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For the fiscal year ended December 31, 2006 | Commission File No. 1-11083 |
Commission File No. 1-11083
BOSTON SCIENTIFIC CORPORATION
DELAWARE | 04-2695240 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
COMMON STOCK, $.01 PAR VALUE PER SHARE | NEW YORK STOCK EXCHANGE | |
| (Title Of Class) | (Name of Exchange on Which Registered) | |
1,480,340,219.
| 3 | |||
34 | |||
132 | |||
141 | |||
| 151 | |||
| EX-10.23 2006 GLOBAL EMPLOYEE STOCK OWNERSHIP PLAN | |||
| EX-10.24 FIRST AMENDMENT TO 2006 GLOBAL EMPLOYEE STOCK OWNERSHIP PLAN | |||
| EX-10.46 GUIDANT CORPORATION 1994 STOCK PLAN, AS AMENDED | |||
| EX-10.47 GUIDANT CORPORATION 1996 NONEMPLOYEE DIRECTOR STOCK PLAN, AS AMENDED | |||
| EX-10.48 GUIDANT CORPORATION 1998 STOCK PLAN, AS AMENDED | |||
| EX-10.49 FORM OF GUIDANT CORPORATION OPTION GRANT | |||
| EX-10.50 FORM OF GUIDANT CORPORATION RESTRICTED STOCK GRANT | |||
| EX-10.51 GUIDANT CORPORATION EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN | |||
| EX-10.52 FIRST AMENDMENT TO GUIDANT CORPORATION EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN | |||
| EX-10.53 | |||
| EX-10.54 | |||
| EX-10.55 | STOCK OWNERSHIP PLAN | ||
| EX-10.56 | OWNERSHIP PLAN | ||
| EX-12 STATEMENT REGARDING COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES | ||||
| EX-21 LIST OF SUBSIDIARIES AS OF 2/ | 28/2007 | |||
| EX-23 CONSENT OF ERNST & YOUNG, LLP | ||||
| EX-31.1 SECTION 302 CEO CERTIFICATION | ||||
| EX-31.2 SECTION 302 CFO CERTIFICATION | ||||
| EX-32.1 SECTION 906 CEO CERTIFICATION | ||||
| EX-32.2 SECTION 906 CFO CERTIFICATION | ||||
Some of our less-invasive medical products are used for enlarging narrowed blood vessels to prevent heart attack and stroke; clearing passages blocked by plaque to restore blood flow; detecting and managing fast, slow or irregular heart rhythms; mapping electrical problems in the heart; opening obstructions and bringing relief to patients suffering from various forms of cancer; performing biopsies and intravascular ultrasounds; mapping electrical problems in the heart; placing filters to prevent blood clots from reaching the lungs, heart or brain; treating urological, gynecological, renal, pulmonary, neurovascular and gastrointestinal diseases; and modulating nerve activity to treat deafness and chronic pain.
2006.
On January 25, 2006, we entered into an agreement and plan of merger with Guidant Corporation pursuant to which we will acquire Guidant for $27 billion (net of proceeds from option exercises). Guidant develops, manufactures and markets products that focus on the treatment of cardiac arrhythmias, heart failure and coronary and peripheral disease. The acquisition will enable us to become a major provider in the high-growth cardiac rhythm management business. The transaction is subject to customary closing conditions, including clearances under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the European Union merger control regulation, as well as approval of Boston Scientific and Guidant shareholders. Subject to these conditions, we currently expect the acquisition to occur during the week of April 3, 2006.
Information on revenues, profits and total assets for our business segments and by geographical area appears in our consolidated financial statements for the year ended December 31, 2005,2006, which are included in Item 8 of this report.
drug-eluting stent systems.
The introduction In the fourth quarter of drug-eluting stents has had a significant impact on the market size for coronary stents and on the distribution of market share across that market. Our drug-eluting2006, we launched our PROMUS™ everolimus-eluting stent system is currently onein certain European countries and expect to launch the PROMUS stent system in certain other European markets in the first quarter of only two drug-eluting stent products2007, certain Inter-Continental markets in the second quarter of 2007 and in the U.S. market. in 2008, subject to regulatory approval.
drug-elutingU.S. TAXUS stent market may be adversely affected as additional competitors enter the market, which began during the third quarter ofsystem sales decreased in 2006 relative to 2005, internationally and is expecteddue in part to occur during the second half of 2007a decline in the U.S. market size due to recent uncertainty regarding the risk of late stent thrombosis following the use of drug-eluting stents. Late stent thrombosis is the formation of a clot, or thrombus, within the stented area one year or more after implantation of the stent. In July 2005, Medtronic, Inc. received approvalthe fourth quarter of 2006, the FDA held a special advisory panel meeting to discuss drug-eluting stents. Members of the panel concluded that drug-eluting stents remain safe and effective when used as indicated, and that the benefits outweigh the risks.
| · | Implantable defibrillator systems used to detect and treat abnormally fast heart rhythms (tachycardia) that could result in sudden cardiac death, including implantable cardiac resynchronization therapy defibrillator systems used to treat heart failure; and |
| · | Implantable pacemaker systems used to manage slow or irregular heart rhythms (bradycardia), including implantable cardiac resynchronization therapy pacemaker systems used to treat heart failure. |
The most significant variables that may impact the sizedaily confirmation of the drug-eluting coronary stent marketpatient’s device status, providing assurance the device is operating properly. Available as an optional component to the system is the LATITUDE Weight Scale and our position withinBlood Pressure Monitor. Weight and blood pressure data is captured by the communicator and sent to the secure server for review by the patient’s physician (or other technician). In addition, this market includeweight and blood information is immediately available to patients in their home to assist their compliance with the entry of additional competitors in international marketsday-to-day and the U.S.; declines in the average selling prices of drug-eluting stent systems; variations in clinical results or product performance of our or our competitors' products; new competitive product launches; delayed or limited regulatory approvals and reimbursement policies; litigation related to intellectual property; continued physician confidence in our technology; the average number of stents used per procedure; expansion of indications for use; a reduction in the overall number of procedures performed; the international adoption rate of drug-eluting stent technology; and the level of supply of our drug-eluting stent system and competitive stent systems.
home-based heart failure instructions prescribed by their physician.
Under Project Horizon, we have made an overarching effort to elevate quality thinking in all that we do. To that end, in 2006, we have made significant improvements to our quality systems, including in the areas of field action decision-making, corrective and preventative actions, management controls, process validations and complaint management systems. In 2006, our Board of Directors created a Compliance and Quality Committee to monitor our compliance and quality initiatives. Our quality policy, applicable to all employees, is “I improve the quality of patient care and all things Boston Scientific.”
research and development pipeline and marketing and sales efforts. During 2005,2006, our clinical organizationorganizations planned, initiated and conducted an expanding series of focused clinical trials that support regulatory and reimbursement requirements and demonstrate the safe and effective clinical performance of critical products and technologies.
Product Diversity
In October, we announced positive results from our TAXUS OLYMPIA registry, supporting the safety and efficacy of our TAXUS Liberté stent system in real-world patient subsets considered high risk for bare-metal stenting, including diabetics, small vessels and long lesions. We are committed to reinvestingcurrently enrolling patients in our profits into ourSYNTAX clinical trial, which will compare the performance of drug-eluting stent technology and other product lines. stents with cardiac surgery in the most complex subsets: those with coronary artery disease in all three coronary arteries, in the left main coronary artery, or both.
We have substantially increased our focus on process controls and validations, supplier controls, distribution controls and providing our operations teams with the training and tools necessary to drive continuous improvement in product quality. In 2007, we are also focused on examining our operations and general business activities to identify cost-improvement opportunities in order to enhance our operational effectiveness.
year'syear’s sales growth. We believe that streamlining,
reflects:
| · | spending on new product development programs; |
| · | regulatory compliance and clinical research, particularly relating to our next-generation stent and CRM platforms and other development programs acquired in connection with our business combinations; and |
| · | sustaining engineering efforts which factor customer (or “post market”) feedback into continuous improvement efforts for currently marketed products. |
groups, approximately 2017 percent from our Endosurgery business groupgroups and approximately 23 percent from our Neuromodulation business group.
In April 2005, we received FDA approval for
We also market both balloon-expandable and self-expandingless-invasive coronary stent systems. Our Express2 coronary stent system is offered on a worldwide basis. The Express2 coronary stent system—an Express stent combined with advanced Maverick® balloon catheter technology—features a laser-bonded, flexible tip with a long, low profile designed for easy tracking and is the platform for our drug-eluting stent system. Its Bioslide® hydrophilic coating is designed to reduce friction, while the proprietary Crimp 360™ process technology secures the stent to the balloon.
artery by-pass surgery.
In July 2006, we launched the new iLab™ Ultrasound Imaging System in the U.S. This new system enhances the diagnosis and treatment of blocked vessels and heart disorders.
e microvasculature where it could cause a heart attack. The FilterWire EZ™ System is a low-profile filter mounted on a rapid-exchange deployment system designed to capture embolic debris released during a procedure and prevent it from traveling to the brain, where it could cause aattack or stroke. It has been granted CE Mark and is commercially available in the U.S., Europe and other international markets for multiple indications, including the treatment of disease in peripheral, coronary and carotid vessels. It is also available in the U.S. for the treatment of saphenous vein grafts (SVGs). In April 2005, we acquired Rubicon Medical Corporation, a developer of embolic protection devices, including a filter that is integrated into a guidewire. The Rubicon™ filter, an embolic protection system that traps and removes debris that may be dislodged during interventional procedures, received CE Mark in April 2005. It has been cleared for commercialization in three indications—SVGs, native coronary arteries and carotid arteries. Product evaluations in Europe will enable us to determine our commercialization strategy for the Rubicon filter.
artery stenting procedures.
tapered or non-tapered vessel configurations.
We design abdominal, thoracic and peripheral vascular grafts for the treatment of aortic aneurysms and dissections, peripheral vascular occlusive diseases and dialysis access. Our grafts and fabrics are used for peripheral vascular and cardiovascular indications.
Electrophysiology
We offer medical devices for the diagnosis and treatment of cardiac conditions called arrhythmias (abnormal heartbeats). Included in our product offerings are RF generators, mapping systems, intracardiac ultrasound and steerable ablation catheters, as well as a line of diagnostic catheters and associated accessories. In 2005, we launched the Chilli II™ cooled ablation catheter, the first bidirectional cooled-tip catheter available in the U.S.
Neurovascular Intervention
nitinol stent sheathed in a delivery system that enables it to
| · | the VITALITY® family of defibrillators which provide a broad range of atrial (upper chambers of the heart) and ventricular (lower chambers) therapies to serve patients’ various needs; |
| · | cardiac resynchronization therapy devices, like those in our CONTAK RENEWAL® family of devices, which can help reduce mortality and hospitalization; |
| · | the INSIGNIA® family of pacemakers which offer proprietary blended sensor technology designed to measure patient workload through respiration and motion, providing rate response based on the patient’s activity; and |
| · | the LATITUDE® Patient Management System, comprised of the LATITUDE Communicator, LATITUDE Website, CONTAK RENEWAL 3RF CRT-D and ZOOM® LATITUDE Programmer, which enables a physician or technician to monitor a patient’s device status and health data from home. |
We launched the Radial Jaw® 4 Single-Use Biopsy Forceps, the newest version of our Radial Jaw Single-Use Biopsy Forceps, in July 2006. The Radial Jaw 4 biopsy forceps are designed to enable collection of large high-quality tissue specimens without the need to use large channel therapeutic endoscopes.
In 2006, we introduced the Spyglass™ Direct Visualization System for direct imaging of the bile duct system. This is the first single operator cholangioscopy device that offers clinicians a direct visualization of the bile duct system and includes supporting devices for tissue acquisition, stone retrieval and lithotripsy.
incontinence.
Also included in the oncology portfolio is a complete line of venous access products which are marketed for infusion therapy.
In September 2006, our next-generation cochlear implant technology, the Harmony™ HiResolution Bionic Ear System was approved by the FDA. We commercially launched this product on a limited basis in late 2006 and anticipate a full launch in early 2007.
Growth Initiatives
In addition to the products and technologies described above, we intend to focus significant resources on the following additional growth initiatives:
Next-Generation Drug-Eluting Stent Platforms
Our next-generation TAXUS® Liberté™ coronary stent system combines the TAXUS® drug-eluting stent technology with a more flexible stent that is intended to enhance deliverability to the lesion site and improve conformability to the natural contours of the vessel. We launched the TAXUS Liberté coronary stent system in Europe and certain Inter-Continental markets in 2005, and expect to launch the TAXUS Liberté coronary stent system in the U.S. during the second half of 2006, subject to receiving regulatory approval. In addition, we intend to continue to invest aggressively in next-generation drug-eluting stent systems and underlying technologies.
In addition, in conjunction with our acquisition of Guidant, Abbott Laboratories has agreed to acquire Guidant's vascular intervention and endovascular businesses and to share the drug-eluting stent
technology it acquires from Guidant with us. This will enable us to access a second drug-eluting stent program that will complement our existing TAXUS stent program.
Bifurcation Stenting
In March 2005, we acquired Advanced Stent Technologies (AST), a development stage company that has developed a coronary bifurcation stent, with a proprietary Petal™ stent feature. We intend to use the AST technology to develop a bifurcation stent that combines a drug-eluting stent with a dual-wire delivery system to address the special challenges of stent therapy at bifurcation sites (branches in the arterial tree).
Carotid Artery Stenting
Carotid artery stenting represents a less-invasive and potentially safer alternative to endarterectomy, the traditional surgical treatment for obstructions in the carotid artery in the neck. Our Carotid Wallstent® Monorail® Endoprosthesis is a self-expanding stent loaded within a rapid exchange deployment system engineered to open the carotid artery and improve blood flow to the brain. Our FilterWire EZ™ Embolic Protection The Precision System is a retrievable device placed distal to the area where the stent isalso being implanted to capture embolic debris released during the procedure and prevent it from migrating to the brain, where it could cause serious harm. We are in the process of seeking FDA approval to market our Carotid Wallstent and Filterwire EZ embolic protection system. In addition, we have collaborated with Endotex Interventional Systems, Inc. to conduct a clinical trial which combines our FilterWire EZ system with the Endotex NexStent® carotid stent. In 2005, the NexStent® Monorail® system, developed and manufactured by Endotex, received CE Mark for commercialization in Europe and certain other international markets. We began to distribute the product during 2005 in those markets. In addition to these exclusive distribution rights, we also expect to acquire Endotex during the second half of 2006 prior to or upon receipt of FDA approval of the NexStent Monorail system.
Endovascular Aortic Repair
In April 2005, we acquired Trivascular, Inc., an early stage company focused on the development of a stent graft for the treatment of abdominal aortic aneurysms, a weak, bulging section of the wall of the aorta that can rupture and lead to death. The Enovus™ device replaces much of the metal in a traditional stent graft with a liquid polymer injected into channels within the stent graft during the procedure, resulting in a graft that can use a small delivery system while potentially providing enhanced durability, positive fixation and seal. A Phase I trial has already been completed and we expect to commence a Phase II trial in 2007 upon completion of certain technical improvements to the device.
Endoscopic Video Imaging
Our Endovations™ Endoscopy Suite is an integrated system that includes a scope, a console and a flat screen monitorassessed for use in endoscopic procedures, such as colonoscopies. By employing lighter, disposable scopes, Endovations is designed to reduce reprocessing costs, improve efficiency and make procedures easier for clinicians and less painful for patients. We expect to conduct first-in-man clinical trialstreating migraine pain.
Our bion® microstimulator is designed, among other things, to relieve migraine pain by sending electrical pulses to the occipital nerves at the base of the skull. The bion microstimulator is currently the subject of a feasibility trial and a commercial release could occur in 2009, subject to regulatory approval.
Cardiac Rhythm Management
Our agreement to acquire Guidant will enable us to become a major provider in the high-growth cardiac rhythm management business. Guidant makes a variety of implantable devices that can monitor the heart and deliver electricity to treat cardiac abnormalities, including tachycardia (abnormally fast or chaotic heart rhythms), heart failure and bradycardia (slow or irregular heart rhythms).
We also have an equity investment in and option to purchase Cameron Health, a company that is developing a subcutaneous implantable cardioverter defibrillator (ICD) for cardiac rhythm management. Implanted in subcutaneous tissue, these ICDs automatically deliver high-energy electrical shocks as needed to stabilize the heart's rhythm when it is beating in a rapid, uncontrolled fashion. Cameron's ICDs offer a less-invasive alternative for treating certain cardiac rhythm abnormalities. In conjunction with our acquisition of Guidant, we have agreed, if required, to divest our equity investment in Cameron Health.
Cardiac Surgery
Our agreement to acquire Guidant will also enable us to enter the cardiac surgery business. Cardiac surgery devices are used to perform endoscopic vessel harvesting, cardiac surgical ablation and less-invasive coronary artery by-pass surgery.
While we intend to focus on each of these and other initiatives, there can be no guarantee that any of them will be successful and we may discontinue any or all of these initiatives at any time.
Marketing and Sales
A dedicated
increase net sales and market share, leverage relationships with leading physicians and their clinical research programs, accelerate the time to bring new products to market and gain access to worldwide technological developments that may be implemented across our product lines. After our acquisition of Guidant, we integrated Guidant’s international sales operations into our geographic regions. Consistent with our geographic focus, the Guidant CRM business became a business unit within each country organization across Europe, Japan and Inter-Continental. In 2005,the first quarter of 2007, we moved functional positions from a regional to a country level in Europe to better address the local business needs. We also created a single cross-functional organization for ourbegan operating through four international business to improve coordination among,units: Europe, Asia Pacific/Japan, Inter-Continental and leverage the resources within, Europe and Inter-Continental.
Distributor Management.
Our international presence exposes us to certain financial and other risks. One of these risks is the potentially negative impact of foreign currency fluctuations on our sales and expenses. Although we engage We currently share a training facility in hedging transactions that may offset the effect of fluctuations in foreign currency exchange rates on foreign currency denominated assets, liabilities, earnings and cash flows, financial exposure may nonetheless result, primarily from the timing of transactions, forecast volatility and the movement of exchange rates.
International markets are also affected by economic pressure to contain reimbursement levels and healthcare costs. Our profitability from our international operations may be limited by risks and uncertainties related to economic conditions in these regions, foreign currency fluctuations, regulatory and reimbursement approvals, competitive offerings, infrastructure development, rights to intellectual property and our ability to implement our overall business strategy. Any significant changes in the competitive, political, legal, regulatory, reimbursement or economic environment where we conduct international operations may have a material impact on our revenues and profits.
Further, the trend in countries around the world, including Japan, toward more stringent regulatory requirements for product clearance, changing reimbursement models and more vigorous enforcement activities has generally caused or may cause medical device manufacturers to experience more uncertainty, delay, risk and expense. In addition, we are required to renew regulatory approvals in certain international jurisdictions, which may require additional testing and documentation. A decision not to dedicate sufficient resources, or the failure to timely renew these approvals, may limit our ability to market our full line of existing products within these jurisdictions.
Brussels, Belgium with Abbott.
establish additional or replacement suppliers for specific components or materials, largely due to the regulatory approval system and the complex nature of the manufacturing processes employed by us and many suppliers. A reduction or interruption in supply, an inability to develop and validate alternative sources if required, or a significant increase in the price of raw materials or components could adversely affect our operations and financial condition, particularly materials or components related to our TAXUS® paclitaxel-elutingand PROMUS™ drug-eluting coronary stent system.
systems and our CRM products.
As part of Project Horizon, we have made modifications to our process validation and complaint management systems. Project Horizon resulted in the reallocation of significant internal engineering and management resources to quality initiatives, as well as incremental spending, which has resulted in adjustments to product launch schedules of certain products and the decision to discontinue certain other product lines over time.
re-examination.
well as a wide range of companies which sell a single or limited number of competitive products or participate only in a specific market segment. If theSince we acquired Guidant, acquisition is consummated, Abbott Laboratories willhas become a primary competitor of ours in the interventional cardiology market. In addition, if the Guidant acquisition is consummated,market and St. Jude Medical, Inc. willhas become a competitor of ours in the CRM market, in addition to the neuromodulationNeuromodulation market.
Additionally, the medical device market is characterized by extensive research and development, and rapid technological change. Developments by other companies of new or improved products, processes or technologies, in particular in the drug-eluting stent market, may make our products or proposed products obsolete or less competitive and may negatively impact our revenues. If we fail to develop new products or enhance existing products, it could have a material adverse effect on our business, financial condition and results of operations. We also face competition from non-medical device companies, such as pharmaceutical companies, which may offer non-surgical alternative therapies for disease states intended to be treated using our products.
More significant changes, such as new designs or materials, may require a separate 510(k) with data to support that the modified device remains substantially equivalent.
Most countries outside of the United States require that product approvals be recertified on a regular basis, generally every five years. The recertification process requires that we evaluate any device changes and any new regulations or standards relevant to the device and conduct appropriate testing to document continued compliance. Where recertification applications are required, they must be approved in order to continue to sell our products in those countries.
in Japan.system. The time required to obtain these foreign approvals to market our products may be longer or shorter than that required in the U.S., and requirements for such approval may differ from those required by the FDA.
The process of obtaining clearance to market products is costly and time-consuming in virtually all of the major markets in which we sell products and can delay the marketing and sale of new products. Countries around the world have recently adopted more stringent regulatory requirements which are expected to add to the delays and uncertainties associated with new product releases, as well as the clinical and regulatory costs of supporting those releases. No assurance can be given that any of our new medical devices will be approved on a timely basis, if at all. In addition, regulations regarding the development, manufacture and sale of medical devices are subject to future change. We cannot predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
Index, which recognizes companies that meet certain corporate responsibility standards.
The interventional medicine market in which we primarily participate is in large part technology driven. Physician customers, particularly in interventional cardiology, move quickly to new products and new technologies. As a result, intellectual property rights, particularly patents and trade secrets, play a
significant role in product development and differentiation. However, intellectual property litigation to defend or create market advantage is inherently complex and unpredictable. Furthermore, appellate courts frequently overturn lower court patent decisions.
In addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors are parties in the same proceeding, or in a series of related proceedings, or litigate multiple features of a single class of devices. These forces frequently drive settlement not only of individual cases, but also of a series of pending and potentially related and unrelated cases. In addition, although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until the conclusion of the proceedings, and are frequently modified on appeal. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other geographies.
Several third parties have asserted that our current and former stent systems infringe patents owned or licensed by them. We have similarly asserted that stent systems or other products sold by these companies infringe patents owned or licensed by us. Adverse outcomes in one or more of these proceedings against us could limit our ability to sell certain stent products in certain jurisdictions, or reduce our operating margin on the sale of these products. In addition, damage awards related to historical sales could be material.
We rely on a combination of patents, trademarks, trade secrets and non-disclosure agreements to protect our intellectual property. We generally file patent applications in the U.S. and foreign countries where patent protection for our technology is appropriate and available. We hold approximately 4,0006,000 U.S. patents (many of which have foreign counterparts) and have approximately 7,800more than 8,600 patent applications pending worldwide that cover various aspects of our technology. In addition, we hold exclusive and non-exclusive licenses to a variety of third-party technologies covered by patents and patent applications. There can be no assurance that pending patent applications will result in issued patents, that patents issued to or licensed by us will not be challenged or circumvented by competitors, or that such patents will be found to be valid or sufficiently broad to protect our technology or to provide us with a competitive advantage.
SeeItem 3. Legal Proceedings below andNote J—Commitments and Contingencies to our 20052006 consolidated financial statements included in Item 8 of this Form 10-K for a further discussion of patent and other litigation and proceedings involving us.in which we are involved. In management'smanagement’s opinion, we are not currently involved in any legal proceeding other than those specifically identified in Note J to our consolidated financial statements, which, individually or in the aggregate, could have a material effect on our financial condition, operations and/or cash flows.
”
| · | The recovery of the CRM market to historical growth rates and our ability to regain CRM market share and increase CRM net sales; |
| · | The overall performance of and referring physician, implanting physician and patient confidence in our and other CRM products and technologies, including our LATITUDE® Patient Management System and Frontier™ CRM technology; |
| · | The results of CRM clinical trials undertaken by us, our competitors or other third parties; |
| · | Our ability to launch various products utilizing the Frontier CRM technology, our next generation CRM pulse generator platform, in the U.S. over the next 36 months and to expand our CRM market position through reinvestment in our CRM products and technologies; |
| · | Our ability to retain our CRM sales force and other key personnel; |
| · | Competitive offerings in the CRM market and the timing of receipt of regulatory approvals to market existing and anticipated CRM products and technologies; and |
| · | Our ability to avoid disruption in the supply of certain components or materials or to quickly secure additional or replacement components or materials on a timely basis. |
| · | Volatility in the coronary stent market, competitive offerings and the timing of receipt of regulatory approvals to market existing and anticipated drug-eluting stent technology and other coronary and peripheral stent platforms; |
| · | Our ability to launch our TAXUS® Express2™ coronary stent system in Japan during the second half of 2007, and to launch our next-generation drug-eluting stent system, the TAXUS® Liberté™ coronary stent system, in the U.S., subject to regulatory approval, and to maintain or expand our worldwide market leadership positions through reinvestment in our drug-eluting stent program; |
| · | The continued availability of our TAXUS stent system in sufficient quantities and mix, our ability to prevent disruptions to our TAXUS stent system manufacturing processes and to maintain or replenish inventory levels consistent with forecasted demand around the world as we transition to next-generation stent products; |
| · | The impact of concerns relating to late stent thrombosis on the size of the coronary stent market, distribution of share within the coronary stent market in the U.S. and around the world, the average number of stents used per procedure and average selling prices; |
| · | The overall performance of and continued physician confidence in our and other drug-eluting stents, our ability to adequately address concerns regarding the risk of late stent thrombosis, and the results of drug-eluting stent clinical trials undertaken by us, our competitors or other third parties; |
| · | Our ability to sustain or increase the penetration rate of drug-eluting stent technology in the U.S. and our European and Inter-Continental markets; |
| · | Our ability to take advantage of our position as one of two early entrants in the U.S. drug-eluting stent market, to anticipate competitor products as they enter the market and to respond to the challenges presented as additional competitors enter the U.S. drug-eluting stent market; |
| · | Our ability to manage inventory levels, accounts receivable, gross margins and operating expenses relating to our drug-eluting stent systems and other product franchises and to react effectively to worldwide economic and political conditions; |
| · | Our ability to manage the launch of our PROMUS™ everolimus-eluting stent system and the supply of this stent system in sufficient quantities and mix; and |
| · | Our ability to manage the mix of our PROMUS stent system revenue relative to our total drug-eluting stent revenue and maintain our overall profitability as a percentage of revenue. |
| · | Any conditions imposed in resolving, or any inability to resolve, our outstanding warning letters or other FDA matters, as well as risks generally associated with our regulatory compliance quality systems and complaint handling; |
| · | The effect of our litigation, risk management practices, including self-insurance, and compliance activities on our loss contingency, legal provision and cash flow; |
| · | The impact of our stockholder derivative and class action, patent, product liability, contract and other litigation and other legal proceedings; |
| · | The ongoing, inherent risk of potential physician communications or field actions related to medical devices; |
| · | Costs associated with our incremental compliance and quality initiatives, including Project Horizon; and |
| · | The availability and rate of third-party reimbursement for our products and procedures. |
| · | Our ability to complete planned clinical trials successfully, to obtain regulatory approvals and to develop and launch products on a timely basis within cost estimates, including the successful completion of in-process projects from purchased research and development; |
| · | Our ability to manage research and development and other operating expenses consistent with our expected revenue growth; |
| · | Our ability to fund and achieve benefits from our focus on internal research and development and external alliances as well as our ability to capitalize on opportunities across our businesses; |
| · | Our ability to develop products and technologies successfully in addition to our drug-eluting stent and cardiac rhythm management technologies; |
| · | Our ability to develop next-generation products and technologies within our drug-eluting stent and cardiac rhythm management business; |
| · | Our failure to succeed at, or our decision to discontinue, any of our growth initiatives; |
| · | Our ability to integrate the acquisitions and other strategic alliances we have consummated, including Guidant; |
| · | Our decision to exercise, or not to exercise, options to purchase certain companies party to our strategic alliances and our ability to fund with cash or common stock these and other acquisitions, or to fund contingent payments associated with these alliances; |
| · | The timing, size and nature of strategic initiatives, market opportunities and research and development platforms available to us and the ultimate cost and success of these initiatives; and |
| · | Our ability to successfully identify, develop and market new products or the ability of others to develop products or technologies that render our products or technologies noncompetitive or obsolete. |
| · | Dependency on international net sales to achieve growth; |
| · | Risks associated with international operations, including compliance with local legal and regulatory requirements as well as reimbursement practices and policies; and |
| · | The potential effect of foreign currency fluctuations and interest rate fluctuations on our net sales, expenses and resulting margins. |
| · | Our ability to generate sufficient cash flow to fund operations and capital expenditures, as well as our strategic investments over the next twelve months and to maintain borrowing flexibility beyond the next twelve months; |
InnovationContents]
International Markets
Liquidity
| · | Our ability to access the public capital markets and to issue debt or equity securities on terms reasonably acceptable to us; |
| Our ability to achieve a 21 percent effective tax rate, excluding certain charges, during 2007 and to recover substantially all of our deferred tax assets; |
| · | Our ability to maintain investment-grade credit ratings and satisfy our financial covenants; |
| · | Our ability to generate sufficient cash flow to effectively manage our debt levels and minimize the impact of interest rate fluctuations on our floating-rate debt; and |
| · | Our ability to better align expenses with future expected revenue levels and reallocate resources to support our future growth. |
| · | Risks associated with significant changes made or to be made to our organizational structure or to the membership of our executive committee; and |
| · | Risks associated with our acquisition of Guidant Corporation, including, among other things, the indebtedness we have incurred and the integration costs and challenges we will continue to face. |
Risks Relatedour products, assessing civil monetary penalties or imposing a consent decree on us, which could result in further regulatory constraints, including the governance of our quality system by a third party. If we or our manufacturers fail to Our Businessadhere to QSR or ISO requirements, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls or other consequences, which could in turn have a material adverse effect on our financial condition or results of operations.
We may not meet regulatory quality standards applicable to our manufacturing and quality processes, which could have an adverse effect on our business, financial condition or results of operations.
In that regard, we are currently taking remedial action in response to certain deficiencies of our quality systems as cited by the FDA in FDA warning letters to us. For example, we received several warning letters from the FDA in 2005 with respect to our global quality-control systems and in 2004 with respect to our auditory product line. In addition, on January 26, 2006, we received a corporate warning letter from the FDA notifying us of serious regulatory problems at three facilities and advising us that our corporate wide corrective action plan relating to three warning letters previously issued to us in 2005 was inadequate. As also stated in this FDA warning letter, the FDA will not grant our requests for exportation certificates to foreign governments or approve pre-market approval applications for our class III devices to which the quality control or current good manufacturing practices deficiencies described in the letter are reasonably related until the deficiencies described in the letter have been corrected. If we are unable to resolve the issues raised by the FDA in its warning letters to the satisfaction of the FDA on a timely basis, we may not be able able to launch our new class III devices as planned, including our Taxus® Liberté™ drug-eluting stent system in the United States in the second half of 2006.
We may face enforcement actions in connection with these FDA warning letters, including injunctive relief and civil fines. While we are working with the FDA to resolve these issues, this work has required and will continue to require the dedication of significant incremental internal and external resources. There can be no assurances regarding the length of time it will take to resolve these issues. In addition, if our remedial actions are not satisfactory to the FDA, the FDA may take further regulatory actions against us, including but not limited to, seizing our product inventory, obtaining a court injunction against further marketing of our products or assessing civil monetary penalties. If we or our manufacturers fail to adhere to QSR or ISO requirements, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls or other consequences, which could in turn have a material adverse effect on our financial condition or results of operations.
or are unable to design around a patent, our business, financial condition or results of operations could be materially adversely affected.
We have similarly asserted that stent systems or other products sold by these companies infringe patents owned or licensed by us.
Drug-eluting coronary stent revenues represented approximately 41% of our consolidated net sales during the fiscal year ended December 31, 2005. We have experienced declines in our U.S. drug-eluting stent revenues during the second half of 2005 as compared to the same period in the prior year largely as a result of a reduction in market share, as well as pricing pressure. Our TAXUS® coronary stent system and Johnson & Johnson's CYPHER® drug-eluting stent system are currently the only two drug-eluting stents available in the U.S. market. During the first three quarters of 2005, we experienced sequential declines in our market share. In the fourth quarter of 2005, our market share stabilized and was relatively consistent with the prior quarter. Our share of the drug-eluting stent market, as well as unit prices, are expected to continue to be adversely affected as additional significant competitors enter the drug-eluting stent market, which began during the third quarter of 2005 internationally and is expected to continue to occur during the second half of 2007 in the U.S. Companies have recently obtained regulatory approval to market and sell their drug-eluting stents in the European market. In July 2005, Medtronic, Inc. received approval from European regulators to begin commercial sales of its Endeavor drug-eluting stent system in the European market. Guidant received similar regulatory
approval to commence European sales of its XIENCE™ V drug-eluting stent system on January 30, 2006. If the acquisition is consummated and following Abbott's acquisition of Guidant's drug-eluting stent portfolio, Abbott will sell the XIENCE™ V drug-eluting stent in competition with us. In addition, on February 17, 2006, Conor Medsystems, Inc. received a CE Mark for its CoStar™ paclitaxel-eluting stent system.
A material decline in our drug-eluting stent revenue would have a significant adverse impact on our future operating results. The most significant variables that may impact the size of the drug-eluting stent market and our position within that market include:
The manufacture of our TAXUS® coronary stent system involves the integration of multiple technologies, critical components, raw materials and complex processes. Significant favorable or unfavorable changes in forecasted demand, as well as disruptions associated with the TAXUS® stent manufacturing process, may impact our inventory levels and our ability to provide the TAXUS® stent system in sufficient quantities and mix. Variability in expected demand or the timing of the launch of next-generation products may result in excess or expired inventory positions and future inventory charges, which may adversely impact our results from operations. Also, if the Guidant acquisition is consummated, we expect to share with Abbott rights to Guidant's XIENCE™ V drug-eluting stent program. As a result, delays in receipt of regulatory approvals for the XIENCE™ V drug-eluting stent system, Abbott's inability to supply us with sufficient quantities of the XIENCE™ V drug-eluting stent system or material nonacceptance of these stents in the marketplace could adversely affect our results from operations, as well as our ability to effectively differentiate ourselves from our competitors in the drug-eluting stent market as the leading company with two drug-eluting stent programs.
We may not be successful in our strategic acquisitions of, investments in or alliances with, other companies and businesses, which have been a significant source of historical growth for us.
historically been significant sources of growth for us. The success of any acquisition, investment or alliance that we may undertake will depend on a number of factors, including:
Healthcare cost containment pressures and legislative or administrative reforms resulting in restrictive reimbursement practices of third-party payors or preferences for alternate therapies could decrease the demand for our products, the prices which customers are willing to pay for those products and the number of procedures performed using our devices, which could have an adverse effect on our business, financial condition or results of operations.
If the acquisition is consummated, the separationcomponents used in our products and any disruption of Guidant's vascular and endovascular businesses from Guidant's other businesses and thesuch sources of supply could adversely impact our production efforts.
Because Abbott will be acquiring Guidant's vascular and endovascular businesses prior to the consummationcost, supply or quality benefits. However, we purchase many of the acquisition, these businesses will needmaterials and components used in manufacturing our products, some of which are custom made. Certain supplies are purchased from single-sources due to be separatedquality considerations, costs or constraints resulting from Guidant's other businesses before the closing of the acquisition. In addition, Boston Scientific and Guidant may face significant challenges in combining operations and product lines in a timely and efficient manner and retaining key Guidant personnel. This integration will be complex and time-consuming, and the separation of the Guidant businesses required by the Abbott transaction will add complexity to the transition process and require the receipt or provision of transitional services. The failure to successfully integrate Guidant's business and ours and to manage the challenges presented by the transition process successfully, including the retention of key Guidant personnel, may prevent us from achieving the anticipated potential benefits of the acquisition.
regulatory requirements. We will incur significant indebtedness in order to finance the acquisition, which will limit our operating flexibility.
In order to finance the cash portion of the acquisition consideration, we expect to incur incremental borrowings of approximately $8 billion. Our significant indebtedness may:
In addition, the terms of the financing obligations to be incurred by us in order to finance the cash portion of the acquisition consideration will contain restrictions substantially similar to the restrictions contained in our current financing obligations, including limitations on our ability to, among other things:
These restrictions will be applicable to Boston Scientific after the acquisition. In addition, to the extent that our credit ratings are below pre-acquisition levels, borrowing costs may increase, and to the extent that our credit ratings are below investment grade, the restrictions in these financing obligations could be more stringent and could include additional covenants, conditions to borrowing, subsidiary guarantees and stock pledges. A failure to comply with these restrictions could result in a default under these financing obligations or could require us to obtain waivers from our lenders for failure to comply
with these restrictions. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could have a material adverse effect on our business, financial condition or results of operations.
We expect that, if the acquisition is consummated, our credit ratings will be downgraded from our current credit ratings and it is possible that our credit ratings could fall below investment grade.
We currently have investment grade credit ratings. During February 2006, our credit rating was downgraded. The rating agencies have indicated that our credit rating will be further downgraded if the acquisition of Guidant is consummated. Although we expect our credit ratings to remain at investment grade following the acquisition of Guidant, it is possible that the credit rating agencies could downgrade our credit ratings to below investment grade. The credit ratings assigned to our indebtedness affect both our ability to obtain new financing and the cost of financing and credit. If our credit ratings were to be further downgraded, our borrowing costs may increase, we may become subject to more stringent covenants and our access to unsecured debt markets could be limited. In addition, we may not be able to refinance our indebtedness on terms acceptable to us, if at all. Further,establish additional or replacement suppliers for certain components or materials in December 2005, we agreed to supplement the terms of our senior notes issued in November 2005 to provide for a potential interest rate adjustment accruing from November 17, 2005 on each series of these senior notes in the event that our credit ratings are downgraded as a result of our closing of the proposed acquisition of Guidant.
If the acquisition is consummated, our stockholders' ownership percentage of Boston Scientific will be diluted and the acquisition will result in dilution to our earnings per share.
In connection with the proposed acquisition, we will issue to Guidant shareholders and Abbott shares of our common stock. As a result of the issuance of these shares of our common stock, our stockholders will own a smaller percentage of our company after the acquisition if the acquisition is consummated. The proposed acquisition will also result in significant dilution to our 2006 earnings per share and may result in dilution to our earnings per share in future years.
Since June of 2005, Guidant has issued a number of product advisories to physicians concerning its defibrillator and pacemaker systems due to reported adverse events and malfunctions that have adversely impacted its sales and market share and, if the acquisition is consummated, could have an adverse effect on our business, financial condition and results of operations.
Since June of 2005, Guidant has issued a number of product advisories to physicians concerning its defibrillator and pacemaker systems due to reported adverse events and malfunctions. For the fiscal year ended December 31, 2005, Guidant reported that sales during the second half of 2005 decreased 14% compared to the same period in 2004, primarilytimely manner largely due to the impactcomplex nature of various implantable defibrillatorour and pacemaker system field actions that occurred in 2005,many of our suppliers’ manufacturing processes. Production issues, including certain voluntary product recallscapacity constraint; quality issues affecting us or our suppliers; an inability to develop and physician notifications. These product recalls included Guidant's decision announced on June 24, 2005 to temporarily stop selling Guidant's leading defibrillator systems, which were returned to the market beginning on August 2, 2005. The impact of the product recalls resulted in Guidant havingvalidate alternative sources if required; or a lower market share for implantable defibrillator and pacemaker systems for the second half of 2005 compared to the same periodsignificant increase in the prior year. If the acquisition is consummated, there can be no assurance that we will be able to regain that market shareprice of materials or sales, if at all. If we are able to regain Guidant's prior market sharecomponents could adversely affect our operations and sales, there can be no assurance as to when our market share and sales will return to pre-product recall levels, due to, among other things, customer perceptionsfinancial condition.
operations. There can be no assurance that, if the Guidant acquisition is consummated, we will not have product recalls concerning defibrillator and pacemaker systems (or our own products) in the future or that any product recalls would not have a material adverse effect on our business, financial condition or results of operations.
The FDA, the Department of Justice, the SEC and various state agencies are conducting, and other governmental entities may commence, investigations of Guidant in connection with Guidant's product recalls which could have an adverse effect on the business, financial condition or results of operations of Guidant and Boston Scientific if the Guidant acquisition is consummated.
The FDA, the Department of Justice, the SEC and various state agencies are conducting, and other governmental entities may commence, investigations of Guidant in connection with Guidant's product recalls. While Guidant is cooperating with officials in connection with these investigations, Guidant cannot predict when these investigations will be resolved, the outcome of these investigations or their impact on Guidant or, if the acquisition is consummated, Boston Scientific. An adverse outcome in any of these investigations could include the commencement of civil and/or criminal proceedings involving substantial fines, penalties and injunctive or administrative remedies, including the exclusion of Guidant and Boston Scientific from government reimbursement programs. Additionally, if these investigations continue over a long period of time, they could divert the attention of management from the day-to- day operations of Guidant's and our business, impose significant administrative burdens on Guidant and us and result in additional compliance or other costs. These potential consequences, as well as any material adverse outcome from any of these investigations, could have an adverse effect on Guidant's and our business, financial condition or results of operations.
| (in square feet) | Total Space | Owned | Leased | |||
|---|---|---|---|---|---|---|
| Domestic | 6,094,000 | 5,211,000 | 883,000 | |||
| Foreign | 1,157,000 | 964,000 | 193,000 | |||
| Total | 7,251,000 | 6,175,000 | 1,076,000 |
| (in square feet) | Total Space | Owned | Leased | |||
| Domestic | 6,255,900 | 4,353,965 | 1,901,935 | |||
| Foreign | 1,986,444 | �� | 1,484,822 | 501,622 | ||
| Total | 8,242,344 | 5,838,787 | 2,403,557 | |||
| | High | Low | ||||
|---|---|---|---|---|---|---|
| 2005 | ||||||
| First Quarter | $ | 35.19 | $ | 28.67 | ||
| Second Quarter | 30.80 | 27.00 | ||||
| Third Quarter | 28.95 | 23.05 | ||||
| Fourth Quarter | 27.33 | 22.95 | ||||
2004 | ||||||
| First Quarter | $ | 44.12 | $ | 35.86 | ||
| Second Quarter | 45.81 | 37.32 | ||||
| Third Quarter | 42.70 | 32.12 | ||||
| Fourth Quarter | 39.46 | 33.36 | ||||
2006 | High | Low | |||||
| First Quarter | $ | 26.48 | $ | 20.90 | |||
| Second Quarter | 23.30 | 16.65 | |||||
| Third Quarter | 17.75 | 14.77 | |||||
| Fourth Quarter | 17.18 | 14.65 | |||||
2005 | |||||||
| First Quarter | $ | 35.19 | $ | 28.67 | |||
| Second Quarter | 30.80 | 27.00 | |||||
| Third Quarter | 28.95 | 23.05 | |||||
| Fourth Quarter | 27.33 | 22.95 | |||||
$17.12.
Year Ended December 31, | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||
Operating Data | ||||||||||||||||
| Net sales | $ | 7,821 | $ | 6,283 | $ | 5,624 | $ | 3,476 | $ | 2,919 | ||||||
| Gross profit | 5,614 | 4,897 | 4,332 | 2,515 | 2,049 | |||||||||||
| Selling, general and administrative expenses | 2,675 | 1,814 | 1,742 | 1,171 | 1,002 | |||||||||||
| Research and development expenses | 1,008 | 680 | 569 | 452 | 343 | |||||||||||
| Royalty expense | 231 | 227 | 195 | 54 | 36 | |||||||||||
| Amortization expense | 530 | 152 | 112 | 89 | 72 | |||||||||||
| Litigation-related charges (credits), net | 780 | 75 | 15 | (99 | ) | |||||||||||
| Purchased research and development | 4,119 | 276 | 65 | 37 | 85 | |||||||||||
| Total operating expenses | 8,563 | 3,929 | 2,758 | 1,818 | 1,439 | |||||||||||
| Operating (loss) income | (2,949 | ) | 968 | 1,574 | 697 | 610 | ||||||||||
| Loss (income) before income taxes | (3,535 | ) | 891 | 1,494 | 643 | 549 | ||||||||||
| Net (loss) income | (3,577 | ) | 628 | 1,062 | 472 | 373 | ||||||||||
| Net (loss) income per common share — basic | $ | (2.81 | ) | $ | 0.76 | $ | 1.27 | $ | 0.57 | $ | 0.46 | |||||
| Net (loss) income per common share — assuming dilution | $ | (2.81 | ) | $ | 0.75 | $ | 1.24 | $ | 0.56 | $ | 0.45 | |||||
| Weighted average shares outstanding — assuming dilution | 1,273.7 | 837.6 | 857.7 | 845.4 | 830.0 | |||||||||||
As of December 31, | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||
Balance Sheet Data | ||||||||||||||||
| Cash, cash equivalents and marketable securities | $ | 1,668 | $ | 848 | $ | 1,640 | $ | 752 | $ | 260 | ||||||
| Working capital | 2,271 | 1,152 | 684 | 487 | 285 | |||||||||||
| Total assets | 31,096 | 8,196 | 8,170 | 5,699 | 4,450 | |||||||||||
| Borrowings (long-term and short-term) | 8,902 | 2,020 | 2,367 | 1,725 | 935 | |||||||||||
| Stockholders’ equity | 15,298 | 4,282 | 4,025 | 2,862 | 2,467 | |||||||||||
| Book value per common share | $ | 10.37 | $ | 5.22 | $ | 4.82 | $ | 3.46 | $ | 3.00 | ||||||
Year Ended December 31, | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Data | |||||||||||||||||
| Net sales | $ | 6,283 | $ | 5,624 | $ | 3,476 | $ | 2,919 | $ | 2,673 | |||||||
| Gross profit | 4,897 | 4,332 | 2,515 | 2,049 | 1,754 | ||||||||||||
| Selling, general and administrative expenses | 1,814 | 1,742 | 1,171 | 1,002 | 926 | ||||||||||||
| Research and development expenses | 680 | 569 | 452 | 343 | 275 | ||||||||||||
| Royalty expense | 227 | 195 | 54 | 36 | 35 | ||||||||||||
| Amortization expense | 152 | 112 | 89 | 72 | 136 | ||||||||||||
| Litigation-related charges (credits), net | 780 | 75 | 15 | (99 | ) | ||||||||||||
| Purchased research and development | 276 | 65 | 37 | 85 | 282 | ||||||||||||
| Total operating expenses | 3,929 | 2,758 | 1,818 | 1,439 | 1,654 | ||||||||||||
| Operating income | 968 | 1,574 | 697 | 610 | 100 | ||||||||||||
| Income before income taxes | 891 | 1,494 | 643 | 549 | 44 | ||||||||||||
| Net income (loss) | 628 | 1,062 | 472 | 373 | (54 | ) | |||||||||||
Net income (loss) per common share—basic | $ | 0.76 | $ | 1.27 | $ | 0.57 | $ | 0.46 | $ | (0.07 | ) | ||||||
| Net income (loss) per common share—assuming dilution | $ | 0.75 | $ | 1.24 | $ | 0.56 | $ | 0.45 | $ | (0.07 | ) | ||||||
Weighted average shares outstanding—assuming dilution | 837.6 | 857.7 | 845.4 | 830.0 | 802.8 | ||||||||||||
As of December 31, | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance Sheet Data | ||||||||||||||||
| Cash, cash equivalents and marketable securities | $ | 848 | $ | 1,640 | $ | 752 | $ | 260 | $ | 185 | ||||||
| Working capital | 1,152 | 684 | 487 | 285 | 275 | |||||||||||
| Total assets | 8,196 | 8,170 | 5,699 | 4,450 | 3,974 | |||||||||||
| Borrowings (long-term and short-term) | 2,020 | 2,367 | 1,725 | 935 | 1,204 | |||||||||||
| Stockholders' equity | 4,282 | 4,025 | 2,862 | 2,467 | 2,015 | |||||||||||
| Book value per common share | $ | 5.22 | $ | 4.82 | $ | 3.46 | $ | 3.00 | $ | 2.49 | ||||||
The Company
Our management'squality policy, applicable to all employees, is “I improve the quality of patient care and all things Boston Scientific.”
and Inter-Continental markets. Further, due to increased penetration rates and the successful launch of our next-generation TAXUS® Liberté™ paclitaxel-eluting coronary stent system in our Europe and Inter-Continental markets, our international TAXUS stent system sales for 2005 increased by 38high 80 percent range, as compared to 2004. This increase in sales was offset by decreased TAXUSU.S. drug-eluting stent system salesmarket penetration rates in the low 70 percent range exiting 2006. Our U.S. during the second half of 2005, as compared to the same period in the prior year largely due to a reduction indrug-eluting stent market share as well as pricing pressure. Duringdeclined throughout the first three quarters of 2005, but has been stable during 2006 and we experienced sequential declines inhave maintained our market share. In the fourth quarter of 2005, our market share stabilized and was relatively consistent with the prior quarter.leadership position. We expect to launch our TAXUS Express2™ stent system in the Japan market, which we believe exceeds $500 million, in the second half of 2007 and our TAXUS Liberté™ stent system in the U.S. in the second half of 2006 and our TAXUS Express2 stent system in Japan in the first half of 2007,, subject to regulatory approvals.
In addition, during 2005,
During 2005, we invested a portionan increase of our increased58 percent.
working capital of $2.271 billion. We continued to generate strong operating cash flow during 2005. In addition, due2006. We expect to favorable market conditions, we raised $750 million from the public markets throughuse a November 2005 debt offering. We used cash generated from operating activities and from the public debt issuance to: repay short-term debt obligations; repurchase sharesportion of our common stock onoperating cash flow to reduce our outstanding debt obligations over the open market; and fund 2005 strategic alliances and acquisitions.
Recent Developments
On January 25, 2006, we entered into a definitive agreement to acquire Guidant Corporationnext several years; our first upcoming debt maturity is in April 2008 for an aggregate purchase price$650 million.
cited by the FDA, and we continue to make progress in transitioning our organization to implement those solutions. We communicate frequently and meet regularly with the FDA to apprise them of our progress. The FDA has communicated the need for us to complete substantially all remediation efforts before they will reinspect our facilities. We have engaged a third party to audit our enhanced quality systems in order to assess our corporate-wide compliance prior to reinspection by the FDA. We believe we will be ready for the third-party audit in the second quarter of 2007.
| | | | | 2005 versus 2004 | 2004 versus 2003 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2005 | 2004 | 2003 | As Reported Currency Basis | Constant Currency Basis | As Reported Currency Basis | Constant Currency Basis | ||||||||||
| United States | $ | 3,852 | $ | 3,502 | $ | 1,924 | 10% | 10% | 82% | 82% | |||||||
| Europe | $ | 1,161 | $ | 994 | $ | 672 | 17% | 17% | 48% | 35% | |||||||
| Japan | 579 | 613 | 541 | (6% | ) | (4% | ) | 13% | 6% | ||||||||
| Inter-Continental | 691 | 515 | 339 | 34% | 28% | 52% | 44% | ||||||||||
| International | $ | 2,431 | $ | 2,122 | $ | 1,552 | 15% | 13% | 37% | 27% | |||||||
| Worldwide | $ | 6,283 | $ | 5,624 | $ | 3,476 | 12% | 11% | 62% | 57% | |||||||
2006 versus 2005 | 2005 versus 2004 | |||||||||||||||||||||
(in millions) | 2006 | 2005 | 2004 | As Reported Currency Basis | Constant Currency Basis | As Reported Currency Basis | Constant Currency Basis | |||||||||||||||
United States | $ | 4,840 | $ | 3,852 | $ | 3,502 | 26 | % | 26 | % | 10 | % | 10 | % | ||||||||
| Europe | 1,574 | 1,161 | 994 | 36 | % | 34 | % | 17 | % | 17 | % | |||||||||||
| Japan | 594 | 579 | 613 | 3 | % | 8 | % | (6 | %) | (4 | %) | |||||||||||
| Inter-Continental | 813 | 691 | 515 | 18 | % | 16 | % | 34 | % | 28 | % | |||||||||||
International | 2,981 | 2,431 | 2,122 | 23 | % | 22 | % | 15 | % | 13 | % | |||||||||||
Worldwide | $ | 7,821 | $ | 6,283 | $ | 5,624 | 24 | % | 24 | % | 12 | % | 11 | % | ||||||||
| | | | | 2005 versus 2004 | 2004 versus 2003 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2005 | 2004 | 2003 | As Reported Currency Basis | Constant Currency Basis | As Reported Currency Basis | Constant Currency Basis | ||||||||||
| Cardiovascular | $ | 4,498 | $ | 4,107 | $ | 2,168 | 10% | 9% | 89% | 84% | |||||||
| Electrophysiology | 132 | 130 | 113 | 2% | 2% | 15% | 12% | ||||||||||
| Neurovascular | 277 | 253 | 223 | 9% | 9% | 13% | 9% | ||||||||||
| Cardiovascular | $ | 4,907 | $ | 4,490 | $ | 2,504 | 9% | 9% | 79% | 74% | |||||||
| Oncology | $ | 207 | $ | 186 | $ | 166 | 11% | 11% | 12% | 8% | |||||||
| Endoscopy | 697 | 641 | 580 | 9% | 9% | 11% | 7% | ||||||||||
| Urology/Gynecology | 324 | 261 | 226 | 24% | 24% | 15% | 13% | ||||||||||
| Endosurgery | $ | 1,228 | $ | 1,088 | $ | 972 | 13% | 13% | 12% | 9% | |||||||
| Neuromodulation | $ | 148 | $ | 46 | N/A | 222% | 222% | N/A | N/A | ||||||||
| Worldwide | $ | 6,283 | $ | 5,624 | $ | 3,476 | 12% | 11% | 62% | 57% | |||||||
(in millions) | 2006 | 2005 | 2004 | 2006 versus 2005 | 2005 versus 2004 | |||||||||||
| Interventional Cardiology | $ | 3,612 | $ | 3,783 | $ | 3,451 | (5 | %) | 10 | % | ||||||
| Peripheral Interventions/ Vascular Surgery | 666 | 715 | 656 | (7 | %) | 9 | % | |||||||||
| Electrophysiology | 134 | 132 | 130 | 2 | % | 2 | % | |||||||||
| Neurovascular | 326 | 277 | 253 | 18 | % | 9 | % | |||||||||
| Cardiac Surgery | 132 | N/A | N/A | N/A | N/A | |||||||||||
| Cardiac Rhythm Management | 1,371 | N/A | N/A | N/A | N/A | |||||||||||
Cardiovascular | 6,241 | 4,907 | 4,490 | 27 | % | 9 | % | |||||||||
| Oncology | 221 | 207 | 186 | 7 | % | 11 | % | |||||||||
| Endoscopy | 754 | 697 | 641 | 8 | % | 9 | % | |||||||||
| Urology | 371 | 324 | 261 | 15 | % | 24 | % | |||||||||
Endosurgery | 1,346 | 1,228 | 1,088 | 10 | % | 13 | % | |||||||||
Neuromodulation | 234 | 148 | 46 | 58 | % | 222 | % | |||||||||
Worldwide | $ | 7,821 | $ | 6,283 | $ | 5,624 | 24 | % | 12 | % | ||||||
In 2004, our U.S.international net sales increased by $1,578$550 million, or 8223 percent, as compared to 2003.2005. The increase related primarily to $1,570the inclusion of $478 million inof international net sales offrom our TAXUS stent system. Declines in our bare-metal stent revenue by $155 million to $59 million in 2004 partially offset this increase, as physicians continued to convert the stents they use in interventional procedures from bare-metal stents to drug-eluting stents, including our TAXUS stent system. Sales from other products within our Cardiovascular division also increased by $49 million, or five percent, during 2004.new CRM and Cardiac Surgery divisions. The remainder of the increase in our U.S. revenues relatedrevenue in these markets was due to sales growth in each ofvarious product franchises, including $35 million in net sales from our other U.S. divisions, including $37Endosurgery group and $27 million in sales growth from our NeuromodulationNeurovascular division.
TAXUS stent system sales in our Europe and Inter-Continental markets were $797 million in 2006 as compared to $793 million in 2005. TAXUS stent system sales were favorably impacted by drug-eluting stent penetration rates in these markets. The drug-eluting stent penetration rates increased during the first half of 2006, and remained relatively flat throughout the second half of 2006 and exiting 2006. Market share declines associated with several competitors having launched new drug-eluting stent products in these markets offset the favorable impact of increased penetration rates.
2 stent system in Japan,
In 2005, our Japan net sales decreased by $34 million, or six percent, as compared to 2004 primarily due to decreased sales from our Cardiovascular division. We have experienced declining coronary stent sales in Japan since a competitor launched its drug-eluting stent in this market late in the second quarter of 2004. Due to the timing of regulatory approval for our TAXUS stent system and government-mandated pricing reductions for other products, we do not expect revenue growth in our existing Japan business until we receive regulatory approval and launch our drug-eluting stent in Japan, which we expect to occur in the first half of 2007.
stent system, which we launched in Japan during the first quarter of 2004. The remainder of the increase in our revenue in these markets was due to incremental growth in various product franchises, none of which were individually significant.
Gross Profit
| | 2005 | 2004 | 2003 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | $ | % of Net Sales | $ | % of Net Sales | $ | % of Net Sales | ||||||
| Gross profit | 4,897 | 77.9 | 4,332 | 77.0 | 2,515 | 72.4 | ||||||
2006 | 2005 | 2004 | |||||||||||||||||
(in millions) | $ | % of Net Sales | $ | % of Net Sales | $ | % of Net Sales | |||||||||||||
| Gross profit | 5,614 | 71.8 | 4,897 | 77.9 | 4,332 | 77.0 | |||||||||||||
In 2004, our gross profit, as a percentage of net sales,
Operating Expenses
Guidant operating expenses. The following table provides a summary of certain of our operating expenses:
| | 2005 | 2004 | 2003 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | $ | % of Net Sales | $ | % of Net Sales | $ | % of Net Sales | ||||||
| Selling, general and administrative expenses | 1,814 | 28.9 | 1,742 | 31.0 | 1,171 | 33.7 | ||||||
| Research and development expenses | 680 | 10.8 | 569 | 10.1 | 452 | 13.0 | ||||||
| Royalty expense | 227 | 3.6 | 195 | 3.5 | 54 | 1.6 | ||||||
| Amortization expense | 152 | 2.4 | 112 | 2.0 | 89 | 2.6 | ||||||
2006 | 2005 | 2004 | |||||||||||||||||
(in millions) | $ | % of Net Sales | $ | % of Net Sales | $ | % of Net Sales | |||||||||||||
| Selling, general and administrative expenses | 2,675 | 34.2 | 1,814 | 28.9 | 1,742 | 31.0 | |||||||||||||
| Research and development expenses | 1,008 | 12.9 | 680 | 10.8 | 569 | 10.1 | |||||||||||||
| Royalty expense | 231 | 3.0 | 227 | 3.6 | 195 | 3.5 | |||||||||||||
| Amortization expense | 530 | 6.8 | 152 | 2.4 | 112 | 2.0 | |||||||||||||
Advanced Bionics; $21 million in employee-related costs primarily attributablerelated to certain business optimization initiatives within our human resources function and international divisions;initiatives; $19 million in stockstock-based compensation expense associated primarily associated with the issuance of deferred stock units in 2005; and $17 million in costs related to certain retirement benefits. Certain charges incurred in 2004 partially offset these increases, including a $110 million enhancement to our 401(k) Plan, and a $90 million non-cash charge resulting from certain modifications to our stock option plans. As a percentage of our net sales, SG&A expenses decreased to 28.9 percent in 2005 from 31.0 percent in 2004 primarily due to the increase in our net sales in 2005.
In 2004, our SG&A expenses increased by $571 million, or 49 percent, as compared to 2003. The increase primarily related to: approximately $200 million in additional marketing programs, increased headcount and higher sales force commission expenses, mainly attributable to our TAXUS stent program and, to a lesser degree, to support our other product franchises; and approximately $40 million due to the impact of foreign currency fluctuations. In addition, our SG&A expenses in 2004 included charges of $110 million attributable to an enhancement to our 401(k) Plan and $90 million resulting from certain modifications to our stock option plans. Further, our SG&A expenses included $40 million in operating expenses associated with our acquisition of Advanced Bionics. As a percentage of our net sales, SG&A expenses decreased to 31.0 percent in 2004 from 33.7 percent in 2003 primarily due to the significant increase in our net sales in 2004.
In 2004, our research and development expensesroyalty expense increased by $117$4 million, or 262 percent, as compared to 2003.2005. The increase relatedwas due to $25 million of royalty expense associated with the CRM and Cardiac Surgery products that we acquired as part of the Guidant acquisition. This increase was offset by a decrease in royalty expense attributable to sales of our TAXUS stent system by $20 million to $153 million for 2006 as compared to the prior year due primarily to an increased investment of approximately $50 million in our Cardiovascular division, which was mainly associated with our next-generation stent platforms. In addition, our research and development expenses in 2004 included $25 million attributable to our acquisition of Advanced Bionics. The remainder of the growth in our research and development spending reflects investments to enhance our clinical and regulatory infrastructure and provide additional funding for research and development on next-generation and novel technology offerings across multiple programs and divisions.lower sales volume. As a percentage of our net sales, research and development expensesroyalty expense decreased to 10.13.0 percent in 20042006 from 13.03.6 percent in 20032005. This decrease was primarily due toa result of the significant increase in ourinclusion of net sales in 2004.
Royalty Expense
from our new CRM and Cardiac Surgery products, which on average have a lower royalty cost relative to legacy Boston Scientific net sales.
our TAXUS stent system. Royalty expense attributable to sales the intangible assets associated with developed technology obtained as part of our TAXUS stent system increased by $137 million to $1472005 acquisition of Rubicon Medical Corporation; and $12 million for 2004the write-off of the intangible assets associated with our Real-time Position Management System (RPM) technology, a discontinued technology platform obtained as comparedpart of our acquisition of Cardiac Pathways Corporation. The write-off of the RPM intangible assets resulted from our decision to 2003. In November 2004, we exercised our right under an existing licensing agreement with Angiotech Pharmaceuticals, Inc. to obtain an exclusive license for the use of paclitaxel and other agents for certain applicationscease investment in the coronary vascular field.
technology. The write-off of the Rubicon developed technology resulted from our decision to redesign the first generation of the technology and concentrate resources on the development and commercialization of the next-generation product. We do not expect these program cancellations and related write-offs to impact our future operations or cash flows materially. Amortization Expenseexpense for 2005 included a $10 million write-off of intangible assets related to our
Enteryx® Liquid Polymer Technology, a discontinued technology platform obtained as a part of our acquisition of Enteric Medical Technologies, Inc.. The write-off resulted from our decision during 2005 to cease selling the Enteryx product.
In 2004, our amortizationEnteryx.
Interest Expense and Other, Net
debt is at fixed interest rates.
stock price, among other factors.
| | | | | Percentage Point Increase | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | 2003 | 2005 versus 2004 | 2004 versus 2003 | |||||
| Reported tax rate | 29.5 | % | 28.9 | % | 26.6 | % | 0.6 | 2.3 | ||
| Impact of certain charges | 5.5 | % | 4.9 | % | 1.6 | % | 0.6 | 3.3 | ||
Percentage Point Increase (Decrease) | ||||||||||||||||
2006 | 2005 | 2004 | 2006 versus 2005 | 2005 versus 2004 | ||||||||||||
| Reported tax rate | 1.2% | 29.5% | 28.9% | (28.3) | 0.6 | |||||||||||
| Impact of certain charges | (20.2%) | 5.5% | 4.9% | (25.7) | 0.6 | |||||||||||
charges include: certain litigation-related charges; purchased research and development; asset write-downs and employee-related costs that resulted from certain business optimization initiatives; costs related to certain retirement benefits; and a tax adjustment associated with a technical correction made to the American Jobs Creation Act.
Management currently estimates that our 2006 effective tax rate, excluding certain charges, will be approximately 23 percent primarily due to our intention to reinvest substantially all of our offshore earnings. However, geographic changes in the manufacture of our products may positively or negatively impact our effective tax rate.
In 2004, the increase in our reported tax rate as compared to 2003 related primarily to the net impact of certain charges during 2004 that were taxed at different rates than our effective tax rate. These charges included: a provision for an extraordinary dividend related to overseas cash balances we repatriated in 2005 pursuant to the American Jobs Creation Act; an accrual for our legal and regulatory exposures; an enhancement to our 401(k) Plan; purchased research and development; and a non-cash charge resulting from certain modifications to our stock option plans. In addition, our effective tax rate was favorably impacted by more revenue being generated from products manufactured in lower tax jurisdictions.
In 2003, we agreed to settle a number
this Form 10-K.
the project relative to those expected at the date of acquisition. We currently expect to launch theTriVascular AAA stent-graftprogram resulted in the U.S. by 2011shutdown of our facility in Santa Rosa, California and to incurthe displacement of approximately $200 million of300 employees. During 2006, we recorded a charge to research and development expenses of approximately $20 million associated primarily with write-downs of fixed assets and a charge to research and development expenses of approximately $10 million associated with severance and related costs overincurred in connection with the next five yearscancellation of the TriVascular AAA program. In addition, we recorded an impairment charge related to complete the project. We continue to assess the pace of developmentremaining TriVascular intangible assets and reversed our opportunities within this market, which may result in a delayaccrual for contingent payments recorded in the timinginitial purchase accounting. The effect of regulatory approval.
AST'sthe write-off of these assets and liabilities was a $23 million charge to amortization expense and a $67 million credit to purchased research and development during the second quarter of 2006. We completed substantially the shutdown activities during the third quarter of 2006.
The AST Petal bifurcation stent in-process project is generally progressing in line with our estimates as of the acquisition date.
In 2003,approval or lower potential market value. We currently expect material net cash inflows from the drug delivery pump to commence in 2012, following its approval in the U.S., which we recorded $37 million of purchased researchexpect to occur in 2011 or 2012. The estimated timing and development. Our 2003 purchased research and development consisted of $9 million relating to our acquisition of InFlow Dynamics, Inc. and $28 million relating primarily to certain acquisitions we consummated in prior years. The in-process projects acquired in connection with our acquisition of InFlow were not significant to our consolidated results. The purchased research and development associated with the prior years' acquisitions related primarily to our 2001 acquisition of Embolic Protection, Inc. and resulted from consideration that was contingent at the date of acquisition, but earned during 2003.
In connection with our 2002 acquisitions, we acquired several in-process projects, including Smart Therapeutics, Inc.'s atherosclerosis stent. The atherosclerosis stent is a self-expanding nitinol stent designed to treat narrowing of the arteries around the brain. During 2005, we completed the atherosclerosis stent in-process project and received Humanitarian Device Exemption approval to begin selling this technology on a limited basis. The total cost for uscosts to complete the project was approximately $10 million.
In connection with our 2001 acquisitions,bion microstimulator and the drug delivery pump have increased relative to what we acquired several significant in-process projects, including Interventional Technologies, Inc.'s next-generation Cutting Balloon® device. The Cutting Balloon device is a novel balloon angioplasty device with mounted scalpels that relieve stress in the artery, reducing the force necessary to expand the vessel. During 2005, we completed the Cutting Balloon in-process project and received FDA approval for this technology. The total cost for us to complete the project was approximately $7 million.
Coronary Stents
Coronary stent revenue represented 43 percent of our consolidated net sales during 2005, and approximated $2,693 million in 2005estimated as compared to $2,351 million in 2004. We estimate that the worldwide coronary stent market will approximate $6 billion in 2006, as compared to $5.9 billion in 2005. Drug-eluting stents are estimated to represent approximately 87 percent of the dollar value of the worldwide coronary stent market in 2005 and 90 percent in 2006. As of the fourth quarter of 2005,acquisition date; however, we believe that the U.S. stent market has been substantially penetrated and estimate that physicians in the U.S. have converted approximately 88 percent of the stents they use in interventional procedures from bare-metal stents to drug-eluting stents. We have experienced declines in our U.S. drug-eluting stent revenues in the second half of 2005 as compared to the same period in the prior year largely as a result of a reduction in market share, as well as pricing pressure. During the first three quarters of 2005, we experienced sequential declines in our market share. In the fourth quarter of 2005, our market share stabilized and was relatively consistent with the prior quarter. We expect to launch our TAXUS Liberté stent system in the U.S. during the second half of 2006, subject to regulatory approval.
As of the fourth quarter of 2005, we estimate that physicians in our Europe and Inter-Continental markets have converted approximately 49 percent of the stents they use in interventional procedures from bare-metal stents to drug-eluting stents, as compared to approximately 40 percent at the end of 2004. We expect that conversion rates will continue to increase in our Europe and Inter-Continental markets. We successfully launched our TAXUS Liberté stent system in certain Inter-Continental markets during the first quarter of 2005 and in Europe during the third quarter of 2005. We believe our TAXUS Liberté stent system represents a driver of future revenue in these markets. Further, we expect to launch our TAXUS Express2 stent system in Japan during the first half of 2007, subject to regulatory approval, where we estimate the size of the market in 2007 to approximate $700 million.
Historically, the worldwide coronary stent market has been dynamic and highly competitive with significant market share volatility. In addition, in the ordinary course of our business, we conduct and participate in numerous clinical trials with a variety of study designs, patient populations and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by us, by our competitors or by third parties, or the market's perception of this clinical data, may adversely impact our position in and share of the drug-eluting stent market and may contribute to increased volatility in the market.
We believe that we can maintain a leadership position within the drug-eluting stent markets in which we compete for a variety of reasons, including:
A material decline in our drug-eluting stent revenue would have a significant adverse impact on our future operating results. The most significant variables that may impact the size of the drug-eluting coronary stent market and our position within this market include:
Our drug-eluting stent system is currently one of only two drug-eluting products in the U.S. market. Our share of the drug-eluting stent market, as well as unit prices, are expected to continue to be adversely impacted as additional significant competitors enter the drug-eluting stent market, which began during the third quarter of 2005 internationally and is expected to occur during the second half of 2007 in the U.S.
The manufacture of our TAXUS stent system involves the integration of multiple technologies, critical components, raw materials and complex processes. Significant favorable or unfavorable changes in forecasted demand as well as disruptions associated with our TAXUS stent manufacturing process may impact our inventory levels. Variability in expected demand or the timing of the launch of next-generation products may result in excess or expired inventory positions and future inventory charges.
Regulatory Compliance
The trend in countries around the world, including the U.S. and Japan, toward more stringent regulatory requirements for product clearance, changing reimbursement models and more rigorous inspection and enforcement activities has generally caused or may cause medical device manufacturers like us to experience more uncertainty, delay, risk and expense. On January 26, 2006, we received a corporate warning letter from the FDA notifying us of serious regulatory problems at three facilities and advising us that our corporate wide corrective action plan relating to three warning letters issued to us in 2005 was inadequate. As also stated in this FDA warning letter, the FDA will not grant our requests for exportation certificates to foreign governments or approve pre-market approval applications for our class III devices to which the quality control or current good manufacturing practices deficiencies described in the letter are reasonably related until the deficiencies described in the letter have been corrected. We intend to resolve the quality issues cited by the FDA prior to the anticipated launch of our TAXUS Liberté stent system in the United States and therefore do not anticipate delays of this product. However, while we believe we can remediate these issues in an expeditious manner, there can be no assurances regarding the length of time itincreases will take to resolve these issues to the satisfaction of the FDA, and any such resolution will likely require the dedication of significant incremental internal and external resources. In addition, if our remedial actions are not satisfactory to the FDA, the FDA may take further regulatory actions against us, including but not limited to seizing our product inventory, obtaining a court injunction against further marketing of our products or assessing civil monetary penalties.
Intellectual Property Litigation
There continues to be significant intellectual property litigation in the coronary stent market and medical device industry. We are currently involved in a number of legal proceedings with our competitors, including Johnson & Johnson and Medtronic, Inc. There can be no assurance that an adverse outcome in one or more of these proceedings would not impact our ability to meet our
objectives in the market. SeeItem 3. Legal Proceedings andNote J—Commitments and Contingencies to our 2005 consolidated financial statements included in Item 8 of this Form 10-K for a description of these legal proceedings.
Innovation
Our approach to innovation combines internally developed products and technologies with those we obtain externally through our strategic acquisitions and alliances. Our research and development program is largely focused on the development of next-generation and novel technology offerings across multiple programs and divisions. We expect to continue to invest aggressively in our drug-eluting stent program to achieve sustained worldwide market leadership positions. We successfully launched our TAXUS Liberté stent system in certain Inter-Continental markets during the first quarter of 2005 and in Europe during the third quarter of 2005. We expect to launch our TAXUS Liberté stent system in the U.S. during the second half of 2006, subject to regulatory approval. Further, we anticipate continuing our increased focus and spending on areas outside of drug-eluting stent technology. We believe our focus will be primarily on technologies in which we have already made significant investments, including neuromodulation, endoscopic systems, carotid stenting, and bifurcation stenting, but may also extend into other medical device opportunities. However, given their early stage of development, there can be no assurance that these technologies will achieve technological feasibility, obtain regulatory approval or gain market acceptance. A delay in the development or approval of these technologies or our decision to reduce funding of these projects may adversely impact the contribution of these technologies to our future growth.
Our acquisitions and alliances are intended to expand further our ability to offer our customers effective, quality medical devices that satisfy their interventional needs. Management believes it has developed a sound plan to integrate acquired businesses. However, our failure to integrate these businesses successfully could impair our ability to realize the strategic and financial objectives of these transactions. Potential future acquisitions, including companies with whom we currently have strategic alliances or options to purchase, may be dilutive to our earnings and may require additional financing, depending on their size and nature. Further, in connection with these acquisitions and other strategic alliances, we have acquired numerous in-process research and development projects. As we continue to undertake strategic initiatives, it is reasonable to assume that we will acquire additional in-process research and development projects.
In addition, we have entered a significant number of strategic alliances with privately held and publicly traded companies. Many of these alliances involve equity investments and often give us the option to acquire the other company or assets of the other company in the future. We enter these strategic alliances to broaden our product technology portfolio and to strengthen and expand our reach into existing and new markets. The success of these alliances is an important element of our growth strategy and we will continue to seek market opportunities and growth through investments in selective strategic alliances and acquisitions. However, the full benefit of these alliances is often dependent on the strength of the other companies' underlying technology and ability to execute. An inability to achieve regulatory approvals and launch competitive product offerings, or litigation related to these technologies, among other factors, may prevent us from realizing the benefit of these alliances.
Our agreement to distribute certain guidewire and sheath products will expire during the first quarter of 2006. Management has identified some replacements for these products. The sales level associated with the replacement products is expected to be less than that of our previously distributed products.
International Markets
International markets are also being affected by economic pressure to contain reimbursement levels and healthcare costs. Our profitability from our international operations may be limited by risks and uncertainties related to economic conditions in these regions, foreign currency fluctuations,
regulatory and reimbursement approvals, competitive offerings, infrastructure development, rights to intellectual property and our ability to implement our overall business strategy. Any significant changes in the competitive, political, regulatory, reimbursement or economic environment where we conduct international operations may have a material impact on our business, financial condition or results of operations.
In addition, we are required to renew regulatory approvals in certain international jurisdictions, which may require additional testing and documentation. If sufficient resources are not available to renew these approvals or these approvals are not timely renewed, our ability to market our full line of existing products within these jurisdictions may be limited.
Guidant Acquisition
On January 25, 2006, we entered into a definitive agreement to acquire Guidant Corporation for an aggregate purchase price of $27 billion (net of proceeds from option exercises), which represents a combination of cash and stock worth $80 per share of Guidant common stock. We expect that this acquisition will enable us to become a major provider in the high-growth cardiac rhythm management business, significantly diversifying our revenue stream across multiple business segments and enhancing our overall competitive position. In addition, in conjunction with the acquisition of Guidant, Abbott Laboratories has agreed to acquire Guidant's vascular intervention and endovascular businesses and has agreed to share the drug-eluting stent technology it acquires from Guidant with us. This will enable us to access a second drug-eluting stent program that will complement our existing TAXUS coronary stent program. The transaction is subject to customary closing conditions, including clearances under the Hart-Scott-Rodino Antitrust Improvements Act and the European Union merger control regulation, as well as approval of Boston Scientific and Guidant shareholders. Subject to these conditions, we currently expect the acquisition to occur during the week of April 3, 2006.
In connection with the acquisition, Boston Scientific will issue to Guidant shareholders and Abbott shares of Boston Scientific common stock. As a result of the issuance of these shares, current Boston Scientific stockholders will own a smaller percentage of Boston Scientific after the acquisition. We expect our weighted average shares outstanding, assuming dilution, to increase from approximately 840 million for 2005 to approximately 1.4 billion following the acquisition. The acquisition will also result in significant dilution to our 2006 earnings per share.
The integration of Guidant's operations and product lines with Boston Scientific will be complex and time-consuming, and the separation of the Guidant businesses required by the Abbott transaction will add complexity to the transition process. The failure to integrate Boston Scientific and Guidant successfully and to manage the challenges presented by the transition process successfully, including the retention of key Guidant personnel, may result in the combined company and its stockholders not achieving the anticipated potential benefits of the acquisition.
In addition, the combined company will incur integration and restructuring costs following the completion of the acquisition as Boston Scientific integrates certain operations of Guidant. Although Boston Scientific and Guidant expect that the realization of efficiencies related to the integration of the businesses may offset incremental transaction, merger-related and restructuring costs over time, no assurances can be made that this net benefit will be achieved in the near term, or at all.
Completion of the acquisition is conditioned upon the receipt of certain governmental authorizations, consents, orders and approvals, including the expiration or termination of the applicable waiting period, and any extension of the waiting period, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval under the European Union merger control regulation. These consents, orders and approvals may impose conditions on, or require divestitures relating to, the divisions, operations or assets of Boston Scientific or Guidant, in addition to the purchase by Abbott of Guidant's vascular and endovascular businesses, and could require modification to the terms of the Abbott transaction agreement in a manner adverse to Boston Scientific or the combined company. These conditions or divestitures may jeopardize or delay completion of the Abbott
transaction or the acquisition or may reduce the anticipated benefits of the Abbott transaction or the acquisition. Further, no assurance can be given that the required consents and approvals will be obtained or that the required conditions to closing will be satisfied, and, if all required consents and approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals or that they will satisfy the terms of the merger agreement. Additionally, completion of the acquisition is conditioned on the absence of certain restraining orders or injunctions by judgment, court order or law that would restrain or prohibit consummation of the acquisition. Boston Scientific and Guidant have received recent claims related to the acquisition from plaintiffs seeking an injunction to prohibit consummation of the acquisition and other relief, including monetary damages.
Liquidity and Capital Resources
| (in millions) | 2005 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 689 | $ | 1,296 | $ | 671 | |||
| Short-term marketable securities | 159 | 344 | 81 | ||||||
| Cash provided by operating activities | 903 | 1,804 | 787 | ||||||
| Cash used for investing activities | 551 | 1,622 | 871 | ||||||
| Cash (used for) provided by financing activities | (954 | ) | 439 | 487 | |||||
| EBITDA* | 1,259 | 1,813 | 879 | ||||||
(in millions) | 2006 | 2005 | 2004 | |||||||
| Cash and cash equivalents | $ | 1,668 | $ | 689 | $ | 1,296 | ||||
| Short-term marketable securities | 159 | 344 | ||||||||
| Cash provided by operating activities | 1,845 | 903 | 1,804 | |||||||
| Cash used for investing activities | 9,312 | 551 | 1,622 | |||||||
| Cash provided by (used for) financing activities | 8,439 | (954 | ) | 439 | ||||||
EBITDA2 | (2,273 | ) | 1,278 | 1,904 | ||||||
| (in millions) | 2005 | 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net income | $ | 628 | $ | 1,062 | $ | 472 | ||||
| Income taxes | 263 | 432 | 171 | |||||||
| Interest expense | 90 | 64 | 46 | |||||||
| Interest income | (36 | ) | (20 | ) | (6 | ) | ||||
| Depreciation and amortization | 314 | 275 | 196 | |||||||
| EBITDA | $ | 1,259 | $ | 1,813 | $ | 879 | ||||
(in millions) | 2006 | 2005 | ||||||
| Short-term debt | $ | 7 | $ | 156 | ||||
| Long-term debt | 8,895 | 1,864 | ||||||
Gross debt | 8,902 | 2,020 | ||||||
| Less: cash, cash equivalents and marketable securities | 1,668 | 848 | ||||||
Net debt | $ | 7,234 | $ | 1,172 | ||||
Significant cash flow effects from our operating assets and liabilities in 2005 included decreases in cash flowconsisting of: $162 million attributable to accounts payable and accrued expenses; $77 million attributable to inventories; $59 million attributable to prepaid expenses and other assets; and $45 million attributable to taxes payable and other liabilities. The decrease in accounts payable and accrued expenses in 2005 as compared to 2004 related to ouran approximate $75 million provision for certain legal and regulatory matters, which included a civil settlement withpayment made to the Department of Justice, and ourJustice; a one-time $110 million 401(k) contribution, which were bothcontribution; a cash settlement with Medinol of $750 million; and tax payments, including those associated with the American Jobs Creation Act. Cash paid during Junefor income taxes and interest was $423 million in 2006 and $437 million in 2005. The increase in inventories in 2005 as comparedWe expect to 2004 related primarily to the accumulation of inventory to fulfill worldwide demand for our TAXUS stent system and our Neuromodulation products. The increase in prepaid expenses and other assets in 2005 as compared to 2004 was attributable to the establishment of a tax-related receivable. The decrease in taxes payable and other liabilities in 2005 as compared to 2004 primarily related to $350make approximately $400 million in tax payments made during 2005 including thosethe first quarter of 2007 associated with cash repatriated under the American Jobs Creation Act and to the expected tax benefit associatedprimarily with the settlement agreement with Medinol. gain on the sale of Guidant’s vascular intervention and endovascular solutions businesses to Abbott.
following represents a reconciliation between EBITDA and net (loss) income:
(in millions) | 2006 | 2005 | 2004 | |||||||
| EBITDA | $ | (2,273 | ) | $ | 1,278 | $ | 1,904 | |||
| Interest income | 67 | 36 | 20 | |||||||
| Interest expense | (435 | ) | (90 | ) | (64 | ) | ||||
| Income taxes | (42 | ) | (263 | ) | (432 | ) | ||||
| Stock-based compensation expense | (113 | ) | (19 | ) | (91 | ) | ||||
| Depreciation and amortization | (781 | ) | (314 | ) | (275 | ) | ||||
| Net (loss) income | $ | (3,577 | ) | $ | 628 | $ | 1,062 | |||
division.
entities.
The following table provides a summary at December 31 of our net debt:
| (in millions) | 2005 | 2004 | ||||
|---|---|---|---|---|---|---|
| Short-term debt | $ | 156 | $ | 1,228 | ||
| Long-term debt | 1,864 | 1,139 | ||||
| Gross debt | $ | 2,020 | $ | 2,367 | ||
| Less: cash, cash equivalents and marketable securities | 848 | 1,640 | ||||
| Net debt | $ | 1,172 | $ | 727 | ||
Payments Due by Period | |||||||||||||||||||
(in millions) | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | |||||||||||||
| Term loan | $ | 650 | $ | 650 | $ | 1,700 | $ | 2,000 | $ | 5,000 | |||||||||
| Abbott loan | 900 | 900 | |||||||||||||||||
| Senior notes | 850 | $ | 2,200 | 3,050 | |||||||||||||||
| $ | 650 | $ | 650 | $ | 1,700 | $ | 3,750 | $ | 2,200 | $ | 8,950 | ||||||||
Our cashhave the flexibility to sell certain non-strategic assets and cash equivalents are primarily held by our non-U.S. operations. In 2005, we repatriated approximately $1,046 million in extraordinary dividends as defined in the American Jobs Creation Act from our non-U.S. operations. The American Jobs Creation Act created a temporary incentiveimplement other strategic initiatives, which may generate proceeds that would be available for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. debt repayment.
In 2005, we repatriated earnings of non-U.S. subsidiaries that did not qualify under the American Jobs Creation Act.2006, our credit ratings were BBB from Fitch Ratings; Baa3 from Moody’s Investor Service; and BBB from Standard & Poor’s Rating Services (S&P). These credit ratings are investment grade. The resulting tax liabilities associated with this repatriation were $127 million. In addition, during 2005, we made a decision to repatriate additional amounts from certain of our non-U.S. operations. In connection with this decision, we established a deferred tax liability of $27 million that we believeMoody’s and S&P ratings outlook is adequate to cover the taxes related to this repatriation.
Borrowings and Credit Arrangements
Revolving Credit Facilities
During 2005, we refinanced ourcurrently negative.
ratio of pro forma EBITDA to interest expense was 5.6 to 1.0. Any breach of these covenants would require that we obtain waivers from our lenders and there can be no assurance that our lenders would grant such waivers. Our credit facilities provide usinability to obtain any necessary waivers, or to obtain them on reasonable terms, could have a material adverse impact on our operations.
During 2005, we decreased our credit and security facility that is secured by our U.S. trade receivables from $400 million to $100 million, effective April 30, 2005.the SEC. During the first quarter of 2006, we expectincreased our authorized common stock from 1.2 billion shares to increase this facility from $1002.0 billion shares in anticipation of our acquisition of Guidant, and issued approximately 577 million shares to $350 million. The credit and security facility terminatesformer Guidant shareholders in August 2006. Borrowing availabilityconjunction with the acquisition. In April 2006, we issued approximately 65 million shares of our common stock under this facility changesregistration statement to Abbott for $1.4 billion. See
factors, fluctuations in the qualityexercise and stock purchase patterns of employees.
In addition, we have uncommitted credit facilities with two commercial Japanese banks that provide for borrowings and promissory notes discounting of up to 15 billion Japanese yen (translated to $127 million at December 31, 2005 and $145 million at December 31, 2004). Approximately $109 million of notes receivable were discounted at an average interest rate of 0.75 percent at December 31, 2005 and $128 million of notes receivable were discounted at an average interest rate of 0.75 percent at December 31, 2004.
As of December 31, 2005 and December 31, 2004, we intended to repay all of our short-term debt obligations within the next twelve-month period.
Senior Notes
We had senior notes of $1,850 million outstanding at December 31, 2005 and $1,600 million outstanding at December 31, 2004.
sinking fund requirements. The January 2017 Notes bear a semi-annual coupon of 5.125 percent, are redeemable prior to maturity and are not subject to any sinking fund requirements. These senior notes are publicly registered securities. We entered into fixed-to-floating interest rate swaps indexed to six-month LIBOR, which approximated 4.70 percent at December 31, 2005 and 2.78 percent at December 31, 2004, to hedge against changes in the fair value of these senior notes.
SeeItem 7A. Quantitative and Qualitative Disclosure About Market Risk for further discussion regarding the treatment of our interest rate swaps.
The remainder of our outstanding borrowings, including capital lease arrangements, was immaterial at December 31, 2005 and December 31, 2004.
Equity
common stock during 2006. We repurchased approximately 25 million shares of our common stock at an aggregate cost of $734 million in 2005, and 10 million shares of our common stock at an aggregate cost of $360 million in 2004, and 22 million shares of our common stock at an aggregate cost of $570 million in 2003.2004. Since 1992, we have repurchased approximately 132 million shares of our common stock and we have approximately 2412 million shares of our common stock held in treasury at year end.year-end. Approximately 37 million shares remain under our previous share repurchase authorizations. Repurchased shares are available for reissuance under our equity incentive plans and for general corporate purposes, including strategic alliances and acquisitions.
During 2005, we received $94 million in proceeds from stock issuances related to our stock option and employee stock purchase plans. Proceeds from the exercise of employee stock options vary from period to period based upon, among other factors, fluctuations in the exercise patterns of employees.
At the effective time of the acquisition, each share of Guidant common stock will be converted into the right to receive (i) $42.00 in cash and (ii) a number of shares of Boston Scientific common stock equal to $38.00, subject to the calculation of the exchange ratio. SeeNote O—Subsequent Events to our 2005 consolidated financial statements included in Item 8 of this Form 10-K for further details regarding the exchange ratio that will be used in determining the purchase price. Under the terms of the Abbott transaction agreement and at the closing of the Abbott transaction, Abbott has agreed to (1) pay an initial purchase price of $4.1 billion in cash plus potential future earn-out payments for the Guidant vascular and endovascular businesses, (2) make a five-year subordinated loan of $900 million to us at a 4.00 percent annual interest rate, and (3) purchase $1.4 billion in shares of Boston Scientific common stock.
In connection with the financing of the cash portion of the purchase price, various banks have committed to providing up to $14 billion in financing, which includes a $7 billion 364-day interim credit facility, a $5 billion five-year term loan facility and a $2 billion five-year revolving credit facility. The interim credit facility, term loan and revolving credit facility will bear interest at LIBOR plus an interest margin between 0.30 percent (high A rating) and 0.85 percent (low BBB rating). The interest
margin will be based on the highest two out of three of our long-term, senior unsecured, corporate credit ratings from Moody's Investor Service, Inc., Standard & Poor's Rating Services and Fitch Ratings. Of the $14 billion available pursuant to the commitment letter, we expect to borrow approximately $7.1 billion to finance the cash portion of the Guidant acquisition purchase price, which includes the $5 billion five-year term loan facility and $2.1 billion in borrowings under the 364-day interim credit facility. We also expect to use the $900 million loan from Abbott, for a total of $8 billion in borrowings to finance the cash portion of the purchase price. In 2006, we anticipate filing a new public registration statement with the SEC under which we intend to issue senior notes in order to refinance any borrowings outstanding under the interim credit facility and to register shares that we will issue to Abbott. The new five-year revolving credit facility will replace our existing $2 billion credit facilities. We also plan to use cash on hand and cash from the Abbott transaction to fund the cash portion of the Guidant purchase price. If the acquisition is completed, we intend to dedicate a significant portion of our future cash flow from operations to repay our outstanding debt obligations.
We currently have investment grade credit ratings. During February 2006, our credit rating was downgraded. The rating agencies have also indicated that they will further downgrade our credit ratings when the Guidant acquisition is consummated. However, we expect our credit ratings to remain at investment grade levels following the acquisition. Our credit ratings affect our cost of borrowings. If our credit ratings were to be downgraded below investment grade, our borrowing costs may increase and we may be subject to more stringent terms and conditions than those currently contained in our financing arrangements.
In addition, our authorized common stock will be increased from 1,200,000,000 shares to 2,000,000,000 shares in conjunction with our proposed acquisition of Guidant.
Contractual Obligations and Commitments
| | Payments Due by Period | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 1 Year or Less | 2-3 Years | 4-5 Years | After 5 Years | Total | ||||||||||
| Debt principal* | $ | 156 | $ | 4 | $ | 2 | $ | 1,852 | $ | 2,014 | |||||
| Interest payments | 100 | 200 | 200 | 846 | 1,346 | ||||||||||
| Debt, including interest | 256 | 204 | 202 | 2,698 | 3,360 | ||||||||||
| Operating leases † | 47 | 56 | 9 | 2 | 114 | ||||||||||
| Purchase obligations†,†† | 102 | 15 | 117 | ||||||||||||
| Minimum royalty obligations†† | 3 | 6 | 4 | 8 | 21 | ||||||||||
| Total | $ | 408 | $ | 281 | $ | 215 | $ | 2,708 | $ | 3,612 | |||||
Payments Due by Period | ||||||||||||||||||||||
(in millions) | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | |||||||||||||||
| Operating leases | $ | 61 | $ | 47 | $ | 24 | $ | 11 | $ | 5 | $ | 36 | $ | 184 | ||||||||
Purchase obligations† | 182 | 1 | 1 | 1 | 185 | |||||||||||||||||
| Minimum royalty obligations | 3 | 3 | 3 | 1 | 1 | 6 | 17 | |||||||||||||||
Interest payments†† | 521 | 497 | 457 | 371 | 214 | 1,013 | 3,073 | |||||||||||||||
$ | 767 | $ | 548 | $ | 485 | $ | 384 | $ | 220 | $ | 1,055 | $ | 3,459 | |||||||||
| † | These obligations related primarily to inventory commitments and capital expenditures entered in the normal course of business. |
| †† | Interest payment amounts related to the $5.0 billion five-year term loan are projected using market interest rates as of December 31, 2006. Future interest payments may differ from these projections based on changes in the market interest rates. |
On January 25, 2006, we entered into a definitive agreement to acquire Guidant Corporation for an aggregate purchase price of $27 billion (net of proceeds from option exercises), which represents a combination of cash and stock worth $80 per share of Guidant common stock. In addition, in conjunction with the acquisition of Guidant, Abbott has agreed to acquire Guidant's vascular intervention and endovascular businesses.contingent consideration. SeeNote O—Subsequent EventsD - Business Combinations to our 20052006 consolidated financial statements included in Item 8 of this Form 10-K for further details regarding the transaction.
Certain of our business combinations involve the payment of contingent consideration. Certain of these payments are based on multiples of the acquired company's revenue during the earn-out period and, consequently, we cannot currently determine the total payments. However, we have developed an estimate of the maximum potential contingent consideration for each of our acquisitions with an outstanding earn-out obligation. At December 31, 2005, the estimated maximum potential amount of future contingent consideration (undiscounted) that we could be required to makepay associated with our business combinations is approximately $4 billion, some of which may be payable in our common stock. The milestones associated with the contingent consideration must be reached in certain future periods ranging from 2006 through 2016. The estimated cumulative specified revenue level associated with these maximum future contingent payments is approximately $10 billion.combinations. Since it is not possible to estimate when, or even if, the acquired companies will reach their performance milestones or the amount of contingent consideration payable based on future revenues, the maximum contingent consideration has not been included in the table above.
In addition, Additionally, we are currently consideringmay consider satisfying these commitments by issuing our stock or refinancing the exercisecommitments with cash, including cash obtained through the sale of our option to acquire EndoTex Interventional Systems, Inc., a developer of stents used in the treatment of stenotic lesions in the carotid arteries. In conjunction with the acquisition of EndoTex, we would pay approximately $100 million in addition to our previous investments and notes issued of approximately $35 million, plus future consideration that is contingent upon EndoTex achieving certain performance-related milestones. Further, manystock.
These
sales arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectibility is reasonably assured. TheseWe generally meet these criteria are generally met at the time of shipment when the risk of loss and title passes to the customer or distributor, unless a consignment arrangement exists. We recognize revenue from consignment arrangements based on product usage, or implant, which indicates that the sale is complete.
For all other transactions, we recognize revenue when title to the goods and risk of loss transfer to customers, provided there are no remaining substantive performance obligations required of us or any matters requiring customer acceptance. For multiple-element arrangements, whereby the sale of devices is combined with future service obligations, we defer revenue on the undelivered elements based on verifiable objective evidence of fair value.
We state inventories at the lower of first-in, first-out cost or market.
obsolete inventory.
We record intangible assets acquired in recent business combinations under the purchase method of accounting.
In addition, we record certain costs associated with our strategic alliances as purchased research and development.
already incurred,incurred; the projected costs to complete,complete; the contribution of core technologies and other acquired assets,assets; the expected introduction datedate; and the estimated useful life of the technology. We base the discount rate used to arrive at a present value as of the date of acquisition on the time value of money and medical technology investment risk factors. For the in-process projects we acquired in connection with our recent acquisitions, we used the following ranges of risk-adjusted discount rates to discount our projected cash flows: 13 percent to 17 percent in 2005,2006, 18 percent to 27 percent;percent in 2004,2005, and 18 percent to 27 percent; andpercent in 2003, 24 percent.2004. We believe that the estimated purchased research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the projects.
We record intangible assets at historical cost. We amortize our intangible assets subject to amortization, including patents, licenses, developed technology and core technology, using the straight-line method over their estimated useful lives.
As of December 31, 2005, we had investments in 66 strategic alliances totaling $594 million. As of December 31, 2004, we had investments in 58 strategic alliances totaling $529 million. These assets primarily represent investments in privately held and publicly traded equity securities.
As of December 31, 2005, we held investments totaling $85 million in three companies that we accounted for under the equity method. Our ownership percentages in these companies range from approximately 21 percent to 28 percent. As of December 31, 2004, we held investments totaling $61 million in two companies that we accounted for under the equity method. Our ownership percentages in these companies range from approximately 25 percent to 30 percent.
Factors that we consider in determining whether we have the ability to exercise significant influence include, but are not limited to:
For investments accounted for under the equity method, we initially record the investment at cost, and adjust the carrying amount to reflect our share of the earnings or losses of the investee, including all adjustments similar to those made in preparing consolidated financial statements. Amounts recorded to adjust the carrying amounts of investments accounted for under the equity method were not material to our statements of operations in 2005, 2004 or 2003. When we do not have the ability to exercise significant influence over an investee, we follow the cost method of accounting.
shareholders.
assets.
2005.
for all years subject to audit. Although we believe our estimates are reasonable, we can make no assurance can be given that the final tax outcome of these matters will not be different from that which iswe have reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and operating results in the period in which we make such determination is made.
determination.
We are substantially self-insured with respect to general, product liability and securities litigation claims. In the normal course of business, product liability and securities litigation claims are asserted against us. We accrue anticipated costs of litigation and loss for product liability and securities litigation claims based on historical experience, or to the extent specific losses are probable and estimable. We record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable. Our accrual for product liability and securities litigation claims was $15 million at December 31, 2005 and $13 million at December 31, 2004. Product liability and securities litigation claims against us will likely be asserted in the future related to events not known to management at the present time. The absence of significant third-party insurance coverage increases our exposure to unanticipated claims or adverse decisions. However, based on product liability and securities litigation losses experienced in the past, our election to become substantially self-insured is not expected to have a material impact on our future operations.
Management believes that our risk management practices, including limited insurance coverage, are reasonably adequate to protect us against anticipated general, product liability and securities litigation losses. However, unanticipated catastrophic losses could have a material adverse impact on our financial position, results of operations and liquidity.
We accrue employee termination costs associated with an ongoing benefit arrangement if the obligation is attributed to prior services rendered, the rights to the benefits have vested and the payment is probable and the amount can be reasonably estimated. We generally record such costs into expense over the future service period, if any. In addition, in conjunction with an employee termination,On January 1, 2006, we may offer voluntary termination benefits to employees. These benefits are recorded when the employee accepts the termination benefits and the amount can be reasonably estimated. Other costs associated with exit activities may include costs related to leased facilities to be abandoned or subleased and long-lived asset impairments.
During 2005, we recorded charges associated with exit activities of approximately $40 million. These charges included costs primarily attributable to employee terminations and outsourcing costs
within our human resources function and international divisions; and a $10 million write-off of intangible assets related to our Enteryx Technology.
The recognition of charges associated with exit activities requires our management to make judgments and estimates regarding the nature, timing, and amount of costs associated with the planned exit activity. Management's estimates of future liabilities may change, requiring us to record additional restructuring charges or reduce the amount of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure their adequacy, that no excess accruals are retained and that utilization of the provisions are for their intended purposes in accordance with developed exit plans.
New Accounting Standard
During 2004, theadopted FASB issued Statement No. 123(R),Share-Based Payment, which is a revision of Statement No. 123,Accounting for Stock-Based Compensation. Statement No. 123(R) supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees and amends Statement No. 95,Statement of Cash Flows. In general, Statement No. 123(R) contains similar accounting concepts as those described in Statement No. 123. However, Statement No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statementstatements of operations based on their fair values. Pro forma disclosure is no longer an alternative. Alternative phase-in methods are allowedWe adopted Statement No. 123(R) using the “modified-prospective method” and have not restated prior period results of operations and financial position to reflect the impact of stock-based compensation expense under Statement No. 123(R). We adopted Statement No. 123(R) on its effective dateuse the Black-Scholes option-pricing model to calculate the grant-date fair value of January 1, 2006 using the "modified-prospective method." Under this method, compensation cost is recognized (a)our stock options. We value restricted stock awards and deferred stock units based on the requirementsclosing trading value of Statement No. 123(R) for all share-based payments granted on or after January 1, 2006 and (b) basedour shares on the requirementsdate of Statement No. 123 for all unvested awardsgrant. The following represents the assumptions used in calculating our stock-based compensation expense that wererequire significant judgment by management:
As permitted by Statement No. 123, for periods prior to January 1, 2006, we accounted for share-based paymentsused our historical volatility as a basis to employees using Opinion No. 25's intrinsic valueestimate expected volatility in our valuation of stock options. We changed our method and, as such, generally recognized no compensation cost for the granting of employee stock options, except as disclosed inNote L—Stock Ownership Plans to our 2005 consolidated financial statements contained in Item 8 of this Form 10-K. Accordingly,estimating volatility upon the adoption of Statement No. 123(R)'s fair value method. We now consider historical volatility, trends in volatility within our industry/peer group and implied volatility.
Further, mostthe process of our stock option awards provide for immediate vesting upon retirement, death or disabilityassessing the impact of the participant. We have traditionally accounted for the pro forma compensation expense related to stock-based awards made to retirement eligible individuals using the stated vesting period of the grant. This approach results in recognizing compensation expense over the vesting period except in the instance of the participant's actual retirement. Statement No. 123(R) clarified the accounting for
stock-based awards made to retirement eligible individuals, which explicitly provides that the vesting period for a grant made to a retirement eligible employee is considered non-substantive and should be ignored when determining the period over which the award should be expensed. Upon adoption of SFAS No. 123(R), we will be required to expense stock-based awards over the period between grant date and retirement eligibility or immediately if the employee is retirement eligible at the date of grant. If we had historically accounted for stock-based awards made to retirement eligible individuals under these requirements, the pro forma expense disclosed in Note A would not have been materially impacted for the periods presented.
| /s/ Tobin | /s/ Lawrence C. Best | ||
| President and Chief Executive Officer | Executive Vice President and Chief Financial Officer |
forecasted transaction.
Year Ended December 31, | 2006 | 2005 | 2004 | |||||||
| Net sales | $ | 7,821 | $ | 6,283 | $ | 5,624 | ||||
| Cost of products sold | 2,207 | 1,386 | 1,292 | |||||||
| Gross profit | 5,614 | 4,897 | 4,332 | |||||||
| Selling, general and administrative expenses | 2,675 | 1,814 | 1,742 | |||||||
| Research and development expenses | 1,008 | 680 | 569 | |||||||
| Royalty expense | 231 | 227 | 195 | |||||||
| Amortization expense | 530 | 152 | 112 | |||||||
| Litigation-related charges | 780 | 75 | ||||||||
| Purchased research and development | 4,119 | 276 | 65 | |||||||
| Total operating expenses | 8,563 | 3,929 | 2,758 | |||||||
| Operating (loss) income | (2,949 | ) | 968 | 1,574 | ||||||
| Other income (expense): | ||||||||||
| Interest expense | (435 | ) | (90 | ) | (64 | ) | ||||
| Fair value adjustment for sharing of proceeds feature of Abbott stock purchase | (95 | ) | ||||||||
| Other, net | (56 | ) | 13 | (16 | ) | |||||
| (Loss) income before income taxes | (3,535 | ) | 891 | 1,494 | ||||||
Income taxes | 42 | 263 | 432 | |||||||
Net (loss) income | $ | (3,577 | ) | $ | 628 | $ | 1,062 | |||
Net (loss) income per common share — basic | $ | (2.81 | ) | $ | 0.76 | $ | 1.27 | |||
Net (loss) income per common share — assuming dilution | $ | (2.81 | ) | $ | 0.75 | $ | 1.24 | |||
| Year Ended December 31, | 2005 | 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $ | 6,283 | $ | 5,624 | $ | 3,476 | ||||
| Cost of products sold | 1,386 | 1,292 | 961 | |||||||
| Gross profit | 4,897 | 4,332 | 2,515 | |||||||
Selling, general and administrative expenses | 1,814 | 1,742 | 1,171 | |||||||
| Research and development expenses | 680 | 569 | 452 | |||||||
| Royalty expense | 227 | 195 | 54 | |||||||
| Amortization expense | 152 | 112 | 89 | |||||||
| Litigation-related charges | 780 | 75 | 15 | |||||||
| Purchased research and development | 276 | 65 | 37 | |||||||
| Total operating expenses | 3,929 | 2,758 | 1,818 | |||||||
| Operating income | 968 | 1,574 | 697 | |||||||
Other income (expense): | ||||||||||
| Interest expense | (90 | ) | (64 | ) | (46 | ) | ||||
| Other, net | 13 | (16 | ) | (8 | ) | |||||
| Income before income taxes | 891 | 1,494 | 643 | |||||||
| Income taxes | 263 | 432 | 171 | |||||||
| Net income | $ | 628 | $ | 1,062 | $ | 472 | ||||
| Net income per common share—basic | $ | 0.76 | $ | 1.27 | $ | 0.57 | ||||
| Net income per common share—assuming dilution | $ | 0.75 | $ | 1.24 | $ | 0.56 | ||||
(See notes to the consolidated financial statements)
As of December 31, | 2006 | 2005 | |||||
Assets | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 1,668 | $ | 689 | |||
| Marketable securities | 159 | ||||||
| Trade accounts receivable, net | 1,424 | 932 | |||||
| Inventories | 749 | 418 | |||||
| Deferred income taxes | 583 | 152 | |||||
| Prepaid expenses and other current assets | 477 | 281 | |||||
Total current assets | $ | 4,901 | $ | 2,631 | |||
| Property, plant and equipment, net | 1,726 | 1,011 | |||||
| Investments | 596 | 594 | |||||
| Other assets | 237 | 225 | |||||
| Intangible assets | |||||||
| Goodwill | 14,628 | 1,938 | |||||
| Technology — core, net | 6,973 | 1,099 | |||||
| Technology — developed, net | 897 | 209 | |||||
| Patents, net | 339 | 338 | |||||
| Other intangible assets, net | 799 | 151 | |||||
| Total intangible assets | 23,636 | 3,735 | |||||
$ | 31,096 | $ | 8,196 | ||||
| As of December 31, | 2005 | 2004 | |||||
|---|---|---|---|---|---|---|---|
| Assets | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 689 | $ | 1,296 | |||
| Marketable securities | 159 | 344 | |||||
| Trade accounts receivable, net | 932 | 900 | |||||
| Inventories | 418 | 360 | |||||
| Deferred income taxes | 152 | 241 | |||||
| Prepaid expenses and other current assets | 281 | 148 | |||||
| Total current assets | 2,631 | 3,289 | |||||
Property, plant and equipment, net | 1,011 | 870 | |||||
| Investments | 594 | 529 | |||||
| Other assets | 225 | 142 | |||||
| Intangible assets | |||||||
| Goodwill | 1,938 | 1,712 | |||||
| Technology—core, net | 1,099 | 942 | |||||
| Technology—developed, net | 209 | 200 | |||||
| Patents, net | 338 | 339 | |||||
| Other intangible assets, net | 151 | 147 | |||||
| Total intangible assets | 3,735 | 3,340 | |||||
| Total Assets | $ | 8,196 | $ | 8,170 | |||
(See notes to the consolidated financial statements)
| As of December 31, | 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Liabilities and Stockholders' Equity | |||||||||
| Current liabilities | |||||||||
| Commercial paper | $ | 149 | $ | 280 | |||||
| Current maturities of long-term debt | 1 | 502 | |||||||
| Bank obligations | 6 | 446 | |||||||
| Accounts payable | 105 | 108 | |||||||
| Accrued expenses | 1,124 | 902 | |||||||
| Income taxes payable | 17 | 255 | |||||||
| Other current liabilities | 77 | 112 | |||||||
| Total current liabilities | 1,479 | 2,605 | |||||||
Long-term debt | 1,864 | 1,139 | |||||||
| Deferred income taxes | 262 | 259 | |||||||
| Other long-term liabilities | 309 | 142 | |||||||
Commitments and contingencies | |||||||||
| Stockholders' equity | |||||||||
| Preferred stock, $.01 par value—authorized 50,000,000 shares, none issued and outstanding | |||||||||
| Common stock, $.01 par value—authorized 1,200,000,000 shares, 844,565,292 shares issued at December 31, 2005 and December 31, 2004 | 8 | 8 | |||||||
| Additional paid-in capital | 1,658 | 1,633 | |||||||
| Deferred compensation | (98 | ) | (2 | ) | |||||
| Treasury stock, at cost — 24,215,559 shares at December 31, 2005 and 9,221,468 shares at December 31, 2004 | (717 | ) | (320 | ) | |||||
| Retained earnings | 3,410 | 2,790 | |||||||
| Accumulated other comprehensive income (loss) | |||||||||
| Foreign currency translation adjustment | (71 | ) | (34 | ) | |||||
| Unrealized gain on available-for-sale securities, net | 26 | 2 | |||||||
| Unrealized gain (loss) on derivative financial instruments, net | 67 | (51 | ) | ||||||
| Minimum pension liability | (1 | ) | (1 | ) | |||||
| Total stockholders' equity | 4,282 | 4,025 | |||||||
| $ | 8,196 | $ | 8,170 | ||||||
As of December 31, | 2006 | 2005 | |||||
Liabilities and Stockholders’ Equity | |||||||
| Current liabilities | |||||||
| Commercial paper | $ | 149 | |||||
| Current debt obligations | $ | 7 | 7 | ||||
| Accounts payable | 222 | 105 | |||||
| Accrued expenses | 1,845 | 1,124 | |||||
| Income taxes payable | 413 | 17 | |||||
| Other current liabilities | 143 | 77 | |||||
Total current liabilities | $ | 2,630 | $ | 1,479 | |||
| Long-term debt | 8,895 | 1,864 | |||||
| Deferred income taxes | 2,784 | 262 | |||||
| Other long-term liabilities | 1,489 | 309 | |||||
| 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 2,000,000,000 shares and issued 1,486,403,445 shares at December 31, 2006; authorized 1,200,000,000 shares and issued 844,565,292 shares at December 31, 2005 | 15 | 8 | |||||
| Additional paid-in capital | 15,792 | 1,658 | |||||
| Deferred cost, ESOP | (58 | ) | |||||
| Deferred compensation | (98 | ) | |||||
| Treasury stock, at cost — 11,728,643 shares at December 31, 2006 and 24,215,559 shares at December 31, 2005 | (334 | ) | (717 | ) | |||
| Retained (deficit) earnings | (174 | ) | 3,410 | ||||
| Accumulated other comprehensive income (loss) | |||||||
| Foreign currency translation adjustment | 16 | (71 | ) | ||||
| Unrealized gain on available-for-sale securities, net | 16 | 26 | |||||
| Unrealized gain on derivative financial instruments, net | 32 | 67 | |||||
| Unrealized costs associated with certain retirement plans | (7 | ) | (1 | ) | |||
Total stockholders’ equity | 15,298 | 4,282 | |||||
$ | 31,096 | $ | 8,196 | ||||
| | Common Stock | Additional Paid-In Capital | | | | Accumulated Other Comprehensive Income (Loss) | | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Deferred Compensation | Treasury Stock | Retained Earnings | Comprehensive Income (Loss) | ||||||||||||||||||||||
| | Shares Issued | Par Value | ||||||||||||||||||||||||
| Balance at December 31, 2002 | 414,882,413 | $ | 4 | $ | 1,250 | $ | (54 | ) | $ | 1,394 | $ | (127 | ) | |||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||
| Net income | 472 | $ | 472 | |||||||||||||||||||||||
| Other comprehensive income (expense), net of tax | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | 69 | 69 | ||||||||||||||||||||||||
| Net change in equity investments | 52 | 52 | ||||||||||||||||||||||||
| Net change in derivative financial instruments | (44 | ) | (44 | ) | ||||||||||||||||||||||
| Net change in minimum pension liability | 1 | 1 | ||||||||||||||||||||||||
| Issuance of common stock | (179 | ) | 512 | (73 | ) | |||||||||||||||||||||
| Issuance of restricted stock, net of cancellations | (1 | ) | 1 | |||||||||||||||||||||||
| Stock split effected in the form of a stock dividend | 414,882,413 | 4 | (4 | ) | ||||||||||||||||||||||
| Repurchases of common stock | (570 | ) | ||||||||||||||||||||||||
| Tax benefit related to stock options | 154 | |||||||||||||||||||||||||
| Amortization of deferred compensation | 1 | |||||||||||||||||||||||||
| Balance at December 31, 2003 | 829,764,826 | 8 | 1,225 | (111 | ) | 1,789 | (49 | ) | $ | 550 | ||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||
| Net income | 1,062 | $ | 1,062 | |||||||||||||||||||||||
| Other comprehensive income (expense), net of tax | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | 16 | 16 | ||||||||||||||||||||||||
| Net change in equity investments | (48 | ) | (48 | ) | ||||||||||||||||||||||
| Net change in derivative financial instruments | (3 | ) | (3 | ) | ||||||||||||||||||||||
| Issuance of common stock | 14,800,466 | 132 | 149 | (56 | ) | |||||||||||||||||||||
| Issuance of restricted stock, net of cancellations | 1 | (3 | ) | 2 | ||||||||||||||||||||||
| Repurchases of common stock | (360 | ) | ||||||||||||||||||||||||
| Tax benefit related to stock options | 185 | |||||||||||||||||||||||||
| Step-up accounting adjustment for certain investments | (5 | ) | ||||||||||||||||||||||||
| Stock-compensation charge for certain modifications | 90 | |||||||||||||||||||||||||
| Amortization of deferred compensation | 1 | |||||||||||||||||||||||||
| Balance at December 31, 2004 | 844,565,292 | 8 | 1,633 | (2 | ) | (320 | ) | 2,790 | (84 | ) | $ | 1,027 | ||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||
| Net income | 628 | $ | 628 | |||||||||||||||||||||||
| Other comprehensive income (expense), net of tax | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | (37 | ) | (37 | ) | ||||||||||||||||||||||
| Net change in equity investments | 24 | 24 | ||||||||||||||||||||||||
| Net change in derivative financial instruments | 118 | 118 | ||||||||||||||||||||||||
| Issuance of common stock | (113 | ) | 207 | |||||||||||||||||||||||
| Common stock issued for acquisitions | (5 | ) | 129 | |||||||||||||||||||||||
| Issuance of restricted stock, net of cancellations | 114 | (115 | ) | 1 | ||||||||||||||||||||||
| Repurchases of common stock | (734 | ) | ||||||||||||||||||||||||
| Tax benefit related to stock options | 28 | |||||||||||||||||||||||||
| Step-up accounting adjustment for certain investments | (8 | ) | ||||||||||||||||||||||||
| Amortization of deferred compensation | 1 | 19 | ||||||||||||||||||||||||
| Balance at December 31, 2005 | 844,565,292 | $ | 8 | $ | 1,658 | $ | (98 | ) | $ | (717 | ) | $ | 3,410 | $ | 21 | $ | 733 | |||||||||
| Common Stock | Deferred Cost, ESOP | ||||||||||||||||||||||||||||||
| Shares Issued | Par Value | Additional Paid-In Capital | Deferred Compensation | Shares | Amount | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Comprehensive Income (Loss) | ||||||||||||||||||||||
Balance at December 31, 2003 | 829,764,826 | $ | 8 | $ | 1,225 | $ | (111 | ) | $ | 1,789 | $ | (49 | ) | ||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||||||||||
| Net income | 1,062 | $ | 1,062 | ||||||||||||||||||||||||||||
| Other comprehensive income (expense), net of tax | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 16 | 16 | |||||||||||||||||||||||||||||
| Net change in equity investments | (48 | ) | (48 | ) | |||||||||||||||||||||||||||
| Net change in derivative financial instruments | (3 | ) | (3 | ) | |||||||||||||||||||||||||||
| Issuance of common stock | 14,800,466 | 132 | 149 | (56 | ) | ||||||||||||||||||||||||||
| Issuance of restricted stock, net of cancellations | 1 | $ | (3 | ) | 2 | ||||||||||||||||||||||||||
| Repurchases of common stock | (360 | ) | |||||||||||||||||||||||||||||
| Tax benefit related to stock options | 185 | ||||||||||||||||||||||||||||||
| Step-up accounting adjustment for certain investments | (5 | ) | |||||||||||||||||||||||||||||
| Stock-based compensation expense for certain modifications | 90 | ||||||||||||||||||||||||||||||
| Amortization of deferred compensation | 1 | ||||||||||||||||||||||||||||||
Balance at December 31, 2004 | 844,565,292 | 8 | 1,633 | (2 | ) | (320 | ) | 2,790 | (84 | ) | $ | 1,027 | |||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||||||||||
| Net income | 628 | $ | 628 | ||||||||||||||||||||||||||||
| Other comprehensive income (expense), net of tax | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | (37 | ) | (37 | ) | |||||||||||||||||||||||||||
| Net change in equity investments | 24 | 24 | |||||||||||||||||||||||||||||
| Net change in derivative financial instruments | 118 | 118 | |||||||||||||||||||||||||||||
| Issuance of common stock | (113 | ) | 207 | ||||||||||||||||||||||||||||
| Common stock issued for acquisitions | (5 | ) | 129 | ||||||||||||||||||||||||||||
| Issuance of restricted stock, net of cancellations | 114 | (115 | ) | 1 | |||||||||||||||||||||||||||
| Repurchases of common stock | (734 | ) | |||||||||||||||||||||||||||||
| Tax benefit related to stock options | 28 | ||||||||||||||||||||||||||||||
| Step-up accounting adjustment for certain investments | (8 | ) | |||||||||||||||||||||||||||||
| Amortization of deferred compensation | 1 | 19 | |||||||||||||||||||||||||||||
Balance at December 31, 2005 | 844,565,292 | 8 | 1,658 | (98 | ) | (717 | ) | 3,410 | 21 | $ | 733 | ||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||||||||||
| Net loss | (3,577 | ) | $ | (3,577 | ) | ||||||||||||||||||||||||||
| Other comprehensive income (expense), net of tax | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 87 | 87 | |||||||||||||||||||||||||||||
| Net change in equity investments | (10 | ) | (10 | ) | |||||||||||||||||||||||||||
| Net change in derivative financial instruments | (35 | ) | (35 | ) | |||||||||||||||||||||||||||
| Net change in certain retirement amounts | (6 | ) | (6 | ) | |||||||||||||||||||||||||||
| Issuance of shares of common stock for Guidant acquisition | 577,206,996 | 6 | 12,508 | ||||||||||||||||||||||||||||
| Conversion of outstanding Guidant stock options | 450 | ||||||||||||||||||||||||||||||
| Issuance of shares of common stock to Abbott | 64,631,157 | 1 | 1,399 | ||||||||||||||||||||||||||||
| Issuance of common stock | (238 | ) | 383 | ||||||||||||||||||||||||||||
| Tax benefit related to stock options | 7 | ||||||||||||||||||||||||||||||
| Reversal of deferred compensation in accordance with SFAS 123(R) | (98 | ) | 98 | ||||||||||||||||||||||||||||
| Stock-based compensation expense, including amounts capitalized to inventory | 115 | ||||||||||||||||||||||||||||||
| Step-up accounting adjustment for certain investments | (7 | ) | |||||||||||||||||||||||||||||
| Acquired 401(k) ESOP for legacy Guidant employees | 3,794,965 | $ | (86 | ) | |||||||||||||||||||||||||||
| 401 (k) ESOP transactions | (9 | ) | (1,237,662 | ) | 28 | ||||||||||||||||||||||||||
Balance at December 31, 2006 | 1,486,403,445 | $ | 15 | $ | 15,792 | 2,557,303 | $ | (58 | ) | $ | (334 | ) | $ | (174 | ) | $ | 57 | $ | (3,541 | ) | |||||||||||
| Year Ended December 31, | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Activities | |||||||||||
| Net income | $ | 628 | $ | 1,062 | $ | 472 | |||||
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
| Gain on sale of equity investments | (4 | ) | (36 | ) | |||||||
| Depreciation and amortization | 314 | 275 | 196 | ||||||||
| Deferred income taxes | 4 | 30 | (31 | ) | |||||||
| Purchased research and development | 276 | 65 | 37 | ||||||||
| Tax benefit relating to stock options | 28 | 185 | 154 | ||||||||
| Stock-compensation expense, including expense for certain modifications | 13 | 62 | 1 | ||||||||
| Increase (decrease) in cash flows from operating assets and liabilities, excluding the effect of acquisitions: | |||||||||||
| Trade accounts receivable | (24 | ) | (317 | ) | (74 | ) | |||||
| Inventories | (77 | ) | (57 | ) | (21 | ) | |||||
| Prepaid expenses and other assets | (59 | ) | (15 | ) | 6 | ||||||
| Accounts payable and accrued expenses | (162 | ) | 362 | 85 | |||||||
| Income taxes payable and other liabilities | (45 | ) | 200 | (19 | ) | ||||||
| Other, net | 11 | (12 | ) | (19 | ) | ||||||
| Cash provided by operating activities | 903 | 1,804 | 787 | ||||||||
| Investing Activities | |||||||||||
| Property, plant and equipment | |||||||||||
| Purchases | (341 | ) | (274 | ) | (188 | ) | |||||
| Proceeds on disposals | 19 | 1 | |||||||||
| Marketable securities | |||||||||||
| Purchases | (56 | ) | (660 | ) | (130 | ) | |||||
| Proceeds from maturities | 241 | 397 | 66 | ||||||||
| Acquisitions | |||||||||||
| Payments for acquisitions of businesses, net of cash acquired | (178 | ) | (804 | ) | (13 | ) | |||||
| Payments relating to prior year acquisitions | (33 | ) | (107 | ) | (283 | ) | |||||
| Strategic alliances | |||||||||||
| Purchases of publicly traded equity securities | (52 | ) | (23 | ) | (105 | ) | |||||
| Payments for investments in privately held companies and acquisitions of certain technologies | (156 | ) | (249 | ) | (220 | ) | |||||
| Proceeds from sales of privately held and publicly traded equity securities | 5 | 98 | 1 | ||||||||
| Cash used for investing activities | (551 | ) | (1,622 | ) | (871 | ) | |||||
| Financing Activities | |||||||||||
| Debt | |||||||||||
| Net (payments on) proceeds from commercial paper | (131 | ) | (723 | ) | 915 | ||||||
| Payments on notes payable, capital leases and long-term borrowings | (508 | ) | (17 | ) | (8 | ) | |||||
| Proceeds from notes payable and long-term borrowings, net of debt issuance costs | 739 | 1,092 | 2 | ||||||||
| Net (payments on) proceeds from borrowings on revolving credit facilities | (413 | ) | 225 | (116 | ) | ||||||
| Equity | |||||||||||
| Repurchases of common stock | (734 | ) | (360 | ) | (570 | ) | |||||
| Proceeds from issuances of shares of common stock | 94 | 225 | 260 | ||||||||
| Other, net | (1 | ) | (3 | ) | 4 | ||||||
| Cash (used for) provided by financing activities | (954 | ) | 439 | 487 | |||||||
| Effect of foreign exchange rates on cash | (5 | ) | 4 | 8 | |||||||
| Net (decrease) increase in cash and cash equivalents | (607 | ) | 625 | 411 | |||||||
| Cash and cash equivalents at beginning of year | 1,296 | 671 | 260 | ||||||||
| Cash and cash equivalents at end of year | $ | 689 | $ | 1,296 | $ | 671 | |||||
| Supplemental cash flow information | |||||||||||
| Cash paid during the year for: | |||||||||||
| Income taxes | $ | 350 | $ | 72 | $ | 30 | |||||
| Interest | 87 | 61 | 52 | ||||||||
Year Ended December 31, | 2006 | 2005 | 2004 | |||||||
Operating Activities | ||||||||||
| Net (loss) income | $ | (3,577 | ) | $ | 628 | $ | 1,062 | |||
| Adjustments to reconcile net (loss) income to cash provided by operating activities: | ||||||||||
| Gain on sale of equity investments | (9 | ) | (4 | ) | (36 | ) | ||||
| Write-downs of investments | 121 | 41 | 58 | |||||||
| Depreciation and amortization | 781 | 314 | 275 | |||||||
| Step-up value of acquired inventory sold | 267 | |||||||||
| Deferred income taxes | (420 | ) | 4 | 30 | ||||||
| Fair-value adjustment for sharing of proceeds feature of Abbott stock purchase | 95 | |||||||||
| Purchased research and development | 4,119 | 276 | 65 | |||||||
| Tax benefit relating to stock options | 28 | 185 | ||||||||
| Stock-based compensation expense | 113 | 19 | 91 | |||||||
| Increase (decrease) in cash flows from operating assets and liabilities, excluding the effect of acquisitions: | ||||||||||
| Trade accounts receivable | 64 | (24 | ) | (317 | ) | |||||
| Inventories | (53 | ) | (77 | ) | (57 | ) | ||||
| Prepaid expenses and other assets | 79 | (100 | ) | (73 | ) | |||||
| Accounts payable and accrued expenses | (1 | ) | (162 | ) | 362 | |||||
| Income taxes payable and other liabilities | 234 | (51 | ) | 171 | ||||||
Other, net | 32 | 11 | (12 | ) | ||||||
| Cash provided by operating activities | 1,845 | 903 | 1,804 | |||||||
Investing Activities | ||||||||||
Property, plant and equipment | ||||||||||
| Purchases | (341 | ) | (341 | ) | (274 | ) | ||||
| Proceeds on disposals | 18 | 19 | ||||||||
Marketable securities | ||||||||||
| Purchases | (56 | ) | (660 | ) | ||||||
| Proceeds from maturities | 159 | 241 | 397 | |||||||
Acquisitions | ||||||||||
| Payments for the acquisition of Guidant | (15,394 | ) | ||||||||
| Cash acquired in the acquisition of Guidant, including proceeds from Guidant’s sale of its vascular intervention and endovascular solutions businesses | 6,708 | |||||||||
| Payments for acquisitions of other businesses, net of cash acquired | (178 | ) | (804 | ) | ||||||
| Payments relating to prior year acquisitions | (397 | ) | (33 | ) | (107 | ) | ||||
Strategic alliances | ||||||||||
| Purchases of publicly traded equity securities | (52 | ) | (23 | ) | ||||||
| Payments for investments in privately held companies and acquisitions of certain technologies | (98 | ) | (156 | ) | (249 | ) | ||||
| Proceeds from sales of privately held and publicly traded equity securities | 33 | 5 | 98 | |||||||
| Cash used for investing activities | (9,312 | ) | (551 | ) | (1,622 | ) | ||||
Financing Activities | ||||||||||
Debt | ||||||||||
| Net payments on commercial paper | (149 | ) | (131 | ) | (723 | ) | ||||
| Payments on notes payable, capital leases and long-term borrowings | (1,510 | ) | (508 | ) | (17 | ) | ||||
| Proceeds from notes payable and long-term borrowings, net of debt issuance costs | 8,544 | 739 | 1,092 | |||||||
| Net proceeds from (payments on) borrowings on revolving credit facilities | 3 | (413 | ) | 225 | ||||||
Equity | ||||||||||
| Repurchases of common stock | (734 | ) | (360 | ) | ||||||
| Proceeds from issuance of shares of common stock to Abbott | 1,400 | |||||||||
| Proceeds from issuances of shares of common stock | 145 | 94 | 225 | |||||||
| Tax benefit relating to stock options | 7 | |||||||||
Other, net | (1 | ) | (1 | ) | (3 | ) | ||||
| Cash provided by (used for) financing activities | 8,439 | (954 | ) | 439 | ||||||
| Effect of foreign exchange rates on cash | 7 | (5 | ) | 4 | ||||||
| Net increase (decrease) in cash and cash equivalents | 979 | (607 | ) | 625 | ||||||
| Cash and cash equivalents at beginning of year | 689 | 1,296 | 671 | |||||||
Cash and cash equivalents at end of year | $ | 1,668 | $ | 689 | $ | 1,296 | ||||
| SUPPLEMENTAL INFORMATION - Cash paid during the year for: | ||||||||||
| Income taxes | $ | 40 | $ | 350 | $ | 72 | ||||
| Interest | 383 | 87 | 61 | |||||||
The preparation of
Cash
The Company invests
2005.
| (in millions) | 2005 | 2004 | |||||
|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 689 | $ | 1,296 | |||
| Marketable securities (maturing 91 days-1 year) | |||||||
| Available-for-sale | 159 | 344 | |||||
| $ | 848 | $ | 1,640 | ||||
(in millions) | 2006 | 2005 | |||||
| Cash and cash equivalents | $ | 1,668 | $ | 689 | |||
| Marketable securities | |||||||
| Available-for-sale | 159 | ||||||
$ | 1,668 | $ | 848 | ||||
The Company provides
The Company's
The Company For all other transactions, we recognize revenue when title to the goods and risk of loss transfer to the customer, provided there are no substantive remaining performance obligations required of us or any matters requiring customer acceptance. For multiple-element arrangements, whereby the sale of devices is combined with future service obligations, we defer revenue on the undelivered elements based on verifiable objective evidence of fair value.
The Company offers
The Company has
The Company states
2004.
The Company states
over a 20 to 40 year life; equipment, furniture and fixtures are depreciated over a 3three to 7seven year life; and 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 records
The valuation of purchased research
The Company uses
The Company records
in the remaining useful life. Conditions that would indicate impairment and trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes-downwe write-down the carrying value of the intangible asset to its fair value in the period identified. The Company
The Company accounts
shareholders.
The Company utilizes
The Company provides for income taxes payable related to earnings of its foreign subsidiaries that may be repatriated in the foreseeable future. Income taxes are not provided on the unremitted earnings of the Company's foreign subsidiaries where such earnings have been permanently reinvested in its foreign operations. It is not practical to estimate the amount of income taxes payable on the earnings that are permanently reinvested in foreign operations. Unremitted earnings of the Company's foreign subsidiaries that are permanently reinvested are $2,106 million at December 31, 2005 and $1,005 million at December 31, 2004.
The Company provides
and calculations where the ultimate tax outcome is uncertain. Judgment is required in determining the Company'sour worldwide income tax provision. In management'sour opinion, we have made adequate provisions for income taxes have been made for all years subject to audit.
Although we believe our estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and operating results in the period in which we make such determination.
The Company is substantially self-insured with respect to general, product liability and securities litigation claims. In the ordinary course of business, product liability and securities litigation claims are asserted against us. The Company accrues anticipated costs of litigation and loss for product liability and securities litigation claims based on historical experience, or to the extent specific losses are probable and estimable. The Company records losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable. The accrual for product liability and securities litigation claims was $15 million at December 31, 2005 and $13 million at December 31, 2004.
Warranty Obligations
The Company estimates
2004.
with exit activities may include costs related to leased facilities to be abandoned or subleased and long-lived asset impairments.
During 2005, the Company recognized chargesIn addition, we account for costs to exit an activity of an acquired company and involuntary employee termination benefits and relocation costs associated with acquired businesses in accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. We include exit activitiescosts in the purchase price allocation of approximately $40 million. These charges includedthe acquired business if a plan to exit an activity of an acquired company exists and those costs primarily attributablehave no future economic benefit to employee terminationsus and outsourcing costs within the Company's human resources function and international divisions; and a $10 million write-off of intangible assets related to its Enteryx® Liquid Polymer Technology, a discontinued technology platform obtainedwill be incurred as a partdirect result of itsthe exit plan, or the exit costs represent amounts to be incurred by us under a contractual obligation of the acquired entity that existed prior to the acquisition date. We recognize involuntary employee termination benefits and relocation costs as liabilities assumed as of Enteric Medical Technologies, Inc. (EMT). The write-off resulted from the Company's decision duringacquisition date when management approves and commits to a plan of termination, and communicates the third quarter of 2005termination arrangement to cease selling the Enteryx product.
employees.
The Company translates
2004.
The Company does
Research
The Company maintains pension
(in millions) | Guidant Retirement Plan | Guidant Excess Benefit Plan | Healthcare Retirement Benefit Plan | |||||||
| Projected benefit obligation | $ | 90 | $ | 30 | $ | 30 | ||||
| Fair value of plan assets | 82 | |||||||||
| Net amount recognized in consolidated balance sheet | $ | 8 | $ | 30 | $ | 30 | ||||
Guidant Retirement Plan | Guidant Excess Benefit Plan | Healthcare Retirement Benefit Plan | ||||||||
| Discount rate | 5.75 | % | 5.75 | % | 5.50 | % | ||||
| Expected return on plan assets | 7.75 | % | ||||||||
| Healthcare cost trend rate | 5.00 | % | ||||||||
| Rate of compensation increase | 4.50 | % | 4.50 | % | ||||||
Net
Potential common stock equivalents are determined using the treasury method. We exclude stock options whose effect would be anti-dilutive from the calculation.
As permitted by Statement No. 123, for periods prior to January 1, 2006, the Company accounted for share-based payments to employees using Opinion No. 25's intrinsic value method and, as such, generally recognized no compensation cost for the granting of employee stock options, except as disclosed inNote L—Stock Ownership Plans. Accordingly, the adoption of Statement No. 123(R)'s fair value method will negatively impact the Company's statements of operations. The impacteffect of adoption of Statement No. 123(R) cannot be quantified at this time because it157, but we do not believe such adoption will depend onmaterially impact our future results of operations or financial position.
| (in millions, except per share data) | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income, as reported | $ | 628 | $ | 1,062 | $ | 472 | |||||
| Add: Stock-based employee compensation expense included in net income, net of related tax effects | 13 | 62 | 1 | ||||||||
| Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (74 | ) | (67 | ) | (62 | ) | |||||
| Pro forma net income | $ | 567 | $ | 1,057 | $ | 411 | |||||
| Net income per common share | |||||||||||
| Basic | |||||||||||
| Reported | $ | 0.76 | $ | 1.27 | $ | 0.57 | |||||
| Pro forma | $ | 0.69 | $ | 1.26 | $ | 0.50 | |||||
| Assuming dilution | |||||||||||
| Reported | $ | 0.75 | $ | 1.24 | $ | 0.56 | |||||
| Pro forma | $ | 0.68 | $ | 1.24 | $ | 0.49 | |||||
Statement No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation costaddition to be reported as a financing cash flow, rather than as an operating cash flow as
required under currently effective accounting literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption of Statement No. 123(R). While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options),considering the amount of operating cash flows recognizedthe error originating in prior periods for such excess tax deductions was $28 million in 2005, $185 million in 2004 and $154 million in 2003.
Further, mostthe current year statement of operations, the misstatement existing at each balance sheet date should also be considered, irrespective of the Company's stock option awards provide for immediate vesting upon retirement, death or disabilityperiod of origin of the participant.error (rollover approach versus iron curtain approach). The Company has traditionally accounted for the pro forma compensation expense related to stock-based awards made to retirement eligible individuals using the stated vesting period of the grant. Thisregistrant must then evaluate whether either approach results in compensation expense being recognized overquantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. We adopted Bulletin No. 108 for the vesting period exceptyear ended December 31, 2006. Our adoption of Bulletin No. 108 did not result in the instancerecording of a cumulative effect adjustment to retained earnings or any revisions to prior reporting periods since we had previously evaluated misstatements using both the participant's actual retirement. Statement No. 123(R) clarifiedrollover approach and the accounting for stock-based awards made to retirement eligible individuals, which explicitly provides that the vesting period for a grant made to a retirement eligible employee is considered non-substantiveiron curtain approach, and should be ignored when determining the period over which the award should be expensed. Upon adoption of SFAS No. 123(R), the Company will be required to expense stock-based awards over the period between grant date and retirement eligibility or immediately if the employee is retirement eligible at the date of grant. If the Company had historically accounted for stock-based awards made to retirement eligible individuals under these requirements, the pro forma expense disclosed above woulddid not have been materially impacted for the periods presented.
any material misstatements under either methodology.
| (in millions) | 2005 | 2004 | |||||
|---|---|---|---|---|---|---|---|
| Trade Accounts Receivable | |||||||
| Accounts receivable | $ | 1,015 | $ | 980 | |||
| Less: allowances | 83 | 80 | |||||
| $ | 932 | $ | 900 | ||||
| Inventories | |||||||
| Finished goods | $ | 286 | $ | 238 | |||
| Work-in-process | 64 | 65 | |||||
| Raw materials | 68 | 57 | |||||
| $ | 418 | $ | 360 | ||||
| Property, Plant and Equipment | |||||||
| Land | $ | 76 | $ | 79 | |||
| Buildings and improvements | 625 | 588 | |||||
| Equipment, furniture and fixtures | 1,152 | 978 | |||||
| 1,853 | 1,645 | ||||||
| Less: accumulated depreciation | 842 | 775 | |||||
| $ | 1,011 | $ | 870 | ||||
| Accrued Expenses | |||||||
| Acquisition-related obligations | $ | 357 | $ | 24 | |||
| Payroll and related liabilities | 294 | 255 | |||||
| Other | 473 | 623 | |||||
| $ | 1,124 | $ | 902 | ||||
Included in other accrued expenses at December 31, 2004 is a $110 million ($71 million after-tax) enhancement to the Company's 401(k) Retirement Savings Plan (401(k) Plan). On September 24, 2004, the Board
(in millions) | 2006 | 2005 | |||||
Trade accounts receivable | |||||||
| Accounts receivable | $ | 1,561 | $ | 1,015 | |||
| Less: allowances | 137 | 83 | |||||
$ | 1,424 | $ | 932 | ||||
Inventories | |||||||
| Finished goods | $ | 447 | $ | 286 | |||
| Work-in-process | 145 | 64 | |||||
| Raw materials | 157 | 68 | |||||
$ | 749 | $ | 418 | ||||
Property, plant and equipment | |||||||
| Land | $ | 115 | $ | 76 | |||
| Buildings and improvements | 827 | 625 | |||||
| Equipment, furniture and fixtures | 1,775 | 1,152 | |||||
| 2,717 | 1,853 | ||||||
| Less: accumulated depreciation | 991 | 842 | |||||
$ | 1,726 | $ | 1,011 | ||||
Accrued expenses | |||||||
| Acquisition-related obligations | $ | 428 | $ | 369 | |||
| Legal reserves | 268 | 35 | |||||
| Payroll and related liabilities | 466 | 294 | |||||
| Other | 683 | 426 | |||||
$ | 1,845 | $ | 1,124 | ||||
Other long-term liabilities | |||||||
| Legal reserves | $ | 217 | |||||
| Other accrued income taxes | 1,041 | $ | 267 | ||||
| Other | 231 | 42 | |||||
$ | 1,489 | $ | 309 | ||||
Included in other accrued expenses as of December 31, 2004 is a $75 million provision for a civil settlement with the Department of Justice. The Company paid the settlement in the second quarter of 2005.
In the second quarter of 2004, the company recorded inventory write-downs of $43 million (pre-tax) in conjunction with its recalls of certain units of the Company's TAXUS® Express2TM paclitaxel-eluting coronary stent systems and Express2 coronary stent systems.our intangible assets.
The Company has
| | 2005 | 2004 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | | Number of Strategic Investments | | Number of Strategic Investments | |||||||
| Available-for-Sale Investments | |||||||||||
| Amortized cost | $ | 103 | $ | 76 | |||||||
| Gross unrealized gains | 44 | 5 | |||||||||
| Gross unrealized losses | (4 | ) | (2 | ) | |||||||
| Fair value | $ | 143 | 5 | $ | 79 | 3 | |||||
| Equity Method Investments | |||||||||||
| Cost | $ | 94 | $ | 64 | |||||||
| Equity in losses | (9 | ) | (3 | ) | |||||||
| Carrying value | $ | 85 | 3 | $ | 61 | 2 | |||||
| Cost Method Investments | |||||||||||
| Carrying value | $ | 366 | 58 | $ | 389 | 53 | |||||
| Total Investments | $ | 594 | 66 | $ | 529 | 58 | |||||
2006 | 2005 | ||||||||||||
(in millions) | Number of Strategic Investments | Number of Strategic Investments | |||||||||||
Available-for-sale investments | |||||||||||||
| Amortized cost | $ | 120 | $ | 103 | |||||||||
| Gross unrealized gains | 36 | 44 | |||||||||||
| Gross unrealized losses | (10 | ) | (4 | ) | |||||||||
| Fair value | $ | 146 | 9 | $ | 143 | 5 | |||||||
Equity method investments | |||||||||||||
| Cost | $ | 123 | $ | 94 | |||||||||
| Equity in losses | (28 | ) | (9 | ) | |||||||||
| Carrying value | $ | 95 | 4 | $ | 85 | 3 | |||||||
Cost method investments | |||||||||||||
| Carrying value | $ | 355 | 68 | $ | 366 | 58 | |||||||
$ | 596 | 81 | $ | 594 | 66 | ||||||||
The Company20 years.
carrying value of $10 million and unrealized loss position of $4 million. The duration of the unrealized loss position iswas less than 12 months. The Company doesWe did not consider these investmentsthis investment to be other-than-temporarily impaired at December 31, 2005 due to the duration of the impairment and the Company'sour ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted recovery of the unrealized loss. In addition, during 2005, the Companywe wrote-off itsour $24 million investment in Medinol, Ltd. The Company'sWe canceled our equity investment was canceled in conjunction with the litigation settlement with Medinol. The write-down of the Medinol investment is included in Litigation-relatedlitigation-related charges in theour consolidated statements of operations.
The Company recorded other-than-temporary impairments
In 2005 the Company recorded realized gains of $4 million from sales of investments in privately held companies. In 2004, the Company recorded realized gains of $36 million from sales of investments in publicly traded and privately held companies.
The Company had approximately $112 million of notes receivable due from privately held and publicly traded companies at December 31, 2005, and $79 millioncompanies. We recorded write-downs of notes receivable at December 31, 2004. The Companyof $39 million in 2006, related primarily to technological delays and financial deterioration of certain of our vascular sealing and gene therapy portfolio companies. We recorded write-downs of notes receivable of $4 million in 20052005.
the decision to sell, discontinue, write-down, or otherwise reduce the funding of certain projects, operations, investments or assets. Any proceeds from sales, or any increases in operating cash flows, resulting from subsequent reviews may be used to reduce debt incurred to fund the Guidant acquisition, or may be reinvested in other research and development projects or other operational initiatives.
Given the materiality of the transaction, we have included supplemental pro forma financial information to give effect to the Guidant acquisition as though it had occurred at the beginning of 2006 and 2005 below. Pro forma information is not presented for our other acquisitions given the immateriality of their results to our consolidated financial statements.
| · | an initial payment of $4.1 billion in cash at the Abbott transaction closing; |
| · | a milestone payment of $250 million upon receipt of an approval from the U.S. FDA within ten years after the Abbott transaction closing to market and sell an everolimus-eluting stent in the U.S.; and |
| · | a milestone payment of $250 million upon receipt of an approval from the Japanese Ministry of Health, Labour and Welfare within ten years after the Abbott transaction closing to market and sell an everolimus-eluting stent in Japan. |
December 31, 2006 | April 21, 2006 | ||||||
| BSX stock price | $ | 17.18 | $ | 22.49 | |||
| Expected volatility | 30.00 | % | 30.00 | % | |||
| Risk-free interest rate | 4.79 | % | 4.90 | % | |||
| Credit spread | 0.35 | % | 0.35 | % | |||
| Expected dividend yield | 0.00 | % | 0.00 | % | |||
| Contractual term to expiration | 1.8 years | 2.5 years | |||||
| Notional shares | 64,635,272 | 64,635,272 | |||||
Consideration to Guidant | ||||
| Cash portion of consideration | $ | 14,527 | ||
| Fair value of Boston Scientific common stock | 12,514 | |||
| Fair value of Boston Scientific options exchanged for Guidant stock options | 450 | |||
| Buyout of options for certain former employees | 97 | |||
| 27,588 | ||||
Other acquisition-related costs | ||||
| Johnson & Johnson termination fee | 705 | |||
| Other direct acquisition costs | 65 | |||
$ | 28,358 | |||
| Expected term (in years) | 2.4 | |||
| Expected volatility | 30 | % | ||
| Risk-free interest rate | 4.92 | % | ||
| Stock price on date of grant | $ | 22.49 | ||
| Weighted-average exercise price | $ | 13.11 |
| Cash | $ | 6,708 | ||
| Intangible assets subject to amortization | 7,719 | |||
| Goodwill | 12,354 | |||
| Other assets | 2,255 | |||
| Purchased research and development | 4,169 | |||
| Current liabilities | (1,803 | ) | ||
| Net deferred income taxes | (2,549 | ) | ||
| Other long-term liabilities | (495 | ) | ||
$ | 28,358 |
Amount Assigned (in millions) | Weighted Average Amortization Period (in years) | Risk-Adjusted Discount Rates used in Purchase Price Allocation | ||||||||
| Amortizable intangible assets | ||||||||||
| Technology - core | $ | 6,142 | 25 | 10%-16% | ||||||
| Technology - developed | 885 | 6 | 10% | |||||||
| Customer relationships | 688 | 15 | 10%-13% | |||||||
| Other | 4 | 10 | 10% | |||||||
$ | 7,719 | 22 | ||||||||
| Goodwill | $ | 12,354 | ||||||||
| Purchased research and development | 4,169 | 13%-17% | ||||||||
| · | Implantable cardioverter defibrillator systems used to detect and treat abnormally fast heart rhythms (tachycardia) that could result in sudden cardiac death, including implantable cardiac resynchronization therapy defibrillator systems used to treat heart failure; |
| · | Implantable pacemaker systems used to manage slow or irregular heart rhythms (bradycardia), including implantable cardiac resynchronization therapy pacemaker systems used to treat heart failure; and |
| · | Cardiac surgery systems used to perform cardiac surgical ablation, endoscopic vein harvesting and clampless beating-heart bypass surgery. |
Year Ended December 31, | |||||||
(in millions, except per share data) | 2006 | 2005 | |||||
Unaudited | |||||||
| Net sales | $ | 8,533 | $ | 8,739 | |||
| Net loss | (3,916 | ) | (4,287 | ) | |||
| Net loss per share - basic | $ | (2.66 | ) | $ | (2.92 | ) | |
| Net loss per share - assuming dilution | $ | (2.66 | ) | $ | (2.92 | ) | |
(in millions) | Purchase Price Adjustments | Charges Utilized in 2006 | Balance at December 31, 2006 | |||||||
| Workforce reductions | $ | 190 | $ | (27 | ) | $ | 163 | |||
| Relocation costs | 15 | (5 | ) | 10 | ||||||
| Contractual commitments | 30 | (5 | ) | 25 | ||||||
$ | 235 | $ | (37 | ) | $ | 198 | ||||
of medical devices and procedures used for treating abdominal aortic aneurysms (AAA). The acquisition was intended to expand the Company'sour vascular surgery technology portfolio.
During the second quarter of 2006, management cancelled the TriVascular AAA stent-graft program. The program cancellation was due principally to forecasted increases in time and costs to complete the development of the stent-graft and to receive regulatory approval. The cancellation of the TriVascular AAA program resulted in the shutdown of our facility in Santa Rosa, California and the displacement of approximately 300 employees. During the second quarter of 2006, we recorded a charge to research and development expenses of approximately $20 million associated primarily with write-downs of fixed assets and a charge to research and development expenses of approximately $10 million associated with severance and related costs incurred in connection with the cancellation of the TriVascular AAA program. In addition, we recorded an impairment charge related to the remaining TriVascular intangible assets and reversed our accrual for contingent payments recorded in the initial purchase accounting. The effect of the write-off of these assets and liabilities was a $23 million charge to amortization expense and a $67 million credit to purchased research and development during the second quarter of 2006. We substantially completed the shutdown activities during the third quarter of 2006.
The Company allocated In 2006, we wrote off $21 million of the excess of purchase price over the fair value of net tangibleintangible assets acquired to specific intangible asset categories for its 2005 acquisitions as follows:
| (in millions) | Amount Assigned | Weighted Average Amortization Period | Risk-Adjusted Discount Rate used in Purchase Price Allocation | |||||
|---|---|---|---|---|---|---|---|---|
| Amortizable Intangible Assets: | ||||||||
| Technology—core | $ | 191 | 20 years | 15%-24% | ||||
| Technology—developed | 59 | 10 years | 15% | |||||
| $ | 250 | 18 years | ||||||
| Unamortizable Intangible Assets: | ||||||||
| Goodwill | $ | 34 | ||||||
| Purchased Research and Development | $ | 251 | 18%-27% | |||||
The Company recorded an aggregate deferred tax asset of $53 million and an aggregate deferred tax liability of $93 million in conjunction with the acquisitions completed during 2005. The deferred tax asset is primarily attributable to net operating loss carryforwards. The deferred tax liability mainly relates to the tax impact of future amortization expense associated with the identified intangible assets acquired indeveloped technology obtained as part of the acquisition.
The write-off of the Rubicon developed technology resulted from a management decision to redesign the first generation of the technology and concentrate resources on the commercialization of the second-generation product.
conditions, including migraine headaches and urge incontinence. The drug delivery pump is an implanted programmable device designed to treat chronic pain. See the Purchased Research and Development section of this note for details on these two in-process projects. The Advanced Bionics acquisition was intended to expand the Company'sour technology portfolio into the implantable microelectronic device market.
Fair values of tangible assets and liabilities obtained in conjunction with the acquisition of Advanced Bionics were as follows:
| (in millions) | | ||
|---|---|---|---|
| Assets | $ | 64 | |
| Liabilities | 35 | ||
| Net Tangible Assets | $ | 29 | |
The Company allocated the excess of purchase price over the fair value of net tangible assets acquired to specific intangible asset categories as follows:
| (in millions) | Amount Assigned | Weighted Average Amortization Period | Risk-Adjusted Discount Rate used in Purchase Price Allocation | |||||
|---|---|---|---|---|---|---|---|---|
| Amortizable Intangible Assets: | ||||||||
| Technology—core | $ | 325 | 20 years | 17%-19% | ||||
| Technology—developed | 26 | 5 years | 14% | |||||
| Customer-related intangible assets | 10 | 15 years | * | |||||
| $ | 361 | 19 years | ||||||
| Unamortizable Intangible Assets: | ||||||||
| Goodwill | $ | 586 | ||||||
| Purchased Research and Development | $ | 50 | 18%-27% | |||||
The Advanced Bionics developed technology consists of auditory and pain management technologies that had received FDA approval as of the acquisition date. The Company determined that the estimated useful life of the developed technology was 5 years given the nature of microelectronic devices and the relatively rapid iteration of future generations of such technology.
The core technology consists of patented and unpatented fundamental neuromodulation platforms for auditory and pain management technologies. This core technology represents the common platform or the common parts within each of the acquired implantable microelectronic device technologies that will be carried over in future iterations of the product. The Company determined that the estimated useful life of the core technology was 20 years.
A significant excess of cost remained after allocating the purchase price to the net tangible and intangible assets, which the Company allocated to goodwill. This significant amount of excess was attributable to the low level of net tangible assets acquired, the early stage of development of the acquired in-process technologies and the relatively short product life cycles of the developed technologies. The Company expected much of the value of the acquisition to be driven by future growth of the neuromodulation markets and technological developments impacting future product offerings. In addition, the goodwill encompasses the value associated with Advanced Bionics' highly technical and specialized assembled workforce; the value of synergies associated with the acquisition given Boston Scientifics' resources, including the Company's operational and global sales and marketing expertise; and the strategic benefit the Company expects to derive due to Advanced Bionics expanding its reach into the rapidly growing implantable microelectronic device market. The goodwill obtained in conjunction with the acquisition of Advanced Bionics is not deductible for tax purposes. The Company has allocated the goodwill to its reportable segments as follows: $468 million to the U.S., $71 million to Europe, $35 million to the Inter-Continental and $12 million to Japan. The Company allocated goodwill by business segment based on the respective revenue contribution during the year of acquisition.
The Company recorded a deferred tax asset of $85 million and a deferred tax liability of $134 million in conjunction with the acquisition of Advanced Bionics. The deferred tax asset is primarily attributable to net operating loss carryforwards. The deferred tax liability mainly relates to the tax impact of future amortization associated with the identified intangible assets acquired in the acquisition.
The following unaudited pro forma information presents the consolidated results of operations of the Company and Advanced Bionics as if the acquisition had occurred at the beginning of each of 2004 and 2003, with pro forma adjustments to give effect to amortization of intangible assets, an increase in interest expense on acquisition financing and certain other adjustments together with related tax effects:
| (in millions, except per share data) | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|
| Net sales | $ | 5,657 | $ | 3,532 | ||
| Net income | 1,079 | 425 | ||||
| Net income per share—basic | $ | 1.29 | $ | 0.52 | ||
| Net income per share—assuming dilution | $ | 1.26 | $ | 0.50 | ||
The $50 million charge for purchased research and development that was a direct result of the transaction is excluded from the unaudited pro forma information above. The unaudited pro forma results are not necessarily indicative of the results that the Company would have attained had the acquisition of Advanced Bionics occurred at the beginning of the periods presented.
On April 2, 2004, the Companywe completed itsour acquisition of the remaining outstanding shares of PVS for an initial payment of approximately $75 million in cash. The CompanyWe may also be required to make earn-out payments in the future that are contingent upon PVS achieving certain performance-related milestones. PVS develops and manufactures guidewires and microcatheter technology for use in accessing the brain, the heart and other areas of the anatomy. The acquisition of PVS was intended to provide the Companyus with additional vascular access technology.
On February 12, 2003, the Company completed its acquisition of InFlow. InFlow is a stent technology development company that focuses on reducing the rate of restenosis, improving the visibility of stents during procedures and enhancing the overall vascular compatibility of the stent. The acquisition was intended to provide the Company with an expanded stent technology and intellectual property portfolio.
The consolidated financial statements include the operating results for each acquired entity from its respective date of acquisition. Pro forma information is not presented for acquisitions other than Advanced Bionics, as the other acquired companies' results of operations prior to their date of acquisition are not material, individually or in the aggregate, to the Company.
Contingent Consideration
The estimated cumulative specified revenue level associated with these maximum future contingent payments is approximately $10 billion.
billion, which includes approximately $7 billion for Advanced Bionics.
AST'sprogram. AST’s Petal bifurcation stent is designed to expand into the side vessel whenwhere a single vessel branches into two vessels, permitting blood to flow into both branches of the bifurcation and providing support at the junction. TheWe estimate the remaining cost to complete the Petal bifurcation stent is estimated to be between $100 million and $125 million. As of the date the Company acquired AST, it expectedWe expect material net cash inflows from the Petal bifurcation stent to begin in 2011, which is when we expect the stent to be commercially available on a worldwide basis within six yearsin the U.S. in a drug-eluting configuration.
The AST Petal bifurcation stent in-process project is generally progressing in line with our estimates as of the acquisition date.
In 2003,approval or lower potential market value. We currently expect material net cash inflows from the Company recorded $37 million of purchased researchdrug delivery pump to commence in 2012, following its approval in the U.S., which we expect to occur in 2011 or 2012. The estimated timing and development. The 2003 purchased research and development consisted of $9 million relating to the acquisition of InFlow and $28 million relating primarily to certain acquisitions that the Company consummated in prior years. The in-process projects acquired in connection with the acquisition of InFlow were not significant to the Company's consolidated results. The purchased research and development associated with the prior
years' acquisitions related primarily to the 2001 acquisition of EPI and resulted from consideration that was contingent at the date of acquisition, but earned during 2003.
In connection with the Company's 2002 acquisitions, it acquired several in-process projects, including Smart's atherosclerosis stent. The atherosclerosis stent is a self-expanding nitinol stent designed to treat narrowing of the arteries around the brain. During 2005, the Company completed the atherosclerosis stent in-process project and received Humanitarian Device Exemption approval to begin selling this technology on a limited basis. The total cost for the Companycosts to complete the project was approximately $10 million.
In connection withbion microstimulator and the Company's 2001 acquisitions, it acquired several significant in-process projects, including IVT's next-generation Cutting Balloon® device. The Cutting Balloon device isdrug delivery pump have increased relative to what we estimated as of the acquisition date; however, we do not believe these increases will have a novel balloon angioplasty device with mounted scalpels that relieve stress in the artery, reducing the force necessary to expand the vessel. During 2005, the Company completed the Cutting Balloon in-process project and received FDA approval for this technology. The total cost for the Company to complete the project was approximately $7 million.
material impact on our results of operations or financial condition.
| | 2005 | 2004 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||
| Amortizable Intangible Assets | |||||||||||||
| Technology—core | $ | 829 | $ | 86 | $ | 634 | $ | 48 | |||||
| Technology—developed | 453 | 244 | 398 | 198 | |||||||||
| Patents | 547 | 209 | 511 | 172 | |||||||||
| Other intangible assets | 281 | 130 | 260 | 113 | |||||||||
| $ | 2,110 | $ | 669 | $ | 1,803 | $ | 531 | ||||||
| Unamortizable Intangible Assets | |||||||||||||
| Goodwill | $ | 1,938 | $ | 1,712 | |||||||||
| Technology—core | 356 | 356 | |||||||||||
| $ | 2,294 | $ | 2,068 | ||||||||||
The Company's
2006 | 2005 | ||||||||||||
(in millions) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||
Amortizable intangible assets | |||||||||||||
| Technology - core | $ | 6,909 | $ | 292 | $ | 829 | $ | 86 | |||||
| Technology - developed | 1,338 | 441 | 453 | 244 | |||||||||
| Patents | 583 | 244 | 547 | 209 | |||||||||
| Customer relationships | 765 | 58 | 73 | 22 | |||||||||
| Other intangible assets | 214 | 122 | 208 | 108 | |||||||||
$ | 9,809 | $ | 1,157 | $ | 2,110 | $ | 669 | ||||||
| Goodwill | $ | 14,628 | $ | 1,938 | |||||||||
| Technology - core | 356 | 356 | |||||||||||
$ | 14,984 | $ | 2,294 | ||||||||||
| (in millions) | Estimated Amortization Expense | ||
|---|---|---|---|
| 2006 | $ | 135 | |
| 2007 | 129 | ||
| 2008 | 111 | ||
| 2009 | 104 | ||
| 2010 | 90 | ||
Estimated Amortization Expense (in millions) | ||||
| 2007 | $ | 608 | ||
| 2008 | 566 | |||
| 2009 | 545 | |||
| 2010 | 533 | |||
| 2011 | 439 | |||
| (in millions) | United States | Europe | Japan | Inter-Continental | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of December 31, 2003 | $ | 1,088 | $ | 115 | $ | 39 | $ | 33 | |||||
| Purchase price adjustments | (3 | ) | (4 | ) | |||||||||
| Goodwill acquired | 320 | 48 | 8 | 24 | |||||||||
| Contingent consideration | 35 | 8 | |||||||||||
| Foreign currency translation | 1 | ||||||||||||
| Balance as of December 31, 2004 | $ | 1,440 | $ | 160 | $ | 55 | $ | 57 | |||||
| Purchase price adjustments | (35 | ) | (4 | ) | (1 | ) | (2 | ) | |||||
| Goodwill acquired | 19 | 3 | 3 | 9 | |||||||||
| Contingent consideration | 189 | 26 | 5 | 14 | |||||||||
| Balance as of December 31, 2005 | $ | 1,613 | $ | 185 | $ | 62 | $ | 78 | |||||
(in millions) | United States | Europe | Japan | Inter-Continental | |||||||||
Balance as of December 31, 2004 | $ | 1,440 | $ | 160 | $ | 55 | $ | 57 | |||||
| Purchase price adjustments | (35 | ) | (4 | ) | (1 | ) | (2 | ) | |||||
| Goodwill acquired | 19 | 3 | 3 | 9 | |||||||||
| Contingent consideration | 189 | 26 | 5 | 14 | |||||||||
Balance as of December 31, 2005 | $ | 1,613 | $ | 185 | $ | 62 | $ | 78 | |||||
| Purchase price adjustments | (4 | ) | |||||||||||
| Goodwill acquired | 7,642 | 3,700 | 387 | 625 | |||||||||
| Contingent consideration | 278 | 40 | 5 | 17 | |||||||||
Balance as of December 31, 2006 | $ | 9,529 | $ | 3,925 | $ | 454 | $ | 720 | |||||
acquisitions properly.
The Company
Futurethe following:
(in millions) | 2006 | 2005 | |||||
| Commercial paper | $ 149 | ||||||
| Other current debt obligations | $ | 7 | 7 | ||||
| 7 | 156 | ||||||
| Term loan | 5,000 | ||||||
| Abbott loan | 900 | ||||||
| Senior notes | 3,050 | 1,850 | |||||
| Fair value adjustment * | (12 | ) | 14 | ||||
| Discounts | (52 | ) | (7 | ) | |||
| Other | 9 | 7 | |||||
| 8,895 | 1,864 | ||||||
$ | 8,902 | $ | 2,020 | ||||
| * | Represents unamortized (losses) gains on interest rate swaps used to hedge the fair value of certain of our senior notes. See Note G - Financial Instruments for further discussion regarding the treatment of our interest rate swaps. |
| | Payments Due by Period | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 1 Year or less | 2-3 Years | 4-5 Years | After 5 Years | Total | ||||||||||
| Debt principal* | $ | 156 | $ | 4 | $ | 2 | $ | 1,852 | $ | 2,014 | |||||
| Interest payments | 100 | 200 | 200 | 846 | 1,346 | ||||||||||
| Debt, including interest | $ | 256 | $ | 204 | $ | 202 | $ | 2,698 | $ | 3,360 | |||||
Payments Due by Period | |||||||||||||||||||
(in millions) | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | |||||||||||||
| Term loan | $ | 650 | $ | 650 | $ | 1,700 | $ | 2,000 | $ | 5,000 | |||||||||
| Abbott loan | 900 | 900 | |||||||||||||||||
| Senior notes | 850 | $ | 2,200 | 3,050 | |||||||||||||||
$ | 650 | $ | 650 | $ | 1,700 | $ | 3,750 | $ | 2,200 | $ | 8,950 | ||||||||
Revolving Credit Facilities
During 2005, the Company refinanced itsa $5.0 billion five-year term loan and a $700 million 364-day interim credit facility loan from a syndicate of commercial and investment banks, as well as a $900 million subordinated loan from Abbott. In addition, we terminated our existing revolving credit facilities and established a new $2.0 billion revolving credit facility. In May 2006, we repaid and terminated the $700 million 364-day interim credit facility loan. We are permitted to extendprepay the term loan and Abbott loan prior to maturity with no penalty or premium.
The Company's Our credit facilities provide borrowing capacity and support itsour commercial paper program. The Company hadIn March 2006, we repaid $149 million ofin commercial paper borrowings that were outstanding at December 31, 2005 at a weighted average interest rate of 4.11 percent and $280 million outstanding at December 31, 2004 at a weighted average interest rate of 2.44 percent. In September 2005, the Companywe repaid 45 billion Japanese yen (approximately $400 million) in credit facility borrowings outstanding at a weighted average interest rate of 0.37 percent.
During 2005, the Company decreased its
2006.
credit provided by banks and
credit and bank guarantees were immaterial at December 31, 2005.
The Company
any sinking fund requirements. These are publicly registered securities. In our subordinated indebtedness, which includes our $900 million note from Abbott. Our senior notes at December 2005, the Company announced its intent to supplement the terms31, 2006 consist of the Company'sfollowing:
Amount (in millions) | Issuance Date | Maturity Date | Semi-annual Coupon Rate | ||||||||||
| January 2011 Notes | $ | 250 | November 2004 | January 2011 | 4.25% | ||||||||
June 2011 Notes | 600 | June 2006 | June 2011 | 6.0% | |||||||||
| June 2014 Notes | 600 | June 2004 | June 2014 | 5.45% | |||||||||
| November 2015 Notes | 400 | November 2005 | November 2015 | 5.5% | |||||||||
| June 2016 Notes | 600 | June 2006 | June 2016 | 6.4% | |||||||||
| January 2017 Notes | 250 | November 2004 | January 2017 | 5.125% | |||||||||
| November 2035 Notes | 350 | November 2005 | November 2035 | 6.25% | |||||||||
The remainder of the Company's outstanding borrowings, including capital lease arrangements, was immaterial at December 31, 2005 and December 31, 2004.
| | 2005 | 2004 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||
| Assets | ||||||||||||
| Foreign exchange contracts | $ | 176 | $ | 176 | $ | 70 | $ | 70 | ||||
| Interest rate swap contracts | 21 | 21 | 32 | 32 | ||||||||
| Liabilities | ||||||||||||
| Long-term debt—fixed-rate | $ | 1,862 | $ | 1,859 | $ | 1,135 | $ | 1,140 | ||||
| Foreign exchange contracts | 55 | 55 | 129 | 129 | ||||||||
| Interest rate swap contracts | 7 | 7 | 1 | 1 | ||||||||
2006 | 2005 | ||||||||||||
(in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
Assets | |||||||||||||
| Foreign exchange contracts | $ | 71 | $ | 71 | $ | 176 | $ | 176 | |||||
| Interest rate swap contracts | 21 | 21 | |||||||||||
Liabilities | |||||||||||||
| Long-term debt | $ | 8,895 | $ | 8,862 | $ | 1,862 | $ | 1,859 | |||||
| Foreign exchange contracts | 27 | 27 | 55 | 55 | |||||||||
| Interest rate swap contracts | 11 | 11 | 7 | 7 | |||||||||
The Company develops, manufactures
The Company estimates
notes.
The Company manages its
hedged. Changes in currency exchange rates related to any unhedged transactions may impact the Company'sour earnings and cash flows.
The Company uses
The Company uses
To
the Company recordedor losses as other long-term assets and $1comprehensive income, net of tax, until the hedged cash flow takes place. At December 31, 2006, we recorded a loss of $7 million, net of unrealized losses recorded astax, in other long-term liabilitiescomprehensive income to recognize the fair value of the interest ratethese swaps. The Company
2004.
| (in millions) | Operating Leases | ||
|---|---|---|---|
| 2006 | $ | 47 | |
| 2007 | 34 | ||
| 2008 | 22 | ||
| 2009 | 6 | ||
| 2010 | 3 | ||
| Thereafter | 2 | ||
| Total minimum lease payments | $ | 114 | |
The Company's
(in millions) | ||||
| 2007 | $ | 61 | ||
| 2008 | 47 | |||
| 2009 | 24 | |||
| 2010 | 11 | |||
| 2011 | 5 | |||
| Thereafter | 36 | |||
$ | 184 | |||
2005.
| (in millions) | 2005 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Domestic | $ | (126 | ) | $ | 353 | $ | 231 | ||
| Foreign | 1,017 | 1,141 | 412 | ||||||
| $ | 891 | $ | 1,494 | $ | 643 | ||||
(in millions) | 2006 | 2005 | 2004 | |||||||
| Domestic | $ | (4,535 | ) | $ | (126 | ) | $ | 353 | ||
| Foreign | 1,000 | 1,017 | 1,141 | |||||||
$ | (3,535 | ) | $ | 891 | $ | 1,494 | ||||
| (in millions) | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Current | |||||||||||
| Federal | $ | 153 | $ | 245 | $ | 159 | |||||
| State | 37 | 20 | 7 | ||||||||
| Foreign | 69 | 137 | 36 | ||||||||
| $ | 259 | $ | 402 | $ | 202 | ||||||
| Deferred | |||||||||||
| Federal | $ | (25 | ) | $ | 73 | $ | (27 | ) | |||
| State | (1 | ) | 4 | (1 | ) | ||||||
| Foreign | 30 | (47 | ) | (3 | ) | ||||||
| 4 | 30 | (31 | ) | ||||||||
| $ | 263 | $ | 432 | $ | 171 | ||||||
(in millions) | 2006 | 2005 | 2004 | |||||||
Current | ||||||||||
| Federal | $ | 251 | $ | 136 | $ | 233 | ||||
| State | 53 | 37 | 20 | |||||||
| Foreign | 158 | 86 | 149 | |||||||
| $ | 462 | $ | 259 | $ | 402 | |||||
Deferred | ||||||||||
| Federal | $ | (421 | ) | $ | (25 | ) | $ | 73 | ||
| State | (24 | ) | (1 | ) | 4 | |||||
| Foreign | 25 | 30 | (47 | ) | ||||||
| (420 | ) | 4 | 30 | |||||||
$ | 42 | $ | 263 | $ | 432 | |||||
The reconciliation of income taxes at the federal statutory rate to the actual provision for income taxes is as follows:
| | 2005 | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|---|
| U.S. federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |
| State income taxes, net of federal benefit | 3.0 | % | 1.1 | % | 0.6 | % | |
| Effect of foreign taxes | (34.3 | %) | (13.5 | %) | (8.8 | %) | |
| Non-deductible merger expenses | 9.9 | % | 1.5 | % | 2.0 | % | |
| Research credit | (1.6 | %) | (1.4 | %) | (1.6 | %) | |
| Legal settlement | 10.2 | % | 1.8 | % | |||
| Extraordinary dividend from subsidiaries | (0.7 | %) | 4.1 | % | |||
| Sale of intangible assets | 5.9 | % | |||||
| Other, net | 2.1 | % | 0.3 | % | (0.6 | %) | |
| 29.5 | % | 28.9 | % | 26.6 | % | ||
2006 | 2005 | 2004 | |
| U.S. federal statutory income tax rate | (35.0%) | 35.0% | 35.0% |
| State income taxes, net of federal benefit | 0.5% | 3.0% | 1.1% |
| Effect of foreign taxes | (6.1%) | (31.9%) | (12.4%) |
| Non-deductible acquisition expenses | 40.8% | 9.9% | 1.5% |
| Research credit | (0.6%) | (1.6%) | (1.4%) |
| Valuation allowance | 2.2% | (0.7%) | (0.6%) |
| Tax liability release on unremitted earnings | (3.8%) | ||
| Legal settlement | 10.2% | 1.8% | |
| Extraordinary dividend from subsidiaries | (0.7%) | 4.1% | |
| Sale of intangible assets | 3.3% | 5.9% | |
| Other, net | (0.1%) | 0.4% | (0.2%) |
1.2% | 29.5% | 28.9% |
| (in millions) | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|
| Deferred Tax Assets | ||||||||
| Inventory costs, intercompany profit and related reserves | $ | 142 | $ | 175 | ||||
| Tax benefit of net operating loss, capital loss and tax credits | 154 | 170 | ||||||
| Reserves and accruals | 125 | 145 | ||||||
| Restructuring and merger-related charges, including purchased research and development | 144 | 161 | ||||||
| Unrealized losses on derivative financial instruments | 30 | |||||||
| Other | 53 | 60 | ||||||
| 618 | 741 | |||||||
| Less: valuation allowance on deferred tax assets | 17 | 23 | ||||||
| $ | 601 | $ | 718 | |||||
| Deferred Tax Liabilities | ||||||||
| Property, plant and equipment | $ | 10 | $ | 19 | ||||
| Intangible assets | 453 | 432 | ||||||
| Unremitted earnings of subsidiaries | 133 | 233 | ||||||
| Litigation settlement | 24 | 23 | ||||||
| Unrealized gains on available-for-sale securities | 14 | 1 | ||||||
| Unrealized gains on derivative financial instruments | 39 | |||||||
| Other | 38 | 28 | ||||||
| 711 | 736 | |||||||
| $ | (110 | ) | $ | (18 | ) | |||
(in millions) | 2006 | 2005 | |||||
| Deferred tax assets | |||||||
| Inventory costs, intercompany profit and related reserves | $ | 241 | $ | 142 | |||
| Tax benefit of net operating loss, capital loss and tax credits | 188 | 154 | |||||
| Reserves and accruals | 291 | 125 | |||||
| Restructuring and acquisition-related charges, including purchased research and development | 108 | 144 | |||||
| Litigation and product liability reserves | 114 | ||||||
| Investment write-down | 78 | ||||||
| Stock-based compensation expense | 57 | ||||||
| Other | 5 | 53 | |||||
| 1,082 | 618 | ||||||
| Less: valuation allowance on deferred tax assets | 97 | 17 | |||||
$ | 985 | $ | 601 | ||||
| Deferred tax liabilities | |||||||
| Property, plant and equipment | $ | 76 | $ | 10 | |||
| Intangible assets | 3,053 | 453 | |||||
| Unremitted earnings of subsidiaries | 133 | ||||||
| Litigation settlement | 24 | 24 | |||||
| Unrealized gains on available-for-sale securities | 10 | 14 | |||||
| Unrealized gains on derivative financial instruments | 19 | 39 | |||||
| Other | 4 | 38 | |||||
3,186 | 711 | ||||||
$ | (2,201 | ) | $ | (110 | ) | ||
deferred tax liability that it had established at December 31, 2004 by $6 million for a technical correction made to the American Jobs Creation Act.
operations. In 2005, the Companywe repatriated earnings of non-U.S. subsidiaries for which itwe had previously accrued tax liabilities. The resulting tax liabilities associated with this repatriation were $127 million. In addition, during 2005, the Company made a decision to repatriate additional amounts from certain of its non-U.S. operations. In connection with this decision, the Company established a deferred tax liability of $27 million that it believes is adequate to cover the taxes related to this repatriation. The tax liability the Company accrued for earnings of non-U.S. subsidiaries to be remitted in the future is $133 million at December 31, 2005.
At December 31, 2005, the Company had U.S. tax net operating loss, capital loss and tax credit carryforwards, the tax effect of which is $103 million. In addition, the Company had foreign tax net operating loss carryforwards, the tax effect of which is $51 million. These carryforwards will expire periodically beginning in 2006. The Company established a valuation allowance of $17 million against these carryforwards. The decrease in the valuation allowance from 2004 to 2005 is primarily attributable to utilization of foreign tax credits and foreign net operating losses reserved for in prior years.
The income tax provision of the unrealized gain or loss component of other comprehensive income was $82 million in 2005, $30 million in 2004 and $5 million in 2003.
paid as a result of such claims and litigation and, therefore, additional losses may be accrued in the future. See Note
A - Significant Accounting Policies for further discussion on our policy for accounting for legal, product liability and security claims. On March 21, 1997, the Company (through its subsidiaries) filed a suit against Johnson & Johnson (through its subsidiaries) in Italy seeking a declaration[Table of noninfringement for the NIR® stent relative to one of the European patents licensed to Ethicon, Inc. (Ethicon), a subsidiary of Johnson & Johnson, and a declaration of invalidity. A technical expert was appointed by the Court and a hearing was held on January 30, 2002. A decision was rendered on September 16, 2004, finding the NIR® stent does not infringe the European patent licensed to Ethicon. A decision with respect to invalidity has not yet been issued.
Contents]
On March 30, 2000, the Company (through its subsidiary) filed suit for patent infringement against two subsidiaries of Cordis alleging that Cordis' Bx Velocity® stent delivery system infringes a published utility model owned by Medinol and exclusively licensed to the Company. The complaint was filed in the District Court of Dusseldorf, Germany seeking monetary and injunctive relief. A hearing was held on March 15, 2001, and on June 6, 2001, the Court issued a written decision that Cordis' Bx Velocity stent delivery system infringes the Medinol published utility model. Cordis appealed the decision of the German court. A hearing on the appeal originally scheduled for April 3, 2003 was suspended until decisions were rendered in two actions pending in the U.S. District Court of New York between Medinol and the Company. On October 19, 2004, Medinol filed an Intervention action requesting that the Court declare that the Company is not entitled to bring the infringement claim against Cordis and to declare that Cordis infringes the Medinol utility model. As a result of the Company's settlement with Medinol in September 2005, the Company assigned all of its rights to bring the suit and rights to damages to Medinol.
an amended complaint alleging that two additional patents owned by the Companyus are infringed by the Cordis products. A bench trial on interfering patent issues was held December 5, 2005 and on September 19, 2006, the filing of post trial briefsCourt found there to be no interference. Trial is in process. A trialscheduled to begin on infringement has not yet been scheduled.
October 9, 2007.
has not yet been scheduled.
scheduled.
Court of Brussels, Belgium seeking preliminary cross-border, injunctive and monetary relief and sought an expedited review of the claims by the Court. A separate suit was filed in the District Court of Brussels, Belgium against nine additional Johnson & Johnson subsidiaries. On February 9, 2004, theThe Belgium Court linked all Johnson & Johnson entities into a single action. A hearing was held on June 7, 2004, and on June 21, 2004, the Courtaction but dismissed the case for failure to satisfy the requirements for expedited review without commenting on the merits of the claims. On August 5, 2004, the Companywe refiled the suit on the merits against the same Johnson & Johnson subsidiaries in the District Court of Brussels, Belgium seeking cross-border, injunctive and monetary relief for infringement of the same European patent. A hearing date has not yet been set.scheduled. In December 2005, the Johnson & Johnson subsidiaries filed a nullity action in France and, in January 2006, the same Johnson & Johnson subsidiaries filed nullity actions in Italy and Germany.
We have filed a counterclaim infringement action in Italy.
A hearing on this appeal was held on November 2, 2006 and a decision is expected on March 15, 2007.
On February 15, 2007, the Court decided to appoint a technical expert. A hearing date has not yet been scheduled.
filed a motion to dismiss the complaint on November 15, 2006. Johnson & Johnson filed its opposition to the motion on January 9, 2007, and defendants filed their reply on January 31, 2007. A hearing on the motion to dismiss was held on February 28, 2007. The judge took the matter under advisement, and stayed discovery pending his decision on the motion.
On January 15, 2004, Medtronic Vascular, Inc., a subsidiary of Medtronic, filed suit against the Company and SCIMED alleging the Company's Express® coronary stent and Express2™ coronary stentour balloon products infringe four U.S. patents owned by Medtronic Vascular. The suit was filed in the District Court of Delaware seeking monetary and injunctive relief. Cross-motions for summary judgment were filed and hearings were held on October 21 and 22, 2004. On January 5, 2005, the Court found the Express coronary stent and Express2 coronary stent not to infringe the patents and on February 2, 2005, issued final judgment in favor of the Company. Medtronic appealed the judgment on March 16, 2005. A hearing on the appeal has been scheduled for April 5, 2006.
Litigation Relating to Advanced Neuromodulation Systems, Inc.
On April 21, 2004, Advanced Neuromodulation Systems, Inc. (ANSI) filed suit against Advanced Bionics, a subsidiary of the Company, alleging that its Precision® spinal cord stimulation system infringes a U.S. patent owned by ANSI. The suit also included allegations of misappropriation of trade secrets and tortious interference with a contract. The suit was filed in the U.S. District Court for the Eastern District of Texas seeking monetary and injunctive relief.
Litigation with Medinol Ltd.
On September 10, 2002, the Company filed suit against Medinol alleging Medinol's NIRFlex™ stent and NIRFlex™ Royal stent products infringe two patents owned by the Company. The suit was filed in Dusseldorf, Germany seeking monetary and injunctive relief. On October 28, 2003, the German Court found that Medinol infringed one of the two patents owned by the Company. On December 8, 2003, the Company filed an appeal relative to the other patent. Subsequently, Medinol filed an appeal relative to the one patent found to be infringed. A hearing was held on both appealsbegin on April 14, 2005. The Court had requested an expert to provide more evidence. A hearing has not yet been scheduled.
On September 25, 2002, the Company filed suit against30, 2007.
Ltd.
Other Patent Litigation
The arbitration hearing is scheduled to begin on September 17, 2007.
August 17, 2006. On December 14, 2006, a decision was rendered upholding the trial court ruling.
two additional U.S. patents owned by ev3. A trial has not yet been scheduled.
of unenforceability. A trial has been scheduled for June 5, 2007.
On November 4, 2004, Applied Hydrogel Technology (AHT) and Dr. Lih-Bin Shih filed a complaint against Medluminal Systems, Inc., InterWest Partners, the Company and three individuals alleging that certain of Medluminal's products infringe a patent owned by AHT. The complaint also includes claims of misappropriation of trade secrets and conversion against the Company and certain of the other defendants. The suit was filed in the U.S. District Court for the Southern District of California seeking monetary and injunctive relief. On February 15, 2005, the case was stayed pending arbitration proceedings. In January 2006, the parties agreed to dismiss the case, and on February 23, 2006, the casestay was dismissedlifted. Subsequently, Micrus provided a covenant not to sue us with prejudice.
On February 1, 2005,respect to one of the Company and Angiotech Pharmaceuticals, Inc. filed suit against Conor Medical System, Inc. in The Hague, The Netherlands seeking a declaration that Conor's drug-eluting stent products infringe patents owned by Angiotech and licensed to the Company.Micrus patents. A hearingtrial date has not yet been scheduled.
On November 8, 2005, the Company and Scimed filed suit against Conor alleging that certain of Conor's stent and drug-coated stent products infringe a patent owned by the Company. The complaint was filed in the U.S. District Court for the District of Delaware seeking monetary and injunctive relief. On December 30, 2005, Conor answered the complaint, denying the allegations.
set.
preliminary injunction. The Company plansWe and Angiotech have appealed the Court’s decision, and the parties plan to pursue normal infringement proceedings against Occam in The Netherlands.
seeking a declaration that Sahajanand’s drug-eluting stent products infringe patents owned by Angiotech and licensed to us. On May 3, 2006, the Court found that the asserted claims were infringed and valid, and provided for injunctive and monetary relief. On July 13, 2006, Sahajanand appealed the Court’s decision. A hearing on the appeal has not been scheduled.
On April 4, 2005, the Company and Angiotech filed suit against Sahajanand Medical Technologies Pvt. Ltd. in The Hague, Netherlands seeking a declaration that Sahajanand's drug-eluting stent products infringe patents owned by Angiotech and licensed to the Company. A hearing is scheduled for March 10, 2006.
On May 19, 2005, G. David Jang, M.D. filed suit against the Company alleging breach of contract relating to certain patent rights assigned to the Company covering stent technology. The suit was filed in the U.S. District Court, Central District of California seeking monetary damages and recision of the contract. On June 24, 2005, the Company answered, denying the allegations, and filed a counterclaim.
On September 7, 2005, Dr. Shaun L. W. Samuels filed suit against the Company alleging misappropriation of trade secrets, unfair competition and that one of the Company's development-stage products infringes a patent owned by Dr. Samuels. The suit was filed in the U.S. District Court, Eastern District of Texas seeking monetary damages and injunctive relief. On November 2, 2005, the Company answered and filed counterclaims for declaratory judgment of non-infringement and invalidity. Trial is expected to begin in December 2006.
on January 3, 2008.
In October 1998, the Company recalled its NIR ON® Ranger with Sox coronary stent delivery system following reports of balloon leaks. Since November 1998, the U.S. Department of Justice had been conducting an investigation primarily regarding: the shipment, sale and subsequent recall of the NIR ON® Ranger with Sox stent delivery system; aspects of its relationship with Medinol, the vendor of the stent; and related events. On June 24, 2005, the Company entered into a civil settlement with the U.S. Department of Justice. As part of the agreement, the Company agreed to pay $74 million. Also pursuant to the agreement, the Department of Justice filed a complaint in the U.S. District Court for the District of Massachusetts together with a Notice of Dismissal with prejudice. No charges were brought against the Company or any employee. The settlement involves no admission of any wrongdoing by the Company or any of its employees. The Company believes it acted legally, responsibly and appropriately at all times.
Other Proceedings
mainly on events that occurred subsequent to the parties'parties’ agreement to stay the action. The plaintiffs'defendants filed a motion remains pending.
to dismiss the amended complaint on or about June 30, 2006. The motion was denied without prejudice at a hearing on October 20, 2006, and the Court ordered that the amended complaint be deemed a demand for our Board of Directors to consider taking action in connection with the allegations of the amended complaint. The Court stayed the litigation until March 9, 2007.
letters.
A consolidated amended complaint was filed on April 17, 2006. The consolidated amended complaint alleges that we made material misstatements and omissions by failing to disclose the supposed merit of the Medinol litigation and DOJ investigation relating to the 1998 NIR ON® Ranger with Sox stent recall, problems with the TAXUS® drug-eluting coronary stent systems that led to product recalls, and our ability to satisfy FDA regulations concerning medical device quality. The consolidated amended complaint seeks unspecified damages, interest, and attorneys’ fees. The defendants filed a motion to dismiss the consolidated amended complaint on June 8, 2006. A hearing on the motion was held on January 30, 2007.
alleges that the defendants breached their fiduciary duties to the Plans' participants, failed to disclose adverse information about the Company to the Plans' participants and imprudently made contributions to the Company's 401(k) plan and GESOP in the form of Company stock. The complaint seeks unspecified damages, and equitable and injunctive relief. On January 26, 2006, February 8, 2006, February 14, 2006, and February 23, 2006 and March 3, 2006, Robert Hochstadt, Jeff Klunke, Kirk Harvey, and Michael Lowe and Douglas Fletcher, respectively, on behalf of themselves and others similarly situated, filed purported class action complaints in the same courtCourt on behalf of the participants and beneficiaries in the Company's Plans. These complaints allegeour Plans alleging similar misconduct under ERISA and seekseeking similar relief as in the Larson lawsuit. On April 3, 2006, the Court issued an order consolidating the actions and appointing Jeffrey Klunke and Michael Lowe as interim lead plaintiffs. On August 23, 2006, plaintiffs filed a consolidated complaint that purports to bring a class action on behalf of all participants and beneficiaries of our 401(k) Plan during the period May 7, 2004 through January 26, 2006 alleging that we, our 401(k) Administrative and Investment Committee (the Committee), members of the Committee, and certain directors violated certain provisions of ERISA. The complaint alleges, among other things, that the defendants breached their fiduciary duties to the 401(k) Plan’s participants. The complaint seeks equitable and monetary relief.
Defendants filed a motion to dismiss on October 10, 2006. Plaintiffs filed their opposition memorandum on December 15, 2006, and defendants filed their reply on January 16, 2007. A hearing has not yet been scheduled.
U. S. District Court for the Southern District of New York. The complaint alleges that we breached the Agreement and Plan of Merger among Boston Scientific Corporation, Advanced Bionics Corporation, the Bionics Trust, Alfred E. Mann, Jeffrey H. Greiner, and David MacCallum, collectively in their capacity as Stockholders’ Representative, and others dated May 28, 2004 (“the Merger Agreement”) or, alternatively, the covenant of good faith and fair dealing. The complaint seeks injunctive and other relief. On February 20, 2007, the Court entered a preliminary injunction prohibiting Boston Scientific from taking certain actions until it completes specific actions described in the Merger Agreement. On February 22, 2007, the plaintiffs filed a motion for leave to amend their complaint to add rescission of the Merger Agreement as an additional possible remedy. That motion has not yet been briefed. No scheduling order has been entered by the court, and no trial date has been set.
Justice, which we paid in 2005.
The Company is
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'sour stockholders. At December 31, 20052006 and December 31, 2004, the Company2005, we had no shares of preferred stock issued or outstanding.
The Company is
definition of retirement to conform to the definition generally used in our stock option plans subsequent to May 2001. As a result of these modifications, we recorded a $90 million charge ($60 million after-tax) in 2004. The Company paid a two-for-onekey assumptions in estimating the charge were the anticipated retirement age and the expected exercise patterns for the individuals whose options we modified.
The Companyduring 2006. We repurchased approximately 25 million shares of itsour common stock at an aggregate cost of $734 million in 2005, and 10 million shares of itsour common stock at an aggregate cost of $360 million in 2004, and 22 million shares of its common stock at an aggregate cost of $570 million in 2003.2004. Since 1992, the Company haswe have repurchased approximately 132 million shares of itsour common stock and hashave approximately 2412 million shares of common stock held in treasury at year end. year-end.
The Company's 1995,
(in millions) | ||||
| Cost of products sold | $ | 15 | ||
| Selling, general and administrative expenses | 74 | |||
| Research and development expenses | 24 | |||
| Loss before income taxes | 113 | |||
| Income tax benefit | 32 | |||
| Net loss | $ | 81 | ||
| Net loss per common share - basic | $ | 0.06 | ||
| Net loss per common share - assuming dilution | $ | 0.06 | ||
During the fourth quarter of 2004, the Company modified certain of its stock option plans principallybased on the fair values at the grant date consistent with the methodology prescribed by Statement No. 123, we would have reported net income and net income per share as the following pro forma amounts:
Year Ended December 31, | |||||||
(in millions, except per share data) | 2005 | 2004 | |||||
| Net income, as reported | $ | 628 | $ | 1,062 | |||
| Add: Stock-based employee compensation expense included in net income, net of related tax effects | 13 | 62 | |||||
| Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax benefits | (74 | ) | (67 | ) | |||
Pro forma net income | $ | 567 | $ | 1,057 | |||
| Net income per common share | |||||||
| Basic | |||||||
| Reported | $ | 0.76 | $ | 1.27 | |||
| Pro forma | $ | 0.69 | $ | 1.26 | |||
| Assuming dilution | |||||||
| Reported | $ | 0.75 | $ | 1.24 | |||
| Pro forma | $ | 0.68 | $ | 1.24 | |||
Year Ended December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
| Options granted (in thousands) | 5,438 | 7,983 | 2,101 | |||||||
| Weighted-average exercise price | $ | 21.48 | $ | 30.12 | $ | 39.72 | ||||
| Weighted-average grant-date fair value | $ | 7.61 | $ | 12.18 | $ | 14.36 | ||||
Black-Scholes Assumptions | ||||||||||
| Expected volatility | 30 | % | 37 | % | 47 | % | ||||
| Expected term (in years) | 5 | 5 | 5 | |||||||
| Risk-free interest rate | 4.26% - 5.18 | % | 3.37% - 4.47 | % | 2.24% - 4.05 | % | ||||
our grant-date fair value assessment.
| | 2005 | 2004 | 2003 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (option amounts in thousands) | Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | |||||||||
| Outstanding at January 1 | 49,028 | $ | 17.84 | 66,103 | $ | 15.16 | 84,218 | $ | 12.23 | ||||||
| Granted | 7,983 | 30.12 | 2,101 | 39.72 | 6,857 | 33.33 | |||||||||
| Exercised | (5,105 | ) | 11.93 | (18,296 | ) | 10.64 | (24,023 | ) | 10.10 | ||||||
| Canceled | (1,621 | ) | 28.24 | (880 | ) | 18.41 | (949 | ) | 13.86 | ||||||
| Outstanding at December 31 | 50,285 | 20.06 | 49,028 | 17.84 | 66,103 | 15.16 | |||||||||
| Exercisable at December 31 | 36,072 | $ | 15.96 | 34,776 | $ | 14.32 | 42,126 | $ | 12.01 | ||||||
Options (in thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in millions) | ||||||||||
Outstanding at January 1, 2004 | 66,103 | $ | 15 | ||||||||||
| Granted | 2,101 | 40 | |||||||||||
| Exercised | (18,296 | ) | 11 | ||||||||||
| Cancelled/forfeited | (880 | ) | 18 | ||||||||||
Outstanding at December 31, 2004 | 49,028 | $ | 18 | ||||||||||
| Granted | 7,983 | 30 | |||||||||||
| Exercised | (5,105 | ) | 12 | ||||||||||
| Cancelled/forfeited | (1,621 | ) | 28 | ||||||||||
Outstanding at December 31, 2005 | 50,285 | $ | 20 | ||||||||||
| Guidant converted options | 39,649 | 13 | |||||||||||
| Granted | 5,438 | 21 | |||||||||||
| Exercised | (10,548 | ) | 11 | ||||||||||
| Cancelled/forfeited | (1,793 | ) | 25 | ||||||||||
Outstanding at December 31, 2006 | 83,031 | $ | 18 | 5 | $ | 233 | |||||||
Exercisable at December 31, 2006 | 68,718 | $ | 16 | 4 | $ | 231 | |||||||
Expected to vest as of December 31, 2006 | 80,802 | $ | 18 | 5 | $ | 232 | |||||||
Non-Vested Stock Award Units (in thousands) | Weighted Average Grant-Date Fair Value | ||||||
| Balance at January 1, 2006 | 3,834 | $ | 30 | ||||
| Granted | 6,580 | 23 | |||||
| Vested | (52 | ) | 32 | ||||
| Forfeited | (487 | ) | 28 | ||||
| Balance at December 31, 2006 | 9,875 | $ | 26 | ||||
| Stock price on date of grant | $ | 24.42 | ||
| Expected volatility | 30 | % | ||
| Expected term (in years) | 3.84 | |||
| Risk-free rate | 4.64 | % |
| | Stock Options Outstanding | Stock Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Options (in thousands) | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Options (in thousands) | Weighted Average Exercise Price | |||||||
| $0.00–8.00 | 3,612 | 4.96 | $ | 6.21 | 3,612 | $ | 6.21 | |||||
| 8.01–16.00 | 17,179 | 4.10 | 11.92 | 17,081 | 11.91 | |||||||
| 16.01–24.00 | 14,339 | 5.15 | 19.78 | 12,068 | 19.49 | |||||||
| 24.01–32.00 | 4,725 | 9.38 | 27.21 | 178 | 31.04 | |||||||
| 32.01–40.00 | 9,284 | 8.37 | 34.59 | 3,098 | 34.77 | |||||||
| 40.01–48.00 | 1,146 | 8.43 | 41.95 | 35 | 41.67 | |||||||
| 50,285 | 5.85 | $ | 20.06 | 36,072 | $ | 15.96 | ||||||
of December 31, 2006:
Unrecognized Compensation Cost (in millions)* | Weighted Average Remaining Vesting Period (in years) | ||||||
| Stock options | $ | 63 | |||||
| Non-vested stock awards | 131 | ||||||
| $ | 194 | 3.3 | |||||
2006.
| | 2005 | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|---|
| Dividend yield | 0 | % | 0 | % | 0 | % | |
| Expected volatility | 36.64 | % | 46.85 | % | 49.28 | % | |
| Risk-free interest rate | 3.76 | % | 3.50 | % | 3.13 | % | |
| Forfeitures | 687,000 | 615,000 | 632,000 | ||||
| Expected life | 5 | 5 | 5 | ||||
The weighted average grant-date fair value per share of options granted, calculated using the Black-Scholes option-pricing model, was $12.18 in 2005, $14.36 in 2004 and $14.96 in 2003.
In 2005, the Company granted approximately 3.9 million deferred stock units to its employees under its stock incentive plans at a weighted average fair value of $30.77. The market value of the shares underlying the deferred stock units was approximately $119 million on the date of issuance. The deferred stock units vest over a period of five to six years. The amount was recorded as deferred compensation and shown as a separate component of stockholders' equity. The deferred compensation is being amortized to expense over the vesting period, and the related expense amounted to $17 million for 2005. During 2005, the Company reversed approximately $5 million of deferred compensation associated with forfeitures of these deferred stock units.
Global Employee Stock Ownership PlanPurchase Plans
The Company's GESOP
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 percent of the fair market value of the Company'sour common stock at the beginning or end of each offering period, whichever is less.
For the offering period beginning July 1, 2007, the employee stock purchase plan was amended to reduce the employee discount for purchasing stock through the program from 15 percent to 10 percent. At December 31, 2006, there were approximately 21 million shares available for future issuance under the employee stock purchase plan.
| | 2005 | 2004 | 2003 | |||
|---|---|---|---|---|---|---|
| Shares issued | 1,445,000 | 1,004,000 | 1,228,000 | |||
| Range of purchase prices | $20.82 - $22.95 | $30.22 - $30.81 | $12.21 - $18.27 | |||
At December 31, 2005, there were approximately two million
2006 | 2005 | 2004 | ||||||||
| Shares issued | 2,765,000 | 1,445,000 | 1,004,000 | |||||||
| Range of purchase prices | $14.20 - $14.31 | $20.82 - $22.95 | $30.22 - $30.81 | |||||||
plan. The fair value of the unallocated shares at December 31, 2006 was $44 million.
| (in millions, except per share data) | 2005 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Basic | |||||||||
| Net income | $ | 628 | $ | 1,062 | $ | 472 | |||
| Weighted average shares outstanding | 825.8 | 838.2 | 821.0 | ||||||
| Net income per common share | $ | 0.76 | $ | 1.27 | $ | 0.57 | |||
| Assuming Dilution | |||||||||
| Net income | $ | 628 | $ | 1,062 | $ | 472 | |||
| Weighted average shares outstanding | 825.8 | 838.2 | 821.0 | ||||||
| Net effect of common stock equivalents | 11.8 | 19.5 | 24.4 | ||||||
| Total | 837.6 | 857.7 | 845.4 | ||||||
| Net income per common share | $ | 0.75 | $ | 1.24 | $ | 0.56 | |||
Potential
(in millions, except per share data) | 2006 | 2005 | 2004 | |||||||
Basic | ||||||||||
| Net (loss) income | $ | (3,577 | ) | $ | 628 | $ | 1,062 | |||
| Weighted average shares outstanding | 1,273.7 | 825.8 | 838.2 | |||||||
Net (loss) income per common share | $ | (2.81 | ) | $ | 0.76 | $ | 1.27 | |||
Assuming dilution | ||||||||||
| Net (loss) income | $ | (3,577 | ) | $ | 628 | $ | 1,062 | |||
| Weighted average shares outstanding | 1,273.7 | 825.8 | 838.2 | |||||||
| Net effect of common stock equivalents | 11.8 | 19.5 | ||||||||
| Total | 1,273.7 | 837.6 | 857.7 | |||||||
Net (loss) income per common share | $ | (2.81 | ) | $ | 0.75 | $ | 1.24 | |||
year.
The Company has
We measure and evaluate our reportable segments based on segment income. This segment income excludes certain corporate and manufacturing expenses associated with divisions that do not meet the definition of a segment, as defined by FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. In addition, certain transactions or adjustments that our chief operating decision maker considers to be non-recurring and/or non-operational, as well as stock-based compensation and amortization expense are excluded from segment income. Although we exclude these amounts from segment income, they are included in reported consolidated net (loss) income and are included in the reconciliation below.distribution that would occur if the segments were not
| (in millions) | United States | Europe | Japan | Inter-Continental | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | ||||||||||||||||
| Net sales | $ | 3,852 | $ | 1,145 | $ | 579 | $ | 643 | $ | 6,219 | ||||||
| Depreciation | 18 | 4 | 3 | 4 | 29 | |||||||||||
| Operating income allocated to reportable segments | 1,803 | 598 | 308 | 295 | 3,004 | |||||||||||
| 2004 | ||||||||||||||||
| Net sales | $ | 3,502 | $ | 980 | $ | 602 | $ | 501 | $ | 5,585 | ||||||
| Depreciation | 9 | 5 | 3 | 2 | 19 | |||||||||||
| Operating income allocated to reportable segments | 1,753 | 507 | 343 | 227 | 2,830 | |||||||||||
| 2003 | ||||||||||||||||
| Net sales | $ | 1,924 | $ | 729 | $ | 568 | $ | 348 | $ | 3,569 | ||||||
| Depreciation | 8 | 3 | 3 | 2 | 16 | |||||||||||
| Operating income allocated to reportable segments | 682 | 356 | 323 | 148 | 1,509 | |||||||||||
(in millions) | United States | Europe | Japan | Inter- Continental | Total | |||||||||||
2006 | ||||||||||||||||
| Net sales | $ | 4,840 | $ | 1,529 | $ | 630 | $ | 783 | $ | 7,782 | ||||||
| Depreciation | 70 | 12 | 4 | 6 | 92 | |||||||||||
| Segment income | 2,273 | 767 | 337 | 382 | 3,759 | |||||||||||
2005 | ||||||||||||||||
| Net sales | $ | 3,852 | $ | 1,152 | $ | 579 | $ | 675 | $ | 6,258 | ||||||
| Depreciation | 18 | 5 | 3 | 4 | 30 | |||||||||||
| Segment income | 1,815 | 644 | 308 | 332 | 3,099 | |||||||||||
2004 | ||||||||||||||||
| Net sales | $ | 3,502 | $ | 982 | $ | 602 | $ | 497 | $ | 5,583 | ||||||
| Depreciation | 10 | 5 | 3 | 3 | 21 | |||||||||||
| Segment income | 1,753 | 557 | 343 | 232 | 2,885 | |||||||||||
| (in millions) | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Sales | |||||||||||
| Total net sales allocated to reportable segments | $ | 6,219 | $ | 5,585 | $ | 3,569 | |||||
| Foreign exchange | 64 | 39 | (93 | ) | |||||||
| $ | 6,283 | $ | 5,624 | $ | 3,476 | ||||||
| Depreciation | |||||||||||
| Total depreciation allocated to reportable segments | $ | 29 | $ | 19 | $ | 16 | |||||
| Manufacturing operations | 89 | 113 | 69 | ||||||||
| Corporate expenses and foreign exchange | 44 | 31 | 22 | ||||||||
| $ | 162 | $ | 163 | $ | 107 | ||||||
| Income before Income Taxes | |||||||||||
| Total operating income allocated to reportable segments | $ | 3,004 | $ | 2,830 | $ | 1,509 | |||||
| Manufacturing operations | (448 | ) | (394 | ) | (305 | ) | |||||
| Corporate expenses and foreign exchange | (476 | ) | (522 | ) | (455 | ) | |||||
| Litigation-related charges | (780 | ) | (75 | ) | (15 | ) | |||||
| Purchased research and development | (276 | ) | (65 | ) | (37 | ) | |||||
| Costs of certain retirement benefits | (17 | ) | (110 | ) | |||||||
| Stock-compensation charge for certain modifications | (90 | ) | |||||||||
| Costs of certain business optimization initiatives | (39 | ) | |||||||||
| 968 | 1,574 | 697 | |||||||||
| Other income (expense) | (77 | ) | (80 | ) | (54 | ) | |||||
| $ | 891 | $ | 1,494 | $ | 643 | ||||||
(in millions) | 2006 | 2005 | 2004 | |||||||
Net sales | ||||||||||
| Total net sales allocated to reportable segments | $ | 7,782 | $ | 6,258 | $ | 5,583 | ||||
| Foreign exchange | 39 | 25 | 41 | |||||||
$ | 7,821 | $ | 6,283 | $ | 5,624 | |||||
Depreciation | ||||||||||
| Total depreciation allocated to reportable segments | $ | 92 | $ | 30 | $ | 21 | ||||
| Manufacturing operations | 76 | 89 | 113 | |||||||
| Depreciation included in special charges | 17 | |||||||||
| Corporate expenses and foreign exchange | 66 | 43 | 29 | |||||||
$ | 251 | $ | 162 | $ | 163 | |||||
(Loss) income before income taxes | ||||||||||
| Total operating income allocated to reportable segments | $ | 3,759 | $ | 3,099 | $ | 2,885 | ||||
| Manufacturing operations | (617 | ) | (449 | ) | (396 | ) | ||||
| Corporate expenses and foreign exchange | (920 | ) | (409 | ) | (462 | ) | ||||
| Purchase accounting adjustments | (4,453 | ) | (276 | ) | (65 | ) | ||||
Acquisition-related and other costs | ||||||||||
| Integration costs | (61 | ) | ||||||||
| CRM technology offering charge | (31 | ) | ||||||||
| Certain retirement benefits | (17 | ) | (110 | ) | ||||||
| Business optimization charges | (19 | ) | (39 | ) | ||||||
| TriVascular AAA program cancellation costs, including amortization expense | 13 | |||||||||
| Litigation-related charges | (780 | ) | (75 | ) | ||||||
| Amortization and stock-based compensation expense | (620 | ) | (161 | ) | (203 | ) | ||||
| (2,949 | ) | 968 | 1,574 | |||||||
| Other income (expense) | (586 | ) | (77 | ) | (80 | ) | ||||
$ | (3,535 | ) | $ | 891 | $ | 1,494 | ||||
| (in millions) | 2005 | 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net Sales | ||||||||||
| Cardiovascular | $ | 4,907 | $ | 4,490 | $ | 2,504 | ||||
| Endosurgery | 1,228 | 1,088 | 972 | |||||||
| Neuromodulation | 148 | 46 | N/A | |||||||
| $ | 6,283 | $ | 5,624 | $ | 3,476 | |||||
| Long-Lived Assets | ||||||||||
| United States | $ | 795 | $ | 660 | $ | 536 | ||||
| Ireland | 140 | 149 | 169 | |||||||
| Other foreign countries | 76 | 61 | 39 | |||||||
| $ | 1,011 | $ | 870 | $ | 744 | |||||
(in millions) | 2006 | 2005 | 2004 | |||||||
Net sales | ||||||||||
| Interventional Cardiology | $ | 3,612 | $ | 3,783 | $ | 3,451 | ||||
| Cardiac Rhythm Management | 1,371 | N/A | N/A | |||||||
| Other | 1,258 | 1,124 | 1,039 | |||||||
Cardiovascular | 6,241 | 4,907 | 4,490 | |||||||
Endosurgery | 1,346 | 1,228 | 1,088 | |||||||
Neuromodulation | 234 | 148 | 46 | |||||||
Worldwide | $ | 7,821 | $ | 6,283 | $ | 5,624 | ||||
Long-lived assets | ||||||||||
| United States | $ | 1,343 | $ | 795 | $ | 660 | ||||
| Ireland | 199 | 140 | 149 | |||||||
| Other foreign countries | 184 | 76 | 61 | |||||||
$ | 1,726 | $ | 1,011 | $ | 870 | |||||
Guidant Transaction
Outstanding Guidant stock options at the closing date of the merger will be converted into options to purchase Boston Scientific common stock, with appropriate adjustments made to the number of shares and the exercise price under those options based on the value of the merger consideration.
In addition, the combined company will incur integration and restructuring costs following the completion of the acquisition as Boston Scientific integrates certain operations of Guidant. Although Boston Scientific and Guidant expect that the realization of efficiencies related to the integration of the businesses may offset incremental transaction, merger-related and restructuring costs over time, no assurances can be made that this net benefit will be achieved in the near term, or at all.
In connection with the financing of the cash portion of the purchase price, various banks have committed to providing up to $14 billion in financing, which includes a $7 billion 364-day interim credit facility, a $5 billion five-year term loan facility and a $2 billion five-year revolving credit facility. The interim credit facility, term loan and revolving credit facility will bear interest at LIBOR plus an interest margin between 0.30 percent (high A rating) and 0.85 percent (low BBB rating). The interest margin will be based on the hightest two out of three of the Company's long-term, senior unsecured,
corporate credit ratings from Moody's Investor Service Inc., Standard & Poor's Rating Services and Fitch Ratings. Of the $14 billion available pursuant to the commitment letter, the Company expects to borrow approximately $7.1 billion to finance the cash portion of the Guidant acquisition purchase price, which includes the $5 billion five-year term loan facility and $2.1 billion in borrowings under the 364-day interim credit facility. The Company also expects to use the $900 million loan from Abbott, for a total of $8 billion in borrowings to finance the cash portion of the purchase price. In 2006, the Company anticipates filing a new public registration statement with the SEC under which it intends to issue senior notes in order to refinance any borrowings outstanding under the interim credit facility and to register shares that it will issue to Abbott. The new five-year revolving credit facility will replace the Company's existing $2 billion credit facilities. The Company also plans to use cash on hand and cash from the Abbott transaction to fund the cash portion of the Guidant purchase price.
Boston Scientific's offer to acquire Guidant was made after the execution of a merger agreement among Guidant, Johnson & Johnson and Shelby Merger Sub, Inc. On January 25, 2006, Guidant terminated the Johnson & Johnson merger agreement and, in connection with the termination, Guidant paid Johnson & Johnson a termination fee of $705 million. Boston Scientific then reimbursed Guidant for the full amount of the termination fee paid to Johnson & Johnson.
In conjunction with the proposed acquisition, Boston Scientific's authorized common stock will be increased from 1,200,000,000 shares to 2,000,000,000 shares. The transaction is subject to customary closing conditions, including clearances under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the European Union merger control regulation, as well as approval of Boston Scientific and Guidant shareholders. The transaction is not subject to any financing condition. Subject to these conditions, it is currently expected that the acquisition will occur during the week of April 3, 2006.
In January 2006, Boston Scientific and Abbott entered into the Abbott transaction agreement pursuant to which, among other things, Abbott agreed to purchase the Guidant vascular and endovascular businesses for:
The Abbott transaction closing is subject to, among other things, the satisfaction or waiver of all of the conditions to close the Guidant transaction and is expected to occur prior to the closing date of the acquisition.
In addition to receiving the initial payment of $4.1 billion at the Abbott transaction closing, Abbott has agreed to lend Boston Scientific $900 million on a subordinated basis. The loan will be payable on the fifth anniversary of the Abbott transaction closing and interest will accrue on the outstanding principal amount at a rate of 4.00 percent per annum.
At the Abbott transaction closing, Abbott will also purchase $1.4 billion in shares of Boston Scientific common stock based on a per share purchase price of the lower of (i) $25.00 and (ii) the average closing price of Boston Scientific common stock during the five consecutive trading day period ending three trading days prior to the Abbott transaction closing. In addition, 18 months after the Abbott transaction closing, Boston Scientific will issue to Abbott additional shares of Boston Scientific
common stock having an aggregate value of up to $60 million (based on the average closing price of Boston Scientific common stock during the 20 consecutive trading day period ending five trading days prior to the date of issuance of those shares) to reimburse Abbott for the cost of borrowing $1.4 billion to purchase the shares of Boston Scientific common stock.
Abbott has agreed not to sell any of these shares of Boston Scientific common stock for six months following the Abbott transaction closing unless the average price per share of Boston Scientific common stock over any consecutive 20 day trading period exceeds $30.00. In addition, during the 18-month period following the Abbott transaction closing, Abbott will not, in any one-month period, sell more than 8.33 percent of these shares of Boston Scientific common stock. Abbott must apply a portion of the net proceeds from its sale of these shares of Boston Scientific common stock in excess of specified amounts, if any, to reduce the principal amount of the loan from Abbott to Boston Scientific.
As a part of the Abbott transaction, Boston Scientific and Abbott will also enter into supply and license and technology transfer arrangements with respect to the everolimus-based drug-eluting stent system currently in development by Guidant. This supply and license agreement will serve as collateral for the $900 million loan.
Outstanding options held by Guidant employees transferred to Abbott will, at Boston Scientific's election, either be converted into a number of shares of Boston Scientific common stock with a fair market value as of the Abbott transaction closing date equal to the excess of the aggregate fair market value of the Guidant common stock subject to the option over the exercise price of the option, net of applicable withholding taxes or exchanged for a cash payment equal to the excess of the aggregate fair market value of the Guidant common stock subject to the option over the aggregate exercise price of the option, net of any applicable withholding taxes.
As a result of the proposed Guidant Transaction and Abbott Transaction, current Boston Scientific stockholders will own a smaller percentage of Boston Scientific following the acquisition. The Company expects its weighted average shares outstanding, assuming dilution, to increase from approximately 840 million for 2005 to approximately 1.4 billion following the acquisition.
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
| Three Months Ended | March 31, | June 30, | September 30, | December 31, | |||||
|---|---|---|---|---|---|---|---|---|---|
| 2005 | |||||||||
| Net sales | $1,615 | $1,617 | $1,511 | $1,540 | |||||
| Gross profit | 1,271 | 1,260 | 1,168 | 1,198 | |||||
| Operating income (loss) | 513 | 326 | (336 | ) | 465 | ||||
| Net income (loss) | 358 | 205 | (269 | ) | 334 | ||||
| Net income (loss) per common share—basic | $0.43 | $0.25 | $(0.33 | ) | $0.41 | ||||
| Net income (loss) per common share—assuming dilution | $0.42 | $0.24 | $(0.33 | ) | $0.40 | ||||
| 2004 | |||||||||
| Net sales | $1,082 | $1,460 | $1,482 | $1,600 | |||||
| Gross profit | 790 | 1,097 | 1,173 | 1,272 | |||||
| Operating income | 264 | 448 | 358 | 504 | |||||
| Net income | 194 | 313 | 258 | 297 | |||||
| Net income per common share—basic | $0.23 | $0.37 | $0.31 | $0.35 | |||||
| Net income per common share—assuming dilution | $0.23 | $0.36 | $0.30 | $0.35 | |||||
Three Months Ended | March 31, | June 30, | Sept 30, | Dec 31, | |||||||||
2006 | |||||||||||||
| Net sales | $ | 1,620 | $ | 2,110 | $ | 2,026 | $ | 2,065 | |||||
| Gross profit | 1,246 | 1,433 | 1,396 | 1,539 | |||||||||
| Operating income (loss) | 497 | (3,925 | ) | 195 | 284 | ||||||||
| Net income (loss) | 332 | (4,262 | ) | 76 | 277 | ||||||||
| Net income (loss) per common share - basic | $ | 0.40 | $ | (3.21 | ) | $ | 0.05 | $ | 0.19 | ||||
| Net income (loss) per common share - assuming dilution | $ | 0.40 | $ | (3.21 | ) | $ | 0.05 | $ | 0.19 | ||||
2005 | |||||||||||||
| Net sales | $ | 1,615 | $ | 1,617 | $ | 1,511 | $ | 1,540 | |||||
| Gross profit | 1,271 | 1,260 | 1,168 | 1,198 | |||||||||
| Operating income (loss) | 513 | 326 | (336 | ) | 465 | ||||||||
| Net income (loss) | 358 | 205 | (269 | ) | 334 | ||||||||
| Net income (loss) per common share - basic | $ | 0.43 | $ | 0.25 | $ | (0.33 | ) | $ | 0.41 | ||||
| Net income (loss) per common share - assuming dilution | $ | 0.42 | $ | 0.24 | $ | (0.33 | ) | $ | 0.40 | ||||
During 2004, the Company recorded after-tax charges In 2005, amortization expense, net of $64tax, was $108 million in the second quarter, $146 million in the third quarter and $122 million in the fourth quarter. Thestock-based compensation expense, net charges for the year consisted of: a provision for a civil settlement; an enhancement to the Company's 401(k) Plan; purchased research and development; a charge relating to taxes on the approximately $1 billion of cash that the Company repatriated in 2005 under the American Jobs Creation Acttax, was $14 million.
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2005,2006, our disclosure controls and procedures were effective.
| John E. Abele | 69 | Director, Founder | ||
| Ursula M. Burns | 48 | Director, President, Business Group Operations and Corporate Senior Vice President, Xerox Corporation | ||
| Nancy-Ann DeParle | 50 | Director, Managing Director, CCMP Capital Advisors, LLC | ||
| Joel L. Fleishman | 72 | Director, Professor of Law and Public Policy, Duke University | ||
| Marye Anne Fox, Ph.D. | 59 | Director, Chancellor of the University of California, San Diego | ||
| Ray J. Groves | 71 | Director, Retired Chairman and Chief Executive Officer, Ernst & Young | ||
| Kristina M. Johnson | 49 | Director, Dean of the Pratt School of Engineering, Duke University | ||
| Ernest Mario, Ph.D. | 68 | Director, Chairman, | ||
| N.J. Nicholas, Jr. | 67 | Director, Private Investor | ||
| 65 | Director, Founder, Chairman of the Board | |||
| John E. Pepper | 68 | Director, Chief Executive Officer, National Underground Railroad Freedom Center | ||
| Uwe E. Reinhardt, Ph.D. | 69 | Director, Professor of Political Economy and Economics and Public Affairs, Princeton University | ||
| Senator Warren B. Rudman | 76 | Director, Former U.S. Senator, Of Counsel, Paul, Weiss, Rifkind, Wharton, & Garrison LLP | ||
| James R. Tobin | 62 | |||
EXECUTIVE OFFICERS | ||||
| Donald Baim, M.D. | 57 | Senior Vice President, Chief Medical and Scientific Officer | ||
| Mark Bartell | 46 | Senior Vice President, Global Sales & Marketing for CRM | ||
| Lawrence C. Best | 57 | Executive Vice President-Finance & Administration and Chief Financial Officer |
| Brian R. Burns | 42 | Senior Vice President, Quality | ||
| Fredericus A. Colen | 54 | Executive Vice President, Operations and Technology, CRM and Chief Technology Officer | ||
| Paul Donovan | 51 | Senior Vice President, Corporate Communications | ||
| 49 | ||||
| Jeffrey H. Goodman | 59 | |||
| William H. (Hank) Kucheman | 57 | Senior Vice President | ||
| Paul A. LaViolette | 49 | Chief Operating Officer | ||
| William McConnell | 57 | Senior Vice President, Administration, CRM | ||
| Stephen F. Moreci | 55 | Senior Vice President and Group President, Endosurgery | ||
| Kenneth J. Pucel | 40 | |||
| Lucia L. Quinn | 53 | Executive Vice President, | ||
| Paul W. Sandman | 59 | Executive Vice President, Secretary and General Counsel | ||
Committees of the Board of Directors
Our Board of Directors has standing Audit, Executive Compensation and Human Resources, Nominating and Governance, and Finance and Strategic Investment Committees. Joel L. Fleishman, Marye Anne Fox, Ernest Mario, John E. Pepper and Uwe E. Reinhardt currently serve on the Audit Committee. Warren B. Rudman, Ursula M. Burns and Ray J. Groves currently serve on the Executive Compensation and Human Resources Committee. Ursula M. Burns, Marye Anne Fox, Ernest Mario, N.J. Nicholas, Jr., John E. Pepper and James R. Tobin currently serve on the Finance and Strategic Investment Committee. Joel L. Fleishman, Ray J. Groves, Uwe E. Reinhardt and Warren B. Rudman currently serve on the Nominating and Governance Committee. Our committee charters are available free of charge on our website (www.bostonscientific.com). Information on our website or connected to our website is not incorporated by reference into this Form 10-K.
Executive Committee
We also have an Executive Committee, comprised of all of our executive officers, which provides guidance to management on our operational strategy. In January 2005, Lucia L. Quinn joined Boston Scientific and in March 2005, she was appointed to the Executive Committee as our Executive Vice President of Human Resources. On March 31, 2005, Robert G. MacLean, our Executive Vice President—Human Resources, retired from Boston Scientific. On December 31, 2005, James H. Taylor, Jr., our Executive Vice President, Corporate Operations, retired from Boston Scientific. There can be no assurance that these or any future changes to our Executive Committee will not have a material impact on our results of operations.
Biographical Summaries
Ursula M. Burns has been a Director of Boston Scientific since 2002. Ms. Burns is President of Business Group Operations and Corporate Senior Vice President of Xerox Corporation. Ms. Burns joined Xerox in 1980, subsequently advancing through several engineering and management positions. Ms. Burns served as Vice President and General Manager, Departmental Business Unit from 1997 to 1999, Senior Vice President, Worldwide Manufacturing and Supply Chain Services from 1999 to 2000, Senior Vice President, Corporate Strategic Services from 2000 to October 2001 and President of Document Systems and Solutions Group until her most recent appointment in January 2003. She serves on the boards of directors of American Express Corporation, the National Association of Manufacturers, the F.I.R.S.T. Foundation and the Rochester Business Alliance and is a Trustee of the University of Rochester. Ms. Burns earned a B.S. degree from Polytechnic Institute of New York and an M.S. degree in mechanical engineering from Columbia University.
Research from 1994 to 1998. Dr. Fox is the Co-Chair of the National Academy of Sciences'Sciences’ Government-University-Industry Research Roundtable and serves on President Bush'sBush’s Council of Advisors on Science and Technology. She has served as the Vice Chair of the National Science Board. She also serves on the boards of a number of other scientific, technological and civic organizations, and is a member of the boards of directors of Red Hat Corp., Pharmaceutical Product Development, Inc., Burroughs-Wellcome Trust and the Camille and Henry Dreyfus Foundation. Dr. Fox also serves on the board of directors of W.R. Grace Co., a specialty chemical company that filed a petition for reorganization under Chapter 11 of the Federal Bankruptcy Code in April 2001. She has been honored by a wide range of educational and professional organizations, and she has authored more than 350 publications, including five books. Dr. Fox holds a B.S. in Chemistry from Notre Dame College, an M.S. in Organic Chemistry from Cleveland State University, and a Ph.D. in Organic Chemistry from Dartmouth College.
including President, U.S.C.I. Division, from July 1993 to November 1993, President, U.S.C.I. Angioplasty Division, from January 1993 to July 1993, Vice President and General Manager, U.S.C.I. Angioplasty Division, from August 1991 to January 1993, and Vice President U.S.C.I. Division, from January 1990 to August 1991. Mr. LaViolette received his B.A. degree from Fairfield University and an M.B.A. degree from Boston College.
Mr. Nicholas is also a member of the Massachusetts Business Roundtable, Massachusetts Business High Technology Council, CEOs for Fundamental Change in Education and the Boys and Girls Club of Boston. After college, Mr. Nicholas served as an officer in the U.S. Navy, resigning his commission as lieutenant in 1966. Mr. Nicholas received a B.A. degree from Duke University, and an M.B.A. degree from The Wharton School of the University of Pennsylvania. He is also the brother of N.J. Nicholas, Jr., one of our directors.
the firm, he served two terms as a U.S. Senator from New Hampshire from 1980 to 1992. He serves on the boards of directors of Collins & Aikman Corporation, Raytheon Corporation and several funds managed by the Dreyfus Corporation. He is the founding co-chairman of the Concord Coalition. Senator Rudman received a B.S. from Syracuse University and an LL.B. from Boston College Law School and served in the U.S. Army during the Korean War.
Mary E. Russell has been our Chief Medical Officer and Senior Vice President, Clinical and Regulatory since December 2004. Previously, Dr. Russell was our Senior Vice President and Chief Medical Officer of Cardiovascular Clinical Sciences from April 2004 to December 2004. From July 2001 until April 2004, Dr. Russell was our Vice President, Clinical Affairs, International and from August 2000 to July 2001, she was our Vice President, Cardiovascular Clinical Affairs. Prior to joining Boston Scientific, Dr. Russell was Medical Director and CV consultant at Parexel International and before that she held faculty positions at Harvard School of Public Health, the Harvard Medical School and hospital appointments at Brigham and Women's Hospital and Massachusetts General Hospital. Dr. Russell received her M.D. from Chicago Medical School.
James H. Taylor, Jr. joined Boston Scientific in August 1999 and was our Executive Vice President
1972 where he achieved the rank of lieutenant.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, our directors, executive officers and persons holding more than 10% of our common stock are required to report their ownership of our common stock and any changes in that ownership to the SEC. Specific due dates for these reports have been established and we are required to report any failure to file by these dates during 2005. To the best of our knowledge, all of these filing requirements were timely satisfied by our directors, executive officers and 10% stockholders with the exception of the following Form 4s filed late due to our administrative oversight: (i) one late Form 4 on behalf of Mr. Pucel and Dr. Russell reporting the withholding of restricted stock on January 3, 2005 to satisfy tax obligations upon vesting of a previously granted award, (ii) one late Form 4 on behalf of Mr. Ocwieja reporting a stock option grant on January 3, 2005, and (iii) one late Form 4 for each of Ms. Burns, Dr. Fox, Mr. Groves, Dr. Mario, Mr. N.J. Nicholas, Jr. and Sen. Rudman reporting the acquisition of stock equivalent units earned in connection with their directors' fees and participationset forth in our Deferred Compensation Program. In making these statements, we have relied upon the written representations of our directors, executive officers and 10% stockholders and copies of their reports that have beenProxy Statement to be filed with the SEC.
Code of Conduct
We have a Code of Conduct applicable to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, and other employees performing similar functions. A copy of our Code of ConductSEC on or about March 21, 2007, is available at www.bostonscientific.com. We will provide a copy of our Code of Conduct to any person free of charge upon written request to Investor Relations at Boston Scientific Corporation, One Boston Scientific Place, Natick, MA 01760-1537. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Conduct by posting that information on our website. Information on our website or connected to it is not incorporated by reference into this Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLEAs of December 31, 2005
The following tables show salaries, bonuses, options and other compensation earned or paid during the last three years, options granted in 2005 and options exercised in 2005 for our Chief Executive Officer and our next four most highly compensated executive officers in 2005 (the Named Officers).
* Paul LaViolette $2,689,000* Lawrence C. Best $1,344,500* Paul W. Sandman $1,075,600* Fredericus A. Colen $1,075,600
Shares will be issued to each of the recipients in accordance with the vesting schedule for the award. These deferred stock unit awards vest in five equal annual installments beginning with the second anniversary of the date of grant, July 1, 2007. In addition, all unvested units will vest upon the recipient's death or disability. Upon the recipient's retirement, one-third of the unvested units
will vest if he retires between January 1, 2006 through July 1, 2006, an additional one-third of the unvested units will vest if he retires between July 2, 2006 through July 1, 2007, and the remaining unvested units will vest if he retires on or after July 2, 2007. Prior to vesting, recipients will not have a right to vote these units or receive dividends if we declare and pay dividends.
| | Executive Retirement Plan(a) | Company Match (401(k) Plan) | Special Contribution (401(k) Plan)(b) | Excess Benefit Plan(c) | Term Life Insurance Premium(d) | Other Life Insurance Premium(e) | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| James R. Tobin | $1,125,091 | $12,600 | $19,800 | $15,563 | $7,920 | — | ||||||
| Paul A. LaViolette | $0 | $12,600 | $19,800 | $21,200 | — | $36,878 | ||||||
| Lawrence C. Best | $1,692,845 | $12,600 | $19,800 | $21,200 | $5,160 | — | ||||||
| Paul W. Sandman | $1,178,198 | $12,600 | $19,800 | $21,200 | — | $83,001 | ||||||
| Fredericus A. Colen | $0 | $12,600 | $19,800 | $13,000 | — | $52,895 | ||||||
The following table provides information on option grants made in 2005 to our Named Officers.
| | | Percent of Total Options Granted to Employees in 2005(2) | | | | | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Number of Shares Underlying Options Granted(1) | | | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(3) | ||||||||
| | Exercise or Base Price per Share | | ||||||||||
| | Expiration Date | |||||||||||
| Name | 5% | 10% | ||||||||||
| James R. Tobin | 0 | — | — | — | — | — | ||||||
| Paul A. LaViolette | 250,000 | 3.13 | % | $26.89 | 7/1/15 | $4,227,744 | $10,713,934 | |||||
| Lawrence C. Best | 125,000 | 1.57 | % | $26.89 | 7/1/15 | $2,113,872 | $5,356,967 | |||||
| Paul W. Sandman | 100,000 | 1.25 | % | $26.89 | 7/1/15 | $1,691,098 | $4,285,573 | |||||
| Fredericus A. Colen | 100,000 | 1.25 | % | $26.89 | 7/1/15 | $1,691,098 | $4,285,573 | |||||
TOTAL 2005 OPTION/SAR EXERCISES AND YEAR-END OPTION/SAR VALUESAs of December 31, 2005
The following table provides information on option exercises in 2005 by our Named Officers and the value of each Named Officer's unexercised options at December 31, 2005.
| Name | Shares Acquired on Exercise | Value Realized | Number Exercisable | Number Unexercisable | Value Exercisable(1) | Value Unexercisable(2) | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| James R. Tobin(1) | 0 | $0 | 3,050,000 | 425,000 | $28,533,116 | $271,000 | ||||||
| Paul A. LaViolette | 400,000 | $9,048,500 | 1,183,500 | 417,500 | $14,549,438 | $97,050 | ||||||
| Lawrence C. Best | 0 | $0 | 2,146,000 | 245,000 | $18,559,650 | $97,050 | ||||||
| Paul W. Sandman | 0 | $0 | 685,000 | 220,000 | $6,816,729 | $97,050 | ||||||
| Fredericus A. Colen | 0 | $0 | 148,174 | 250,000 | $1,182,306 | $194,100 | ||||||
EQUITY COMPENSATION PLANS
The following table summarizes information, as of December 31, 2005, relating to our equity compensation plans pursuant to which grants of options, restricted stock grants or other rights to acquire shares may be granted from time to time.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||
|---|---|---|---|---|---|---|
| Equity compensation plans approved by security holders(1) | 54,001,147 | $19.63 | 35,406,342 | |||
| Equity compensation plans not approved by security holders(2) | 0 | $0 | 0 | |||
| Total | 54,001,147 | $19.63 | 35,406,342 | |||
Executive Benefit Programs and Change of Control Arrangements
In May 2005, we adopted an Executive Retirement Plan which covers executive officers and division presidents. The Executive Retirement Plan provides retiring executive officers with a lump sum benefit of 2.5 months of salary for each completed year of service, up to a maximum of 36 months pay. The Executive Retirement Plan provides retiring division presidents with a lump sum benefit of 1.5 months of salary for each completed year of service, up to a maximum of 24 months pay. Receipt of payments under the Executive Retirement Plan will be conditioned upon the retiring employee's entering into a separation agreement with Boston Scientific, which would include a non-competition provision. To be considered retired under the Executive Retirement Plan, an employee's age plus his or her years of service with Boston Scientific must be at least 65 years (provided that the employee is at least 55 years old and has been with Boston Scientific for at least 5 years). In addition, the Executive Retirement Plan allows our Chief Executive Officer the discretion to cause Boston Scientific to enter into consulting arrangements with retiring executives. The consulting arrangement could provide for up to a $100,000 retainer for up to 50 days of specified consulting services and a $3,000 per diem fee
thereafter for services actually rendered for the first year and, for future years, a $2,000 per diem fee for all services actually rendered.
We make annual payments to certain executive vice presidents following their retirement or termination (other than for cause) equal to the premium for executive life insurance (plus a gross-up amount for tax purposes) for a period ending on the tenth anniversary of the policy initiation date or, in some circumstances, such other date as would allow the policy to become self-funding.
In addition to these agreements, our key executives, including our Named Officers, have retention and indemnification agreements with Boston Scientific. In general, the retention agreements entitle key executives to a lump sum payment of three times the executive's base salary and assumed on-plan incentive bonus (or prior year's bonus, if higher), if either the executive's employment is terminated (other than for cause) or his or her duties are diminished, in each event, following a change in control. The executive would also be entitled to continuation of health and other welfare benefits for three years. In addition, we would compensate the executive for any excise tax liability he or she may incur by reason of payments made under the agreement.
All stock options granted to our executive officers, including our Named Officers, under our 1992, 1995, 2000 and 2003 Long-Term Incentive Plans will become immediately exercisable in the event of a "change in control" or "Covered Transaction" as defined in each Long-Term Incentive Plan. Additionally, under certain circumstances in the event of a change in control or Covered Transaction, options granted under (i) our 1992 Long-Term Incentive Plan prior to October 31, 2001 will become immediately exercisable and the value of all outstanding stock options will be cashed out, (ii) our 1995 Long-Term Incentive Plan prior to October 31, 2001 will, unless otherwise determined by our Compensation Committee, become immediately exercisable and automatically converted into an option or other award of the surviving entity, and (iii) our 2000 Long-Term Incentive Plan prior to December 2000 will become immediately exercisable and/or converted into an option or other award of the surviving entity.
The Internal Revenue Service limits the amount of eligible earnings that can be subject to an employer match in qualified 401(k) retirement savings plans. As a result, certain of our employees are unable to take full advantage of our 6% matching contribution for their retirement savings. In June 2005, the Board authorized a non-qualified 401(k) Restoration Plan to supplement our existing 401(k) plan. The 401(k) Restoration Plan would enable our domestic employees, including our executive officers, whose base salary and commissions exceed $210,000 per year to make additional contributions for their retirement savings and to participate more fully in the 6% matching contribution, subject to an eligible earnings cap of three times the IRS statutory limit. Implementation of the 401(k) Restoration Plan was deferred as a result of recent regulations affecting deferred compensation plans.
In connection with the one-time special contribution we made to our 401(k) Retirement Savings Plan for the benefit of our employees announced in September 2004, we adopted in June of 2005 an Excess Benefit Plan. The Excess Benefit Plan is a non-qualified deferred compensation plan designed to provide specific supplemental benefits to those employees who would have exceeded the 2004 IRS contribution limits if the special contribution had been made to their 401(k) plan accounts. The Excess Benefit Plan was established to accept the "overflow" contributions on behalf of those employees, including our executive officers.
Pursuant to our Executive Allowance Plan, we provide a cash allowance to eligible employees in lieu of perquisites typically provided by other companies, such as company cars, health care costs not otherwise covered or tax planning services. Under this plan, our executive officers receive $25,000 per year and our division presidents receive $15,000 per year.
We also have an Executive Relocation Policy for our executive officers who are requested by us to move in connection with their current job and for newly hired employees who will become executive officers of Boston Scientific and who are required to move in connection with accepting a job with us. The policy covers reasonable expenses associated with the move and certain relocation services to minimize the inconvenience of moving.
Employment Contracts and Termination of Employment Arrangements
James R. Tobin served as our President and Chief Executive Officer under a letter agreement until March 17, 2004. Since that time, no new employment agreement has been executed, but in January 2006, Mr. Tobin agreed to extend his tenure as our President and Chief Executive Officer and on February 28, 2006, the Board of Directors approved a Long-Term Incentive Plan for Mr. Tobin. Under this Plan, Mr. Tobin will receive an award of 250,000 deferred stock units, 50% of which will be issued on December 31, 2008 and 50% of which will be issued on December 31, 2009.
In addition, Mr. Tobin would be eligible to receive up to 2,000,000 performance-based deferred stock units, 50% of which would be issued on December 31, 2008 in the event that shares of Boston Scientific common stock reach specified prices per share as set forth below and 50% of which would be issued on December 31, 2009 in the event that shares of Boston Scientific common stock reach specified prices per share as set forth below (units that do not vest on December 31, 2008 may vest on December 31, 2009 if the specified prices per share have been reached):
| Share Performance Price | % of Restrictions that Lapse | 12/31/08 Measurement Date | 12/31/09 Measurement Date | Total Shares Earned | ||||
|---|---|---|---|---|---|---|---|---|
| $75 and above | 100 | % | 1,000,000 | 1,000,000 | 2,000,000 | |||
| $60 | 80 | % | 800,000 | 800,000 | 1,600,000 | |||
| $50 | 60 | % | 600,000 | 600,000 | 1,200,000 | |||
| $40 | 40 | % | 400,000 | 400,000 | 800,000 | |||
| $35 | 20 | % | 200,000 | 200,000 | 400,000 | |||
| Below $35 | 0 | % | 0 | 0 | 0 | |||
During 2000, we provided a home improvement loan in the amount of $400,000 to Paul A. LaViolette, who is now our Chief Operating Officer. In accordance with the Sarbanes-Oxley Act of 2002, we did not modify or renew this loan and Mr. LaViolette repaid this loan in full in May 2005. We do not provide new loans to our executive officers.
In May 2005, Peter M. Nicholas, our co-founder and Chairman of the Board, and John E. Abele, our co-founder, retired as employees of Boston Scientific. In connection with their retirement:
one-time charitable donation of up to $1 million to any qualified charitable organization designated by Mr. Abele.
Both Mr. Nicholas and Mr. Abele continue to serve on our Board of Directors and will receive non-employee director compensation as described below.
On January 31, 2005, Dennis A. Ocwieja, our Senior Vice President, Regulatory Affairs and Quality, retired from Boston Scientific. In connection with his retirement, we entered into a separation agreement, which provides for a lump-sum payment (based on years of service) representing one-year's salary ($310,248.38 less applicable payroll withholding), annual payments equal to the premium for executive life insurance (plus a gross-up amount for tax purposes) until February 2010 and the transfer of certain office equipment. In addition, we paid Mr. Ocwieja an additional $100,000 for up to 50 days of transitional and consulting services from January 31, 2005 to January 31, 2006. If we request additional services during the one-year period beginning February 1, 2006, we have agreed to pay Mr. Ocwieja $2,000 per day for those services. The agreement also provided for a general release of claims by Mr. Ocwieja, a non-competition provision and other terms and conditions customary for agreements of this nature.
In March 2005, we entered into a separation agreement with Robert G. MacLean, our Executive Vice President—Human Resources, in connection with his retirement from Boston Scientific on March 31, 2005. The terms of this agreement provided for a lump-sum payment (based on years of service) representing two-years' salary ($760,073.08 less applicable payroll withholding), annual payments equal to the premium for executive life insurance (plus a gross-up amount for tax purposes) until 2008 and the transfer of certain office equipment. In addition, we paid Mr. MacLean an additional $100,000 for up to 50 days of transitional and consulting services for the period from March 31, 2005 to March 31, 2006. If we request additional services during the one-year period beginning April 1, 2006, we have agreed to pay Mr. MacLean $2,000 per day for these services. The agreement also provided for a general release of claims by Mr. MacLean, a non-competition provision and other terms and conditions customary for agreements of this nature.
On January 6, 2006, we entered into a separation agreement with James Taylor, Jr., our Executive Vice President, Corporate Operations, in connection with his retirement on December 31, 2005. The terms of this agreement provided for a lump sum payment of approximately $550,000, approximately $136,000 in relocation services, and annual payments equal to the premium for executive life insurance (plus a gross-up amount for tax purposes) of approximately $72,500 per year for the first seven years after his retirement and approximately $22,500 per year for the next two years thereafter, a total of approximately $552,500. In addition, Mr. Taylor received a special bonus of $550,000. In addition, we paid Mr. Taylor an additional $100,000 for up to 50 days of transitional and consulting services for the period from January 1, 2006 to January 1, 2007. If we request additional services during the one-year period beginning January 2, 2007, we have agreed to pay Mr. Taylor $2,000 per day for these services. The agreement also provided for a general release of claims by Mr. Taylor, a non-competition provision and other terms and conditions customary for agreements of this nature. In tribute to Mr. Taylor, the Board of Directors authorized Boston Scientific to make a donation of $100,000 to an independent charitable foundation to be formed by Mr. Taylor to grant scholarships to African-American high school students to attend college.
In May 2005, we issued Lucia Quinn, our Executive Vice President-Human Resources, 30,000 deferred stock units which vest in equal annual installments over three years beginning on May 31, 2006, the first anniversary of the award. If Ms. Quinn leaves Boston Scientific for any reason (other than her termination for cause), the restrictions on those deferred stock units would automatically lapse and we would be obligated to issue Ms. Quinn all of the shares issuable to her under this grant.
Directors Compensation
Employee Directors
Our directors who are also employees receive no additional compensation for serving on the Board or its Committees.
Non-employee Directors
We compensate our non-employee directors as follows:
In addition, we pay or reimburse our directors for transportation, hotel, food and other incidental expenses incurred in connection with attending Board and Committee meetings and participating in director education programs.
We grant options to purchase our common stock to our non-employee directors at fair market value on the date of the grant. The options become exercisable in three approximately equal installments, commencing on the first anniversary of the date of grant, and have a ten-year term. We also grant restricted stock awards to our non-employee directors at no charge, but they are subject to forfeiture restrictions. The shares become free from restriction upon the expiration of each director's current term of office. The annual option grant and restricted stock awards are generally made on the date of each Annual Meeting, but if a director is elected to the Board on a date other than the Annual Meeting, an option grant and restricted stock award is made on the date the director is first elected to the Board.
Non-employee directors may, by written election, defer receipt of all or a portion of the annual cash retainer, Committee chair fees and the restricted stock award under our Deferred Compensation Program until he or she retires from our Board. Cash amounts deferred can be invested in common stock equivalents or another investment option in which we credit the amount deferred, plus accrued interest (compounded annually based upon the Moody's Composite Yield on Seasoned Corporate Bonds as reported for the month of September of each calendar year). Amounts are only payable after a director's termination of Board service, and may be either paid as a lump sum or in installments previously specified by the director at the time of election.
Compensation Committee Interlocks and Insider Participation
The members of our Executive Compensation and Human Resources Committee are Warren B. Rudman, Ursula M. Burns and Ray J. Groves. None of these Committee members has ever been an officer or employee of Boston Scientific. To our knowledge, there were no other relationships involving members of the Compensation Committee or our other directors which require disclosure in this Annual Report as a Compensation Committee interlock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
Set
reference.
| Name and Address | Number of Shares Beneficially Owned | Percent of Shares Outstanding | ||
|---|---|---|---|---|
| John E. Abele c/o Boston Scientific Corporation One Boston Scientific Place Natick, MA 01760 | 58,801,038 | (1) | 7.2% | |
Robert M. Dombroff as Trustee of The Abele Children's Irrevocable Trust Dated October 29, 1979 c/o Bingham McCutchen LLP 1 State Street Hartford, CT 06103 | 65,450,657 | 7.8% | ||
Peter M. Nicholas c/o Boston Scientific Corporation One Boston Scientific Place Natick, MA 01760 | 107,058,477 | (2) | 13.0% | |
Promerica, L.P Peter M. Nicholas, General Partner c/o The Bollard Group One Joy Street Boston, MA 02108 | 98,475,630 | (3) | 12.0% | |
Barclays Global Investor N.A.(4) 45 Fremont Street San Francisco, CA 94105 | 67,573,461 | 8.2% | ||
Security Ownership of Executive Officers and Directors
The following table shows, as of January 31, 2006, the amount of our common stock beneficially owned by:
STOCK OWNERSHIP OF OFFICERS AND DIRECTORSAs of January 31, 2006
| Name | Number of Shares Beneficially Owned | Percent of Shares Outstanding | ||
|---|---|---|---|---|
| John E. Abele(1) | 58,801,038 | 7.2% | ||
| Ursula M. Burns(2) | 14,834 | * | ||
| Joel L. Fleishman(3) | 139,901 | * | ||
| Marye Anne Fox(4) | 18,648 | * | ||
| Ray J. Groves(5) | 36,334 | * | ||
| Ernest Mario(6) | 148,534 | * | ||
| N.J. Nicholas, Jr.(7) | 649,756 | * | ||
| Peter M. Nicholas(8) | 107,058,477 | 13.01% | ||
| John E. Pepper(9) | 35,734 | * | ||
| Uwe E. Reinhardt(10) | 39,334 | * | ||
| Warren B. Rudman(11) | 26,334 | * | ||
| James R. Tobin(12) | 3,215,977 | * | ||
| Lawrence C. Best(13) | 2,199,842 | * | ||
| Fredericus A. Colen(14) | 198,174 | * | ||
| Paul A. LaViolette(15) | 1,254,227 | * | ||
| Paul W. Sandman(16) | 736,350 | * | ||
| All directors and executive officers as a group (24 persons)(17) | 175,390,490 | 21.10% | ||
offered to non-employee directors. Also excludes 12,750 shares held by a charitable foundation of which Mr. Fleishman is the president and as to which Mr. Fleishman disclaims beneficial ownership.
sole voting but not investment power. Also includes 2,400 shares owned by Mr. Pepper's spouse as to which he disclaims beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
During 2005, we made payments of approximately $550,000
During 2005, we made payments of approximately $118,000 to Arnold & Porter LLP, a law firm of which the brother of Paul W. Sandman, our General Counsel, was the managing partner.
Several of our directors are affiliated with Duke University. Joel L. Fleishman has been employed by Duke University since 1971 and is currently a Professor of Law and Public Policy there. Ernest Mario is a Trustee of Duke University and Chairman of the Board of the Duke University Health System. Peter M. Nicholas received his B.A. degree from Duke University and is Chairman and a member of the executive committee of the Board of Trustees of Duke University. Uwe E. Reinhardt is
a Trustee of Duke University and the Duke University Health System. In addition, we do business in the ordinary coursebe filed with the medical center and other healthcare facilities at Duke University.
From time to time, our directorsSEC on or executive officers may invest in venture funds in which we are also an investor. These venture funds are generally managedabout March 21, 2007, is incorporated into this Annual Report on Form 10-K by unaffiliated third parties. Our decisions, and the decisions of our directors and officers, to invest in these ventures are made independently of each other.
Entities affiliated with our co-founders, Pete Nicholas and John Abele, have entered into voting agreements with Guidant Corporation pursuant to which each entity has agreed to vote the shares of Boston Scientific common stock beneficially owned by it (approximately 31% in the aggregate) in favor of (i) the proposed amendment of our certificate of incorporation to increase the number of shares we are authorized to issue from 1.2 billion shares to 2 billion shares and (ii) the issuance of shares of Boston Scientific common stock to Guidant shareholders in connection with the proposed acquisition of Guidant.
reference.
| Type of Fees | 2004 | 2005 | ||||
|---|---|---|---|---|---|---|
| Audit Fees (1) | $ | 3,354,000 | $ | 3,989,000 | ||
| Audit-Related Fees (2) | $ | 358,000 | $ | 314,000 | ||
| Tax Fees (3) | $ | 1,097,000 | $ | 902,000 | ||
| All Other Fees (4) | $ | 38,000 | $ | 38,000 | ||
| Total | $ | 4,847,000 | $ | 5,243,000 | ||
Audit Committee Pre-Approval Policy
It is the Audit Committee's policy to approve in advance the types and amounts of audit, audit-related, tax and any other servicesProxy Statement to be provided by our independent auditors. In situations where it is not possible to obtain full Audit Committee approval, the Committee has delegated authority to the Chairman of the Audit Committee to grant pre-approval of audit, audit-related, tax and all other services. Any pre-approval decisions by the Chairman are required to be reviewedfiled with the Audit Committee at its next scheduled meeting. The Audit Committee has approved all of Ernst & Young's services for 2004 and 2005 and, in doing so, has considered whether the provision of such servicesSEC on or about March 21, 2007, is compatible with maintaining auditor independence.
EXHIBIT NO. | ||||
TITLE | ||||
2.1 | Agreement and Plan of Merger, dated as of January 25, 2006, among Boston Scientific Corporation, Galaxy Merger Sub, Inc. and Guidant Corporation (Exhibit 2.1, Current Report on Form 8-K, dated January 25,2006, File No. 1-11083). | |||
| 3.1 | Second Restated Certificate of Incorporation of the Company, as amended (Exhibit 3.1, Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 3.2, Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 3.3, Annual Report on Form 10-K for the year ended December 31, 1998, and Exhibit 3.4, Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-11083). | |||
| 3.2 | Restated By-laws of the Company (Exhibit 3.2, Registration No. 33-46980). | |||
| 3.4 | Certificate of | |||
| 4.1 | Specimen Certificate for shares of the | ||
| 4.2 | Description of Capital Stock contained in Exhibits 3.1, 3.2 and | ||
Indenture dated as of June 25, 2004 between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank) (Exhibit 4.1, Current Report on Form 8-K dated June 25, 2004, File No. 1-11083). | |||
| 4.4 | Indenture dated as of November | ||
| 4.5 | Form of |
Form of Second Supplemental Indenture dated as of April 21, 2006 (Exhibit 99.6, Current Report on Form 8-K dated April 21, 2006, File No. 1-11083). | |||
| 4.7 | 5.45% Note due June 15, 2014 in the aggregate principal amount of $500,000,000 (Exhibit 4.2, Current Report on Form 8-K dated June 25, 2004, File No. 1-11083). | ||
| 4.8 | 5.45% Note due June 15, 2014 in the aggregate principal amount of $100,000,000 (Exhibit 4.3, Current Report on Form 8-K dated June 25, 2004, File No. 1-11083). | ||
| 4.9 | Form of Global Security for the 5.125% Notes due 2017 (Exhibit 4.3, Current Report on Form 8-K dated November | ||
| 4.10 | Form of Global Security for the 4.250% Notes due 2011 (Exhibit 4.2, Current Report on Form 8-K dated November | ||
| 4.11 | Form of Global Security for the 5.50% Notes due 2015, and form of Notice to the holders thereof (Exhibit 4.1, Current Report on Form 8-K dated November 17, 2005 and Exhibit 99.5, Current Report on Form 8-K dated April 21, 2006, File No. 1-11083). | ||
| 4.12 | Form of Global Security for the 6.25% Notes due 2035, and form of Notice to holders thereof (Exhibit 4.2, Current Report on Form 8-K dated November 17, 2005 | ||
| 4.13 | Indenture dated as of | ||
| 4.14 | Form of Global Security for the 6.00% Notes due 2011 (Exhibit 4.2, Current Report on Form 8-K dated June 9, 2006, File No. 1-11083). | ||
| 4.15 | Form of Global Security for the 6.40% Notes due 2016 (Exhibit 4.3, Current Report on Form 8-K dated June 9, 2006, File No. 1-11083). |
| 10.1 | Form of Credit and Security Agreement dated as of August 16, 2002 among Boston Scientific Funding Corporation, the Company, Blue Ridge Asset Funding Corporation, Victory Receivables Corporation The Bank of Tokyo-Mitsubishi Ltd., New York Branch and Wachovia Bank, N.A., as amended (Exhibit 10.1, Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, Exhibit 10.1, Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.01, Quarterly Report on Form 10-Q for quarter ended September 30, 2003, Exhibit 10.1, Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, Exhibit 10.1, Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and Exhibit 10.1, Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, Exhibit 10.1, Current Report on Form 8-K dated August 12, 2005, Exhibit 10.7, Current Report on Form 8-K dated March 20, 2006, Exhibit 10.1, Quarterly Report on Form 10-Q for quarter ended June 30, 2006, File No. 1-11083). | ||
Form of Omnibus Amendment dated as of December 21, 2006 among the Company, Boston Scientific Funding Corporation, Variable Funding Capital Company LLC, Victory Receivables Corporation and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (Amendment No. 1 to Receivable Sale Agreement and Amendment No. 9 to Credit and Security Agreement). | |||
| 10.3 | Form of Receivables Sale Agreement dated as of August 16, 2002 between the Company and each of its Direct or Indirect Wholly-Owned Subsidiaries that Hereafter Becomes a Seller Hereunder, as the Sellers, and Boston Scientific Funding Corporation, as the Buyer (Exhibit 10.2, Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 1-11083). | ||
| 10.4 | Form of Credit Agreement dated as of April 21, 2006 among the Company, BSC International Holding Limited, Merrill Lynch Capital Corporation, Bear Stearns Corporate Lending Inc., Deutsche Bank Securities Inc., Wachovia Bank, National Association, Bank of America, N.A., Banc of America Securities LLC, Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (Exhibit 99.1, Current Report on Form 8-K dated April 21, 2006, File No. 1-11083). | ||
| 10.5 | License Agreement among Angiotech Pharmaceuticals, Inc., Cook Incorporated and the Company dated July 9, 1997, and related Agreement dated December 13, 1999 (Exhibit 10.6, Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-11083). | ||
| 10.6 | Amendment between Angiotech Pharmaceuticals, Inc. and the Company dated November 23, 2004 modifying July 9, 1997 License Agreement among Angiotech Pharmaceuticals, Inc., Cook Incorporated and the Company (Exhibit 10.1, Current Report on Form 8-K dated November 23, 2004, File No. 1-11083). | ||
| 10.7 | Form of Offer Letter | ||
| 10.8 | |||
10.9 | Form of Deferred Stock Unit Agreement dated as of July 25, 2006 between Boston Scientific and Donald S. Baim, M.D. (Exhibit 10.3, Current Report on Form 8-K dated July 27, 200, File No. 1-11083). | ||
| 10.10 | Form of Indemnification Agreement between the Company and certain Directors and Officers (Exhibit 10.16, Registration No. 33-46980). | ||
| 10.11 | Form of Retention Agreement between the Company and certain Executive Officers, as amended (Exhibit | ||
| 10.12 | Form of Non-Qualified Stock Option Agreement (vesting over three years) (Exhibit 10.1, Current Report on Form 8-K dated December 10, 2004, File No. 1-11083). | ||
| 10.13 | Form of Non-Qualified Stock Option Agreement (vesting over four years) (Exhibit 10.2, Current Report on Form 8-K dated December 10, 2004, File No. 1-11083). | ||
| 10.14 | Form of Restricted Stock Award Agreement (Exhibit 10.3, Current Report on Form 8-K dated December 10, 2004, File 1-11083). | ||
| 10.15 | Form of Deferred Stock Unit Award Agreement (Exhibit 10.4, Current Report on Form 8-K dated December 10, 2004, File 1-11083). | ||
| *10.16 | Form of Deferred Stock Unit Award Agreement (vesting over four years). | ||
| 10.17 | Form of Non-Qualified Stock Option Agreement (Non-employee Directors) (Exhibit 10.5, Current Report on Form 8-K dated December 10, 2004, File 1-11083). | ||
| 10.18 | Form of Restricted Stock Award Agreement (Non-Employee Directors) (Exhibit 10.6, Current Report on Form 8-K dated December 10, 2004,File 1-11083). | ||
| 10.19 | Form of Deferred Stock Unit Award Agreement (Non-Employee Directors) (Exhibit 10.7, Current Report on Form 8-K dated December 10, 2004, File No. 1-11083). | ||
| 10.20 | Boston Scientific Corporation 401(k) Retirement Savings Plan, as Amended and Restated, Effective January 1, 2001, and amended (Exhibit 10, 12, Annual Report on Form 10-K for the year ended December | ||
| *10.21 | Form of Fifth Amendment to Boston Scientific Corporation 401(k) Retirement Savings Plan, effective as of January 1, 2006. | ||
| 10.22 | 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, Exhibit 10.21, Annual Report on Form 10-K for the year ended December 31, 2000, Exhibit 10.22, Annual Report on Form 10-K for the year ended December 31, 2000 and Exhibit 10.14, Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-11083). | ||
| *10.23 | Boston Scientific Corporation 2006 Global Employee Stock Ownership Plan. | ||
| *10.24 | First Amendment of the Boston Scientific Corporation 2006 Global Employee Stock Ownership Plan. | ||
| 10.25 | 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. | ||
| 10.26 | 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, Exhibit 10.3, Annual Report on Form 10-K for the year ended December 31, 2000 and Exhibit 10.1, Current Report on Form 8-K dated December 31, 2004, File No.1-11083). | ||
| 10.27 | Boston Scientific Corporation 2003 Long-Term Incentive Plan, as amended (Exhibit 10.17, Annual Report on Form 10-K for the year ended December 31, 2003 and Exhibit | ||
| 10.28 | Boston Scientific Corporation 2000 Long Term Incentive Plan, as amended (Exhibit 10.20, Annual Report on Form 10-K for the year ended December 31, 1999, Exhibit 10.18, Annual Report on Form 10-K for the year ended December 31, 2001, | ||
| 10.29 | Boston Scientific Corporation 1995 Long-Term Incentive Plan, as amended (Exhibit 10.1, Annual Report on Form 10-K for the year | ||
| ended December 31, 1996, Exhibit 10.5, Annual Report on Form 10-K for the year ended December 31, 2001, | |||
| 10.30 | 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, Exhibit 10.2, Annual Report on Form 10-K for the year ended December 31, 2001, | ||
| 10.31 | Form of Deferred Stock Unit Agreement between Lucia L. Quinn and Boston Scientific Corporation dated May 31, 2005 (Exhibit 10.1, Current Report on Form 8-K dated May 31, 2005, File No. 1-11083). | ||
| 10.32 | Form of Boston Scientific Corporation Excess Benefit Plan (Exhibit 10.1, Current Report on Form 8-K dated June 29, 2005, File No. 1-11083). | ||
| 10.33 | Form of Trust Under the Boston Scientific Corporation Excess Benefit Plan (Exhibit 10.2, Current Report on Form 8-K dated June 29, 2005, File No. 1-11083). | ||
| 10.34 | Form of Non-Qualified Stock Option Agreement dated July 1, 2005 (Exhibit 10.1, Current Report on Form 8-K dated July 1, 2005, File No. 1-11083). | ||
| 10.35 | Form of Deferred Stock Unit Award Agreement dated July 1, 2005 (Exhibit 10.2, Current Report on Form 8-K dated July 1, 2005, File No. 1-11083). | ||
| 10.36 | Form of 2006 Performance Incentive Plan (Exhibit 10.1, Current Report on Form 8-K dated June 30, 2006, File No. 1-11083). | ||
| 10.37 | Form of 2007 Performance Incentive Plan, as amended (Exhibit 10.2, Current Report on Form 8-K dated February 20, 2007, File No. 1-11083). | ||
| 10.38 | Form of Non-Qualified Stock Option Agreement (Executive) (Exhibit 10.1, Current Report on Form 8-K dated May 12, 2006, File No. 1-11083). | ||
| 10.39 | Form of Deferred Stock Unit Award Agreement (Executive) (Exhibit 10.2, Current Report on Form 8-K dated May 12, 2006, File No. 1-11083). | ||
| 10.40 | Form of Non-Qualified Stock Option Agreement (Special) (Exhibit 10.3, Current Report on Form 8-K dated May 12, 2006, File No. 1-11083). | ||
| 10.41 | Form of Deferred Stock Unit Award Agreement (Special) (Exhibit 10.4, Current Report on Form 8-K dated May 12, 2006, File No. 1-11083). | ||
| 10.42 | Target Therapeutics, Inc. 1988 Stock Option Plan, as amended (Exhibit 10.2, Quarterly Report of Target Therapeutics, Inc. on Form 10-Q for the quarter ended September 30, 1996, File No. 0-19801 and Exhibit 10.1, Current Report on Form 8-K dated December 31, 2004, File No. 1-11083). | ||
Embolic Protection Incorporated 1999 Stock Plan, as amended (Exhibit 10.1, Registration Statement on Form S-8, Registration No. 333-61060 and Exhibit 10.1, Current Report on Form 8-K dated December 31, 2004, File No. 1-11083). | |||
| 10.44 | Quanam Medical Corporation 1996 Stock Plan, as amended (Exhibit 10.3, Registration Statement on Form S-8, Registration No. 333-61060 and Exhibit 10.1, Current Report on Form 8-K dated December 31, 2004, File No. 1-11083). | ||
| 10.45 | RadioTherapeutics Corporation 1994 Stock Incentive Plan, as amended (Exhibit 10.1, Registration Statement on Form S-8, Registration No. 333-76380 and Exhibit 10.1, Current Report on Form 8-K dated December 31, 2004, File No. 1-11083). | ||
| *10.46 | Guidant Corporation 1994 Stock Plan, as amended. | ||
| *10.47 | Guidant Corporation 1996 Nonemployee Director Stock Plan, as amended. | ||
| *10.48 | Guidant Corporation 1998 Stock Plan, as amended. | ||
| *10.49 | Form of | ||
| *10.50 | Form of | ||
| *10.55 | Fourth Amendment of the Guidant Corporation Employee Savings and Stock Ownership Plan. | ||
| *10.56 | Fifth Amendment of the Guidant Corporation Employee Savings and Stock Ownership Plan. | ||
| 10.57 | Settlement Agreement effective September 21, 2005 among Medinol Ltd., Jacob Richter and Judith Richter and Boston Scientific Corporation, Boston Scientific Limited and Boston Scientific Scimed, Inc. (Exhibit 10.1, Current Report on Form 8-K dated September 21, 2005, File No. 1-11083). | ||
| Transaction Agreement, dated as of January 8, 2006, as amended, between Boston Scientific Corporation and Abbott | |||
| 10.59 | Purchase Agreement between Guidant Corporation and Abbott Laboratories dated April 21, 2006, as amended (Exhibit 10.2 and Exhibit 10.3, Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. | ||
| 10.60 | Promissory Note between BSC International Holding Limited (“Borrower”) and Abbott Laboratories (“Lender”) dated April 21, 2006 (Exhibit 10.4, Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 1-11083) | ||
10.61 | Subscription and Stockholder Agreement | ||
10.62 | Decision and Order of | ||
| Boston Scientific Executive Allowance Plan (Exhibit 10.53, Annual Report on Form 10-K for year ended December 31, 2005, File No. 1-11083). | |||
| 10.64 | Boston Scientific Executive Retirement Plan (Exhibit 10.54, Annual Report on Form 10-K for year ended December 31, 2005, File No. 1-11083). | ||
| Form of Deferred Stock Unit Agreement between James R. Tobin and the Company dated February 28, 2006 (2003 Long-Term Incentive Plan) (Exhibit 10.56, Annual Report on Form 10-K for year ended December 31, 2005, File No. 1-11083). | |||
| 10.66 | Form of Deferred Stock Unit Agreement between James R. Tobin and the Company dated February 28, 2006 (2000 Long-Term Incentive Plan) (Exhibit 10.57, Annual Report on Form 10-K for year ended December 31, 2005, File No. 1-11083). | ||
| 11 | Statement regarding computation of per share earnings (included in Note | ||
| *12 | Statement regarding computation of ratios of earnings to fixed charges. | ||
| 14 | Code of Conduct (Exhibit 14, Annual Report on Form 10-K for the year ended December 31, 2005, File No. 1-11083). | ||
| *21 | List of the | ||
| *23 | Consent of Independent Auditors, Ernst & Young, LLP. | ||
| *31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| *31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| *32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| *32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| BOSTON SCIENTIFIC CORPORATION | |||
Dated: March 1, 2007 | By: | /s/ LAWRENCE C. BEST | |
Lawrence C. Best | |||
| Chief Financial Officer | |||
Dated: March 1, | /s/ JOHN E. ABELE John E. Abele Director, Founder |
Dated: March 1, | /s/ LAWRENCE C. BEST Lawrence C. Best Executive Vice President, Finance and Administration and Chief Financial Officer (Principal Financial And Accounting Officer) |
Dated: March 1, | /s/ URSULA M. BURNS Ursula M. Burns Director |
Dated: March 1, | /s/ Nancy-Ann DeParle Director |
Dated: March 1, | /s/ JOEL L. FLEISHMAN Joel L. Fleishman Director |
| Dated: March 1, 2007 | /s/ MARYE ANNE FOX Marye Anne Fox, Ph.D. Director |
Dated: March 1, | /s/ RAY J. GROVES Ray J. Groves Director |
Dated: March 1, | /s/ KRISTINA M. JOHNSON Kristina M. Johnson Director |
| Dated: March 1, 2007 | /s/ ERNEST MARIO Ernest Mario, Ph.D. Director | |
/s/ N.J. NICHOLAS, JR. N.J. Nicholas, Jr. Director |
Dated: March 1, | /s/ Pete M. Nicholas Director, Founder, Chairman of the Board |
Dated: March 1, | /s/ JOHN E. PEPPER John E. Pepper Director |
Dated: March 1, | /s/ UWE E. REINHARDT Uwe E. Reinhardt, Ph.D. Director |
Dated: March 1, | /s/ WARREN B. RUDMAN Warren B. Rudman Director |
Dated: March 1, | /s/ JAMES R. TOBIN James R. Tobin Director, President and Chief Executive Officer (Principal Executive Officer) |
| Year ended December 31, | Balance at Beginning of Year | Charges to Costs and Expenses | Deductions to Allowance for Uncollectible Amounts (a) | Charges to Other Accounts (b) | Balance at End of Year | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Allowances for uncollectible amounts and for sales returns | |||||||||||||
| 2005 | $ | 80 | 9 | (8 | ) | 2 | $ | 83 | |||||
| 2004 | $ | 61 | 14 | (4 | ) | 9 | $ | 80 | |||||
| 2003 | $ | 58 | 6 | (5 | ) | 2 | $ | 61 | |||||
Year Ended December 31, | Balance at Beginning of Year | Balance Assumed from Guidant | Charges to Costs and Expenses | Deductions to Allowances for Uncollectible Amounts (a) | Charges to Other Accounts (b) | Balance at End of Year | |||||||||||||
| Allowances for uncollectible | |||||||||||||||||||
| amounts and sales returns: | |||||||||||||||||||
| 2006 | $ | 83 | 15 | 12 | (7 | ) | 19 | $ | 122 | ||||||||||
| 2005 | $ | 80 | 9 | (8 | ) | 2 | $ | 83 | |||||||||||
| 2004 | $ | 61 | 14 | (4 | ) | 9 | $ | 80 | |||||||||||