher
outstanding debt balance, including the issuance of $2.1 billion in commercial
paper on September 10, 1998 to finance the acquisition of Schneider and the
issuance of $500 million in fixed rate debt securities during the first quarter
of 1998. Other income (expense), net, changed from income of less than $1
million in 1997 to expense of $5 million in 1998. The change is primarily
attributable to net gains on sales of equity investments in 1997 that were more
significant than in 1998.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-4
<PAGE> 7
The Company's effective tax rate, including the impact of special charges, was
approximately 39% in 1997 and 4% in 1998. Excluding these special charges, the
pro forma effective tax rate increased from approximately 32% during 1997 to 33%
during 1998. The increase is primarily attributable to a shift in the mix of
U.S. and international business. The effective rate for 1999 is expected to
increase slightly due to the continued shift in the geographic mix of the
Company's business.
The Company has substantially completed the integration of all mergers and
acquisitions consummated in 1996 and 1997. The Company expects to complete the
integration of Schneider by the end of 1999. Management believes it has
developed a sound plan for continuing and concluding the integration process,
and that it will achieve that plan. However, in view of the number of major
transactions undertaken by the Company, the dramatic change in the size of the
Company and the complexity of its organization resulting from these
transactions, management also believes that the successful implementation of its
plan presents a significant degree of difficulty. The failure to integrate these
businesses effectively could adversely affect the Company's operating results in
the near term, and could impair the Company's ability to realize the strategic
and financial objectives of these transactions.
Uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers in
the U.S. may result in continued pressure on selling prices of certain products
and resulting compression on gross margins. The U.S. marketplace is increasingly
characterized by consolidation among healthcare providers and purchasers of
medical devices that prefer to limit the number of suppliers from which they
purchase medical products. There can be no assurance that these entities will
continue to purchase products from the Company. In addition, international
markets are also being affected by economic pressure to contain reimbursement
levels and healthcare costs. The Company's ability to benefit from its
international expansion may be limited by risks and uncertainties related to
economic conditions in these regions, competitive offerings, infrastructure
development, rights to intellectual property, and the ability of the Company to
implement its overall business strategy. Any significant changes in the
political, regulatory or economic environment where the Company conducts
operations may have a material impact on revenues and profits. Although these
factors may impact the rate at which Boston Scientific can grow, the Company
believes that it is well positioned to take advantage of opportunities for
growth that exist in the markets it serves.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales increased 18% in 1997 to $1,831 million from $1,551 million in 1996.
International sales for the year were adversely impacted by changes in foreign
currency exchange rates. Without the impact of changes in exchange rates, net
sales for the year increased approximately 23%. Net income for the year ended
December 31, 1997, excluding merger-related and special charges, decreased
approximately 10% to $266 million from $295 million during the year ended
December 31, 1996.
In 1997, the Company recorded merger-related charges of $146 million ($106
million, net of tax) and purchased research and development of $29 million, net
of tax, and the Company recorded a charge of $31 million ($21 million, net of
tax) to reflect the impact of implementing an accounting standard issued in 1997
related to business process reengineering. 1997 results also include provisions
related to inventory write-downs of $19 million ($13 million, net of tax) and
litigation-related reserves of $34 million ($23 million, net of tax). During
1996, the Company recorded merger-related charges of $32 million ($29 million,
net of tax) and purchased research and development of $110 million ($99 million,
net of tax). Reported net income for 1997 was $110 million, or $0.28 per share
(diluted), as compared to $167 million, or $0.42 per share, for the prior year.
U.S. revenues increased approximately 16% from 1996 to $1,076 million in 1997,
while international revenues, increased approximately 20% from 1996 to $755
million in 1997. International sales as a percentage of worldwide sales
increased from 40% in 1996 to 41% in 1997. International sales during 1997 were
negatively impacted compared to 1996 by approximately $77 million of unfavorable
exchange rate movements caused primarily by the strengthening of the U.S. dollar
versus major European currencies and the Japanese yen. Worldwide vascular and
nonvascular sales increased 16% and 26%, respectively, from 1996 to 1997.
Gross profit as a percentage of net sales was approximately 70.2% and 72.4%
during 1997 and 1996, respectively. The decline in gross margins during 1997 is
primarily attributable to write-downs for excess and obsolete inventory and a
decline in average selling prices as a result of continuing pressure on
healthcare costs and increased competition. In addition, gross margins were
negatively impacted by the unfavorable foreign exchange rate movements discussed
above. The negative impact of the above conditions was partially offset by the
Company's U.S. cost containment programs and the positive gross margin impact of
selected new product offerings.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
Selling, general and administrative expenses increased 35% from $492 million in
1996 to $663 million in 1997, and increased as a percentage of sales from 32% to
36% of net sales. The increase includes $34 million in litigation-related
reserves recorded in 1997. In addition, the Company continued to expand its
domestic and international sales and distribution organizations.
Amortization expense increased 37% from $24 million in 1996 to $32 million in
1997, and increased as a percentage of sales from 1.5% to 1.8% of net sales. The
increase in dollars is primarily a result of several strategic alliances
initiated by the Company during 1997.
Royalty expenses remained at approximately 1% of net sales while increasing 30%
from $17 million in 1996 to $22 million in 1997. The increase in overall royalty
expense dollars is due to increased sales and royalties due under several
strategic alliances that the Company initiated in 1997 and prior years.
Research and development expenses remained at approximately 9% of net sales
while increasing 24% from $135 million in 1996 to $167 million in 1997. The
increase in research and development dollars reflects increased spending in
regulatory, clinical research and various other product development programs,
and reflects the Company's continued commitment to refine existing products and
procedures and to develop new technologies that provide simpler, less traumatic,
less costly and more efficient diagnosis and treatment.
Interest and dividend income was $4 million as compared to $6 million in 1996.
The decrease is primarily attributable to a decrease in the Company's average
cash and marketable securities balance resulting from the use of cash to fund
the Company's working capital, finance several of the Company's recent
acquisitions and alliances and to repurchase the Company's common stock.
Interest expense increased from $12 million in 1996 to $14 million in 1997. The
overall increase in interest expense is primarily attributable to a higher
outstanding balance related to the Company's commercial paper borrowings. Other
income (expense), net, changed from expense of $5 million in 1996 to less than
$1 million of income in 1997. The change is primarily attributable to net gains
on sales of equity investments of approximately $11 million compared to net
gains of $1 million in 1996.
The Company's effective tax rate, including the impact of special charges, was
approximately 45% in 1996 and 39% in 1997. Excluding these special charges, the
pro forma effective tax rate improved from approximately 34% during 1996 to 32%
during 1997. The reduction in the Company's effective tax rate, excluding the
impact of special charges, is primarily due to increased business in lower tax
geographies and certain tax planning initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments totaled $75 million at December 31, 1998
compared to $80 million at December 31, 1997. Cash flows provided by operating
activities increased from $80 million in 1997 to $258 million during 1998. Cash
used in investing and provided by financing activities during the same period
increased from $251 million to $2,225 million and $162 million to $1,977
million, respectively. The increases are primarily the result of financing the
Schneider acquisition with commercial paper and capital expenditures incurred to
expand the Company's manufacturing facilities. In addition, cash was provided by
the exercise of stock options. As a result, working capital decreased from $227
million at December 31, 1997 to current liabilities exceeding current assets by
$353 million at December 31, 1998.
Accounts receivable increased $172 million from December 31, 1997 to December
31, 1998. The increase is primarily attributable to recording approximately $65
million of Schneider accounts receivable as of the date of the acquisition, an
increase in U.S. sales in the second half of 1998 compared to the second half of
1997, and an increase in international sales to countries where healthcare
systems have longer payment terms. In addition to impacting selling prices, the
trend to managed care in the U.S. has also resulted in more complex billing and
collection procedures. The Company's ability to effectively react to the
changing environment may impact its bad debt and sales return provisions in the
future. In addition, the deterioration in the Japan economy may impact the
Company's ability to collect its outstanding Japan receivables.
Inventory increased $70 million from December 31, 1997 to December 31, 1998. The
increase since December 31, 1997 is primarily attributable to recording $40
million of Schneider inventory as of the date of acquisition, continued stocking
of the NIR(R) stent in the U.S. and Japan and an increase in U.S. finished
goods. The Company is committed to purchase approximately $150 million of NIR(R)
stents through 1999. Excluding the impact of Schneider inventory acquired,
inventory has decreased since the second quarter of 1998. The Company expects
inventory levels to continue to decline in 1999 as the Company's new global
supply chain management system becomes fully operational. Successful
implementation of the Company's supply chain initiative is necessary to reduce
the Company's inventory to an acceptable level and to reduce manufacturing
costs.
In connection with the Schneider acquisition, the Company established $1.7
billion in additional revolving credit facilities. The Company's revolving
credit facilities (Facilities) now total $2.2 billion and consist of a $1.0
billion facility that terminates in June 2002 and $1.2 billion in 364-day
facilities that terminate in September 1999. The Company may extend the 364-day
revolving credit facilities for an additional 364 days
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-6
<PAGE> 9
under certain conditions. Use of the borrowings is unrestricted and the
borrowings are unsecured. Commercial paper is supported by the Facilities and
outstanding commercial paper reduces available borrowings under the Facilities.
The Facilities require the Company to maintain a specific ratio of consolidated
funded debt (as defined) to consolidated net worth (as defined) plus
consolidated funded debt. The ratio requirement is 70% through December 31, 1999
and 60% thereafter. As of December 31, 1998, the ratio was approximately 64%.
The Company currently intends to comply with the reduction in the ratio through
an equity issuance, as discussed below.
As noted, the Company financed the Schneider acquisition by issuing
approximately $2.1 billion in commercial paper. At December 31, 1998, the
Company had approximately $1.8 billion of commercial paper outstanding at a
weighted average interest rate of 6.23%. The Company expects a minimum of $800
million will remain outstanding through the next twelve months and, accordingly,
has classified this portion of borrowings as long-term at December 31, 1998.
During the first quarter of 1999, the Company refinanced substantially all of
its commercial paper with short-term borrowings under its Facilities due to the
limited market for its commercial paper. The variable interest rates on the
borrowings is approximately 5.75%. The Company intends to continue to borrow
under its Facilities until it is able to issue commercial paper at reasonable
rates.
In 1999, the Company intends to refinance a portion of the outstanding credit
facilities balance by raising more permanent financing through an issuance of
convertible securities and additional equity securities. In September 1998, the
Company filed a Public Registration Statement with the U.S. Securities and
Exchange Commission. At December 31, 1998, the Company had no outstanding
securities issued under this registration statement.
In March 1998, the Company issued $500 million of 6.625% debt securities (Debt
Securities) due March 2005 under a Public Debt Registration Statement filed with
the U.S. Securities and Exchange Commission. The Debt Securities are not
redeemable prior to maturity and are not subject to any sinking fund
requirements. A significant portion of the net proceeds from the sale of the
Debt Securities (approximately $496 million) was used for repayment of
indebtedness under the Company's commercial paper program.
During March 1998, the Company borrowed 1.2 billion yen (the equivalent of
approximately $11 million) under a financing arrangement with a Japanese bank at
a fixed interest rate of 2.1%. The term of the borrowing extends through 2012.
At December 31, 1998, the Company had an additional 6 billion Japanese yen
borrowings (approximately $53 million) outstanding with a syndicate of Japanese
banks. The interest rate on the borrowings is 2.47%. The borrowings are payable
in 2002.
The Company had uncommitted Japanese credit facilities with several Japanese
banks to provide for borrowings and promissory notes discounting of up to 7.5
billion Japanese yen (approximately $66 million). At December 31, 1998, there
were no borrowings under these facilities and approximately $61 million of
receivables were discounted at average interest rates of approximately 1.5%.
Since early 1995, the Company has entered into several transactions involving
acquisitions and alliances, certain of which have involved equity investments.
As the healthcare environment continues to undergo rapid change, management
expects that it will continue to focus on strategic initiatives and/or make
additional investments in existing relationships. In connection with these
acquisitions, the Company has acquired numerous in-process research and
development projects. As the Company continues to build its research base in
future years, it is reasonable to assume that it will acquire additional
in-process research and development platforms. Management does not expect the
acquisitions and alliances to be significant during 1999. As of December 31,
1998, the Company's cash obligations required to complete the balance of the
Company's initiatives to integrate businesses related to its mergers and
acquisitions and its fourth quarter rationalization plan are estimated to be
approximately $70 million. In addition, the Company has outstanding $140 million
of acquisition-related cash obligations. Substantially all of these cash outlays
will occur during 1999. Further, the Company expects to incur capital
expenditures of approximately $130 million during 1999.
The Company expects that its cash and cash equivalents, marketable securities,
cash flows from operating activities, proceeds from the issuance of debt and
equity securities discussed previously and borrowing capacity will be sufficient
to meet its projected operating cash needs, including integration costs through
the end of 1999. As noted, the Company has $1.2 billion of 364-day credit
facilities that expire in September 1999. An extension of these facilities will
be needed if the Company does not obtain additional financing through an equity
offering or other means. The Company intends to issue equity and other
securities, but there are no assurances that additional financing can be or will
be obtained.
YEAR 2000 READINESS
The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. The Company has undertaken a global effort to
identify and mitigate Year 2000 issues in its information systems, products,
facilities and suppliers.
The Company established a multidisciplinary Year 2000 Task Force in 1998,
comprised of management from each of the Company's principal functional areas,
including Finance, Information Technology, Regulatory Affairs, Customer Service,
Manufacturing, Distribution, Purchasing, Facilities, Legal and Communications. A
core team and a program management office has also been established for
coordinating and
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-7
<PAGE> 10
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
- ---------------------
tracking all Year 2000 issues. This office is comprised of Company management
and staff and representatives of an experienced Year 2000 consulting firm. These
efforts report directly to members of the Company's Executive Committee.
An independent consulting firm has been working with the Company for over two
years to implement a global information system that is designed to be Year 2000
compliant. In addition to the Company's information systems project, other
internal systems are being addressed largely through the replacement and testing
of much of the Company's older systems. The efforts are both company-wide and
site specific, spanning the range from the Information Technology department
systems to manufacturing operations (including production facilities, support
equipment, and process control) and infrastructure technologies.
The vast majority of the Company's products do not perform date-sensitive
operations and are therefore unaffected by Year 2000 issues. Steps have been
taken to correct non-compliance which affects the functional performance of the
few remaining products.
Through December 31, 1998, the Company has expended in excess of $100 million to
implement and operate a Year 2000 compliant global information system, and other
costs relating to Year 2000 compliance. The Company does not anticipate that
additional compliance costs will have a material impact on its business
operations or its financial condition.
The Company relies on third party providers for services such as
telecommunications, Internet service, utilities, certain product components and
other key services. Interruption of those services due to Year 2000 issues could
affect the Company's operations. The Company has initiated an evaluation of the
status of third party service providers' compliance efforts and of alternative
and contingency requirements. While approaches to reducing risks of interruption
of business operations vary by business unit, options include identification of
alternative service providers available to provide such services if a service
provider fails to become Year 2000 compliant within an acceptable time frame.
Based on the Company's evaluation to date, management believes that in most
cases redundant capacity exists at the supplier or that alternative sources of
supply are available or could be developed within a reasonable amount of time
should compliance become an issue for individual suppliers.
The Company believes that its Year 2000 program will identify and correct all
material non-compliant systems and operations before the end of 1999. Third
party service providers are being assessed and the Company expects to have
contingency plans that will avoid failures having a material effect on the
Company's business operations or financial condition in place before the end of
1999.
There can be no assurance that the Company's Year 2000 program will identify and
correct all non-compliant systems of the Company and its third party service
providers or that any such failure will not have a material effect on the
Company's business operations or financial condition.
MARKET RISK DISCLOSURES
In the normal course of business, the Company is exposed to market risk from
changes in interest rates and foreign currency exchange rates. The Company
addresses these risks through a risk management program that includes the use of
derivative financial instruments. The use of derivative financial instruments
are initiated within the guidelines of documented corporate risk management
policies. The Company does not enter into any derivative transactions for
speculative purposes.
The Company's floating and fixed rate debt obligations are subject to interest
rate risk. A 100 basis point increase in interest rates related to the Company's
floating rate borrowings, assuming the amount borrowed remains constant, would
result in an annual increase in the Company's then current interest expense of
approximately $18 million. The Company intends to refinance a portion of its
floating rate borrowings through a combination of issuance of convertible
securities and additional equity securities, which are subject to market risk. A
100 basis point increase in interest rates related to the Company's fixed
long-term debt would not result in a material change in its fair value.
The Company enters into foreign exchange contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with commitments,
generally one to six months. The Company does not engage in speculation. The
Company's foreign exchange contracts should not subject the Company to material
risk due to exchange rate movements because gains and losses on these contracts
should offset losses and gains on the assets and liabilities being hedged. The
Company had spot and forward foreign exchange contracts outstanding in the
notional amounts of $230 million and $177 million as of December 31, 1998 and
1997, respectively. Although the Company engages in hedging transactions that
may offset the effect of fluctuations in foreign currency exchange rates on
foreign currency denominated assets and liabilities, financial exposure may
nonetheless result, primarily from the timing of transactions and the movement
of exchange rates. The short-term nature of these contracts has resulted in
these instruments having insignificant fair values at December 31, 1998.
A sensitivity analysis of changes in the fair value of foreign currency exchange
contracts outstanding at December 31, 1998 indicates that, if the U.S. dollar
uniformly weakened by 10% against all currencies, the fair value of these
contracts
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-8
<PAGE> 11
would decrease by $11 million. While these hedging instruments are subject to
fluctuations in value, such fluctuations are generally offset by changes in the
value of the underlying exposures being hedged. In addition, unhedged foreign
currency balance sheet exposures as of December 31, 1998 are not expected to
result in a significant loss of earnings or cash flows. As the Company has
expanded its international operations, its sales and expenses denominated in
foreign currencies have expanded and that trend is expected to continue.
Therefore, most international sales and expenses have been, and are expected to
be, subject to the effect of foreign currency fluctuations and these
fluctuations may have an impact on margins. The Company's sensitivity analysis
of the effects of changes in foreign currency exchange rates does not factor in
a potential change in sales levels or local currency selling prices.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the euro. The participating countries agreed to adopt the euro as their
common legal currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the legacy currencies) and the
euro were established as of that date. The legacy currencies are scheduled to
remain legal tender as denominations of the euro until at least January 1, 2002
(but not later than July 1, 2002). During this transition period, parties may
settle transactions using either the euro or a participating country's legacy
currency. The Company is addressing the potential impact resulting from the euro
conversion, including adaptation of information technology systems, competitive
implications related to pricing and foreign currency considerations.
Management currently believes that the introduction of the euro will not have a
material impact related to the adaptation of information technology systems or
foreign currency exposures. The increased price transparency resulting from the
use of a single currency in the eleven participating countries may affect the
ability of the Company to price its products differently in the various European
markets. A possible result of this is price harmonization at lower average
prices for products sold in some markets. However, uncertainty exists as to the
effects the euro will have on the marketplace.
LITIGATION
The Company is involved in various lawsuits, including patent infringement and
product liability suits, from time to time in the normal course of business. In
management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in the notes to consolidated
financial statements which, individually or in the aggregate, could have a
material effect on the financial condition, operations and cash flows of the
Company. The Company believes that it has meritorious defenses against claims
that it has infringed patents of others. However, there can be no assurance that
the Company will prevail in any particular case. An adverse outcome in one or
more cases in which the Company's products are accused of patent infringement
could have a material adverse effect on the Company.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position.
SEC REVIEW OF FINANCIAL REPORTING
Within the past year, the Securities and Exchange Commission (SEC) has publicly
stated its desire to focus on transparent financial reporting and potential
earnings management issues, including restructuring charges, asset write-downs,
acquired in-process research and development write-offs, materiality thresholds,
revenue recognition, and general reserves. In connection with these efforts, the
SEC sent out letters to approximately 150 public companies indicating that their
1998 financial statements may be subject to review. Following its receipt of one
of these letters, the Company requested the SEC Staff to evaluate the Company's
purchase price allocation of the Schneider acquisition, including the amount
allocated to purchased research and development. Shortly thereafter, the Company
informed the SEC of its intention to offer equity to refinance a portion of its
outstanding credit facilities balance with more permanent financing. The
Company's discussions with the SEC on the Schneider purchase price allocation
are continuing. The SEC has also recently requested that the Company provide
additional disclosures with respect to prior acquisitions and merger related and
special charges and provide the SEC with additional information with respect to
direct transactions and other costs. The Company has supplemented its
disclosures and provided the information requested. There can be no assurance
that the SEC will not require the Company to further expand or modify its
disclosures relating to these or other issues or to make related changes in its
financial reporting, including the restatement of prior reported results, which
could materially impact future earnings per share of the Company.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements contained in this report
include, but are not limited to, statements with respect to, and the Company's
performance may be affected by: (a) the Company's ability to obtain benefits
from the Schneider acquisition, including purchased research and development and
physician and hospital relationships; (b) the process, outlays and plan for the
integration of businesses acquired by the Company, and the successful and timely
implementation of the rationalization plan; (c) the impact and timing of
successful implementation of the Company's supply chain initiatives; (d) the
potential impacts of continued consolidation among healthcare providers, trends
towards managed care and economically motivated buyers, healthcare cost
containment, more stringent regulatory requirements and more vigorous
enforcement activities; (e) the Company's belief that it is well positioned to
take advantage of opportunities for growth that exist in the markets it serves;
(f) the Company's continued commitment to refine existing products and
procedures and to develop new technologies that provide simpler, less traumatic,
less costly and more efficient diagnosis and treatment; (g) the Company's
ability to launch products on a timely basis, including products resulting from
purchased research and development; (h) risks associated with
international operations; (i) the potential effect of foreign currency
fluctuations on revenues, expenses and resulting margins and the trend toward
increasing sales and expenses denominated in foreign currencies; (j) the
Company's belief that its effective tax rate for 1999 will only increase
slightly from 1998; (k) the ability of the Company to manage accounts
receivable, manufacturing costs and inventory levels and mix and to react
effectively to the changing managed care environment and worldwide economic
conditions; (l) the ability of the Company to meet its projected cash needs
through the end of 1999; (m) the ability
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
of the global information systems to improve supply chain management; (n) costs
and risks associated with implementing Year 2000 compliance and business process
reengineering; (o) timely and uninterrupted supply of the NIR(R) coronary stent
and increase in purchase price; (p) the ability to realize improved long-term
returns on the Company's investments with a direct selling presence in Europe,
Japan and Emerging Markets; (q) the ability of the Company to obtain more
permanent financing to re-finance a portion of its commercial paper and amounts
borrowed under the Facilities, to comply with its debt ratio through an equity
issuance and to place its commercial paper at reasonable rates; (r) the
Company's expectation that a minimum of $800 million of short-term debt
supported by the Facilities will remain outstanding through the next twelve
months; (s) the Company's ability to fund development of purchased technology
and to realize value assigned to in-process research and development and other
intangible assets; (t) the impact of stockholder class action, patent, product
liability and other litigation, the outcome of the U.S. Department of Justice
investigation, and the adequacy of the Company's product liability insurance;
(u) the potential impact resulting from the euro conversion, including
adaptation of information technology systems, competitive implications related
to pricing and foreign currency considerations; (v) the final outcome of the
Company's discussions with the SEC relating to the Schneider purchase price
allocation and the SEC's request for additional information and the resulting
impact on prior reported results as well as on future earnings per share of the
Company; and (w) the timing, size and nature of strategic initiatives available
to the Company.
Several important factors, in addition to the specific factors discussed in
connection with such forward-looking statements individually, could affect the
future results of the Company and could cause those results to differ materially
from those expressed in the forward-looking statements contained herein. Such
additional factors include, among other things, future economic, competitive and
regulatory conditions, demographic trends, third-party intellectual property,
financial market conditions and future business decisions of Boston Scientific
and its competitors, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of Boston Scientific.
Therefore, the Company wishes to caution each reader of this report to consider
carefully these factors as well as the specific factors discussed with each
forward-looking statement in this report and as disclosed in the Company's
filings with the Securities and Exchange Commission as such factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the ability of the Company to implement its business strategy and may
cause actual results to differ materially from those contemplated by the
statements expressed herein.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-10
<PAGE> 13
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,233,576 $1,830,778 $1,551,238
Cost of products sold 734,841 545,541 427,838
-------------------------------------------------
Gross profit 1,498,735 1,285,237 1,123,400
Selling, general and administrative expenses 754,970 662,647 492,332
Amortization expense 52,662 32,398 23,576
Royalties 31,315 22,177 17,061
Research and development expenses 200,285 167,194 134,919
Purchased research and development 681,952 29,475 110,000
Restructuring and merger-related charges (credits) (15,014) 145,891 32,341
-------------------------------------------------
1,706,170 1,059,782 810,229
-------------------------------------------------
Operating income (loss) (207,435) 225,455 313,171
Other income (expense):
Interest and dividend income 4,835 3,706 6,297
Interest expense (67,573) (14,285) (11,518)
Other, net (5,141) 255 (4,620)
-------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting (275,314) 215,131 303,330
Income taxes (10,945) 83,651 136,236
-------------------------------------------------
Income (loss) before cumulative effect of change
in accounting (264,369) 131,480 167,094
Cumulative effect of change in accounting (net of tax) (21,080)
-------------------------------------------------
Net income (loss) $ (264,369) $ 110,400 $ 167,094
=================================================
Earnings (loss) per common share - basic:
Income (loss) before cumulative effect
of change in accounting $ (0.68) $ 0.34 $ 0.43
Cumulative effect of change in accounting (0.06)
-------------------------------------------------
Net income (loss) per common share - basic $ (0.68) $ 0.28 $ 0.43
=================================================
Earnings (loss) per common share - assuming dilution:
Income (loss) before cumulative effect
of change in accounting $ (0.68) $ 0.33 $ 0.42
Cumulative effect of change in accounting (0.05)
-------------------------------------------------
Net income (loss) per common share - assuming dilution $ (0.68) $ 0.28 $ 0.42
=================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-11
<PAGE> 14
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- -------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 70,330 $ 57,993
Short-term investments 5,073 22,316
Trade accounts receivable, net 537,786 365,463
Inventories 461,981 391,580
Deferred income taxes 129,922 146,956
Prepaid expenses and other current assets 61,535 36,176
-----------------------------
Total current assets 1,266,627 1,020,484
Property, plant and equipment, net 679,882 498,967
Other assets:
Excess of cost over net assets acquired, net 876,843 100,382
Technology - core and developed, net 606,475 70,694
Patents, trademarks and other intangibles, net 330,217 142,270
Deferred income taxes 69,346
Investments 34,058 66,239
Other assets 29,263 25,234
-----------------------------
$3,892,711 $1,924,270
=============================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-12
<PAGE> 15
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- -------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $1,016,163 $423,250
Bank obligations 11,324 23,958
Accounts payable 108,597 98,878
Accrued expenses 245,022 161,236
Acquisition-related obligations 139,623
Accrual for restructuring and merger-related charges 71,231 68,358
Income taxes payable 18,821 11,436
Other current liabilities 8,877 6,292
-----------------------------
Total current liabilities 1,619,658 793,408
Long-term debt 1,363,822 46,325
Deferred income taxes 58,034
Other long-term liabilities 88,094 69,205
Commitments and contingencies
Stockholders' equity:
Preferred stock, $ .01 par value - authorized 50,000,000 shares,
none issued and outstanding
Common stock, $ .01 par value - authorized 600,000,000 shares,
394,185,781 shares issued at December 31, 1998;
authorized 300,000,000 shares, 195,611,491 shares
issued at December 31, 1997 3,942 1,956
Additional paid-in capital 506,750 432,556
Contingent stock repurchase obligation 18,295
Treasury stock, at cost - 1,800,627 shares at December 31, 1997 (96,260)
Retained earnings 381,246 677,608
Accumulated other comprehensive income (expense):
Foreign currency translation adjustment (72,289) (94,279)
Unrealized gain on available-for-sale securities, net 1,488 17,422
-----------------------------
Total stockholders' equity 821,137 957,298
-----------------------------
$3,892,711 $1,924,270
=============================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-13
<PAGE> 16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
- --------------------
<TABLE>
<CAPTION>
Common Stock Contingent Accumulated
--------------- Additional Stock Other
Shares Par Paid-In Repurchase Treasury Retained Comprehensive Comprehensive
Issued Value Capital Obligation Stock Earnings Income(Expense) Income(Loss)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 195,035 $1,950 $431,052 $(26,296) $406,957 $ (5,746)
Comprehensive income:
Net income 167,094 $ 167,094
Other comprehensive income (expense),
net of tax:
Net change in equity investments 10,053 10,053
Foreign currency translation
adjustment (23,385) (23,385)
Issuance of common stock 576 6 (5,500) 66,385
Purchase of common stock for treasury (66,355)
Sale of stock repurchase obligation (24,855) $24,855 2,523
Tax benefit relating to stock option and
employee stock purchase plans 36,377
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 195,611 1,956 437,074 24,855 (23,743) 574,051 (19,078) $ 153,762
Comprehensive income: ==========
Net income 110,400 $ 110,400
Other comprehensive expense, net of tax:
Net change in equity investments (1,464) (1,464)
Foreign currency translation adjustment (56,315) (56,315)
Issuance of common stock (47,713) 114,134 (11,758)
Purchase of common stock for treasury (188,159)
Sale of stock repurchase obligation (18,295) 18,295 1,508
Expiration of stock repurchase obligation 24,855 (24,855)
Tax benefit relating to stock option and
employee stock purchase plans 36,635 4,915
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 195,611 1,956 432,556 18,295 (96,260) 677,608 (76,857) $ 52,621
Comprehensive loss: ==========
Net loss (264,369) $(264,369)
Other comprehensive income (expense),
net of tax:
Net change in equity investments (15,934) (15,934)
Foreign currency translation adjustment 21,990 21,990
Issuance of common stock 2,047 20 47,444 96,260 (55,492)
Stock split effected in the
form of a stock dividend 196,528 1,966 (1,966)
Expiration of stock repurchase obligation 18,295 (18,295)
Tax benefit relating to stock option and
employee stock purchase plans 8,455 25,465
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 394,186 $3,942 $506,750 $381,246 $(70,801) $(258,313)
=======================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-14
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (264,369) $110,400 $167,094
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Gain on sale of equity investments (4,933) (10,526) (827)
Depreciation and amortization 128,605 86,692 66,317
Deferred income taxes (151,424) (52,214) (11,749)
Noncash special charges (credits) (35,464) 37,104 14,378
Purchased research and development 681,952 29,475 110,000
Exchange (gain) loss (2,411) 4,212 2,115
Increase (decrease) in cash flows from
operating assets and liabilities:
Trade accounts receivable (94,823) (59,462) (105,370)
Inventories (25,664) (179,951) (90,980)
Prepaid expenses and other current assets 7,004 9,751 (19,399)
Accounts payable and accrued expenses 35,792 101,378 31,342
Accrual for restructuring and merger-related charges (22,107) 28,489 (60,420)
Other liabilities 11,412 (17,075) 32,175
Other, net (5,105) (7,779) 7,303
----------------------------------
Cash provided by operating activities 258,465 80,494 141,979
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment, net (174,039) (220,097) (145,332)
Net maturities of held-to-maturity
short-term investments 28,555 28,152
Purchases of available-for-sale securities (7,834) (74,947)
Sales of available-for-sale securities 11,562 5,351 70,260
Acquisitions of businesses, net of cash acquired (2,059,979) (18,076) (264,493)
Payments for acquisitions of and/or investments
in certain technologies, net (2,314) (39,066) (8,564)
Other, net 205 (6,379)
----------------------------------
Cash used in investing activities (2,224,770) (250,962) (401,303)
FINANCING ACTIVITIES:
Net increase in commercial paper 1,392,913 210,750 212,500
Proceeds from notes payable and long-term debt,
net of debt issuance costs 522,850 52,005
Payments on notes payable, capital leases and
long-term borrowings (33,231) (10,929) (27,816)
Proceeds from issuances of shares of common stock,
net of tax benefits 99,795 96,213 77,642
Acquisitions of treasury stock,
net of proceeds from put options (186,651) (63,832)
Other, net (4,959) 484 762
----------------------------------
Cash provided by financing activities 1,977,368 161,872 199,256
Effect of foreign exchange rates on cash 1,274 (5,586) (2,588)
----------------------------------
Net increase (decrease) in cash and cash equivalents 12,337 (14,182) (62,656)
Cash and cash equivalents at beginning of period 57,993 72,175 134,831
----------------------------------
Cash and cash equivalents at end of period $ 70,330 $ 57,993 $ 72,175
==================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-15
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE A)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Boston Scientific Corporation (Boston Scientific or the Company) and
its subsidiaries, substantially all of which are wholly-owned, and include the
results of EP Technologies, Inc. (EPT) and Target Therapeutics, Inc. (Target)
acquired in 1996 and 1997, respectively, accounted for as poolings-of-interests
for all periods presented. The statements also include the results of Symbiosis
Corporation (Symbiosis), beginning in March 1996, the results of Endotech, Ltd.
and MinTec, Inc., and certain related companies (Endotech/MinTec), beginning in
May 1996 and the results of Schneider Worldwide (Schneider), beginning in
September 1998. Investments in affiliates, representing 20% to 50% of the
ownership of such companies, are accounted for under the equity method,
including the Company's investment in Medinol Ltd. (Medinol). Income recorded in
connection with these investments was not significant during the periods
presented. Investments in affiliates, representing less than 20% of the
ownership of such companies, are accounted for under the cost method.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCY: All assets and liabilities of foreign
subsidiaries are translated at the rate of exchange at year end while sales and
expenses are translated at the average rates in effect during the year. The net
effect of these translation adjustments is shown in the accompanying financial
statements as a component of stockholders' equity.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS: Short-term investments are recorded at fair value, which
approximates cost.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the
Company to concentration of credit risk consist primarily of temporary cash and
cash equivalents, marketable securities, forward foreign exchange contracts and
accounts receivable. The Company invests its excess cash primarily in high
quality securities and limits the amount of credit exposure to any one financial
institution. The Company's investment policy limits exposure to concentration of
credit risk and changes in market conditions. The Company is exposed to
credit-related losses in the event of non-performance by counterparties to
financial instruments. The Company transacts forward foreign exchange contracts
with major financial institutions to limit its credit exposure.
The Company provides credit, in the normal course of business, primarily to
hospitals, private and governmental institutions and healthcare agencies and
doctors' offices. The Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market.
PROPERTY, PLANT AND EQUIPMENT: Property, plant, equipment and leaseholds are
stated at historical cost. Expenditures for maintenance and repairs are charged
to expense; betterments are capitalized. The Company provides for depreciation
and amortization by the straight-line method at rates which are intended to
depreciate and amortize the cost of these assets over their estimated useful
lives. Buildings and improvements are depreciated over a 15 to 40-year life;
equipment, furniture and fixtures are depreciated over a 2 to 12-year life.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease.
The Company capitalizes interest incurred on funds used to construct property,
plant and equipment. Interest capitalized was $4 million during 1998 and $5
million during 1997. The Company receives grant money equal to a percentage of
expenditures on eligible capital equipment which is recorded as deferred income
and recognized ratably over the life of the underlying assets. The grant money
would be repayable, in whole or in part, should the Company fail to meet certain
employment goals.
INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line
method over the following lives: Patents and trademarks (3 - 20 years); Licenses
(2 - 20 years); Core and developed technology (3 - 25 years); Excess of cost
over net assets acquired (15 - 40 years); Other intangibles (various).
The Company examines the carrying value of its excess of cost over net assets
acquired and other intangible assets to determine whether there are any
impairment losses. If indicators of impairment were present in intangible assets
used in operations, and future cash flows were not expected to be sufficient to
recover the assets' carrying amount, an impairment loss would be charged to
expense in the period identified. No event has been identified that would
indicate an impairment of the value of material intangible assets recorded in
the accompanying consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-16
<PAGE> 19
INCOME TAXES: The Company utilizes the asset and liability method for accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
the enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Taxes are not provided on unremitted earnings of subsidiaries outside the United
States (U.S.) where such earnings are permanently reinvested. At December 31,
1998, unremitted earnings of non-U.S. subsidiaries were $416 million. It is not
practical to estimate the amount of taxes payable on these foreign earnings.
Research and development tax credits are recorded as a reduction in income tax
expense in the year realized.
FORWARD FOREIGN EXCHANGE CONTRACTS: The Company enters into forward foreign
exchange contracts to hedge foreign currency transactions on a continuing basis
for periods consistent with commitments. The Company does not engage in
speculation. The Company's foreign exchange contracts do not subject the Company
to material balance sheet risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the assets and liabilities
being hedged. During 1998, net foreign currency transaction and translation
gains (losses) that are reflected as other income (expense) on the Consolidated
Statements of Operations totaled approximately $2 million of net foreign
exchange gains compared to net foreign exchange losses of $4 million and $2
million in 1997 and 1996, respectively.
Although the Company engages in hedging transactions that may offset the effect
of fluctuations in foreign currency exchange rates on foreign currency
denominated assets and liabilities, financial exposure may nonetheless result,
primarily from the timing of transactions and the movement of exchange rates.
Further, any significant changes in the political, regulatory or economic
environment where the Company conducts international operations may have a
material impact on revenues and profits.
REVENUE RECOGNITION: The Company recognizes revenue from the sale of its
products when the products are shipped to its customers. The Company allows its
customers to return certain products for credit. The Company also allows
customers to return defective or damaged products for credit or replacement.
Accruals are made and evaluated for adequacy for all returns.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
STOCK COMPENSATION ARRANGEMENTS:The Company accounts for its stock compensation
arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and intends to continue to do so. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation".
ACCOUNTING CHANGE: In 1997, the Company implemented Emerging Issues Task Force
(EITF) No. 97-13 "Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project that Combines Business Process Reengineering and
Information Technology Transformation", the effect of which ($31 million or $21
million, net of tax) is reflected as a cumulative effect of change in accounting
in 1997.
NEW ACCOUNTING STANDARDS: In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
The Company has not yet adopted the American Institute of Certified Public
Accountants' Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities", which will require adoption in 1999, or SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which will require adoption
in 2000. The Company is in the process of determining the effect of adoption of
these statements on its consolidated financial statements and related
disclosures but does not believe the impact will be significant.
NET INCOME PER COMMON SHARE: Net income (loss) per common share is based upon
the weighted average number of common shares, common share equivalents and the
dilutive effect of European put options, if applicable, outstanding each year.
The Company paid a two-for-one stock split on November 30, 1998. All historical
per share amounts have been restated to reflect the stock split.
RECLASSIFICATIONS: Certain prior years' amounts have been reclassified to
conform to the current years' presentation.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE B TO NOTE D)
NOTE B - OTHER BALANCE SHEET INFORMATION
Components of other selected captions in the Consolidated Balance Sheets at
December 31 consisted of:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
TRADE ACCOUNTS RECEIVABLE
Accounts receivable $586,937 $395,942
Less allowances 49,151 30,479
---------------------------
$537,786 $365,463
===========================
INVENTORIES
Finished goods $248,925 $209,506
Work-in-process 82,861 45,683
Raw materials 130,195 136,391
---------------------------
$461,981 $391,580
===========================
PROPERTY, PLANT AND EQUIPMENT
Land $ 48,233 $ 45,213
Buildings and improvements 418,669 306,958
Equipment, furniture and fixtures 478,437 354,344
---------------------------
945,339 706,515
Less accumulated depreciation and amortization 265,457 207,548
---------------------------
$679,882 $498,967
===========================
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired $897,805 $115,638
Less accumulated amortization 20,962 15,256
---------------------------
$876,843 $100,382
===========================
TECHNOLOGY - CORE AND DEVELOPED
Core technology $420,960
Developed technology 219,985 $ 89,004
---------------------------
640,945 89,004
Less accumulated amortization 34,470 18,310
---------------------------
$606,475 $ 70,694
===========================
PATENTS, TRADEMARKS AND OTHER INTANGIBLES
Patents and trademarks $273,364 $129,610
Licenses 66,404 58,040
Other intangibles 76,069 13,768
---------------------------
415,837 201,418
Less accumulated amortization 85,620 59,148
---------------------------
$330,217 $142,270
===========================
ACCRUED EXPENSES
Payroll and related liabilities $ 83,763 $ 40,547
Other 161,259 120,689
---------------------------
$245,022 $161,236
===========================
</TABLE>
Inventories as of December 31, 1998 include approximately $123 million of NIR(R)
coronary stents which are supplied by Medinol. Delays, stoppages, or
interruptions in the supply and/or mix of the NIR(R) stent could adversely
affect the operating results of the Company. During 1998, worldwide NIR(R)
coronary stent sales were approximately 13% of worldwide sales.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-18
<PAGE> 21
NOTE C - CASH, CASH EQUIVALENTS AND INVESTMENTS
<TABLE>
<CAPTION>
Cash, cash equivalents, and investments, stated at fair market value, consisted of the following:
FAIR GROSS GROSS
MARKET UNREALIZED UNREALIZED AMORTIZED
(IN THOUSANDS) VALUE GAINS LOSSES COST
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
AVAILABLE-FOR-SALE:
Cash and money market accounts $ 70,330 $70,330
Equity securities (with a readily determinable fair value) 20,567 $ 9,159 $6,684 18,092
Debt securities 5,073 5,073
-------------------------------------------------
$ 95,970 $ 9,159 $6,684 $93,495
=================================================
DECEMBER 31, 1997
AVAILABLE-FOR-SALE:
Cash and money market accounts $ 57,993 $57,993
Equity securities (with a readily determinable fair value) 47,828 $31,079 $2,090 18,839
Debt securities 16,607 16,607
-------------------------------------------------
$122,428 $31,079 $2,090 $93,439
=================================================
</TABLE>
The Company has no trading securities. Unrealized gains and temporary losses for
available-for-sale securities are excluded from earnings and are reported, net
of tax, as a separate component of stockholders' equity until realized. The cost
of available-for-sale securities is based on the specific identification method.
At December 31, 1998 and 1997, the Company had investments totaling $13 million
and $24 million, respectively, in which the fair market value was not readily
determinable.
NOTE D - BORROWINGS AND CREDIT ARRANGEMENTS
The Company's borrowings at December 31 consisted of:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $1,016,163 $423,250
Bank obligations 11,324 23,958
Long-term debt - fixed rate 563,822 46,325
Long-term debt - floating rate 800,000
</TABLE>
At December 31, 1998, the Company had approximately $1.8 billion of commercial
paper outstanding at a weighted average interest rate of 6.23% compared to $423
million at a weighted average interest rate of 6.46% at December 31, 1997. The
Company's commercial paper borrowings are supported by revolving credit
facilities with certain domestic and foreign financial institutions. At December
31, 1998, the revolving credit facilities totaled $2.2 billion. The credit
facilities consist of a $1.0 billion credit facility which terminates in June
2002 and $1.2 billion in 364-day facilities which terminate in September 1999
and can be extended for an additional 364 days under certain conditions. The
Company has the ability to refinance a portion of its short-term debt on a
long-term basis through its credit facilities and expects a minimum of $800
million will remain outstanding through the next twelve months and, accordingly,
the Company has classified this portion of borrowings as long-term at December
31, 1998. Under the revolving credit facilities, the Company has the option to
borrow amounts at various interest rates. Use of the borrowings is unrestricted
and the borrowings are unsecured. The revolving credit facilities require the
Company to maintain a specific ratio of consolidated funded debt (as defined) to
consolidated net worth (as defined) plus consolidated funded debt. In the first
quarter of 1999, the Company refinanced substantially all of the outstanding
commercial paper borrowings with proceeds of borrowings under the revolving
credit facilities. The Company had other outstanding bank obligations of $11
million and $24 million at December 31, 1998 and 1997, respectively, at weighted
average interest rates of 6.45% and 2.55%, respectively.
In March 1998, the Company issued $500 million of seven-year senior notes. The
senior notes bear a coupon of 6.625% payable semiannually, and are not
redeemable prior to maturity or subject to any sinking fund requirements.
During March 1998, the Company borrowed 1.2 billion Japanese yen (approximately
$11 million) at a fixed interest rate of 2.1% from a Japanese bank to finance a
facility construction project. The term of the borrowing extends through 2012.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE D CONTINUED TO NOTE G)
- ----------------------------
At December 31, 1998, the Company had an additional 6 billion Japanese yen
borrowings (approximately $53 million) outstanding with a syndicate of Japanese
banks. The interest rate on the borrowings is 2.47% and the borrowings are
payable in 2002.
The Company has uncommitted Japanese credit facilities with several Japanese
banks to provide for borrowings and promissory notes discounting of up to 7.5
billion Japanese yen (approximately $66 million). At December 31, 1998, there
were no borrowings outstanding under the Japanese credit facilities compared to
2.7 billion Japanese yen (approximately $21 million) at December 31, 1997.
During 1998, approximately $266 million of receivables were discounted through
promissory notes compared to $194 million during 1997. At December 31, 1998,
approximately $61 million of receivables were discounted at average interest
rates of approximately 1.5%.
In September 1998, the Company filed a $1.2 billion shelf registration with the
U.S. Securities and Exchange Commission under which the Company may from time to
time issue various equity and debt securities. At December 31, 1998, the Company
had no outstanding securities issued under this shelf registration.
Interest paid, including interest paid under capital leases and mortgage loans,
amounted to $65 million in 1998, $19 million in 1997, and $13 million in 1996.
NOTE E - LEASES
Rent expense amounted to $40 million in 1998, $37 million in 1997 and $22
million in 1996. Future minimum rental commitments as of December 31, 1998 under
noncancelable capital and operating lease agreements are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ---------------------------------------------------------------------------
<S> <C> <C>
1999 $ 3,425 $ 32,427
2000 2,274 29,247
2001 2,282 15,508
2002 2,299 11,460
2003 2,323 7,437
Thereafter 8,872 50,002
------------------------
Total minimum lease payments 21,475 $146,081
========================
Amount representing interest 8,799
-------
Present value of minimum
lease payments $12,676
=======
</TABLE>
NOTE F - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments. However, considerable judgment
is required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheets
for cash and cash equivalents are valued at cost which approximates their fair
value.
INVESTMENTS: The fair values for marketable debt and equity securities are based
on quoted market prices when readily determinable.
COMMERCIAL PAPER AND BANK OBLIGATIONS: The carrying amounts of the Company's
borrowings under its commercial paper program and its financing agreements
approximate their fair value.
LONG-TERM DEBT: The fair value of the Company's fixed rate long-term debt is
estimated based on quoted market prices. The carrying amounts of the Company's
floating rate long-term debt approximate their fair value.
FORWARD FOREIGN EXCHANGE CONTRACTS: The fair values of forward foreign exchange
contracts are estimated based on the amount that the Company would receive or
pay to terminate the agreements at the reporting date. The Company had spot and
forward foreign exchange contracts outstanding in the notional amounts of $230
million and $177 million as of December 31, 1998 and 1997, respectively.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-20
<PAGE> 23
<TABLE>
<CAPTION>
The carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows:
1998 1997
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash, cash equivalents and investments $ 95,970 $ 95,970 $122,428 $122,428
Forward foreign exchange contracts, net 3,038 2,476
Liabilities:
Commercial paper 1,016,163 1,016,163 423,250 423,250
Bank obligations -short-term 11,324 11,324 23,958 23,958
Long-term debt - fixed rate 563,822 549,522 46,325 47,255
Long-term debt - floating rate 800,000 800,000
Forward foreign exchange contracts, net 7,436 7,501
</TABLE>
<TABLE>
<CAPTION>
NOTE G - INCOME TAXES
Income (loss) before income taxes and cumulative effect of change in accounting consisted of:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(346,518) $178,381 $253,239
Foreign 71,204 36,750 50,091
-----------------------------------------
$(275,314) $215,131 $303,330
=========================================
</TABLE>
<TABLE>
<CAPTION>
The related provision (benefit) for income taxes consisted of:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $106,177 $97,237 $116,191
State 20,903 14,567 9,108
Foreign 13,399 16,614 22,686
----------------------------------------
140,479 128,418 147,985
========================================
Deferred:
Federal (112,024) (30,123) 4,175
State (27,127) (5,648) 522
Foreign (12,273) (8,996) (16,446)
----------------------------------------
(151,424) (44,767) (11,749)
========================================
$(10,945) $83,651 $136,236
========================================
</TABLE>
<TABLE>
<CAPTION>
The reconciliation of taxes on income at the federal statutory rate to the actual provision (benefit) for income taxes is:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $(96,360) $75,296 $106,166
State income taxes, net of federal benefit 8,368 7,760 8,778
Effect of foreign taxes (24,849) (9,981) 3,641
Non-deductible merger-related expenses and
purchased research and development 93,247 14,957 19,902
Other, net 8,649 (4,381) (2,251)
----------------------------------------
$(10,945) $83,651 $136,236
========================================
</TABLE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE G CONTINUED TO NOTE I)
- ----------------------------
<TABLE>
<CAPTION>
SIGNIFICANT COMPONENTS OF THE COMPANY'S DEFERRED TAX ASSETS AND LIABILITIES AT DECEMBER 31 CONSISTED OF:
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Inventory costs, intercompany profit and related reserves $ 84,942 $ 98,636
Tax benefit of net operating loss and tax credits 29,013 28,808
Reserves and accruals 29,148 31,937
Merger-related charges, including purchased research
and development 201,006 44,302
Other, net 5,875 23,669
------------------------
349,984 227,352
Less valuation allowance on deferred tax assets 24,698 23,250
------------------------
$325,286 $204,102
========================
Deferred tax liabilities:
Property, plant and equipment $ (7,222) $ (8,509)
Intangible assets (51,415) (33,593)
Unremitted earnings of subsidiaries (55,980) (52,104)
Other (10,414) (9,407)
------------------------
(125,031) (103,613)
========================
Deferred SFAS No. 115 adjustment (987) (11,567)
------------------------
$199,268 $ 88,922
========================
</TABLE>
At December 31, 1998, the Company had U.S. tax net operating loss carryforwards
and research and development tax credits of approximately $14 million that will
expire periodically beginning in the year 2006. In addition, the Company had
foreign tax net operating loss carryforwards of approximately $15 million that
will expire periodically beginning in the year 2000. The Company established a
valuation allowance of $25 million for these carryforwards primarily
attributable to the carryforwards acquired as part of the Company's 1995, 1996
and 1997 mergers and acquisitions.
Income taxes paid amounted to $109 million in 1998, $89 million in 1997 and $85
million in 1996. The income tax provision (benefit) of the unrealized gain or
loss component of other comprehensive income (expense) was approximately $(11)
million, $1 million and $7 million for 1998, 1997 and 1996, respectively.
NOTE H - STOCKHOLDERS' EQUITY
PREFERRED STOCK: The Company is authorized to issue 50 million shares of
preferred stock in one or more series and to fix the powers, designations,
preferences and relative, participating, option or other rights thereof,
including dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences and the number of shares constituting any series,
without any further vote or action by the Company's stockholders. At December
31, 1998, the Company had no shares of preferred stock outstanding.
COMMON STOCK: The Company is authorized to issue 600 million shares of common
stock, $.01 par value per share. Holders of common stock are entitled to one
vote per share. Holders of common stock are entitled to receive dividends when
and if declared by the Board of Directors and to share ratably in the assets of
the Company legally available for distribution to its stockholders in the event
of liquidation. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The holders of common stock do not have
cumulative voting rights. The holders of a majority of the shares of common
stock can elect all of the Directors and can control the management and affairs
of the Company.
The Company is authorized to purchase on the open market up to approximately 40
million shares of the Company's common stock. Purchases will be made at
prevailing prices as market conditions and cash availability warrant. Stock
repurchased under the Company's systematic plan will be used to satisfy its
obligations pursuant to employee benefit and incentive plans. The Company did
not repurchase any shares of its common stock during 1998. Prior to 1998, a
total of 20 million shares of the Company's common stock was repurchased under
the program.
On August 27, 1998, the Company announced that its Board of Directors approved a
two-for-one stock split, to be effected in the form of a 100 percent stock
dividend. On November 4, 1998, the Company announced that its stockholders had
approved an amendment to the Company's certificate of
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-22
<PAGE> 25
incorporation increasing the Company's authorized common stock from 300,000,000
shares to 600,000,000 shares and authorized preferred stock from 25,000,000 to
50,000,000 shares. The amendment allowed the two-for-one stock split announced
on August 27, 1998 to go forward. The stock split was paid on November 30, 1998
to stockholders of record as of November 13, 1998. All historical share and per
share amounts have been restated to reflect the stock split except for share
amounts presented in the Consolidated Balance Sheets and the Consolidated
Statements of Stockholders' Equity which reflect the actual share amounts
outstanding for each period presented.
NOTE I - STOCK OWNERSHIP PLANS
EMPLOYEE AND DIRECTOR STOCK INCENTIVE PLANS
Boston Scientific's 1992 and 1995 Long-Term Incentive Plans provide for the
issuance of up to 40 million shares of common stock. The terms of these two
plans are similar. The plans cover officers, employees and consultants of and to
the Company and provide for the grant of various incentives, including qualified
and non-qualified options, stock grants, share appreciation rights and
performance awards. Options granted to purchase shares of common stock are
either immediately exercisable or exercisable in installments as determined by
an appointed committee consisting of two or more non-employee directors (the
Committee), and, in the case of any qualified options, expire within ten years
from date of grant. In the case of qualified options, if an employee owns more
than 10% of the voting power of all classes of stock, the option granted will be
at 110% of the fair market value of the Company's common stock on the date of
grant and will expire over a period not to exceed five years.
The Committee may also make stock grants in which shares of common stock may be
issued to officers, employees and consultants at a purchase price less than fair
market value. The terms and conditions of such issuances, including whether
achievement of individual or Company performance targets is required for the
retention of such awards, are determined by the Committee. The Committee may
also issue shares of common stock and/or authorize cash awards under the
incentive plans in recognition of the achievement of long-term performance
objectives established by the Committee. Stock grants for 5,000 shares, 15,000
shares and 2,000 shares were issued to employees during 1998, 1997 and 1996,
respectively.
Boston Scientific's 1992 Non-Employee Directors' Stock Option Plan provides for
the issuance of up to 200,000 shares of common stock and authorizes the
automatic grant to outside directors of options to acquire 4,000 shares of
common stock generally on the date of each annual meeting of the Stockholders of
the Company. Options under this plan are exercisable ratably over a three-year
period and expire ten years from the date of grant.
Shares reserved for future issuance under all of the Company's plans totaled
approximately 42 million at December 31, 1998.
If the Company had elected to recognize compensation expense for the granting of
options under stock option plans based on the fair values at the grant dates
consistent with the methodology prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation", net income (loss) and earnings (loss) per share would
have been reported as the following pro forma amounts:
<TABLE>
<CAPTION>
(IN THOUSANDS, YEAR ENDED DECEMBER 31,
EXCEPT PER SHARE DATA) 1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $(264,369) $110,400 $167,094
Pro forma (302,455) 82,974 151,820
- ---------------------------------------------------------------------
Earnings (loss) per common share -
assuming dilution
As reported $ (0.68) $ 0.28 $ 0.42
Pro forma (0.77) 0.21 0.38
- ---------------------------------------------------------------------
</TABLE>
The weighted average grant-date fair value per share of options granted during
1998, 1997 and 1996, calculated using the Black-Scholes options pricing model,
is $13.13, $9.08 and $7.21, respectively.
The fair value of the stock options used to calculate the pro forma net income
(loss) and earnings (loss) per share amounts above is estimated using the
Black-Scholes options pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 37.80% 35.90% 37.70%
Risk-free interest rate 5.64 6.42% 6.12%
Actual forfeitures 1,127,000 1,340,000 682,000
Expected life 3.7 4.0 3.7
</TABLE>
The effects of expensing the estimated fair value of stock options on 1997 and
1996 pro forma amounts are not necessarily representative of the effects on
reporting the results of operations, as the periods presented include only three
and two years, respectively, of option grants under the Company's plans.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (NOTE I CONTINUED TO NOTE K)
<TABLE>
<CAPTION>
Information related to stock options at December 31 under stock ownership plans is as follows:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
(OPTION AMOUNTS IN THOUSANDS) OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 33,206 $15.76 29,078 $11.42 29,398 $8.28
Granted 6,621 35.91 10,716 24.70 6,654 20.52
Exercised (5,557) 10.19 (5,106) 8.98 (5,948) 6.23
Canceled (2,222) 22.02 (1,482) 18.58 (1,026) 10.36
-------------------------------------------------------------------
Outstanding at December 31 32,048 20.45 33,206 15.76 29,078 11.42
===================================================================
Exercisable at December 31 13,053 $11.58 12,230 $ 9.08 10,784 $7.93
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Below is additional information related to stock options outstanding and exercisable at December 31, 1998:
STOCK OPTIONS STOCK OPTIONS
(OPTION AMOUNTS IN THOUSANDS) OUTSTANDING EXERCISABLE
- -------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.00- 8.00 7,082 4.49 $ 5.71 6,898 $ 5.67
8.01-16.00 5,179 6.18 13.63 2,907 13.47
16.01-24.00 4,890 7.60 20.64 1,999 20.46
24.01-32.00 8,976 8.42 25.10 1,186 25.14
32.01-40.00 5,921 9.32 36.85 63 34.16
---------------------------------------------------------
32,048 7.23 $20.45 13,053 $11.58
=========================================================
</TABLE>
STOCK PURCHASE PLAN
Boston Scientific's Global Employee Stock Ownership Plan (Stock Purchase Plan)
provides for the granting of options to purchase up to 3 million shares of the
Company's common stock to all eligible employees. Under the Stock Purchase Plan,
each eligible employee is granted, at the beginning of each period designated by
the Committee as an offering period, an option to purchase shares of the
Company's common stock equal to not more than 10% of the employee's eligible
compensation. Such options may be exercised generally only to the extent of
accumulated payroll deductions at the end of the offering period, at a purchase
price equal to 85% of the fair market value of the Company's common stock at the
beginning or end of each offering period, whichever is less.
During 1998, approximately 380,000 shares were issued at $23.35 per share.
During 1997, approximately 240,000 shares were issued at prices ranging from
$23.45 to $24.33 per share, and, during 1996, approximately 240,000 shares were
issued at prices ranging from $18.06 to $19.71 per share. At December 31, 1998,
there were approximately 1.6 million shares available for future issuance.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-24
<PAGE> 27
NOTE J - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC:
Net income (loss) $(264,369) $110,400 $167,094
====================================
Weighted average
shares outstanding 390,836 389,146 387,018
====================================
Net income (loss) per
common share $ (0.68) $ 0.28 $ 0.43
====================================
ASSUMING DILUTION:
Net income (loss) $(264,369) $110,400 $167,094
====================================
Weighted average
shares outstanding 390,836 389,146 387,018
Net effect of dilutive
put options 28
Net effect of dilutive
stock options 10,602 11,688
------------------------------------
Total 390,836 399,776 398,706
====================================
Net income (loss) per
common share $ (0.68) $ 0.28 $ 0.42
====================================
</TABLE>
During 1998, approximately 9 million stock options were not included in the
computation of earnings per share, assuming dilution, because they would have
been antidilutive. In addition, during 1998 and 1997, approximately 7 million
and 10 million stock options, respectively, were not included in the computation
of earnings per share, assuming dilution, because exercise prices were greater
than the average market price of the common shares.
NOTE K - COMMITMENTS AND CONTINGENCIES
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a wholly owned subsidiary
of the Company, filed a suit for patent infringement against Advanced
Cardiovascular Systems, Inc. (ACS), alleging willful infringement of two of
SCIMED's U.S. patents by ACS's RX ELIPSE(TM) PTCA catheter. The suit was filed
in the U.S. District Court for the Northern District of California seeking
monetary and injunctive relief. In January 1998, the Company added the ACS RX
MULTILINK(TM) stent delivery system to its complaint. ACS has answered, denying
the allegations of the complaint. Trial is expected to begin in 1999.
On December 29, 1998, the Company and SCIMED filed a cross-border suit against
ACS, Guidant Corporation (Guidant) and various foreign subsidiaries in The
Netherlands alleging ACS's MULTILINK(TM), RX ELIPSE, RX MULTILINK HP(TM) and RX
DUET(TM) catheters and stent delivery systems infringe one of the Company's
European patents. In this action, the Company requested relief covering The
Netherlands, the United Kingdom, France, Germany and Italy. A hearing on
cross-border jurisdiction will be held on March 12, 1999. A hearing on the
merits is set for November 5, 1999.
On January 13, 1999, SCIMED filed a suit for patent infringement against ACS,
Guidant and Guidant Sales Corporation alleging willful infringement of two of
SCIMED's U.S. patents by ACS's RX MULTILINK HP and RX DUET stent delivery
systems and one of SCIMED's U.S. patents by ACS's RX MULTILINK stent delivery
system. The suit was filed in the U.S. District Court for the Northern District
of California seeking monetary and injunctive relief. ACS has answered, denying
the allegations of the complaint.
On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,
alleging willful infringement by SCIMED'S EXPRESS PLUS(TM) and EXPRESS PLUS
II(TM) PTCA catheters of four U.S. patents licensed to ACS. Suit was filed in
the U.S. District Court for the Northern District of California and seeks
monetary and injunctive relief. SCIMED has answered, denying the allegations of
the complaint. Trial is expected to begin in 1999.
On March 12, 1996, ACS filed two suits for patent infringement against SCIMED,
alleging in one case the willful infringement of a U.S. patent by SCIMED's
EXPRESS PLUS, EXPRESS PLUS II and LEAP(R) EXPRESS PLUS PTCA catheters, and in
the other case the willful infringement of a U.S. patent by SCIMED's BANDIT(TM)
PTCA catheter. The suits were filed in the U.S. District Court for the Northern
District of California and seek monetary and injunctive relief. SCIMED has
answered, denying the allegations of the complaints. Both trials are expected to
begin in 1999.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE K CONTINUED)
- ---------------------
On September 16, 1997, ACS filed a suit for patent infringement against the
Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter infringes two
U.S. patents licensed to ACS and one U.S. patent owned by ACS. Suit was filed in
the U.S. District Court for the Northern District of California seeking monetary
damages, injunctive relief and that the patents be adjudged valid, enforceable
and infringed. The Company and SCIMED have answered, denying the allegations in
the complaint. A trial date has not yet been set.
On August 12, 1998, ACS and an affiliate of ACS filed suit for patent
infringement against the Company and SCIMED alleging that the Company's NIR(R)
stent infringes five patents owned by ACS. The suit was filed in the U.S.
District Court for the Southern District of Indiana seeking injunctive and
monetary relief. The Company and SCIMED have answered, denying the allegations
of the complaint. A trial date has been set for February 22, 2000.
On March 25, 1996, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson Company (Johnson & Johnson), filed a suit for patent infringement
against SCIMED, alleging the infringement of five U.S. patents by SCIMED's LEAP
balloon material, used in certain SCIMED catheter products, including SCIMED's
BANDIT and EXPRESS PLUS catheters. The suit was filed in the U.S. District Court
for the District of Minnesota and seeks monetary and injunctive relief. SCIMED
has answered, denying the allegations of the complaint. Trial is expected to
begin in 1999.
On March 17, 1997, the Company, through its subsidiaries, filed suit against
Cordis in France seeking a declaration of noninfringement for the Company's LEAP
balloon in relation to a European patent owned by Cordis. A hearing on the
pleadings is scheduled for May 11, 1999.
On July 18, 1997, Cordis filed a cross border suit in The Netherlands against
various subsidiaries of the Company, alleging that the LEAP balloon infringes
one of Cordis' European patents. In this action, Cordis requested expedited
relief, including an injunction, covering The Netherlands, Germany, France, the
United Kingdom and Italy. The court posed certain questions to the European
Patent Office (EPO). The Company appealed the court's decision to present
questions to the EPO. A hearing on the appeal was held June 16, 1998. In
November 1998, the Court of Appeals held that there was a "ready chance" that
the Cordis patent would be found invalid and dismissed the action.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis,
alleging willful infringement of several SCIMED U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in
the U.S. District Court for the District of Minnesota, Fourth District, seeking
monetary and injunctive relief. The parties have agreed to add Cordis'
CHARGER(TM) and HELIX(TM) catheters to the suit. Cordis has answered, denying
the allegations of the complaint. Trial is expected to begin in 1999.
On March 13, 1997, the Company (through its subsidiaries) filed suits against
Johnson & Johnson (through its subsidiaries) in The Netherlands, the United
Kingdom and Belgium, and on March 17, 1997 filed suit in France, seeking a
declaration of noninfringement for the NIR(R) stent relative to two European
patents licensed to Ethicon, Inc. (Ethicon), a Johnson & Johnson subsidiary, as
well as a declaration of invalidity with respect to those patents. After a trial
on the merits in the United Kingdom during March 1998, the Court ruled on June
26, 1998 that neither of the patents is infringed by the NIR(R) stent, and that
both patents are invalid. Ethicon has appealed. On October 28, 1998, the
Company's motion for a declaration of noninfringement in France was dismissed
for failure to satisfy statutory requirements; the French invalidity suits were
not affected. The Company has appealed the dismissal, and a hearing is scheduled
for March 22, 1999.
On March 20, 21 and 22, 1997, the Company (through its subsidiaries) filed
additional suits against Johnson & Johnson (through its subsidiaries) in Sweden,
Italy and Spain, respectively, seeking a declaration of noninfringement for the
NIR(R) stent relative to one of the European patents licensed to Ethicon in
Sweden, Italy and Spain and a declaration of invalidity in Italy and Spain.
Ethicon and other Johnson & Johnson subsidiaries filed a cross-border suit in
The Netherlands on March 17, 1997, alleging that the NIR(R) stent infringes one
of the European patents licensed to Ethicon. In this action, the Johnson &
Johnson entities requested relief, including provisional relief (a preliminary
injunction), covering Austria, Belgium, France, Greece, Italy, The Netherlands,
Norway, Spain, Sweden, Switzerland and the United Kingdom. On April 2, 1997, the
Johnson & Johnson entities filed a similar cross-border proceeding in The
Netherlands with respect to a second European patent licensed to Ethicon.
Johnson & Johnson subsequently withdrew its request for cross-border relief in
the United Kingdom. In October, 1997, Johnson & Johnson's request for
provisional cross-border relief on both patents was denied by the Dutch court,
on the ground that it is "very likely" that the NIR(R) stent will be found not
to infringe the patents. Johnson & Johnson appealed this decision with respect
to one of the patents; the appeal has been denied on the ground that there is a
"ready chance" that the patent will be declared null and void. In January 1999,
Johnson & Johnson amended the claims of one of the patents, changed the action
from a cross-border case to a Dutch national action, and indicated its intent
not to pursue its action on the second patent. A hearing has been set for
March 26, 1999.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-26
<PAGE> 29
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that the Company's NIR(R) stent infringes one of Ethicon's
patents. On June 23, 1998, the case was stayed following a decision in an
unrelated nullity action in which the Ethicon patent was found to be invalid.
On June 16, 1997, the Company and SCIMED filed a suit against Johnson & Johnson,
Ethicon and Johnson & Johnson International Systems Co. in the U.S. District
Court for the District of Massachusetts seeking a declaratory judgment of
noninfringement for the NIR(R) stent relative to two patents licensed to Johnson
& Johnson and that the two patents are invalid and unenforceable. The Company
subsequently amended its complaint to add a third patent. Johnson & Johnson
answered, denying the allegations of the complaint, and counterclaiming for
patent infringement. In October 1997, Johnson & Johnson's motion to dismiss the
suit was denied. This action has been consolidated with the Delaware action
described below.
On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR(R) stent infringes certain
Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court
of Canada seeking a declaration of infringement, monetary damages and injunctive
relief. The Company has answered, denying the allegations of the complaint.
On October 22, 1997, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the importation and use of the NIR(R) stent
infringes two patents owned by Cordis. The suit was filed in the U.S. District
Court for the District of Delaware seeking monetary damages, injunctive relief
and that the patents be adjudged valid, enforceable and infringed. The Company
and SCIMED have answered the complaint, denying Cordis' allegations. The
Massachusetts case described above has been consolidated with this action. A
trial date has been set for March 6, 2000.
On April 13, 1998, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's NIR(R) stent infringes a third
patent owned by Cordis. The suit was filed in the U.S. District Court for the
District of Delaware seeking injunctive and monetary relief. The Company and
SCIMED have answered, denying the allegations of the complaint. A trial date has
been set for March 6, 2000.
On August 13, 1998, Arterial Vascular Engineering, Inc. (AVE) filed a suit for
patent infringement against the Company and SCIMED alleging that the Company's
NIR(R) stent infringes two patents owned by AVE. The suit was filed in the U.S.
District Court for the District of Delaware seeking injunctive and monetary
relief. The Company and SCIMED have answered, denying the allegations of the
complaint. A trial date has not yet been set.
On December 15, 1998, the Company and SCIMED filed a cross-border suit against
AVE in The Netherlands alleging that AVE's AVE GFX(TM), AVE GFX 2(TM), AVE
LTX(TM) and USCI CALYPSO(TM) rapid exchange catheters and stent delivery systems
infringe one of the Company's European patents. In this action, the Company
requested relief covering The Netherlands, the United Kingdom, France, Germany
and Italy. A hearing is set for October 22, 1999.
On December 18, 1998, AVE filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's MAXXUM(TM) and VIVA!(TM)
catheters infringe a patent owned by AVE. The suit was filed in the U.S.
District Court for the District of Delaware seeking injunctive and monetary
relief. The Company and SCIMED have answered, denying the allegations of the
complaint.
On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District
Court for the District of Delaware alleging that certain Company products,
including the Company's MaxForce TTS(TM) catheter, infringe a patent assigned to
Bard. Following a trial and jury verdict, on February 3, 1999 the court entered
a judgment that the Company infringed the Bard patent and awarded damages to
Bard in the amount of $10.8 million. The Company was also enjoined from selling
the product found to be infringing. The Company is appealing the judgment to the
Court of Appeals for the Federal Circuit. The Company no longer markets the
accused device.
On May 12, 1998, Bard filed a cross-border suit in The Netherlands against
various subsidiaries of the Company, alleging that the Company's VIVA!(TM) and
MAXXUM(TM) rapid exchange catheters infringe one of Bard's European patents. In
this action, Bard requested relief covering The Netherlands, Germany, France,
Spain and the United Kingdom. On February 16, 1999, the suit was withdrawn for
procedural reasons. The Company is aware that AVE, successor-in-interest to
Bard's cardiovascular business, could file a similar suit against the Company,
alleging infringement of the patent by one or more of the Company's products.
On March 7, 1996, Cook Inc. (Cook) filed suit in the Regional Court, Munich
Division for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally
Invasive Technologies alleging that the Cragg EndoPro(TM) System I and
Stentor(TM) endovascular device infringe a certain Cook patent. Since the
purchase of the assets of the Endotech/MinTec companies by the Company, the
Company has assumed control of the litigation. The defendant answered, denying
the allegations. A court-appointed technical expert has provided the court with
technical advice. A final hearing is scheduled to be held on May 12, 1999.
On June 30, 1998, Cook filed suit in the Regional Court, Dusseldorf Division
for Patent Disputes, in Dusseldorf,
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE K CONTINUED TO NOTE M)
- ----------------------------
Germany against the Company alleging that the Company's PASSAGER(TM) peripheral
vascular stent graft and VANGUARD(TM) endovascular aortic graft products
infringe the same Cook patent. A hearing date has been set for July 22, 1999.
On January 13, 1999, Medical Innovations Corporation (Innovations) filed a
lawsuit in the U.S. District Court for the District of Utah alleging that
certain Company products, including the Company's Ultratome(TM) XL sphinctertome
product, infringe two patents assigned to Innovations. The suit also includes a
claim of unfair trade practices. Innovations is seeking injunctive relief and
monetary damages for both claims. The Company is preparing an answer, denying
the allegations of the complaint.
On February 1, 1999, Hewlett-Packard Company filed a suit in the U.S. District
Court for the District of Massachusetts against the Company alleging violation
of the Sherman Antitrust Act and Massachusetts General Laws Chapter 93A and
breach of contract. The Company is preparing an answer, denying the allegations
of the complaint.
Beginning November 4, 1998, a number of shareholders of the Company, on behalf
of themselves and all others similarly situated, filed purported stockholders'
class action suits in the U.S. District Court for the District of Massachusetts
alleging that the Company and certain of its officers violated certain sections
of the Securities Exchange Act of 1934. The complaints principally allege that
as a result of certain accounting irregularities involving the improper
recognition of revenue by the Company's subsidiary in Japan, the Company's
previously issued financial statements were materially false and misleading. In
all, 16 purported class action suits have been filed. Plaintiffs have moved for
the appointment of lead plaintiffs and lead counsel. The Company and its
officers have not yet filed an answer, but intend to vigorously defend all
actions.
The Company is aware that the U.S. Department of Justice is conducting an
investigation of matters that include the Company's NIR ON(TM) Ranger(TM) with
Sox(TM) coronary stent delivery system which was voluntarily recalled by the
Company in October 1998 following reports of balloon leaks. The Company is
cooperating fully in the investigation.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the Company
will prevail in any particular case. An adverse outcome in one or more cases in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company.
At December 31, 1998 and 1997, the Company has accrued approximately $38 million
and $42 million, respectively, of litigation-related reserves to cover certain
costs of defense, settlement and damages.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against product
liability losses as could otherwise materially affect the Company's financial
position.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-28
<PAGE> 31
NOTE L -- BUSINESS COMBINATIONS
On September 10, 1998, the Company consummated its acquisition of Schneider
Worldwide, formerly a member of the Medical Technology Group of Pfizer Inc., for
$2.2 billion, net of assets acquired and liabilities assumed. The acquisition
was accounted for using the purchase method of accounting. The consolidated
financial statements include Schneider's operating results from the date of
acquisition. The aggregate purchase price has been allocated on a preliminary
basis to the assets acquired and liabilities assumed based on their estimated
fair values at date of acquisition. The estimated excess of purchase price over
the fair value of net tangible assets acquired was allocated to specific
intangible asset categories as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Excess of cost over net assets acquired $ 781,232
Purchased research and development 671,000
Core technology 420,960
Developed technology 126,940
Assembled workforce, customer lists, trademarks and patents 194,780
==========
$2,194,912
==========
</TABLE>
Core technology, developed technology, assembled workforce, customer lists,
trademarks and patents are being amortized on a straight-line basis over periods
ranging from 9 to 25 years and the excess of cost over net assets acquired is
being amortized on a straight-line basis over 40 years.
The Company recorded a $671 million ($524 million, net of tax) charge to account
for purchased research and development acquired. The valuation of purchased
research and development, for which management is primarily responsible,
represents the estimated fair value related to incomplete projects. At the date
of the acquisition, the development of these projects had not reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the date
of acquisition. The Securities and Exchange Commission (SEC) recently has
published guidelines for valuing in-process research and development. In that
regard, in February 1999, the Company requested that the SEC review its
preliminary allocation. Upon completion of the review the Company will finalize
its purchase price allocation.
The income approach was used to establish the fair values of the intangible
assets. This approach establishes the fair value of an asset by estimating the
after-tax cash flows attributable to the asset over its useful life and then
discounting these after-tax cash flows back to a present value. The discounting
process uses a rate of return commensurate with the time value of money
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-29
<PAGE> 32
and investment risk factors. Accordingly, for the purpose of establishing the
fair value of each asset in the Schneider analysis, revenues for each future
period were estimated, along with costs, expenses, taxes and other charges.
Revenue estimates were based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors. With respect to the
value of purchased research and development, the Company considered, among other
factors, the research and development project's stage of completion, the
complexity of the work completed to date, the costs already incurred, the
projected costs to complete, the contribution of core technologies and other
acquired assets, the projected product introduction date and the estimated
useful life of the technology. The respective after-tax cash flows were then
discounted back to present value using a risk-adjusted discount rate. The
discount rates used in the Schneider analysis ranged from 16%-28% depending upon
the risk profile of the particular asset.
The most significant purchased research and development projects that were
in-process at the date of acquisition were brachytherapy, devices for aneurysmal
disease and coronary stents which in the aggregate represent over 60% of the
in-process value. The brachytherapy project represents approximately 26% of the
purchased research and development value. Key assumptions used in the analysis
of brachytherapy included gross margins excluding depreciation of approximately
87% and a discount rate of 28%. The brachytherapy system is an intravascular
radiation system designed to reduce clinical restenosis after PTCA and/or
stenting. The system consists of a computer controlled afterloader, beta
radiation source, centering catheter, source delivery wire and dummy wire. As of
the date of acquisition, the project was expected to be completed and the
products commercially available in the U.S. within two to three years, with an
estimated cost to complete of approximately $5 to $10 million.
The coronary stent projects represent approximately 16% of the purchased
research and development value. Key assumptions used in the analysis of coronary
stents included gross margins excluding depreciation of approximately 87% and a
discount rate of 28%. Projects underway at the date of acquisition were stent
systems for native coronary artery disease, saphenous vein graft disease, and
versions with novel delivery systems. The stent systems in-process are designed
to conform to the arterial anatomy resulting in remodeling of the vessel. An
atraumatic tip reduces vessel trauma and enhances trackability, while position
markers together with a high degree of stent radiopacity facilitate proper
placement. The stent systems also use a unique reconstrainable delivery system.
The Company believes that the stent systems will be especially helpful in the
treatment of saphenous vein graft disease. As of the date of acquisition, the
projects were expected to be completed and the products commercially available
for sale in the U.S. within one year with an estimated cost to complete of
approximately $1 to $3 million.
The aneurysmal disease projects represent approximately 20% of the purchased
research and development value. Key assumptions used in the analysis of the
aneurysmal disease projects included gross margins excluding depreciation of
approximately 86% and a discount rate of 28%. The objective of the projects is
to develop endoluminal grafts for the treatment of late stage vascular aneurysms
and occlusions. The most significant of the projects in this category at the
date of acquisition was the endoluminal graft for the treatment of abdominal
aortic aneurysms. The device consists of an endoluminal graft trunk where the
lumen is formed into two sockets which, after placement of the trunk in the
proximal neck of the aneurysm, accepts two endoluminal graft legs which extend
to the iliac arteries. Valuable elements of the abdominal aortic device at the
date of acquisition include the spun Corethane(R) graft covering, the
self-expanding scaffold design, and the delivery systems. Other projects in this
category included the endoluminal graft for thoracic aortic aneurysmal disease,
which is a tubular endoluminal graft to be used in the aorta distal to the
aortic arch. As of the date of acquisition, the projects were expected to be
completed and the products commercially available in the U.S. within two to
three years, with an estimated cost to complete of approximately $10 to $15
million.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-30
<PAGE> 33
The major risk associated with the timely completion and commercialization of
these products is the ability to confirm the safety and efficacy of the
technology based on long term clinical outcomes data.
The Company believes that the assumptions used in the forecasts were reasonable
at the time of the acquisition. No assurance can be given, however, that the
underlying assumptions used to estimate expected project revenues, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. For these reasons, among others, actual results may vary
from the projected results.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Schneider as if the acquisition had
occurred at the beginning of each year presented, with pro forma adjustments to
give effect to amortization of intangibles, purchased research and development,
an increase in interest expense on acquisition financing and certain other
adjustments together with related tax effects:
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands, except per share data) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $2,482,809 $2,161,626
Net loss (302,683) (471,186)
Net loss per share - assuming dilution (0.77) (1.21)
- ----------------------------------------------------------------------------------------------
</TABLE>
In 1997, the Company completed its merger with Target in a tax-free,
stock-for-stock transaction accounted for as a pooling-of-interests. In
conjunction with this merger, Target's stockholders received 1.07 shares of the
Company's common stock in exchange for each share of Target common stock.
Approximately 33 million shares of the Company's common stock were issued in
connection with the Target merger.
In 1996, the Company completed its merger with EPT in a stock-for-stock
transaction. The transaction, which is accounted for as a pooling-of-interests,
was effected through the exchange of 0.297 shares of the Company's common stock
for each EPT share held. Approximately 6.8 million shares of the Company's
common stock were issued in conjunction with the EPT merger.
In 1996, the Company acquired Symbiosis, an original equipment manufacturer and
formerly a wholly-owned subsidiary of American Home Products Corporation, for
approximately $153 million. In 1996, the Company also purchased the assets of
Endotech/Mintec for approximately $72 million. Both acquisitions were cash
transactions and are accounted for using the purchase method of accounting.
Accordingly, the aggregate purchase prices have been allocated among the assets
acquired based on their estimated fair values at the date of acquisition. The
allocations of the purchase prices resulted in provision for in-process research
and development of $39 million and $57 million, respectively.
The valuations of the purchased research and development represent the estimated
fair value related to incomplete projects at the dates of acquisition. At the
dates of acquisition, in management's opinion, the development of these projects
had not reached technological feasibility and the research and development in
process had no alternative future uses. Accordingly, these costs were expensed
at date of acquisition. The valuations of in-process research and development
projects for both acquisitions were performed using the income approach. Each
project's expected cash flows were evaluated separately and discounted back to
the present at risk-adjusted discount rates.
The most significant project valued for the Symbiosis acquisition related to a
guidewire project (approximately 80% of the in-process value). Key assumptions
used in the analysis of the guidewire project included gross margins excluding
depreciation of approximately 65% and a discount rate of 18%. Other expenses
were based on estimated costs to complete the project. Symbiosis' historical
pricing, margin and expense levels were adjusted to reflect end user market
rates. As of the date of acquisition, the Company expected to continue
development of the Symbiosis guidewire project through the balance of 1996 at a
cost of an additional $3 million. Product commercialization was anticipated in
1997. Delays have occurred which have lengthened the development period and
increased the completion costs by approximately $1 million. Product launch is
now expected to occur sometime in late 1999.
The most significant Endotech/Mintec project related to an abdominal aortic
aneurysm repair device (approximately 90% of the in-process value). Key
assumptions used in the analysis of the project were gross margins excluding
depreciation of approximately 80% and discount rates of 20-23%. Other expenses
were based on estimated costs to complete the project. Endotech/Mintec was a
start-up operation at the date of acquisition, thus, the valuation used
estimated end user market prices. Initial market availability of the device was
anticipated by the Company in Europe in 1996, Japan in 1999, and the U.S. in
2000. The staggered timing reflected the need to conduct clinical evaluations
and receive regulatory approvals in the respective countries. Expected aggregate
cost for completion was $17 million to be spent between 1996 and 2000. The
Endotech/MinTec product provided a proprietary technology, however, additional
development and clinical work was still necessary to address and improve product
components, product performance and clinical efficacy. Product offering in
Europe commenced approximately a year from the date of the acquisition. The
timeline for product availability in the U.S. and Japan has slipped by
approximately one year due to technology issues. Estimated costs to date have
been approximately $11 million and total costs to complete the project are
uncertain.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-31
<PAGE> 34
NOTE M - RESTRUCTURING AND
MERGER-RELATED CHARGES
The Company is in the process of implementing a rationalization plan initiated
in conjunction with the consummation of the Schneider acquisition. The
rationalization plan takes into consideration duplicate capacity and
opportunities for further leveraging of cost and technology platforms. The
Company's actions approved and committed to in the fourth quarter of 1998 will
result in the displacement in 1999 of approximately 2,000 current positions,
over half of which are manufacturing positions. The Company has decided to close
five Schneider facilities, as well as transition the manufacturing of selected
Boston Scientific product lines to different sites. The Company estimates that
the costs associated with these activities, excluding transition costs, will be
approximately $62 million, most of which represent severance and related costs.
The costs related to transitioning the manufacturing are not expected to be
significant (less than $10 million) and will be recognized as incurred.
Approximately $36 million of the total has been capitalized as part of the
purchase price of Schneider. The remaining $26 million ($17 million, net of tax)
has been charged to operations. The rationalization plan also resulted in the
decision to expand, not close, the Target facilities originally provided for in
a 1997 merger-related charge and to relocate other product lines to those Target
facilities. In the fourth quarter, the Company reversed $21 million ($14
million, net of tax) of previously recorded merger-related charges of which $4
million related to facility costs and which also included reductions for
revisions of estimates relating to contractual commitment payments, associated
legal costs and other asset write-downs originally provided for as a 1997 merger
charge. In addition, as part of the Schneider acquisition, in the fourth quarter
of 1998, the Company recorded estimated costs of approximately $16 million to
cancel contractual obligations, primarily with distributors.
In the second quarter of 1998, the Company realigned its operating units and
decided to operate Target independently instead of as a part of its vascular
division as was planned at the date of the Target acquisition. As a result, in
the second quarter of 1998, the Company reversed $20 million ($13 million, net
of tax) of 1997 merger-related charges primarily related to revised estimates
for costs of workforce reductions and costs of cancelling contractual
commitments.
At December 31, 1998, the Company had an accrual for restructuring and
merger-related charges of $89 million, which is comprised of $50 million of
accrued severance and related costs primarily associated with integrating
Schneider and streamlining manufacturing operations, $16 million related to the
cost of cancelling contractual commitments recorded in connection
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE M CONTINUED TO NOTE N)
- ----------------------------
with the Schneider acquisition and $23 million of accruals remaining for 1997
and prior mergers (primarily costs associated with rationalized facilities and
statutory benefits which are subject to litigation).
During 1997, the Company recorded merger-related charges of $146 million ($106
million, net of tax) primarily related to the Company's acquisition of Target
and purchased research and development of $29 million, net of tax, in
conjunction with accounting for its additional investment in Medinol and other
strategic investments. The Company's Target merger-related charges reflect
estimated costs to integrate all aspects of the Target business into the
vascular business, and include those costs typical in a merging of operations,
such as rationalization of facilities, workforce reductions, unwinding of
various contractual commitments, asset writedowns and other integration costs.
The Company planned to integrate the Target business into its vascular business,
terminate the Target distributors in countries where the Company had a direct
sales presence, move the Target manufacturing and research and development
operations to Ireland and other vascular facilities, and manage Target's
administrative and corporate activities at the Company's headquarters.
Specifically, the Company planned to exit Target's leased headquarters,
manufacturing and research locations in California, as well as, terminate
Target's sales offices in Germany, Japan and the United Kingdom. The lease
terminations were planned to begin during 1997 and to be completed by the end of
1998. In conjunction with the exit plan, the Company planned to terminate
approximately 500 people, of which approximately 100 were
corporate/administrative, 300 were manufacturing and 100 were research and
development personnel. At the date of the Target acquisition, the Company also
provided for the excess cost over fair market value of selected Target lease
hold improvements, machinery and computer equipment, and other assets ($8
million). In the second quarter of 1997, the Company decided not to reintroduce
a vascular product that had been previously withdrawn from the European market.
As a result, the Company determined that there would be no future sales of the
product, thus no projected cash flows. The Company wrote off the intellectual
property ($8 million) associated with the product as a result of this analysis.
Finally, in conjunction with the implementation of a global information system
the Company provided for the estimated residual value of its legacy systems ($8
million), based on the date which the systems were planned to be removed from
service. During 1996, the Company recorded merger-related and other unusual
charges of approximately $32 million. Charges include estimated direct
transaction costs ($5 million) of the merger with EPT and estimated costs to be
incurred in merging EPT with subsidiaries of the Company ($12 million).
Estimated costs include those typical in merging of operations and relate to,
among other things, rationalization of facilities, workforce reductions,
unwinding of various contractual commitments, asset writedowns and other
integration costs. The remaining $15 million, which is primarily nondeductible
for tax purposes, represents primarily a change in prior year estimates of
merger related charges ($7 million), and a provision related to costs associated
with a joint venture arrangement ($8 million). Due to the revised estimates for
costs of workforce reductions discussed previously, the number of Target
employees actually displaced was approximately 40 (approximately 35 of whom were
terminated in 1997 and the remainder subsequent to 1997) as compared to the
original estimate of 500 employees. Less than 10 employees were terminated under
the EPT plan.
The activity impacting the accrual for restructuring and merger-related charges
during 1998 and 1997, net of reclassifications made by management based on
available information, is summarized in the table below:
<TABLE>
<CAPTION>
Charges to Charges Charges to Charges
Balance at Operations Utilized Balance at Operations Utilized
12/31/95 in 1996 in 1996 12/31/96 in 1997 in 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
Facilities $25,642 $5,300 $ (13,863) $17,079 $1,818 $ (5,103)
Workforce reductions 31,863 2,000 (9,299) 24,564 10,164 (23,064)
Contractual commitments 50,921 (43,932) 6,989 (6,365)
Asset write-downs 7,541 (2,809) 4,732 3,418 (6,861)
Direct and other 19,291 (14,947) 4,344 115 (4,204)
-----------------------------------------------------------------------------------------
135,258 7,300 (84,850) 57,708 15,515 (45,597)
1996 RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
Facilities 1,818 1,818 (1,672)
Workforce reductions 1,655 (322) 1,333 (138)
Contractual commitments 1,940 (773) 1,167 (306)
Asset write-downs 4,497 (2,981) 1,516 (750)
Direct and other 15,131 (13,116) 2,015 (148)
-----------------------------------------------------------------------------------------
25,041 (17,192) 7,849 (3,014)
1997 RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
Facilities 6,375 (326)
Workforce reductions 14,491 (2,108)
Contractual commitments 52,673 (24,824)
Asset write-downs 24,184 (10,437)
Direct and other 32,653 (23,484)
-----------------------------------------------------------------------------------------
130,376 (61,179)
1998 SCHNEIDER PURCHASE PRICE
ADJUSTMENTS:
Facilities
Workforce reductions
Contractual commitments
Asset write-downs
Direct and other
-----------------------------------------------------------------------------------------
1998 RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
Facilities
Workforce reductions
Contractual commitments
Asset write-downs
Direct and other
-----------------------------------------------------------------------------------------
TOTAL:
Facilities 25,642 7,118 (13,863) 18,897 8,193 (7,101)
Workforce reductions 31,863 3,655 (9,621) 25,897 24,655 (25,310)
Contractual commitments 50,921 1,940 (44,705) 8,156 52,673 (31,495)
Asset write-downs 7,541 4,497 (5,790) 6,248 27,602 (18,048)
Direct and other 19,291 15,131 (28,063) 6,359 32,768 (27,836)
-----------------------------------------------------------------------------------------
$135,258 $32,341 $(102,042) $65,557 $145,891 $(109,790)
=========================================================================================
<CAPTION>
Purchase Charges
Price (Credits) to Charges
Balance at Adjustments Operations Utilized Balance at
12/31/97 in 1998 in 1998 in 1998 12/31/98
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRIOR RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
Facilities $13,794 $ (2,231) $ (2,641) $8,922
Workforce reductions 11,664 (4,026) (3,271) 4,367
Contractual commitments 624 268 (156) 736
Asset write-downs 1,289 282 (1,071) 500
Direct and other 255 3,916 (1,824) 2,347
-------------------------------------------------------------------------
27,626 (1,791) (8,963) 16,872
1996 RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
Facilities 146 3,958 (2,181) 1,923
Workforce reductions 1,195 (1,195)
Contractual commitments 861 (816) (45)
Asset write-downs 766 (766)
Direct and other 1,867 (1,865) (2)
-------------------------------------------------------------------------
4,835 (684) (2,228) 1,923
1997 RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
Facilities 6,049 (5,970) (79)
Workforce reductions 12,383 (10,700) (1,157) 526
Contractual commitments 27,849 (7,156) (19,236) 1,457
Asset write-downs 13,747 (7,079) (5,638) 1,030
Direct and other 9,169 (7,634) (645) 890
-------------------------------------------------------------------------
69,197 (38,539) (26,755) 3,903
1998 SCHNEIDER PURCHASE PRICE
ADJUSTMENTS:
Facilities
Workforce reductions $35,611 (8,439) 27,172
Contractual commitments 16,580 (773) 15,807
Asset write-downs
Direct and other
-------------------------------------------------------------------------
52,191 (9,212) 42,979
1998 RESTRUCTURING AND MERGER-
RELATED INITIATIVES:
Facilities
Workforce reductions 14,102 (1,561) 12,541
Contractual commitments 855 (755) 100
Asset write-downs 9,027 9,027
Direct and other 2,016 (241) 1,775
-------------------------------------------------------------------------
26,000 (2,557) 23,443
TOTAL:
Facilities 19,989 (4,243) (4,901) 10,845
Workforce reductions 25,242 35,611 (1,819) (14,428) 44,606
Contractual commitments 29,334 16,580 (6,849) (20,965) 18,100
Asset write-downs 15,802 1,464 (6,709) 10,557
Direct and other 11,291 (3,567) (2,712) 5,012
-------------------------------------------------------------------------
$101,658 $52,191 $(15,014) $(49,715) $89,120
=========================================================================
</TABLE>
The 1998, 1997 and 1996 restructuring and merger-related charges were recognized
under the provisions of EITF 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The 1998 purchase price adjustment was
recognized under the provisions of APB 16 "Business Combinations" and EITF 95-3
"Recognition of Liabilities in Connection with a Purchase Business Combination".
Total facilities write-downs under the Company's previously discussed
restructuring and merger-related charges provided for during 1996, 1997 and 1998
for owned assets were measured as the difference between carrying value and fair
value less cost to sell (approximately $8 million net of reversals). The charge
for leased facilities during the same periods was measured using the lease
commitment remaining after the facility was removed from service (approximately
$3 million net of reversals). Write-downs of machinery and equipment,
intangibles and other assets were measured by the difference between the
carrying value and fair market value of the assets (approximately $32 million
net of reversals). Reversals in 1998 of previously recorded charges were
primarily based on the initial amount charged. To the extent that any of the
above assets continued to be used in operations before being sold, scrapped or
abandoned, depreciation and lease payments continued to be charged to
operations. Depreciation not charged to operations related to assets held for
disposal during 1998 was approximately $2 million.
The December 31, 1998 accrual for restructuring and merger-related charges is
classified within the balance sheet as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------
<S> <C>
Accrual for restructuring and
merger-related charges $71,231
Property, plant and equipment, net 13,848
Other long-term liabilities 4,041
-------
$89,120
=======
</TABLE>
As of December 31, 1998, the Company's cash obligations required to complete the
balance of the Company's initiatives to integrate businesses related to its
mergers and acquisitions and announced rationalization strategy are estimated to
be approximately $70 million. Further, the Company has outstanding $140 million
of acquisition-related cash obligations. The Company expects that substantially
all restructuring and merger-related charges will be paid during 1999 with the
exception of $4 million of 1997 and prior facility related costs and statutory
benefits subject to litigation which are expected to be paid or settled
subsequent to 1999. The ultimate costs to be incurred relating to the facilities
cannot be determined until a willing buyer for the properties is found and the
facilities are sold.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-33
<PAGE> 36
NOTE N - SEGMENT REPORTING
Boston Scientific is a worldwide developer, manufacturer and marketer of medical
devices for less invasive procedures. The Company has four reportable operating
segments based on geographic regions: the United States, Europe, Japan and
Emerging Markets. Each of the Company's reportable segments generates revenues
from the sale of minimally invasive medical devices. The reportable segments
represent an aggregate of operating divisions.
Sales and operating results of reportable segments are based on internally
derived standard foreign exchange rates and do not include inter-segment
profits. 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. Total
assets and purchases of property, plant and equipment are based on foreign
exchange rates used in the Company's consolidated financial statements.
<TABLE>
<CAPTION>
UNITED EMERGING
(IN THOUSANDS) STATES EUROPE JAPAN MARKETS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Net sales $1,394,222 $381,130 $332,465 $118,751 $2,226,568
Depreciation and amortization 63,676 17,389 2,457 826 84,348
Operating income excluding special charges 462,830 54,220 178,180 9,453 704,683
Total assets 1,394,769 551,682 203,841 75,540 2,225,832
Purchases of property, plant and
equipment, net 96,632 50,132 18,857 8,418 174,039
--------------------------------------------------------------------
1997:
Net sales $1,076,292 $325,960 $298,639 $ 88,042 $1,788,933
Depreciation and amortization 56,884 8,960 2,083 280 68,207
Operating income excluding special charges 373,226 62,346 154,975 16,835 607,382
Total assets 1,088,463 429,157 135,835 53,257 1,706,712
Purchases of property, plant and
equipment, net 138,587 65,918 13,684 1,908 220,097
--------------------------------------------------------------------
1996:
Net sales $ 924,205 $294,139 $196,450 $ 65,668 $1,480,462
Depreciation and amortization 43,515 6,854 1,305 214 51,888
Operating income excluding special charges 296,444 99,876 122,482 32,989 551,791
--------------------------------------------------------------------
</TABLE>
The Company's results for Europe and Emerging Markets reflect investments in
people and infrastructure made to transition from distributors to direct sales
in most markets. The direct sales model should benefit operating margins in
future years (refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations).
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE N CONTINUED)
- ---------------------
A reconciliation of the totals reported for the reportable segments to the
applicable line items in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
Total net sales for reportable segments $2,226,568 $1,788,933 $1,480,462
Foreign exchange 7,008 41,845 70,776
---------------------------------------
$2,233,576 $1,830,778 $1,551,238
=======================================
Depreciation and amortization:
Total depreciation and amortization allocated
to reportable segments $ 84,348 $ 68,207 $ 51,888
Corporate expenses and foreign exchange 44,257 18,485 14,429
---------------------------------------
$ 128,605 $ 86,692 $ 66,317
=======================================
Income (loss) before income taxes and cumulative
effect of change in accounting:
Total operating income excluding special
charges for reportable segments $ 704,683 $ 607,382 $ 551,791
Corporate expenses and foreign exchange (245,180) (206,561) (96,279)
Purchased research and development (681,952) (29,475) (110,000)
Restructuring and merger-related (charges) credits 15,014 (145,891) (32,341)
---------------------------------------
(207,435) 225,455 313,171
Other income (expense) (67,879) (10,324) (9,841)
---------------------------------------
$ (275,314) $ 215,131 $ 303,330
=======================================
Total assets:
Total assets for reportable segments $2,225,832 $1,706,712
Corporate assets 1,666,879 217,558
-------------------------
$3,892,711 $1,924,270
=========================
</TABLE>
<TABLE>
<CAPTION>
ENTERPRISE-WIDE INFORMATION
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
Vascular $1,777,204 $1,426,129 $1,228,414
Nonvascular 425,287 376,992 299,698
Other 31,085 27,657 23,126
---------------------------------------
$2,233,576 $1,830,778 $1,551,238
=======================================
Long-lived assets:
United States $ 484,298 $ 377,749
Ireland 118,825 78,776
Other foreign countries 76,759 42,442
-------------------------
$ 679,882 $ 498,967
=========================
</TABLE>
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-35
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
- --------------------
BOARD OF DIRECTORS
BOSTON SCIENTIFIC CORPORATION
We have audited the accompanying consolidated balance sheets of Boston
Scientific Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Boston Scientific
Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As more fully described in Note A, in 1997, the Company changed its accounting
policy to conform to the consensus reached by the FASB Emerging Issues Task
Force on its Issue No. 97-13.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 16, 1999
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-36
<PAGE> 39
FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $2,233,576 $1,830,778 $1,551,238 $1,190,821 $932,969
Gross profit 1,498,735 1,285,237 1,123,400 848,074 638,872
Selling, general and administrative expenses 754,970 662,647 492,332 385,338 309,702
Amortization expense 52,662 32,398 23,576 6,210 1,594
Royalties 31,315 22,177 17,061 26,233 25,682
Research and development expenses 200,285 167,194 134,919 105,788 86,320
Purchased research and development 681,952 29,475 110,000 67,946
Restructuring and merger-related charges (credits) (15,014) 145,891 32,341 204,448
Total operating expenses 1,706,170 1,059,782 810,229 795,963 423,298
Operating income (loss) (207,435) 225,455 313,171 52,111 215,574
Income (loss) before cumulative effect of
change in accounting (264,369) 131,480 167,094 (18,419) 142,274
Cumulative effect of change in accounting (net of tax) (21,080)
Net income (loss) $ (264,369) $ 110,400 $ 167,094 $ (18,419) $142,274
Income (loss) per common share before cumulative
effect of change in accounting:
Basic $ (0.68) $ 0.34 $ 0.43 $ (0.05) $ 0.38
Assuming dilution (0.68) 0.33 0.42 (0.05) 0.38
Net income (loss) per common share:
Basic $ (0.68) $ 0.28 $ 0.43 $ (0.05) $ 0.38
Assuming dilution (0.68) 0.28 0.42 (0.05) 0.38
Weighted average shares outstanding -
assuming dilution 390,836 399,776 398,706 381,574 379,126
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Working capital $(353,031) $ 227,076 $ 335,001 $ 344,609 $ 475,255
Total assets 3,892,711 1,924,270 1,585,045 1,159,445 1,114,433
Commercial paper 1,016,163 423,250 212,500
Bank obligations - short-term 11,324 23,958 28,056 57,520 88,948
Long-term debt, net of current portion 1,363,822 46,325 4,162 16,800
Stockholders' equity 821,137 957,298 995,115 807,917 794,190
Book value per common share $ 2.08 $ 2.47 $ 2.50 $ 2.12 $ 2.10
</TABLE>
The Company paid a two-for-one stock split on November 30, 1998. All historical
amounts above have been restated to reflect the stock split.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-37
<PAGE> 40
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net sales $453,465 $488,032 $575,390 $716,689
Gross profit 315,160 338,572 370,290 474,713
Operating income (loss) 96,122 110,369 (559,199) 145,273
Net income (loss) 59,641 67,460 (461,928) 70,458
Net income (loss) per common share -
assuming dilution $ 0.15 $ 0.17 $ (1.18) $ 0.18
--------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Net sales $425,892 $463,312 $461,646 $479,928
Gross profit 305,986 332,901 327,052 319,298
Operating income (loss) 102,556 (28,365) 112,537 38,727
Income (loss) before cumulative effect of
change in accounting 68,518 (33,189) 80,123 16,028
Net income (loss) 68,518 (33,189) 80,123 (5,052)
Net income (loss) per common share -
assuming dilution $ 0.17 $ (0.09) $ 0.20 $ (0.01)
</TABLE>
During the fourth quarter of 1998, the Company recorded a charge of $26 million
representing estimated severance and other related cost associated with
integrating Schneider and streamlining manufacturing operations and reversed $21
million of merger-related amounts no longer required. Fourth quarter results
also include adjustments of $30 million related primarily to write-downs of
assets no longer deemed to be strategic. During the third quarter of 1998, the
Company recorded a $671 million charge to account for purchased research and
development acquired in the purchase of Schneider. Further, the third quarter
results include a provision of $31 million for costs associated with the
Company's decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM)
coronary stent system in the U.S. During the second quarter of 1998, the Company
reversed approximately $20 million of merger-related amounts no longer required
and recorded purchased research and development of $11 million in connection
with another acquisition consummated during the period.
The Company recorded merger-related charges and purchased research and
development totaling $158 million and $17 million during the second and fourth
quarters of 1997, respectively. In addition, during the fourth quarter of 1997,
the Company recorded provisions for inventory write-downs ($19 million),
litigation-related reserves ($34 million) and implemented EITF No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology Transformation", the effect of which ($31 million) is reflected as a
cumulative effect of change in accounting.
On November 3, 1998, the Company announced it had detected the occurrence of
business irregularities in the operations of its Japanese subsidiary. As a
result, the Company has restated its quarterly results for the first three
quarters of 1998 which allows for more accurate period to period comparisons.
The restatement resulted in a decrease in revenues of $34 million for the six
months ended June 30, 1998. Revenues, as previously reported, were $470 million
and $506 million for the quarters ended March 31, 1998, and June 30, 1998,
respectively. Net income (loss), previously reported, was $67 million, $79
million, and $(509) million for the quarters ended March 31, 1998, June 30,
1998, and September 30, 1998, respectively.
The Company paid a two-for-one stock split on November 30, 1998. All historical
amounts above have been restated to reflect the stock split.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-38
<PAGE> 41
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS
(UNAUDITED)
- ------------------------
The following table shows the market range for the Company's common stock based
on reported sales prices on the New York Stock Exchange. All amounts below
reflect the impact of the Company's two-for-one common stock split which was
effected in the form of a 100% stock dividend paid in the fourth quarter of
1998.
<TABLE>
<CAPTION>
High Low
- ---------------------------------------------------------
<S> <C> <C>
1998
First Quarter $35.844 $21.125
Second Quarter 37.281 30.219
Third Quarter 40.844 25.125
Fourth Quarter 29.500 20.125
High Low
- ---------------------------------------------------------
1997
First Quarter $35.750 $29.313
Second Quarter 31.469 20.500
Third Quarter 39.219 26.625
Fourth Quarter 29.875 20.500
</TABLE>
The Company has not paid a cash dividend during the past five years. The Company
currently intends to retain all of its earnings to finance the continued growth
of its business. Boston Scientific may consider declaring and paying a dividend
in the future; however, there can be no assurance that it will do so.
At December 31, 1998, there were approximately 8,600 record holders of the
Company's common stock.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-39
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the use of our report dated February 16, 1999 with respect to the
consolidated financial statements of Boston Scientific Corporation, as amended,
which are incorporated by reference in this Form 10-K/A2 from Exhibit 13.1
thereto.
Our audits also included the financial statement schedule of Boston Scientific
Corporation listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Forms S-8 Nos. 33-57242, 33-89772, 33-93790, 33-99766, 33-80265, 333-02256,
333-25033, and 333-25037) and in the Registration Statements (Forms S-3 Nos.
333-37255, 333-64887 and 333-64991) of our report dated February 16, 1999, with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K/A2)
of Boston Scientific Corporation.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
June 1, 1999
