1
Exhibit 13
FOR THE YEAR 2000
BOSTON SCIENTIFIC AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
FINANCIAL TABLE OF CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS ........................... F-13
CONSOLIDATED BALANCE SHEETS ..................................... F-14
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ................. F-16
CONSOLIDATED STATEMENTS OF CASH FLOWS ........................... F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................... F-18
REPORT OF INDEPENDENT AUDITORS .................................. F-42
FIVE-YEAR SELECTED FINANCIAL DATA ............................... F-43
QUARTERLY RESULTS OF OPERATIONS ................................. F-44
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED MATTERS ............................................. F-45
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
Net sales for the year ended December 31, 2000 were $2,664 million as compared
to $2,842 million in 1999, a decline of 6 percent. Net sales were adversely
affected by approximately $30 million arising from foreign currency fluctuations
compared to the prior year. Net income for 2000 was $373 million, or $0.91 per
share (diluted), as compared to net income for 1999 of $371 million, or $0.90
per share.
United States (U.S.) revenues decreased approximately 9% to $1,577 million
during 2000, while international revenues decreased approximately 1% to $1,087
million. The decrease in worldwide sales was principally attributable to a
decline in the Company's sales of coronary stents and balloons, primarily in the
U.S. Worldwide coronary stent revenues and worldwide coronary balloon revenues
were approximately $427 million and $357 million, respectively, during 2000,
compared to $604 million and $429 million, respectively, during 1999.
The worldwide coronary stent market is dynamic and highly competitive, with
significant market share volatility. In addition, technology and competitive
offerings in the market are constantly changing. The Company's reduction in
coronary stent revenues during 2000 reflects this volatility. The decline in
balloon revenues during 2000 results from new product offerings by the Company's
competitors as well as a trend towards fewer balloons being used in stent
procedures. In early 2001, the Company received approval from the U.S. Food and
Drug Administration to market four NIR(R) coronary stent systems as well as its
Maverick(R) balloon dilatation catheter in the U.S. The Company believes the
launch of these new products will enable the Company to remain competitive in
these markets. However, stent revenues for 2001 will be impacted by continued
volatility in the worldwide coronary stent market, product development and the
timing of submission for and receipt of regulatory approvals to market next
generation coronary and peripheral stent platforms in the U.S. and international
markets. All of these factors could also negatively impact the Company's ability
to transition to new products and to continue to offer competitive stent
products. Stent revenues for 2001 may be negatively impacted by a reduction in
average selling prices due to competitive pressures.
Gross profit as a percentage of net sales increased from 65.3% in 1999 to 68.8%
in 2000. The improvement in gross margin in 2000 is due primarily to the
recording of a pre-tax provision of $62 million for excess NIR(R) stent
inventories and purchase commitments during the third quarter of 1999. The
improvement is also due to benefits that the Company realized through its
increased ability to better manage inventory and lower product costs, partially
offset by a shift in the Company's product sales mix.
The Company's new stent systems launched in the U.S. in the first quarter of
2001 will negatively impact gross margins because the systems include more
expensive gold-coated stents with higher costing delivery systems. Further, the
Company's ability to effectively manage its mix and levels of inventory,
including consignment inventory, as the Company transitions to new products will
be critical in minimizing excess inventories.
Medinol Ltd. (Medinol), an Israeli company, is the supplier of the NIR(R)
coronary stent. Any unforeseen delays, stoppages or interruptions in the supply
and/or mix of NIR(R) stent inventory could adversely affect the operating
results and/or revenues of the Company. Generally, the Company has less control
over inventory manufactured by third parties as compared to inventory
manufactured internally. Furthermore, the purchase price of NIR(R) coronary
stents, the amount of NIR(R) coronary stent sales as a percentage of worldwide
sales and the mix of coronary stent platforms could significantly impact gross
margins. As average selling prices for the NIR(R) stents fluctuate, the
Company's cost to purchase the stents will change, because cost is based on a
constant percentage of average selling prices. Therefore, if higher-costing
NIR(R) stents are being sold as average selling prices are declining, gross
margins could be negatively impacted. At December 31, 2000, the Company had
approximately $149 million of net NIR(R) coronary stent inventory and was
committed to purchase approximately $32 million of NIR(R) stents from Medinol.
Worldwide NIR(R) coronary stent sales as a percentage of worldwide sales were
approximately 15% in 2000 compared to approximately 20% in 1999. The Company's
relationship with Medinol has been contentious, and the Company's ability to
manage its relationship with Medinol could impact the future operating results
of the Company.
F-2 BOSTON SCIENTIFIC AND SUBSIDIARIES
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the third quarter of 2000, the Company approved and committed to a global
operations plan which encompasses a series of strategic initiatives to increase
productivity and enhance innovation. The plan includes manufacturing process and
supply chain programs and a plant optimization initiative. The manufacturing
process and supply chain programs are designed to lower inventory levels and the
cost of manufacturing and to minimize inventory write-downs. Gross margin
benefits will not be fully realized until manufacturing processes are improved
and historical inventories are sold.
The intent of the plant optimization initiative is to better allocate the
Company's resources by creating a more effective network of manufacturing and
research and development facilities. It will consolidate manufacturing
operations along product lines and shift significant amounts of production to
Company facilities in Miami and Ireland and to contract manufacturing. The
Company's plan includes the discontinuation of manufacturing activities at two
facilities in the U.S. and the closure of a third facility. The Company expects
that the plan will be substantially completed over the next twelve months.
During 2000, the Company recorded a pre-tax special charge of approximately $58
million associated with the plant optimization initiative. The charge relates to
severance and outplacement costs for the approximately 1,950 manufacturing,
manufacturing support and management employees who are expected to be affected
by the plan over the next twelve months. Less than $1 million had been charged
against the related accrual for the approximately 10 employees terminated
pursuant to the plan as of December 31, 2000. In addition, during 2000, the
Company recorded pre-tax costs of $11 million as cost of sales related to
transition costs associated with the plant optimization plan and accelerated
depreciation on fixed assets whose useful lives have been reduced as a result of
the initiative. During 2001, the Company estimates that it will record pre-tax
expenses of approximately $70 million as cost of sales related to the plant
optimization initiative, primarily for transition costs, accelerated
depreciation and abnormal production variances related to underutilized plant
capacity.
The Company expects that it will make total cash outlays, net of proceeds from
building and fixed asset sales, of approximately $115 million for the plant
optimization initiative, $85 million of which the Company expects to make during
2001 with the remainder being primarily severance costs for employees terminated
during 2001 but paid out in 2001 and 2002. The Company anticipates that these
cash outlays will be funded from cash flows from operating activities and from
the Company's borrowing capacity. The cash outlays include severance and
outplacement costs, transition costs and capital expenditures related to the
plan. The success of the initiative may be dependent on the Company's ability to
retain existing employees and attract new employees during the transition
period.
The Company estimates that the global operations plan will achieve pre-tax
operating savings, relative to the base year of 1999, of approximately $100
million in 2001, $220 million in 2002 and $250 million in annualized savings
thereafter. Incremental pre-tax savings expected to be realized in 2001 relative
to 2000 are estimated to be approximately $30 million. These savings will be
realized primarily as reduced cost of sales and are expected to help mitigate
gross margin pressures resulting from the launch of higher costing stents and
stent delivery systems. Additionally, the Company intends to use a portion of
these savings, when generated, to increase its investment in research and
development.
Selling, general and administrative expenses as a percentage of sales increased
from 30% of sales in 1999 to 33% in 2000 and increased approximately $25 million
from 1999 to $867 million. The increase in expenses as a percentage of sales in
2000 is primarily attributable to the reduction in sales combined with an
increase in costs incurred to strengthen and retain the Company's field sales
force and to expand its direct sales presence in international regions. The
Company's ability to retain its established sales force may impact the operating
results of the Company.
Amortization expense remained at approximately 3% of net sales while decreasing
1% from $92 million in 1999 to $91 million in 2000.
Royalties decreased approximately 20% from $46 million in 1999 to $37 million in
2000. The reduction in royalties is primarily due to non-recurring expenses of
approximately $7 million recorded during 1999. The Company continues to enter
into strategic technological alliances, some of which include royalty
commitments.
BOSTON SCIENTIFIC AND SUBSIDIARIES F-3
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Research and development expenses remained at approximately 7% of net sales
while increasing 1% from $197 million in 1999 to $199 million in 2000. The
investment in research and development dollars reflects spending on new product
development programs as well as regulatory compliance and clinical research. The
Company continues to be committed to refining existing products and procedures
and to developing new technologies that can reduce risk, trauma, cost, procedure
time and the need for aftercare. In 2001, the Company expects to increase its
investment in research and development over 2000 levels to fund the development
of new products and clinical trials, including the Company's drug-coated stent
program, the carotid program and an internally developed stent platform.
Additionally, the Company plans to expand its research and development teams to
enhance the Company's product development, clinical affairs and regulatory
compliance capabilities in 2001 and beyond.
Interest expense decreased from $118 million in 1999 to $70 million in 2000. The
overall decrease in interest expense is primarily attributable to a lower
average debt balance. Other income (expense), net, changed from expense of
approximately $9 million in 1999 to income of approximately $17 million in 2000.
The change is primarily due to an increase in net gains recognized on sales of
available-for-sale securities and to an increase in gains on derivative
financial instruments.
The Company's effective tax rate, including the impact of restructuring-related
charges and credits, decreased from 34% in 1999 to 29% in 2000. Excluding the
impact of restructuring-related charges and credits, the Company's effective tax
rate decreased from 34% in 1999 to 30% in 2000. The decrease is primarily
attributable to a shift in the mix of the Company's U.S. and international
businesses. Management currently estimates that the 2001 effective tax rate will
remain at approximately 30%. However, the effective tax rate could be negatively
impacted by acquisitions of businesses contemplated by the Company in 2001.
Uncertainty remains with regard to future changes within the health care
industry. The trend toward managed care and economically motivated and more
sophisticated buyers in the U.S. may result in continued pressure on selling
prices of certain products and resulting compression on gross margins. In
addition to impacting selling prices, the trend to managed care in the U.S. has
also resulted in more complex billing and collection procedures. The Company's
ability to react effectively to the changing environment may impact its bad debt
and sales allowances in the future. Further, the U.S. marketplace is
increasingly characterized by consolidation among health care providers and
purchasers of medical devices that prefer to limit the number of suppliers from
which they purchase medical products. There can be no assurance that these
entities will continue to purchase products from the Company.
International markets are also being affected by economic pressure to contain
reimbursement levels and health care costs. The Company's ability to benefit
from its international expansion may be limited by risks and uncertainties
related to economic conditions in these regions, regulatory and reimbursement
approvals, competitive offerings, infrastructure development, rights to
intellectual property and the ability of the Company to implement its overall
business strategy. Any significant changes in the competitive, political,
regulatory or economic environment where the Company conducts international
operations may have a material impact on revenues and profits, especially in
Japan given its high profitability relative to its contribution to revenues.
Deterioration in the Japanese and/or emerging markets economies may impact the
Company's ability to grow its business and to collect its accounts receivable.
Additionally, the trend in countries around the world toward more stringent
regulatory requirements for product clearance and more vigorous enforcement
activities has generally caused or may cause medical device manufacturers to
experience more uncertainty, greater risk and higher expenses. These factors may
impact the rate at which Boston Scientific can grow. In addition, the impact of
selling higher costing stents, the cost of maintaining the Company's sales force
and increasing its investment in research and development is expected to result
in lower operating margins for 2001. However, management believes that it is
positioning the Company to take advantage of opportunities that exist in the
markets it serves.
F-4 BOSTON SCIENTIFIC AND SUBSIDIARIES
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net sales increased 27% in 1999 to $2,842 million as compared to $2,234 million
in 1998. The 1999 results include the operations of Schneider Worldwide
(Schneider), which was acquired in the third quarter of 1998. On a pro forma
basis, assuming Schneider revenues had been included in all of 1998, net sales
in 1999 increased approximately 14%. Net income for 1999 was $371 million or
$0.90 per share (diluted) as compared to a reported net loss for 1998 of $264
million, or $0.68 per share, including merger-related charges and credits of
$667 million ($527 million, net of tax).
U.S. revenues increased approximately 25% to $1,741 million during 1999, while
international revenues increased approximately 31% to $1,101 million. Without
the impact of foreign currency exchange rates on translation of international
revenues, worldwide sales for 1999 increased approximately 25%. The increase in
sales was primarily attributable to the inclusion of Schneider sales for the
entire year and the Company's sales of coronary stents in the U.S. and Japan.
U.S. coronary stent revenues and worldwide coronary stent revenues, primarily
sales of the NIR(R) stent, were approximately $409 million and $604 million,
respectively, during 1999, compared to $211 million and $324 million,
respectively, during 1998. Worldwide NIR(R) coronary stent sales as a percentage
of worldwide sales were approximately 20% in 1999 compared to approximately 13%
in 1998.
Gross profit as a percentage of net sales decreased from 67.1% in 1998 to 65.3%
in 1999. The decrease in gross margin is primarily due to a provision recorded
in the third quarter of 1999 of $62 million for excess NIR(R) stent inventories
and purchase commitments. The excess position was driven primarily by a
shortfall in planned third-quarter NIR(R) stent revenues, a reduction in NIR(R)
stent sales forecasted for 1999 and 2000, and strategic decisions regarding
versions of the NIR(R) stent system to be launched. In the third quarter of
1998, the Company provided $31 million for costs associated with the Company's
decision to recall voluntarily the NIR ON(R) Ranger(TM) with Sox(TM) coronary
stent system in the U.S. Excluding these charges, gross margins were 67.5% and
68.1% for 1999 and 1998, respectively. Gross margins during 1999 were positively
impacted compared to 1998 by a reduction in other inventory charges. However,
the reduction was offset by a decrease in average selling prices and increased
manufacturing costs.
Selling, general and administrative expenses as a percentage of sales decreased
from 34% of sales in 1998 to 30% of sales in 1999 and increased approximately
$87 million from 1998 to $842 million. The decrease as a percentage of sales is
primarily attributable to the increase in sales due to the launch of coronary
stents in the U.S. and Japan, the realization of synergies as the Company
integrated Schneider into its organization, and improved returns in Asia Pacific
and Latin America as the Company continued to leverage its direct sales
infrastructure. The increase in expense dollars is primarily attributable to
higher selling expenses as a result of the launch of coronary stents in the
U.S., increased costs to expand the Company's direct sales presence in Asia
Pacific and Latin America, and increased legal expenses.
Amortization expense increased from $53 million in 1998 to $92 million in 1999
and increased as a percentage of sales from 2% to 3%. The increase is primarily
a result of the amortization of intangibles related to the purchase of
Schneider.
Royalty expense increased approximately 48% from $31 million in 1998 to $46
million in 1999. The increase in royalties is primarily due to royalty
obligations assumed in connection with the Schneider acquisition and payments
made to Medinol on sales of internally developed stent platforms.
Research and development expenses decreased as a percentage of sales from 9% in
1998 to 7% in 1999. Research and development expenses were $200 million in 1998
and $197 million in 1999. The decrease as a percentage of sales is primarily
attributable to the launch of coronary stents in the U.S. and Japan and the
realization of synergies in connection with the Schneider acquisition.
During 1999, the Company identified and reversed restructuring and
merger-related charges of $10 million no longer deemed necessary. These amounts
related primarily to the restructuring charges accrued in the fourth quarter of
1998 and reflect the reclassification of assets from held-for-disposal to
held-for-use resulting from management's decision to resume a development
program previously planned to be eliminated. In addition, estimated severance
costs for 1998 initiatives were reduced as a result of attrition. During 1998,
the Company recorded merger-related charges and credits of $667 million ($527
million, net of tax) primarily related to purchased research and development
acquired in the $2.1 billion cash purchase of
BOSTON SCIENTIFIC AND SUBSIDIARIES F-5
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Schneider. On September 10, 1998, the Company consummated its acquisition of
Schneider, formerly a member of the Medical Technology Group of Pfizer Inc. The
acquisition was accounted for using the purchase method of accounting. The
consolidated financial statements include Schneider's operating results from the
date of acquisition.
The aggregate purchase price of the Schneider acquisition has been allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. The estimated excess of purchase price over the fair
value of the net tangible assets acquired was allocated to specific intangible
asset categories with the remainder assigned to excess of cost over net assets
acquired. At December 31, 2000, the net intangibles recorded in connection with
the Schneider acquisition, including the excess of cost over net assets
acquired, represented 39% and 70% of the Company's total assets and
stockholders' equity, respectively. Core technology, developed technology,
assembled workforce, trademarks and patents are being amortized on a
straight-line basis over periods ranging from 9 to 25 years. The Company is
amortizing the value assigned to customer lists (relationships) over 25 years
because it has been the Company's experience that physician and hospital
relationships are built for the long term and fundamental to the Company's
business of bringing innovative products to market. The Company realizes that
maintaining these and similar relationships will require ongoing efforts.
However, both Schneider and the Company have over a 20-year history of working
closely with interventionalists and their institutions for both vascular and
nonvascular applications, and management believes these relationships will
continue to benefit the Company. In addition, after considering the long-term
prospects for the less invasive medical device industry and the fundamental role
of catheter-based interventional medicine, as well as Schneider's competitive
position within the industry, management concluded that it is appropriate to
amortize the excess of the Schneider purchase price over the fair value of the
assets acquired over 40 years. Finally, the Company recorded a $671 million
($524 million, net of tax) charge to account for purchased research and
development. The valuation of purchased research and development, for which
management is primarily responsible, represents the estimated fair value at the
date of acquisition related to in-process projects. As of the date of
acquisition, the in-process projects had not yet reached technological
feasibility and had no alternative future uses. Accordingly, the value
attributable to these projects was immediately expensed at acquisition. If the
projects are not successful or completed in a timely manner, the Company may not
realize the financial benefits expected for these projects.
The income approach was used to establish the fair values of the purchased
research and development. This approach established the fair value of an asset
by estimating the after-tax cash flows attributable to the in-process project
over its useful life and then discounting these after-tax cash flows back to a
present value. Revenue estimates were based on estimates of relevant market
sizes, expected market growth rates, expected trends in technology and expected
product introductions by competitors. In arriving at the value of the in-process
research and development projects, the Company considered, among other factors,
the in-process project's stage of completion, the complexity of the work
completed as of the acquisition date, the costs already incurred, the projected
costs to complete, the contribution of core technologies and other acquired
assets, the expected introduction date, and the estimated useful life of the
technology. The discount rate used to arrive at a present value as of the date
of acquisition was based on the time value of money and medical technology
investment risk factors. For the Schneider purchased research and development
programs, a risk-adjusted discount rate of 28% was utilized to discount the
projected cash flows. The Company believes 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.
The most significant Schneider purchased research and development projects that
were in-process at the date of acquisition were brachytherapy, devices for
aneurysmal disease and coronary stents, which represented approximately 26%, 20%
and 16% of the in-process value, respectively. Set forth below are descriptions
of these in-process projects, including their status at the end of 2000.
The brachytherapy system is an intravascular radiation system designed to reduce
clinical restenosis after a balloon angioplasty and/or a stent procedure. The
system consists of a computer-controlled afterloader, beta radiation source,
centering catheter, source delivery wire and dummy wire. As of the date of
acquisition, the project was expected to be completed and the products
commercially available in the U.S. within
F-6 BOSTON SCIENTIFIC AND SUBSIDIARIES
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
two to three years, with an estimated cost to complete of approximately $5
million to $10 million.
The aneurysmal disease projects are endoluminal grafts for the treatment of late
stage vascular aneurysms and occlusions. The most significant of the projects in
this category at the date of acquisition was the endoluminal graft for the
treatment of abdominal aortic aneurysms. As of the date of acquisition, the
projects were expected to be completed and the products commercially available
in the U.S. within two to three years, with an estimated cost to complete of
approximately $10 million to $15 million.
Coronary stent systems underway at the date of acquisition were stent systems
for native coronary artery disease, saphenous vein graft disease, and versions
with novel delivery systems. The Company believes that the stent systems will be
especially helpful in the treatment of saphenous vein graft disease. As of the
date of acquisition, the projects were expected to be completed and the products
commercially available for sale in the U.S. within one year with an estimated
cost to complete of approximately $1 million to $3 million.
In the second quarter of 2000, the brachytherapy project was discontinued due to
system performance issues. However, the Company recently outsourced this project
to a third party in which it holds a minority interest. As part of a subsequent
project consolidation program, the Schneider abdominal aortic aneurysm project
has been integrated with another internal project. As a result, the Company will
pursue the development of next-generation products for aortic aneurysmal disease
with an integrated platform while minimizing duplicative research and
development. The cost of the development is still estimated to be in the range
of approximately $10 million to $15 million. The coronary stent projects have
been completed.
During 1998, the Company established a rationalization plan in conjunction with
the consummation of the Schneider acquisition, taking into consideration
duplicate capacity as well as opportunities for further leveraging of cost and
technology platforms. The Company's actions, approved and committed to in the
fourth quarter of 1998, included the planned displacement of approximately 2,000
positions, over half of which were manufacturing positions and would result in
annualized cost savings of approximately $50 million to $75 million. During the
fourth quarter of 1998, the Company estimated the costs associated with these
activities, excluding transition costs, to be approximately $62 million, most of
which represented severance and related costs. Approximately $36 million of the
total was capitalized as part of the purchase price of Schneider. The remaining
$26 million was charged to operations during 1998. In addition, as part of the
Schneider acquisition, the Company capitalized estimated costs of approximately
$16 million to cancel Schneider's contractual obligations, primarily with its
distributors.
The Company substantially completed its rationalization plan in 1999, including
the closure of five Schneider facilities as well as the transition of
manufacturing for selected Boston Scientific product lines to different sites.
Approximately 1,800 positions were eliminated (resulting in the termination of
approximately 1,500 employees) in connection with the rationalization plan, and
the anticipated cost savings have been achieved. As noted previously, in the
third quarter of 1999, the Company identified and reversed restructuring and
merger-related charges of $10 million no longer deemed necessary. During 1999,
the costs related to the transition of manufacturing operations were not
significant and were recognized in operations as incurred.
The 1998 rationalization plan also resulted in the decision to expand, not
close, the Target Therapeutics, Inc. (Target) facilities originally provided for
in a 1997 merger-related charge and to relocate other product lines to those
Target facilities. In the fourth quarter of 1998, the Company reversed $21
million of previously recorded merger-related charges, of which $4 million
related to facility costs and which also included reductions for revisions of
estimates relating to contractual commitment payments, associated legal costs
and other asset write-downs originally provided for as a 1997 merger-related
charge.
In the second quarter of 1998, the Company realigned its operating units and
decided to operate Target independently instead of as a part of its vascular
division as was planned at the date of the Target acquisition. Management
believed that an independent Target would allow the business unit to develop its
technologies and markets more effectively than it would as part of the vascular
division. As a result of this decision, the Company reversed $20 million of 1997
Target merger-related charges primarily related to revised estimates for costs
of workforce reductions and costs of canceling contractual commitments. In
addition, the Company recorded purchased research and development of
approximately $11 million in connection
BOSTON SCIENTIFIC AND SUBSIDIARIES F-7
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
with another acquisition consummated during 1998, and, in the fourth quarter of
1998, the Company recorded $30 million of year-end adjustments related primarily
to write-downs of assets no longer deemed to be strategic. The assets related
primarily to inventory, long-lived and intangible assets that the Company did
not believe would be sold or realized, respectively, because of revisions to and
terminations of strategic alliances. The provisions were recorded as costs of
sales ($12 million), selling, general and administrative expenses ($12 million),
amortization expenses ($2 million), royalties ($2 million), research and
development expenses ($1 million) and other expenses ($1 million).
Interest expense increased from $68 million in 1998 to $118 million in 1999. The
overall increase in interest expense was primarily attributable to a higher
average outstanding debt balance borrowed in conjunction with the Schneider
acquisition.
The Company's effective tax rate, including the impact of merger-related charges
and credits, was approximately 4% in 1998 and 34% in 1999. The Company's
pro-forma effective tax rate, excluding the impact of merger-related charges and
credits, increased from approximately 33% in 1998 to 34% in 1999. The increase
is primarily attributable to a shift in the mix of the Company's U.S. and
international business.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments totaled $60 million at December 31, 2000,
compared to $78 million at December 31, 1999. The Company had $173 million of
working capital at December 31, 2000 as compared to current assets equaling
current liabilities at December 31, 1999. The increase in working capital is
primarily due to the repayment of approximately $340 million of short-term debt
obligations using the Company's cash flows from operations, partially offset by
changes in other working capital accounts. Cash proceeds during 2000 were
generated primarily from operating activities. Cash proceeds during the period
were partially offset by the repayment of approximately $447 million of
outstanding short-term and long-term debt obligations and purchases of the
Company's common stock of approximately $222 million.
The Company had approximately $56 million and $277 million of commercial paper
outstanding at December 31, 2000, and 1999, respectively, at weighted-average
interest rates of 8.00% and 6.70%, respectively. In addition, the Company had
approximately $187 million and $421 million in revolving credit facility
borrowings outstanding at December 31, 2000 and 1999, respectively, at
weighted-average interest rates of 4.54% and 6.66%, respectively. At December
31, 2000, the revolving credit facilities totaled $1.65 billion, consisting of a
$1.0 billion credit facility that terminates in June 2002, a $600 million
364-day credit facility that terminates in September 2001 and a $50 million
uncommitted credit facility. The revolving credit facilities also support the
Company's commercial paper borrowings. Use of the borrowings is unrestricted and
the borrowings are unsecured. The revolving credit facilities require the
Company to maintain a specific ratio of consolidated funded debt (as defined) to
consolidated net worth (as defined) plus consolidated funded debt of less than
or equal to 60%. As of December 31, 2000, the ratio was approximately 26%.
The Company has the ability to refinance a portion of its short-term debt on a
long-term basis through its revolving credit facilities. The Company does not
expect that its short-term borrowings as of December 31, 2000, will remain
outstanding beyond the next twelve months and, accordingly, the Company has not
reclassified any of the short-term borrowings as long-term at December 31, 2000,
compared to $108 million of such reclassifications at December 31, 1999.
In March 1998, the Company issued $500 million of seven-year senior notes. The
senior notes bear a coupon of 6.625% payable semi-annually, and are not
redeemable prior to maturity or subject to any sinking fund requirements.
The Company had 6.0 billion Japanese yen (translated to approximately $53
million and $58 million at December 31, 2000 and 1999, respectively) of
borrowings outstanding with a syndicate of Japanese banks. The interest rate on
the borrowings is 2.37% and the borrowings are payable in 2002. In addition, the
Company had approximately 1.1 billion Japanese yen (translated to approximately
$9 million) and 1.2 billion Japanese yen (translated to approximately $12
million) of borrowings outstanding from a Japanese bank used to finance a
facility construction project at December 31, 2000, and 1999, respectively. The
interest rate on the borrowings is 2.1% and principal payments are due
semi-annually through 2012.
F-8 BOSTON SCIENTIFIC AND SUBSIDIARIES
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company has uncommitted Japanese credit facilities with several Japanese
banks, which provided for borrowings and promissory notes discounting of up to
15.0 billion Japanese yen (translated to approximately $131 million) and 11.5
billion Japanese yen (translated to approximately $112 million) at December 31,
2000 and 1999, respectively. There was $12 million in borrowings outstanding
under the Japanese credit facilities at an interest rate of 1.5% at December 31,
2000 compared to no borrowings at December 31, 1999. At December 31, 2000,
approximately $108 million of notes receivable were discounted at average
interest rates of approximately 1.5% compared to $112 million of discounted
notes receivable at average interest rates of approximately 1.4% at December 31,
1999.
The Company has recognized net deferred tax assets aggregating $226 million at
December 31, 2000, and $238 million at December 31, 1999. The assets relate
principally to the establishment of inventory and product-related reserves and
purchased research and development. In light of the Company's historical
financial performance, the Company believes that these assets will be
substantially recovered.
The Company is authorized to purchase on the open market and in private
transactions up to approximately 60 million shares of the Company's common
stock. Stock repurchased under the Company's systematic plan will be used to
satisfy its obligations pursuant to its equity incentive plans. Under the
authorization, the Company may also repurchase shares outside of the Company's
systematic plan. These additional shares would principally be used to satisfy
the Company's obligations pursuant to its equity incentive plans, but may also
be used for general corporate purposes, including acquisitions. During 2000, the
Company repurchased approximately 12 million shares at an aggregate cost of $222
million. As of December 31, 2000, a total of approximately 38 million shares of
the Company's common stock have been repurchased.
In December 2000, a jury found that the Company's NIR(R) coronary stent
infringed one claim of a patent owned by Johnson & Johnson. A final decision has
not yet been entered pending post trial motions. The Company could be found
liable and owe damages of approximately $324 million for past sales, plus
interest, and additional damages for sales occurring after the jury verdict. The
Company expects to appeal any adverse determination and post the necessary bond
pending appeal.
On February 15, 2001, the Company announced the signing of a definitive
agreement to acquire Interventional Technologies, Inc (IVT). IVT develops,
manufactures and markets minimally invasive devices for use in interventional
cardiology, including the Cutting Balloon(TM) catheter and the Infiltrator(R)
transluminal drug delivery catheter. Boston Scientific will pay approximately
$345 million in cash plus additional cash amounts contingent upon achieving
performance and other milestones. The transaction is subject to regulatory
approval and is expected to be consummated in the second quarter of 2001.
On February 27, 2001, the Company acquired privately held Embolic Protection,
Inc., a developer of embolic protection medical devices. Boston Scientific will
pay approximately $75 million in cash and assumed restricted stock and options
plus additional amounts contingent upon achieving certain performance
milestones. Contingent payments would be made in cash or stock of Boston
Scientific at the Company's election.
On February 28, 2001, the Company announced the signing of a definitive
agreement to acquire Quanam Medical Corporation, (Quanam) a manufacturer of
medical devices that specializes in drug delivery systems. Boston Scientific
will pay an immaterial amount in stock as initial consideration plus additional
payments contingent upon achieving performance and other milestones. Contingent
payments would be made in stock of Boston Scientific.
On March 5, 2001, the Company announced the acquisition of Catheter Innovations,
Inc., a manufacturer of vascular access products. Boston Scientific will pay an
immaterial amount as initial consideration plus additional payments contingent
upon achieving performance and other milestones. Contingent payments would be
made in cash or stock of Boston Scientific at the Company's election.
These acquisition transactions involve contingent payments. The Company expects
to make contingent payments in 2001 of approximately $100 million to $200
million for performance and other milestones achieved in connection with these
transactions. All of these transactions will be accounted for using the purchase
method of accounting.
Management believes it is developing a sound plan to integrate these businesses.
The failure to successfully integrate these businesses effectively could impair
the Company's ability to realize the strategic and financial
BOSTON SCIENTIFIC AND SUBSIDIARIES F-9
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
objectives of these transactions. As the health care environment continues to
undergo rapid change, management expects that it will continue to focus on
strategic initiatives and/or make additional investments in existing
relationships. In connection with these and other acquisitions consummated
during the last five years, the Company has acquired numerous in-process
research and development projects. As the Company continues to build its
research base, it is reasonable to assume that it will acquire additional
research and development platforms.
Additionally, the Company expects to incur capital expenditures of approximately
$100 million during 2001. The Company expects that its cash and cash
equivalents, marketable securities, cash flows from operating activities and
borrowing capacity will be sufficient to meet its projected operating cash
needs, including capital expenditures, restructuring initiatives, and the
above-mentioned acquisitions of businesses.
Further, the Company continues to engage in negotiations to acquire Medinol. If
the Company is successful in its attempt to acquire Medinol, the Company will
need additional financing capacity to consummate the transaction. Although the
Company believes it will be able to obtain additional financing, there are no
assurances that additional financing can be or will be obtained.
MARKET RISK DISCLOSURES
In the normal course of business, the Company is exposed to market risk from
changes in interest rates and foreign currency exchange rates. The Company
addresses these risks through a risk management program that includes the use of
derivative financial instruments. The program is operated pursuant to documented
corporate risk management policies. The Company does not enter into any
derivative transactions for speculative purposes.
The Company's floating and fixed-rate investments and debt obligations are
subject to interest rate risk. As of December 31, 2000, a 100-basis-point
increase in interest rates, assuming the amount invested and borrowed remained
constant, would not result in a material increase in the Company's then current
net interest.
The Company enters into foreign exchange forward contracts to hedge its net
recognized foreign currency transaction exposures for periods consistent with
commitments, generally one to six months. In addition, on January 1, 2000, the
Company initiated a program to hedge a portion of its forecasted intercompany
and third-party transactions with foreign exchange forward and option contracts
upon adoption of the Financial Accounting Standards Board Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Hedging activity
is intended to offset the impact of currency fluctuations on forecasted earnings
and cash flow. However, the Company may be impacted by changes in foreign
currency exchange rates related to the unhedged portion. The success of the
hedging program depends, in part, on forecasts of transaction activity in
various currencies (currently the Japanese yen and the euro). The Company may
experience unanticipated foreign currency exchange gains or losses to the extent
that there are timing differences between forecasted and actual activity during
periods of currency volatility. The Company had foreign exchange forward and
option contracts outstanding in the total notional amount of $452 million and
$128 million as of December 31, 2000, and 1999, respectively. The Company has
recorded approximately $37 million of assets and $1 million of liabilities to
recognize the fair value of its contracts outstanding on December 31, 2000, as
compared to an immaterial amount at December 31, 1999. Foreign exchange
contracts that hedge net recognized foreign currency transaction exposures
should not subject the Company's earnings and cash flow to material risk due to
exchange rate movements because gains and losses on these contracts should
offset losses and gains on the transactions being hedged. Hedges of anticipated
transactions may subject the income statement to volatility.
A sensitivity analysis of changes in the fair value of foreign exchange
contracts outstanding at December 31, 2000 indicates that, if the U.S. dollar
uniformly weakened by 10% against all currencies, the fair value of these
contracts would decrease by $37 million as compared to a $9 million decrease
based on foreign exchange contracts outstanding at December 31, 1999. While
these hedging instruments are subject to fluctuations in value, such
fluctuations are generally offset by changes in the value of the underlying
exposures being hedged. As the Company has expanded its international
operations, its sales and expenses denominated
F-10 BOSTON SCIENTIFIC AND SUBSIDIARIES
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
in foreign currencies have expanded, and that trend is expected to continue.
Therefore, most international sales and expenses have been, and are expected to
be, subject to the effect of foreign currency fluctuations, and these
fluctuations may have an impact on margins. The Company's sensitivity analysis
of the effects of changes in foreign currency exchange rates does not factor in
a potential change in sales levels or local currency selling prices.
Although the Company engages 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.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates among existing sovereign currencies and the
euro. On January 1, 2001, Greece became the twelfth member of the participating
countries that have agreed to adopt the euro as their common legal currency.
Fixed conversion rates among the participating countries' existing currencies
(the legacy currencies) and the euro have been established. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002 (but not later than July 1, 2002). During this
transition period, parties may settle transactions using either the euro or a
participating country's legacy currency. The Company has addressed and/or
continues to address the potential impact resulting from the euro conversion,
including adaptation of information technology systems, competitive implications
related to pricing and foreign currency considerations.
Management currently believes that the euro conversion will not have a material
impact related to its overall business in Europe or elsewhere. The increased
price transparency resulting from the use of a single currency in the twelve
participating countries may affect the ability of the Company to price its
products differently in the various European markets. A possible result of this
is price harmonization at lower average prices for products sold in some
markets. However, uncertainty exists as to the effects the euro will have on the
marketplace.
LITIGATION
The Company is involved in various lawsuits, including patent infringement and
product liability suits, from time to time in the normal course of business. In
management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in the notes to the
consolidated financial statements which, individually or in the aggregate, could
have a material effect on the financial condition, operations and cash flows of
the Company. Additionally, legal costs associated with asserting the Company's
patent portfolio and defending against claims that the Company's products
infringe the intellectual property of others are significant, and legal costs
associated with non-patent litigation and compliance activities are rising.
Depending upon the prevalence, significance and complexity of these matters, the
Company's legal provision could be adversely affected in the future.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage that management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements discussed in this report
include, but are not limited to, statements with respect to, and the Company's
performance may be affected by: (a) the Company's ability to timely implement
the global operations plan within its cost estimates, to retain and attract
employees as it implements its plant optimization initiative and to achieve
estimated operating savings; (b) the Company's ability to achieve manufacturing
cost declines, gross margin benefits and inventory reductions from its
manufacturing process and supply chain programs; (c) the Company's ability to
continue to realize benefits from
BOSTON SCIENTIFIC AND SUBSIDIARIES F-11
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the Schneider acquisition, including purchased research and development and
physician and hospital relationships; (d) the ability of the Company to manage
accounts receivable, manufacturing costs and inventory levels and mix, and to
react effectively to changing managed care environment, reimbursement levels and
worldwide economic conditions; (e) the potential impacts of continued
consolidation among health care providers, trends toward managed care, disease
state management and economically motivated buyers, health care cost
containment, the financial viability of health care providers, more stringent
regulatory requirements and more vigorous enforcement activities; (f)
management's ability to position the Company to take advantage of opportunities
that exist in the markets it serves; (g) the Company's ability to retain its
established sales force; (h) the Company's continued commitment to refine
existing products and procedures and to develop new technologies that can reduce
risk, trauma, cost, procedure time, and the need for aftercare; (i) the
Company's ability to increase its investment in research and development and to
develop, trial and launch products on a timely basis, including products
resulting from purchased research and development; (j) risks associated with
international operations; (k) the potential effect of foreign currency
fluctuations on revenues, expenses and resulting margins and the trend toward
increasing sales and expenses denominated in foreign currencies; (l) the
Company's ability to maintain its effective tax rate for 2001 and to
substantially recover its net deferred tax assets; (m) the ability of the
Company to meet its projected cash needs and obtain additional financing, if
necessary; (n) the ability of the Company to manage its relationship with
Medinol; (o) unforeseen delays, stoppages or interruptions in the supply and/or
mix of NIR(R) coronary stent inventory, difficulties in managing inventory
relating to new product introductions and the Company's cost to purchase the
NIR(R) coronary stent; (p) NIR(R) coronary stent sales as a percentage of
worldwide sales and the mix of coronary stent platforms; (q) volatility in the
coronary stent market, delays in development of new stent platforms and the
timing of submission for and receipt of regulatory approvals to market new
coronary and peripheral stent platforms; (r) the Company's ability to remain
competitive in the coronary stent and balloon markets; (s) the development of
competing or technologically advanced products by the Company's competitors; (t)
the ability of the Company to close the IVT and Quanam acquisitions; (u) the
Company's ability to develop a sound integration plan, effectively integrate
newly acquired businesses and realize their strategic and financial objectives;
(v) the effect of litigation and compliance activities on the Company's legal
provision and cash flow; (w) the impact of stockholder class action, patent,
product liability, Federal Trade Commission and other litigation, as well as the
outcome of the U.S. Department of Justice investigation and the adequacy of the
Company's product liability insurance; (x) the potential impact resulting from
the euro conversion, including adaptation of information technology systems,
competitive implications related to pricing, and foreign currency
considerations; and (y) the timing, size and nature of strategic initiatives and
research and development platforms available to the Company.
Several important factors, in addition to the specific factors discussed in
connection with such forward-looking statements individually, could affect the
future results and growth rates of the Company and could cause those results and
rates to differ materially from those expressed in the forward-looking
statements contained herein. Such additional factors include, among other
things, future economic, competitive and regulatory conditions, demographic
trends, third-party intellectual property, financial market conditions and
future business decisions of Boston Scientific and its competitors, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of Boston Scientific. Therefore, the Company wishes to caution each
reader of this report to consider carefully these factors as well as the
specific factors discussed with each forward-looking statement in this report
and as disclosed in the Company's filings with the Securities and Exchange
Commission as such factors, in some cases, have affected, and in the future
(together with other factors) could affect, the ability of the Company to
implement its business strategy and may cause actual results to differ
materially from those contemplated by the statements expressed herein.
F-12 BOSTON SCIENTIFIC AND SUBSIDIARIES
13
CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2000 1999 1998
- ----------------------- ------- ------- -------
Net sales $ 2,664 $ 2,842 $ 2,234
Cost of products sold 832 986 735
------- ------- -------
Gross profit 1,832 1,856 1,499
Selling, general and administrative expenses 867 842 755
Amortization expense 91 92 53
Royalties 37 46 31
Research and development expenses 199 197 200
Purchased research and development 682
Restructuring and merger-related charges (credits) 58 (10) (15)
------- ------- -------
1,252 1,167 1,706
======= ======= =======
Operating income (loss) 580 689 (207)
Other income (expense):
Interest expense (70) (118) (68)
Other, net 17 (9)
------- ------- -------
Income (loss) before income taxes 527 562 (275)
Income taxes 154 191 (11)
------- ------- -------
Net income (loss) $ 373 $ 371 $ (264)
======= ======= =======
Net income (loss) per common share - basic $ 0.92 $ 0.92 $ (0.68)
======= ======= =======
Net income (loss) per common share - assuming dilution $ 0.91 $ 0.90 $ (0.68)
======= ======= =======
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
BOSTON SCIENTIFIC AND SUBSIDIARIES F-13
14
CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2000 1999
- ----------------------- ------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 54 $ 64
Short-term investments 6 14
Trade accounts receivable, net 361 445
Inventories 354 376
Deferred income taxes 152 121
Prepaid expenses and other current assets 65 35
------ ------
Total current assets 992 1,055
Property, plant and equipment, net 567 604
Other assets:
Excess of cost over net assets acquired, net 821 840
Technology - core and developed, net 507 570
Patents, trademarks and other intangibles, net 343 316
Deferred income taxes 74 117
Investments 99 55
Other assets 24 15
------ ------
$3,427 $3,572
====== ======
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
F-14 BOSTON SCIENTIFIC AND SUBSIDIARIES
15
CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN MILLIONS, EXCEPT SHARE AND PER SHARE
DATA)
YEAR ENDED DECEMBER 31, 2000 1999
- ----------------------- ------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ 56 $ 277
Bank obligations 204 323
Accounts payable 67 92
Accrued expenses 279 286
Accrual for restructuring and merger-related charges 73 32
Income taxes payable 137 42
Other current liabilities 3 3
------- -------
Total current liabilities 819 1,055
Long-term debt 562 678
Obligations under capital leases 12 10
Other long-term liabilities 99 105
Commitments and contingencies
Stockholders' equity:
Preferred stock, $ .01 par value - authorized 50,000,000 shares,
none issued and outstanding
Common stock, $ .01 par value - authorized 600,000,000 shares,
414,922,050 shares issued at December 31, 2000 and 1999 4 4
Additional paid-in capital 1,210 1,210
Treasury stock, at cost - 15,074,381 shares at December 31, 2000
and 5,872,857 shares at December 31, 1999 (282) (126)
Deferred compensation (15)
Retained earnings 1,116 752
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (142) (123)
Unrealized gain on available-for-sale securities, net 17 7
Unrealized gain on derivative financial instruments, net 27
------- -------
Total stockholders' equity 1,935 1,724
------- -------
$ 3,427 $ 3,572
======= =======
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
BOSTON SCIENTIFIC AND SUBSIDIARIES F-15
16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN MILLIONS, EXCEPT SHARE DATA)
Common Stock Contingent
-------------------------- Additional Stock
Shares Issued Par Paid-In Repurchase Treasury Deferred
(In thousands) Value Capital Obligation Stock Compensation
-------------- --------- ---------- ---------- --------- ------------
BALANCE AT
DECEMBER 31, 1997 195,611 $ 2 $ 433 $ 18 $ (96)
Comprehensive loss:
Net loss
Other comprehensive income
(expense), net of tax:
Foreign currency translation
adjustment
Net change in equity
investments
Issuance of common stock 2,047 47 96
Stock split effected in the form
of a stock dividend 196,528 2
Expiration of stock repurchase
obligation 18 (18)
Tax benefit relating to incentive
stock option and employee stock
purchase plans 9
------- -------- -------- -------- -------- --------
BALANCE AT
DECEMBER 31, 1998 394,186 4 507
Comprehensive income:
Net income
Other comprehensive income
(expense), net of tax:
Foreign currency translation
adjustment
Net change in equity
investments
Issuance of common stock 20,736 654 1
Purchases of common stock for
treasury (127)
Tax benefit relating to incentive
stock option and employee stock
purchase plans 49
------- -------- -------- -------- -------- --------
BALANCE AT
DECEMBER 31, 1999 414,922 4 1,210 (126)
Comprehensive income:
Net income
Other comprehensive income
(expense), net of tax:
Foreign currency translation
adjustment
Net change in equity
investments
Net change in derivative
financial instruments
Issuance of common stock (7) 45
Issuance of restricted stock 2 24 $ (26)
Cancellation of restricted stock (3) 3
Purchases of common stock for
treasury (222)
Tax benefit relating to incentive
stock option and employee stock
purchase plans 5
Amortization of deferred
compensation 8
------- -------- -------- -------- -------- --------
BALANCE AT
DECEMBER 31, 2000 414,922 $ 4 $ 1,210 $ (282) $ (15)
======= ======== ======== ======== ======== ========
Accumulated
Other Comprehensive
Retained Comprehensive Income
Earnings Income (Loss) (Loss)
--------- ------------- -------------
BALANCE AT
DECEMBER 31, 1997 $ 678 $ (77)
Comprehensive loss:
Net loss (264) $ (264)
Other comprehensive income
(expense), net of tax:
Foreign currency translation
adjustment 22 22
Net change in equity
investments (16) (16)
Issuance of common stock (56)
Stock split effected in the form
of a stock dividend (2)
Expiration of stock repurchase
obligation
Tax benefit relating to incentive
stock option and employee stock
purchase plans 25
-------- -------- --------
BALANCE AT
DECEMBER 31, 1998 381 (71) $ (258)
--------
Comprehensive income:
Net income 371 $ 371
Other comprehensive income
(expense), net of tax:
Foreign currency translation
adjustment (51) (51)
Net change in equity
investments 6 6
Issuance of common stock
Purchases of common stock for
treasury
Tax benefit relating to incentive
stock option and employee stock
purchase plans
-------- -------- --------
BALANCE AT
DECEMBER 31, 1999 752 (116) $ 326
--------
Comprehensive income:
Net income 373 $ 373
Other comprehensive income
(expense), net of tax:
Foreign currency translation
adjustment (19) (19)
Net change in equity
investments 10 10
Net change in derivative
financial instruments 27 27
Issuance of common stock (9)
Issuance of restricted stock
Cancellation of restricted stock
Purchases of common stock for
treasury
Tax benefit relating to incentive
stock option and employee stock
purchase plans
Amortization of deferred
compensation
-------- -------- --------
BALANCE AT
DECEMBER 31, 2000 $ 1,116 $ (98) $ 391
======== ======== ========
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
F-16 BOSTON SCIENTIFIC AND SUBSIDIARIES
17
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
YEAR ENDED DECEMBER 31, 2000 1999 1998
- ----------------------- ------- ------- -------
OPERATING ACTIVITIES:
Net income (loss) $ 373 $ 371 $ (264)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Gain on sale of equity investments (14) (5)
Depreciation and amortization 181 178 129
Deferred income taxes 2 (29) (151)
Noncash special credits (5) (36)
Purchased research and development 682
Tax benefit relating to stock option and
employee stock purchase plans 5 49 34
Increase (decrease) in cash flows from
operating assets and liabilities:
Trade accounts receivable 78 82 (95)
Inventories 15 68 (26)
Prepaid expenses and other current assets (24) 8 7
Accounts payable and accrued expenses (27) 38 36
Accrual for restructuring and
merger-related charges 45 (45) (22)
Other liabilities 91 58 11
Other, net 14 3 (7)
------- ------- -------
Cash provided by operating activities 739 776 293
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (76) (80) (175)
Proceeds from sales of property, plant and equipment 4 21 1
Sales of available-for-sale securities 15 5 11
Acquisitions of businesses, net of cash acquired (2,060)
Payments related to 1998 acquisition (128)
Payments for acquisitions of and/or investments
in certain technologies, net (50) (3) (2)
------- ------- -------
Cash used for investing activities (107) (185) (2,225)
FINANCING ACTIVITIES:
Net (decrease) increase in commercial paper (221) (1,539) 1,393
Net (payments on) proceeds from borrowings
on revolving credit facilities (234) 421
Proceeds from notes payable and long-term debt,
net of debt issuance costs 22 8 522
Payments on notes payable, capital leases and
long-term borrowings (14) (10) (33)
Proceeds from issuances of shares of common stock 29 655 66
Acquisitions of treasury stock (222) (127)
Other, net 2 (1) (5)
------- ------- -------
Cash (used for) provided by financing activities (638) (593) 1,943
Effect of foreign exchange rates on cash (4) (4) 1
------- ------- -------
Net (decrease) increase in cash and cash equivalents (10) (6) 12
Cash and cash equivalents at beginning of year 64 70 58
------- ------- -------
Cash and cash equivalents at end of year $ 54 $ 64 $ 70
======= ======= =======
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
BOSTON SCIENTIFIC AND SUBSIDIARIES F-17
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Boston Scientific Corporation (Boston Scientific or the Company) and
its subsidiaries, substantially all of which are wholly-owned, and include the
results of Schneider Worldwide (Schneider) beginning in September 1998.
Investments in companies, representing 20% to 50% of their ownership, are
accounted for under the equity method, including the Company's 22% ownership in
Medinol Ltd. (Medinol). Income recorded in connection with these investments did
not have a material impact on the Company's operating results during the periods
presented. Investments in companies, representing less than 20% of their
ownership, are accounted for under the cost method.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
TRANSLATION OF FOREIGN CURRENCY: All assets and liabilities of foreign
subsidiaries are translated at the rate of exchange at year end while sales and
expenses are translated at the average rates in effect during the year. The net
effect of these translation adjustments is shown in the accompanying financial
statements as a component of stockholders' equity.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS: Short-term investments are recorded at fair value, which
approximates cost.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the
Company to concentration of credit risk consist primarily of temporary cash and
cash equivalents, marketable securities, derivative instrument contracts and
accounts receivable. The Company invests its excess cash primarily in
high-quality securities and limits the amount of credit exposure to any one
financial institution. The Company's investment policy limits exposure to
concentration of credit risk and changes in market conditions. Counterparties to
financial instruments expose the Company to credit-related losses in the event
of non-performance. The Company transacts derivative instrument contracts with
major financial institutions to limit its credit exposure.
The Company provides credit, in the normal course of business, primarily to
hospitals, private and governmental institutions and health care agencies and
doctors' offices. The Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market. Generally, write-downs of consignment inventory are charged to selling,
general and administrative expenses.
PROPERTY, PLANT AND EQUIPMENT: Property, plant, equipment and leaseholds are
stated at historical cost. Expenditures for maintenance and repairs are charged
to expense; betterments are capitalized. The Company provides for depreciation
and amortization by the straight-line method at rates which are intended to
depreciate and amortize the cost of these assets over their estimated useful
lives. Buildings and improvements are depreciated over a 15-to-40 year life;
equipment, furniture and fixtures are depreciated over a 2-to-12 year life.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease.
The Company receives grant money equal to a percentage of expenditures on
eligible capital equipment, which is recorded as deferred income and recognized
ratably over the life of the underlying assets. The grant money would be
repayable, in whole or in part, should the Company fail to meet certain
employment goals.
INTANGIBLE ASSETS: Intangible assets are recorded at historical cost and
amortized using the straight-line method over the following lives: Patents and
trademarks (3 - 20 years); Licenses (2 - 20 years); Core and developed
technology (3 - 25 years); Excess of cost over net assets acquired (8 - 40
years); Other intangibles (various).
The Company reviews its excess of cost over net assets acquired and other
intangible assets to determine if any adverse conditions exist that would
indicate impairment. Conditions that would trigger an 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 amount of an asset exceeds the sum
of its undiscounted cash flows, the carrying value is written down to fair value
F-18 BOSTON SCIENTIFIC AND SUBSIDIARIES
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in the period identified. Fair value is calculated as the present value of
estimated future cash flows using a risk-adjusted discount rate commensurate
with the Company's weighted-average cost of capital.
INCOME TAXES: The Company utilizes the asset and liability method for accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
the enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Income taxes are provided on unremitted earnings of subsidiaries outside the
United States (U.S.) where such earnings are expected to be repatriated. The
Company intends to determine annually the amount of unremitted earnings of
non-U.S. subsidiaries to invest indefinitely in its non-U.S. operations. It is
not practical to estimate the amount of taxes payable on earnings determined to
be invested indefinitely in non-U.S. operations. At December 31, 2000,
unremitted earnings of non-U.S. subsidiaries were $758 million.
REVENUE RECOGNITION: The Company recognizes revenue from the sale of its
products when the products are shipped to its customers unless a consignment
arrangement exists. Revenue from consignment customers is recognized based on
notification from the customer of usage indicating sales are complete. The
Company allows its customers to return certain products for credit. The Company
also allows customers to return defective or damaged products for credit or
replacement. Accruals are made and evaluated for adequacy for all returns.
LEGAL COSTS: The Company accrues costs of settlement, damages and, under certain
conditions, costs of defense when such costs are probable and estimable.
Otherwise, such costs are expensed as incurred.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
STOCK COMPENSATION ARRANGEMENTS: The Company accounts for its stock compensation
arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and intends to continue to do so. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." Any compensation cost
on fixed awards with pro rata vesting is recognized on a straight-line basis
over the award's vesting period.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: As of January 1, 2000, the
Company adopted Financial Accounting Standards Board Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was issued
in June, 1998 and its amendments Statements 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" and 138, "Accounting for Derivative Instruments and Certain
Hedging Activities" issued in June 1999 and June 2000, respectively
(collectively referred to as Statement 133).
As a result of adoption of Statement 133, the Company recognizes all derivative
financial instruments in the consolidated financial statements at fair value
regardless of the purpose or intent for holding the instrument. Changes in the
fair value of derivative financial instruments are either recognized
periodically in earnings or in stockholders' equity as a component of
comprehensive income depending on whether the derivative financial instrument
qualifies for hedge accounting. Changes in fair values of derivatives not
qualifying for hedge accounting are reported in earnings.
The Company recorded an immaterial transition adjustment upon adoption of
Statement 133.
NEW ACCOUNTING STANDARD: In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements," which the Company adopted in the fourth quarter of
2000. SAB 101 provides a framework for various revenue recognition issues and
more conservative interpretations of existing accounting guidance. The Company's
adoption of this bulletin had no material effect on the Company's reported
results of operations or financial position.
SHIPPING AND HANDLING COSTS: The Company does not generally recognize revenue
from shipping and handling of its products. Shipping and handling costs are
recorded as selling, general and administrative expenses.
NET INCOME PER COMMON SHARE: Net income (loss) per common share is based upon
the weighted-average number of common shares, common share equivalents and the
dilutive effect of European put options, if applicable, outstanding each year.
The Company paid a two-for-one stock split on November 30, 1998. All historical
per-share amounts have been restated to reflect the stock split.
RECLASSIFICATIONS: Certain prior years' amounts have been reclassified to
conform to the current year's presentation.
BOSTON SCIENTIFIC AND SUBSIDIARIES F-19
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - OTHER BALANCE SHEET INFORMATION
Components of other selected captions in the Consolidated Balance Sheets at
December 31 consisted of:
(In millions) 2000 1999
- ------------- ---- ----
TRADE ACCOUNTS RECEIVABLE
Accounts receivable $428 $508
Less allowances 67 63
---- ----
$361 $445
==== ====
INVENTORIES
Finished goods $172 $194
Work-in-process 59 60
Raw materials 123 122
---- ----
$354 $376
==== ====
PROPERTY, PLANT AND EQUIPMENT
Land $ 56 $ 56
Buildings and improvements 365 376
Equipment, furniture and fixtures 521 508
---- ----
942 940
Less accumulated depreciation and amortization 375 336
---- ----
$567 $604
==== ====
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired $879 $886
Less accumulated amortization 58 46
---- ----
$821 $840
==== ====
TECHNOLOGY - CORE AND DEVELOPED
Core technology $421 $421
Developed technology 220 222
---- ----
641 643
Less accumulated amortization 134 73
---- ----
$507 $570
==== ====
PATENTS, TRADEMARKS AND OTHER
Patents and trademarks $296 $284
Licenses 102 69
Other 77 75
---- ----
475 428
Less accumulated amortization 132 112
---- ----
$343 $316
==== ====
ACCRUED EXPENSES
Payroll and related liabilities $112 $ 97
Other 167 189
---- ----
$279 $286
==== ====
During 2000, the Company purchased approximately $130 million of NIR(R) coronary
stents from Medinol and had approximately $149 million of net NIR(R) inventory
on hand as of December 31, 2000. Any delays, stoppages, or interruptions in the
supply and/or mix of the NIR(R) stent could adversely affect the operating
results of the Company. Worldwide NIR(R) coronary stent sales were approximately
15% of 2000 worldwide sales.
F-20 BOSTON SCIENTIFIC AND SUBSIDIARIES
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents and investments, stated at fair value, consisted of the
following:
Gross Gross
Fair Unrealized Unrealized Amortized
(In millions) Value Gains Losses Cost
- ------------- ----- ---------- ---------- ---------
DECEMBER 31, 2000
AVAILABLE-FOR-SALE:
Cash and money market accounts $54 $54
Equity securities (with a readily
determinable fair value) 42 $28 $ 1 15
--- --- --- ---
$96 $28 $ 1 $69
DECEMBER 31, 1999
AVAILABLE-FOR-SALE:
Cash and money market accounts $64 $64
Equity securities (with a readily
determinable fair value) 29 $17 $ 5 17
--- --- --- ---
$93 $17 $ 5 $81
--- --- --- ---
The Company has no trading securities. Unrealized gains and temporary losses for
available-for-sale securities are excluded from earnings and are reported, net
of tax, as a separate component of stockholders' equity until realized. The cost
of available-for-sale securities is based on the specific identification method.
At December 31, 2000 and 1999, the Company had investments totaling $63 million,
including its investment in Medinol, and $40 million, respectively, in which the
fair value was not readily determinable. During 2000, the Company received cash
dividends of approximately $25 million, net of tax, from Medinol.
NOTE D - BORROWINGS AND CREDIT ARRANGEMENTS
The Company's borrowings at December 31 consisted of:
(In millions) 2000 1999
---- ----
Commercial paper $ 56 $277
Bank obligations - short-term 204 323
Long-term debt - fixed rate 562 570
Long-term debt - floating rate 108
Capital leases (see Note E) 12 10
---- ----
The Company had approximately $56 million and $277 million of commercial paper
outstanding at December 31, 2000 and 1999, respectively, at weighted-average
interest rates of 8.00% and 6.70%, respectively. In addition, the Company had
approximately $187 million and $421 million in revolving credit facility
borrowings outstanding at December 31, 2000 and 1999, respectively, at
weighted-average interest rates of 4.54% and 6.66%, respectively. At December
31, 2000, the revolving credit facilities totaled $1.65 billion, consisting of a
$1.0 billion credit facility that terminates in June 2002, a $600 million
364-day credit facility that terminates in September 2001 and a $50 million
uncommitted credit facility. The revolving credit facilities also support the
Company's commercial paper borrowings. Use of the borrowings is unrestricted and
the borrowings are unsecured. The revolving credit facilities require the
Company to maintain a specific ratio of consolidated funded debt (as defined) to
consolidated net worth (as defined) plus consolidated funded debt of less than
or equal to 60%. The ratio was approximately 26% and 37% at December 31, 2000
and 1999, respectively.
The Company has the ability to refinance a portion of its short-term debt on a
long-term basis through its revolving credit facilities. The Company does not
expect that its short-term borrowings as of
BOSTON SCIENTIFIC AND SUBSIDIARIES F-21
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000 will remain outstanding beyond the next twelve months and,
accordingly, the Company has not reclassified any of the short-term borrowings
as long-term at December 31, 2000, compared to $108 million of such
reclassifications at December 31, 1999.
In March 1998, the Company issued $500 million of seven-year senior notes. The
senior notes bear a coupon of 6.625% payable semi-annually, and are not
redeemable prior to maturity or subject to any sinking fund requirements.
The Company had 6.0 billion Japanese yen (translated to approximately $53
million and $58 million at December 31, 2000 and 1999, respectively) of
borrowings outstanding with a syndicate of Japanese banks. The interest rate on
the borrowings is 2.37% and the borrowings are payable in 2002. In addition, the
Company had approximately 1.1 billion Japanese yen (translated to approximately
$9 million) and 1.2 billion Japanese yen (translated to approximately $12
million) of borrowings outstanding from a Japanese bank used to finance a
facility construction project at December 31, 2000 and 1999, respectively. The
interest rate on the borrowings is 2.1% and principal payments are due
semi-annually through 2012.
The Company has uncommitted Japanese credit facilities with several Japanese
banks, which provided for borrowings and promissory notes discounting of up to
15.0 billion Japanese yen (translated to approximately $131 million) and 11.5
billion Japanese yen (translated to approximately $112 million) at December 31,
2000 and 1999, respectively. There was $12 million in borrowings outstanding
under the Japanese credit facilities at an interest rate of 1.5% at December 31,
2000, compared to no borrowings at December 31, 1999. At December 31, 2000,
approximately $108 million of notes receivable were discounted at average
interest rates of approximately 1.5% compared to $112 million of discounted
notes receivable at average interest rates of approximately 1.4% at December 31,
1999.
In addition, the Company had other outstanding short-term bank obligations of $5
million and $10 million at December 31, 2000 and 1999, respectively, at
weighted-average interest rates of 6.04% and 5.04%, respectively.
Interest paid, including interest paid under capital leases and mortgage loans,
amounted to $69 million in 2000, $117 million in 1999, and $65 million in 1998.
NOTE E - LEASES
Rent expense amounted to $36 million in 2000, $37 million in 1999 and $40
million in 1998. Future minimum rental commitments as of December 31, 2000 under
noncancelable capital and operating lease agreements are as follows:
Year Ended
December 31, Capital Operating
(In millions) Leases Leases
- ------------- ------- ---------
2001 $ 2 $ 32
2002 2 27
2003 3 14
2004 3 9
2005 2 8
Thereafter 9 51
---- ----
Total minimum lease payments 21 $141
==== ====
Amount representing interest 9
---- ----
Present value of minimum lease payments $ 12
==== ====
NOTE F - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments. However, considerable judgment
is required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheets
for cash and cash equivalents are valued at cost which approximates their fair
value.
INVESTMENTS: The fair values for marketable debt and equity securities are based
on quoted market prices when readily determinable.
COMMERCIAL PAPER AND BANK OBLIGATIONS: The carrying amounts of the Company's
borrowings under its commercial paper program and its financing agreements
approximate their fair value.
LONG-TERM DEBT: The fair value of the Company's fixed rate long-term debt is
estimated
F-22 BOSTON SCIENTIFIC AND SUBSIDIARIES
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
based on quoted market prices. The carrying amounts of the Company's floating
rate long-term debt approximate their fair value.
FOREIGN EXCHANGE CONTRACTS: The fair values of foreign exchange contracts are
estimated based on the amount that the Company would receive or pay to terminate
the agreements at the reporting date. The Company had foreign exchange contracts
outstanding in the notional amounts of $452 million and $128 million as of
December 31, 2000 and 1999, respectively.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 2000 and 1999 are as follows:
2000 1999
----------------- -----------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- ------------- -------- ----- -------- -----
ASSETS:
Cash, cash equivalents and investments $ 96 $ 96 $ 93 $ 93
Foreign exchange contracts 37 37
LIABILITIES:
Commercial paper $ 56 $ 56 $277 $277
Bank obligations - short-term 204 204 323 323
Long-term debt - fixed rate 562 518 570 530
Long-term debt - floating rate 108 108
Foreign exchange contracts 1 1
---- ---- ---- ----
BOSTON SCIENTIFIC AND SUBSIDIARIES F-23
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - INCOME TAXES
Income (loss) before income taxes consisted of:
YEAR ENDED DECEMBER 31,
(In millions) 2000 1999 1998
- ------------- ----- ----- -----
Domestic $ 272 $ 422 $(346)
Foreign 255 140 71
----- ----- -----
$ 527 $ 562 $(275)
===== ===== =====
The related provision (benefit) for income taxes consisted of:
YEAR ENDED DECEMBER 31,
(In millions) 2000 1999 1998
- ------------- ----- ----- -----
Current:
Federal $ 115 $ 164 $ 106
State 8 17 21
Foreign 29 39 13
----- ----- -----
152 220 140
===== ===== =====
Deferred:
Federal (9) (8) (112)
State (1) (1) (27)
Foreign 12 (20) (12)
----- ----- -----
2 (29) (151)
----- ----- -----
$ 154 $ 191 $ (11)
===== ===== =====
The reconciliation of taxes on income at the federal statutory rate to the
actual provision (benefit) for income taxes is:
YEAR ENDED DECEMBER 31,
(In millions) 2000 1999 1998
- ------------- ----- ----- -----
Tax at statutory rate $ 184 $ 197 $ (96)
State income taxes, net of federal benefit 5 11 8
Effect of foreign taxes (36) (20) (25)
Non-deductible merger-related expenses and
purchased research and development 93
Other, net 1 3 9
----- ----- -----
$ 154 $ 191 $ (11)
===== ===== =====
F-24 BOSTON SCIENTIFIC AND SUBSIDIARIES
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities at
December 31 consisted of:
(In millions) 2000 1999
- ------------- ----- -----
Deferred tax assets:
Inventory costs, intercompany profit and related reserves $ 92 $ 89
Tax benefit of net operating loss and tax credits 33 42
Reserves and accruals 36 21
Restructuring and merger-related charges, including
purchased research and development 228 230
Other, net 28 21
----- -----
417 403
Less valuation allowance on deferred tax assets 27 38
----- -----
$ 390 $ 365
===== =====
Deferred tax liabilities:
Property, plant and equipment $ (4) $ (3)
Intangible assets (66) (45)
Unremitted earnings of subsidiaries (58) (59)
Unrealized gains and losses on available-for-sale securities (10) (5)
Unrealized gains and losses on derivative financial instruments (16)
Other (10) (15)
----- -----
(164) (127)
===== =====
$ 226 $ 238
===== =====
At December 31, 2000, the Company had U.S. tax net operating loss carryforwards
and tax credits of approximately $23 million that expire periodically beginning
in the year 2007. In addition, the Company had foreign tax net operating loss
carryforwards of approximately $10 million that will expire periodically
beginning in the year 2002. The Company established a valuation allowance of $27
million for these carryforwards. The reduction from 1999 to 2000 in the
valuation allowance is primarily related to the utilization of net operating
loss carryforwards that were previously restricted by U.S. tax law.
Income taxes paid amounted to $50 million in 2000, $93 million in 1999 and $109
million in 1998. The income tax provision (benefit) of the unrealized gain or
loss component of other comprehensive income (loss) was approximately $21
million, $4 million, and $(11) million for 2000, 1999, and 1998, respectively.
BOSTON SCIENTIFIC AND SUBSIDIARIES F-25
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - STOCKHOLDERS' EQUITY
PREFERRED STOCK: The Company is authorized to issue 50 million shares of
preferred stock in one or more series and to fix the powers, designations,
preferences and relative participating, option or other rights thereof,
including dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences and the number of shares constituting any series,
without any further vote or action by the Company's stockholders. At December
31, 2000, the Company had no shares of preferred stock outstanding.
COMMON STOCK: The Company is authorized to issue 600 million shares of common
stock, $.01 par value per share. Holders of common stock are entitled to one
vote per share. Holders of common stock are entitled to receive dividends when
and if declared by the Board of Directors and to share ratably in the assets of
the Company legally available for distribution to its stockholders in the event
of liquidation. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The holders of common stock do not have
cumulative voting rights. The holders of a majority of the shares of common
stock can elect all of the directors and can control the management and affairs
of the Company.
The Company paid a two-for-one stock split on November 30, 1998. All historical
share and per share amounts have been restated to reflect the stock split except
for share amounts presented in the Consolidated Statements of Stockholders'
Equity which reflect the actual share amounts outstanding for each period
presented.
On June 30, 1999, the Company completed a public offering of 14.950 million
shares of its common stock at a price of $39.875 per share under a $1.2 billion
shelf registration filed with the Securities and Exchange Commission in
September 1998. The Company used the net proceeds from the public offering of
approximately $578 million to repay borrowings under the revolving credit
facilities. Approximately $604 million remain available for the issuance of
various debt or equity securities under the shelf registration.
The Company is authorized to purchase on the open market and in private
transactions up to approximately 60 million shares of the Company's common
stock. Stock repurchased under the Company's systematic plan will be used to
satisfy its obligations pursuant to its equity incentive plans. Under the
authorization, the Company may also repurchase shares outside of the Company's
systematic plan. These additional shares would principally be used to satisfy
the Company's obligations pursuant to its equity incentive plans, but may also
be used for general corporate purposes, including acquisitions. During 2000, the
Company repurchased approximately 12 million shares at an aggregate cost of $222
million. As of December 31, 2000, a total of approximately 38 million shares of
the Company's common stock have been repurchased.
NOTE I - STOCK OWNERSHIP PLANS
EMPLOYEE AND DIRECTOR STOCK INCENTIVE PLANS
Boston Scientific's 1992 and 1995 Long-Term Incentive Plans provide for the
issuance of up to 40 million shares of common stock. During 2000, the Company's
Board of Directors and stockholders approved and adopted the Boston Scientific
2000 Long-Term Incentive Plan, which reserves an additional 20 million shares of
common stock for issuance under this plan. The terms of these three plans are
similar. Together, the plans cover officers of, directors of, employees of and
consultants to the Company and provide for the grant of various incentives,
including qualified and non-qualified options, stock grants, share appreciation
rights and performance awards. Options granted to purchase shares of common
stock are either immediately exercisable or exercisable in installments as
determined by the Compensation Committee of the Board of Directors, consisting
of two or more non-employee directors (the Committee), and, expire within ten
years from date of grant. In the case of qualified options, if an employee owns
more than 10% of the voting power of all classes of stock, the option granted
will be at 110% of the fair market value of the Company's common stock on the
date of grant and will expire over a period not to exceed five years.
The Committee may also make stock grants in which shares of common stock may be
issued to directors, officers, employees and consultants at a purchase price
less than fair market value. The terms and conditions of such issuances,
including whether achievement of individual or Company performance targets is
required for the retention of such awards, are determined by the Committee. The
Committee may also issue shares of common stock and/or authorize cash awards
under the incentive plans in recognition of the
F-26 BOSTON SCIENTIFIC AND SUBSIDIARIES
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
achievement of long-term performance objectives established by the Committee.
In January 2000, the Company granted under its 1992 and 1995 Long-Term Incentive
Plans approximately 1.1 million shares of its common stock to a limited group of
employees subject to certain forfeiture restrictions. The purpose of the program
was to help retain key employees. The market value of these shares was
approximately $26 million on the date of issuance and the vesting period is
three years. This amount was recorded as deferred compensation and is shown as a
separate component of stockholders' equity. The deferred compensation is being
amortized to expense over the vesting period and amounted to approximately $8
million for the year ended December 31, 2000. During the year ended December 31,
2000, approximately 143,000 shares of restricted stock were forfeited. No stock
grants were issued in 1999 and 5,000 shares were issued during 1998.
Boston Scientific's 1992 Non-Employee Directors' Stock Option Plan provides for
the issuance of up to 200,000 shares of common stock and authorizes the
automatic grant to outside directors of options to acquire a specified number of
shares of common stock generally on the date of each annual meeting of the
stockholders of the Company. Options under this plan are exercisable ratably
over a three-year period and expire ten years from the date of grant.
Shares reserved for future issuance under all of the Company's incentive plans
totaled approximately 52 million at December 31, 2000.
If the Company had elected to recognize compensation expense for the granting of
options under stock option plans based on the fair values at the grant dates
consistent with the methodology prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation," net income (loss) and earnings (loss) per share would
have been reported as the following pro forma amounts:
YEAR ENDED DECEMBER 31,
(In millions, except per share data) 2000 1999 1998
- ------------------------------------ -------- -------- --------
Net income (loss)
As reported $ 373 $ 371 $ (264)
Pro forma 333 329 (302)
-------- -------- --------
Earnings (loss) per common share - assuming dilution
As reported $ 0.91 $ 0.90 $ (0.68)
Pro forma 0.83 0.80 (0.77)
======== ======== ========
The weighted-average grant-date fair value per share of options granted during
2000, 1999 and 1998, calculated using the Black-Scholes options pricing model,
is $8.67, $13.81 and $13.13, respectively.
The fair value of the stock options used to calculate the pro forma net income
(loss) and earnings (loss) per share amounts above is estimated using the
Black-Scholes options pricing model with the following weighted-average
assumptions:
2000 1999 1998
--------- --------- ---------
Dividend yield 0% 0% 0%
Expected volatility 47.20% 48.60% 37.80%
Risk-free interest rate 6.01% 5.37% 5.64%
Actual forfeitures 2,737,000 1,272,000 1,127,000
Expected life 4.6 4.2 3.7
========= ========= =========
BOSTON SCIENTIFIC AND SUBSIDIARIES F-27
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information related to stock options at December 31 under stock incentive plans
is as follows:
(Option amounts in thousands) 2000 1999 1998
- ----------------------------- -------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding at January 1 31,511 $23.63 32,048 $20.45 33,206 $15.76
Granted 18,441 18.22 6,634 31.57 6,621 35.91
Exercised (1,348) 11.23 (5,195) 12.39 (5,557) 10.19
Canceled (4,031) 28.18 (1,976) 28.29 (2,222) 22.02
------ ------ ------ ------ ------ ------
Outstanding at December 31 44,573 21.36 31,511 23.63 32,048 20.45
====== ====== ====== ====== ====== ======
Exercisable at December 31 16,921 $19.56 13,346 $16.22 13,053 $11.58
====== ====== ====== ====== ====== ======
Below is additional information related to stock options outstanding and
exercisable at December 31, 2000:
Stock Options
(Option amounts in thousands) Stock Options Outstanding Exercisable
- ----------------------------- ----------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
- ------------------------ ------- ----------- -------- ------- --------
$0.00 - 8.00 3,669 2.61 $ 5.71 3,669 $ 5.71
8.01-16.00 11,655 8.10 12.82 3,765 13.65
16.01-24.00 9,586 8.25 18.68 3,004 20.53
24.01-32.00 11,332 7.65 26.42 3,480 25.07
32.01-40.00 8,105 7.77 36.14 2,945 36.37
40.01-48.00 226 8.53 44.96 58 44.85
------ ---- ------ ------ ------
44,573 7.51 $21.36 16,921 $19.56
====== ==== ====== ====== ======
STOCK PURCHASE PLAN
Boston Scientific's Global Employee Stock Ownership Plan (Stock Purchase Plan)
provides for the granting of options to purchase up to 3 million shares of the
Company's common stock to all eligible employees. Under the Stock Purchase Plan,
each eligible employee is granted, at the beginning of each period designated by
the Committee as an offering period, an option to purchase shares of the
Company's common stock equal to not more than 10% of the employee's eligible
compensation. Such options may be exercised generally only to the extent of
accumulated payroll deductions at the end of the offering period, at a purchase
price equal to 85% of the fair market value of the Company's common stock at the
beginning or end of each offering period, whichever is less.
During 2000, approximately 754,000 shares were issued at prices ranging from
$18.59 to $18.65 per share. During 1999, approximately 603,000 shares were
issued at prices ranging from $22.47 to $22.79 per share, and during 1998,
approximately 380,000 shares were issued at $23.35 per share. At December 31,
2000, there were approximately 219,000 shares available for future issuance.
F-28 BOSTON SCIENTIFIC AND SUBSIDIARIES
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
YEAR ENDED DECEMBER 31,
(In millions, except share and per share data) 2000 1999 1998
- ---------------------------------------------- --------- --------- ---------
BASIC:
Net income (loss) $ 373 $ 371 $ (264)
========= ========= =========
Weighted average shares
outstanding (in thousands) 405,271 404,783 390,836
========= ========= =========
Net income (loss) per
common share $ 0.92 $ 0.92 $ (0.68)
========= ========= =========
ASSUMING DILUTION:
Net income (loss) $ 373 $ 371 $ (264)
========= ========= =========
Weighted average shares
outstanding (in thousands) 405,271 404,783 390,836
Net effect of dilutive stock-based
compensation (in thousands) 3,051 6,568
--------- ---------
Total 408,322 411,351 390,836
========= ========= =========
Net income (loss) per
common share $ 0.91 $ 0.90 $ (0.68)
========= ========= =========
During 2000, 1999 and 1998, approximately 24 million, 7 million and 7 million
potential common shares, respectively, were not included in the computation of
earnings per share, assuming dilution, because exercise prices were greater than
the average market price of the common shares. In addition, during 1998,
approximately 9 million stock options were not included in the computation of
earnings per share, assuming dilution, because they would have been
antidilutive.
NOTE K - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Upon adoption of Statement 133, the Company initiated a program to hedge a
portion of its forecasted intercompany and third-party transactions with foreign
exchange forward and option contracts. These contracts are entered into to
reduce the risk that the Company's earnings and cash flows resulting from
certain forecasted transactions will be adversely affected by changes in foreign
currency exchange rates. However, the Company may be impacted by changes in
foreign currency exchange rates related to the unhedged portion. The success of
the hedging program depends, in part, on forecasts of transaction activity in
various currencies (currently the Japanese yen and the euro). The Company may
experience unanticipated foreign currency exchange gains or losses to the extent
that there are timing differences between forecasted and actual activity during
periods of currency volatility. However, since the critical terms of forward
contracts designated as cash flow hedging instruments are the same as the
underlying forecasted transaction, changes in the fair value of forward
contracts should be highly effective in offsetting the present value of changes
in the expected cash flows from the forecasted transaction. The ineffective
portion of any changes in the fair value of option contracts designated as cash
flow hedging instruments is recognized immediately in earnings. The Company did
not recognize material gains or losses resulting from either hedge
ineffectiveness or changes in forecast probability during 2000.
The effective portion of any changes in the fair value of the derivative
instruments, designated as cash flow hedges, is recorded in accumulated other
comprehensive income/(loss) (AOCI) until the third-party
BOSTON SCIENTIFIC AND SUBSIDIARIES F-29
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
transaction associated with the hedged forecasted transaction occurs. Once the
third-party transaction associated with the hedged forecasted transaction
occurs, the effective portion of any related gain or loss on the cash flow hedge
is reclassified from AOCI to earnings. In the event the hedged forecasted
intercompany or third-party transaction does not occur, or it becomes probable
that it will not occur, the effective portion of any gain or loss on the related
cash flow hedge would be reclassified from AOCI to earnings at that time.
The Company recognized a net gain of approximately $8 million in earnings from
derivative instruments designated as cash flow hedges of forecasted transactions
during 2000. All of the derivative instruments, designated as cash flow hedges,
outstanding at December 31, 2000, mature within the subsequent 24-month period.
As of December 31, 2000, approximately $27 million of unrealized net gains have
been recorded in AOCI, net of tax, to recognize the effective portion of any
fair value of derivative instruments that are, or previously were, designated as
cash flow hedges. Of this amount, a gain of approximately $14 million, net of
tax, is expected to be reclassified to earnings within the next twelve months to
mitigate foreign exchange risk.
Furthermore, the Company continues to hedge predominantly all of its net
recognized foreign currency transactional exposures with forward foreign
exchange contracts to reduce the risk that the Company's earnings and cash flows
will be adversely affected by changes in foreign currency exchange rates. These
foreign exchange contracts are not designated as cash flow, fair value or net
investment hedges under Statement 133. These derivative instruments do not
subject the Company's earnings or cash flows to material risk due to exchange
rate movements because gains and losses on these derivatives offset losses and
gains on the assets and liabilities being hedged. These forward foreign exchange
contracts are entered into for periods consistent with commitments, generally
one to six months.
In June 2000, the FASB approved certain interpretations of Statement 133 that
affected the accounting for cash flow hedges of forecasted intercompany
transactions in a manner that was not consistent with the intended accounting
under the Company's hedging strategy. As a result, effective July 1, 2000, the
Company removed the cash flow hedge designation from a portion of its derivative
instruments that matured on various dates prior to December 31, 2000.
Accordingly, changes in the fair value of derivative instruments that hedged
forecasted transactions but were not designated as cash flow hedges were
recorded in earnings each period. The Company recognized a net gain of
approximately $6 million in earnings from these dedesignated hedges during 2000.
NOTE L - COMMITMENTS AND CONTINGENCIES
On May 16, 2000, the Company entered into an agreement with Guidant Corporation
(Guidant) to settle all outstanding litigation between the two companies and
their affiliates. The Company and Guidant had pending a number of lawsuits in
the U.S. and Europe in which each had accused the other of patent infringement.
The litigation involved coronary stent delivery systems and dilatation
catheters. As part of the settlement, the companies agreed to license certain
patents to each other. In addition, the companies agreed to specified financial
terms depending upon the ultimate resolution of Guidant's August 12, 1998,
lawsuit against the Company filed in Indiana related to the Company's NIR(R)
stent and of the Company's May 31, 1994, lawsuit against Guidant in California
related to Guidant's RX ELIPSE(TM) PTCA catheter and RX MULTILINK(TM) stent
delivery system (described below). All other disputes between the parties were
dismissed.
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a subsidiary of the
Company, filed a suit for patent infringement against Advanced Cardiovascular
Systems, Inc. (ACS), a subsidiary of Guidant, alleging willful infringement of
two of SCIMED's U.S. patents by ACS's RX ELIPSE(TM) PTCA catheter. The suit was
filed in the U.S. District Court for the Northern District of California seeking
monetary and injunctive relief. In January 1998, the Company added the ACS RX
MULTILINK(TM) stent delivery system to its complaint. On June 6, 1999, the Court
granted summary judgment in favor of ACS affirming that SCIMED's patents were
not infringed. SCIMED has appealed the judgment. A hearing was held October 2,
2000, and the Company is awaiting the decision.
On August 12, 1998, ACS and an affiliate of ACS filed suit for patent
infringement against the Company and SCIMED alleging that the Company's NIR(R)
stent infringes five patents owned by ACS. The suit was filed
F-30 BOSTON SCIENTIFIC AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in the U.S. District Court for the Southern District of Indiana seeking
injunctive and monetary relief. On June 28, 2000, the Court granted the
Company's motion to dismiss the action. ACS has appealed the decision.
On March 25, 1996, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson Company (Johnson & Johnson), filed a suit for patent infringement
against SCIMED, alleging the infringement of five U.S. patents by SCIMED's
LEAP(R) balloon material used in certain SCIMED catheter products, including
SCIMED's BANDIT(TM) and EXPRESS PLUS(TM) catheters. The suit was filed in the
U.S. District Court for the District of Minnesota and seeks monetary and
injunctive relief. SCIMED has answered, denying the allegations of the
complaint. A trial date has not yet been set.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis,
alleging willful infringement of several SCIMED U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in
the U.S. District Court for the District of Minnesota, seeking monetary and
injunctive relief. The parties have agreed to add Cordis' CHARGER(TM) and
HELIX(TM) catheters to the suit. Cordis has answered, denying the allegations of
the complaint. A trial date has not yet been set.
On March 13, 1997, the Company (through its subsidiaries) filed suits against
Johnson & Johnson (through its subsidiaries) in The Netherlands, the United
Kingdom and Belgium, and on March 17, 1997, filed suit in France, seeking a
declaration of noninfringement for the NIR(R) stent relative to two European
patents licensed to Ethicon, Inc. (Ethicon), a Johnson & Johnson subsidiary, as
well as a declaration of invalidity with respect to those patents. After a trial
on the merits in the United Kingdom during March 1998, the court ruled on June
26, 1998, that neither of the patents is infringed by the NIR(R) stent, and that
both patents are invalid. Ethicon appealed, and on March 20, 2000, the appellate
court upheld the trial outcome. On October 28, 1998, the Company's motion for a
declaration of noninfringement in France was dismissed for failure to satisfy
statutory requirements; the French invalidity suits were not affected.
On March 20, 21 and 22, 1997, the Company (through its subsidiaries) filed
additional suits against Johnson & Johnson (through its subsidiaries) in Sweden,
Italy and Spain, respectively, seeking a declaration of noninfringement for the
NIR(R) stent relative to one of the European patents licensed to Ethicon in
Sweden, Italy and Spain and a declaration of invalidity in Italy and Spain. In
Italy, following a July 9, 1999, hearing, a technical expert was appointed by
the court. Ethicon and other Johnson & Johnson subsidiaries filed a cross-border
suit in The Netherlands on March 17, 1997, alleging that the NIR(R) stent
infringes one of the European patents licensed to Ethicon. In this action, the
Johnson & Johnson entities requested relief, including provisional relief (a
preliminary injunction), covering Austria, Belgium, France, Greece, Italy, The
Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. On April
2, 1997, the Johnson & Johnson entities filed a similar cross-border proceeding
in The Netherlands with respect to a second European patent licensed to Ethicon.
Johnson & Johnson subsequently withdrew its request for cross-border relief in
the United Kingdom. In October, 1997, Johnson & Johnson's request for
provisional cross-border relief on both patents was denied by the Dutch court,
on the ground that it is "very likely" that the NIR(R) stent will be found not
to infringe the patents. Johnson & Johnson appealed this decision with respect
to the second patent; the appeal has been denied on the ground that there is a
"ready chance" that the patent will be declared null and void. In January 1999,
Johnson & Johnson amended the claims of the second patent, changed the action
from a cross-border case to a Dutch national action, and indicated its intent
not to pursue its action on the first patent. On June 23, 1999, the Dutch Court
affirmed that there were no remaining infringement claims with respect to either
patent. In late 1999, Johnson & Johnson appealed this decision. A hearing on the
appeal has not yet been scheduled.
On May 6, 1997, Ethicon Endosurgery, Inc., sued the Company in Dusseldorf,
Germany, alleging that the Company's NIR(R) stent infringes one of Ethicon's
patents. On June 23, 1998, the case was stayed following a decision in an
unrelated nullity action in which the Ethicon patent was found to be invalid.
On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR(R) stent infringes certain
BOSTON SCIENTIFIC AND SUBSIDIARIES F-31
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Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court
of Canada seeking a declaration of infringement, monetary damages and injunctive
relief. The Company has answered, denying the allegations of the complaint. A
trial is expected to begin in fall 2002.
On October 22, 1997, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the importation and use of the NIR(R) stent
infringes two patents owned by Cordis. On April 13, 1998, Cordis filed a suit
for patent infringement against the Company and SCIMED alleging that the
Company's NIR(R) stent infringes two patents owned by Cordis. The suits were
filed in the U.S. District Court for the District of Delaware seeking monetary
damages, injunctive relief and that the patents be adjudged valid, enforceable
and infringed. A trial on both actions was held in November and December 2000. A
jury found that the NIR(R) stent does not infringe three Cordis patents, but
does infringe one Cordis patent and awarded damages of approximately $324
million to Cordis. A final decision has not yet been entered by the Court
pending post trial motions scheduled through June 2001.
On June 7, 1999, the Company, SCIMED and Medinol filed suit for patent
infringement against Johnson & Johnson, Johnson & Johnson Interventional Systems
and Cordis, alleging two U.S. patents owned by Medinol are infringed by at least
Cordis' CROWN(TM), MINI CROWN(TM) and CORINTHIAN(TM) stents. The suit was filed
in the U.S. District Court for the District of Minnesota seeking injunctive and
monetary relief. The case has been transferred to the U.S. District Court for
the District of Delaware. A trial is scheduled to begin in August 2001.
On March 24, 2000, the Company (through its subsidiaries) and Medinol filed a
cross-border suit against Johnson & Johnson, Cordis and certain of their foreign
subsidiaries in The Netherlands alleging Cordis' BX Velocity(TM) stent delivery
system infringes one of Medinol's European patents. In this action, the Company
and Medinol requested monetary and injunctive relief covering The Netherlands,
Austria, Belgium, Switzerland, Germany, Denmark, Spain, France, Greece, Ireland,
Italy, Liechtenstein, Luxembourg, Monaco, Portugal and Sweden. A hearing was
held January 12, 2001. A decision is expected in March 2001.
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 is scheduled for March 15, 2001.
On April 14, 2000, the Company (through its subsidiaries) and Medinol filed suit
for patent infringement against Johnson & Johnson, Cordis, and a subsidiary of
Cordis alleging that Cordis' BX Velocity stent delivery system infringes a
patent owned by Medinol. The complaint was filed in the U.S. District Court for
the District of Delaware seeking monetary and injunctive relief. The Company
filed a motion seeking a preliminary injunction, and a hearing on the motion was
held on August 3, 2000. Trial is expected to begin in August 2001.
On August 13, 1998, Arterial Vascular Engineering, Inc., now named Medtronic AVE
Inc. (AVE), filed a suit for patent infringement against the Company and SCIMED
alleging that the Company's NIR(R) stent infringes two patents owned by AVE. The
suit was filed in the U.S. District Court for the District of Delaware seeking
injunctive and monetary relief. On May 25, 2000, AVE amended the complaint to
include a third patent. The Company and SCIMED have answered, denying the
allegations of the complaint. Trial is expected to begin in January 2002.
On December 15, 1998, the Company and SCIMED filed a cross-border suit against
AVE in The Netherlands alleging that AVE's AVE GFX(TM), AVE GFX 2(TM), AVE
LTX(TM) and USCI CALYPSO(TM) rapid exchange catheters and stent delivery systems
infringe one of the Company's European patents. In this action, the Company
requested relief covering The Netherlands, the United Kingdom, France, Germany
and Italy. A hearing on the merits was held on October 22, 1999. The Court
delayed its decision pending advice from the Dutch Patent Office, which was
recently received. A final hearing has not yet been scheduled.
On December 18, 1998, AVE filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's MAXXUM(TM) and VIVA!(TM)
catheters infringe a patent owned by AVE. The suit was
F-32 BOSTON SCIENTIFIC AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
filed in the U.S. District Court for the District of Delaware seeking injunctive
and monetary relief. The Company and SCIMED have answered, denying the
allegations of the complaint. A trial is scheduled for June 4, 2001.
On March 10, 1999, the Company (through its subsidiary Schneider (Europe) AG)
filed suit against AVE alleging that AVE's AVE GFX, AVE GFX2, AVE LTX, CALYPSO
RELY(TM), PRONTO SAMBA(TM) and SAMBA RELY(TM) rapid-exchange catheters and stent
delivery systems infringe one of the Company's German patents. The suit was
filed in the District Court of Dusseldorf, Germany, seeking injunctive and
monetary relief. A hearing was held on January 27, 2000. The Court has delayed
its decision pending expert advice and on May 15, 2000, the Court appointed a
technical expert.
On April 6, 1999, AVE filed suit against SCIMED and another subsidiary of the
Company alleging that the Company's NIR(R) stent infringes one of AVE's European
patents. The suit was filed in the District Court of Dusseldorf, Germany,
seeking injunctive and monetary relief. A hearing was held in Germany on
September 23, 1999, and on November 4, 1999, the court dismissed the complaint.
On December 21, 1999, AVE appealed the dismissal and a hearing is scheduled for
May 2001.
On May 14, 1999, Medtronic, Inc. (Medtronic), filed suit against the Company and
SCIMED alleging that a variety of the Company's NIR(R) stent products infringe a
Medtronic patent. The suit was filed in the U.S. District Court for the District
of Minnesota seeking injunctive and monetary relief. In February 2000, the court
found that the NIR(R) stent products do not infringe Medtronic's patent and the
suit was dismissed. Medtronic appealed the decision. A hearing on the appeal was
held on January 9, 2001, and the Company is awaiting the decision.
On July 7, 1999, Medtronic filed suit against the Company and SCIMED, alleging
that SCIMED's RADIUS(TM) stent infringes two patents owned by Medtronic. The
suit was filed in the U.S. District Court for the District Court of Minnesota
seeking injunctive and monetary relief. The Company has answered, denying
allegations of the complaint. A trial is scheduled for July 2001.
On March 28, 2000, the Company and certain subsidiaries filed suit for patent
infringement against AVE alleging that AVE's S670 rapid exchange coronary stent
system infringes a patent licensed to the Company. The suit was filed in the
U.S. District Court for the Northern District of California seeking monetary and
injunctive relief. In July 2000, this matter was sent to arbitration. An
arbitration hearing is currently scheduled for April 2001 to determine whether
AVE's S670 and S660 rapid exchange coronary stent delivery systems and the R1
rapid exchange catheter are licensed pursuant to the terms of a preexisting
settlement agreement.
On December 6, 2000, the Company and SCIMED filed suit for patent infringement
against AVE alleging that AVE's S660 and S670 coronary stent delivery systems
and R1 rapid exchange catheter infringe a patent owned by the Company. The suit
was filed in the United States District Court for the District of Delaware
seeking monetary and injunctive relief.
On March 7, 1996, Cook Inc. (Cook), filed suit in the Regional Court, Munich
Division for Patent Disputes, in Munich, Germany, against MinTec, Inc. Minimally
Invasive Technologies alleging that the Cragg EndoPro(TM) System I and
Stentor(TM) endovascular device infringe a certain Cook patent. Following the
purchase of the assets of the Endotech/MinTec companies by the Company, the
Company assumed control of the litigation. A final hearing was held on May 12,
1999, and the court held no infringement of the Cook patents. The case was
dismissed in June 1999. Cook has appealed the decision. On July 27, 2000, the
Court stayed the action pending the outcome of a nullity action filed by the
Company against the patent.
On June 30, 1998, Cook filed suit in the Regional Court, Dusseldorf Division for
Patent Disputes, in Dusseldorf, Germany, against the Company alleging that the
Company's PASSAGER(TM) peripheral vascular stent graft and VANGUARD(TM)
endovascular aortic graft products infringe the same Cook patent. A hearing was
held on July 22, 1999, and a decision was received in September 1999 finding the
Company's products infringe the Cook patent. The Company appealed the decision.
A hearing is scheduled for June 21, 2001.
BOSTON SCIENTIFIC AND SUBSIDIARIES F-33
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 18, 1999, Cook filed suit against the Company and SCIMED, alleging that
SCIMED's RADIUS(TM) coronary stent infringes a certain U.S. patent owned by
Cook. The suit was filed in the U.S. District Court for the Southern District of
Indiana seeking monetary damages and injunctive relief. On July 14, 1999, Cook
filed an amended complaint adding Meadox Medicals, Inc. (Meadox), a wholly owned
subsidiary of the Company, as a party to the suit, and adding a breach of
contract claim. The Company, SCIMED and Meadox have answered, denying the
allegations of the complaint. A trial date is scheduled for April 2002.
On May 19, 2000, the Company and SCIMED filed suit against a subsidiary of Cook
alleging that Cook's MBL-4(TM), MBL-6(TM), MBL-4-XL(TM) and MBL-6-OV(TM)
ligating devices infringe three of the Company's patents. The suit was filed in
the U.S. District Court for the District of Massachusetts seeking monetary
damages and injunctive relief. Cook counterclaimed seeking declaratory judgment
that the Company's patents are invalid and unenforceable and Cook's products do
not infringe the Company's patents. The Company filed a motion requesting a
preliminary injunction which was denied in September 2000. The Company has
appealed the court's decision and a hearing on the appeal has not yet been
scheduled.
On February 3, 1999, the Company filed suit against Influence, Inc. (Influence),
alleging that Influence infringes certain of the Company's patents covering the
treatment of female urinary incontinence. The suit was filed in the Northern
District of California. Influence counterclaimed, alleging that the Company
infringes certain Influence patents, also relating to the treatment of female
urinary incontinence. On January 31, 2001, the Company and Influence entered
into an agreement to settle the litigation. Pursuant to the terms of the
agreement, both parties will cross-license patents relating to certain treatment
for female urinary incontinence.
On March 27, 2000, American Medical Systems, Inc. (AMS), filed suit against the
Company alleging that the Company induces infringement of an AMS patent covering
a certain treatment for female urinary incontinence. The complaint also alleges
misappropriation of trade secrets and breach of contract. The suit was filed in
the U.S. District Court for the District of Minnesota seeking monetary and
injunctive relief. On January 31, 2001, the Company and AMS entered into an
agreement to settle the litigation. Pursuant to the terms of the agreement, both
parties will cross-license patents relating to certain treatment for female
urinary incontinence.
On October 31, 2000, the Federal Trade Commission (FTC) filed suit against the
Company for alleged violations of a Consent Order dated May 5, 1995, pursuant to
which the Company had licensed certain intravascular ultrasound technology to
Hewlett-Packard Company (HP). The suit was filed in the U.S. District Court for
the District of Massachusetts seeking civil penalties and injunctive relief. The
Company has filed a motion to dismiss the complaint, and the FTC has filed a
motion for summary judgment. The motions are scheduled to be heard on May 3,
2001.
Beginning November 4, 1998, a number of shareholders of the Company, on behalf
of themselves and all others similarly situated, filed purported stockholders'
class action suits in the U.S. District Court for the District of Massachusetts
alleging that the Company and certain of its officers violated certain sections
of the Securities Exchange Act of 1934. The complaints principally alleged that
as a result of certain accounting irregularities involving the improper
recognition of revenue by the Company's subsidiary in Japan, the Company's
previously issued financial statements were materially false and misleading. In
August 1999, lead plaintiffs and lead counsel filed a purported consolidated
class action complaint adding allegations that the Company issued false and
misleading statements with respect to the launch of its NIR ON(R) Ranger(TM)
with Sox(TM) coronary stent delivery system and the system's subsequent recall.
The Company and its officers have filed a motion to dismiss the consolidated
complaint. The Plaintiffs have opposed the Company's motion to dismiss the
consolidated complaint.
On July 28, 2000, Dr. Tassilo Bonzel filed a complaint naming certain of the
Company's Schneider Worldwide subsidiaries and Pfizer Inc. (Pfizer), and certain
of its affiliates as defendants, alleging that Pfizer failed to pay Dr. Bonzel
amounts owed under a license agreement involving Dr. Bonzel's patented
Monorail(TM) technology. The suit was filed in the District Court for the State
of Minnesota seeking monetary relief. Dr. Bonzel has also provided a notice of
breach of the agreement which could lead to its termination. On September 5,
2000, the Company and Boston Scientific Scimed, Inc. (formerly known as
Schneider (USA), Inc.), filed suit against
F-34 BOSTON SCIENTIFIC AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dr. Bonzel in the U.S. District Court for the District of Massachusetts seeking
a declaratory judgment of non-infringement, because the Company has not breached
the terms of the license agreement and that Dr. Bonzel is estopped from
asserting infringement. Dr. Bonzel filed a motion to dismiss or stay the
Massachusetts action, and a hearing was held on October 25, 2000. A decision on
this motion is pending.
The Company is aware that the U.S. Department of Justice is conducting an
investigation of matters that include the Company's NIR ON(R) Ranger(TM) with
Sox(TM) coronary stent delivery system which was voluntarily recalled by the
Company in October 1998 following reports of balloon leaks. The Company is
cooperating fully in the investigation.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company. As of December 31, 2000, the potential
exposure for litigation-related accruable costs is estimated to range from $16
million to $27 million. The Company's total accrual as of December 31, 2000, and
1999 for litigation-related reserves was approximately $16 million and $46
million, respectively. As of December 31, 2000, the range of loss for reasonably
possible contingencies that can be estimated is $0 to $344 million, plus
interest, and additional damages for sales occurring after the jury verdict
related to the Cordis suit for patent infringement filed on October 22, 1997.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the Company
will prevail in any particular case. An adverse outcome in one or more cases in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company. Further, product liability claims may be
asserted in the future relative to events not known to management at the present
time. The Company has insurance coverage which management believes is adequate
to protect against product liability losses as could otherwise materially affect
the Company's financial position.
NOTE M - BUSINESS COMBINATIONS
On September 10, 1998, the Company consummated its acquisition of Schneider
Worldwide, formerly a member of the Medical Technology Group of Pfizer Inc., for
$2.2 billion, net of assets acquired and liabilities assumed. The acquisition
was accounted for using the purchase method of accounting. The consolidated
financial statements include Schneider's operating results from the date of
acquisition. The aggregate purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair values at date of
acquisition. The excess of purchase price over the fair value of net tangible
assets acquired was allocated to specific intangible asset categories. These
categories include core technology, developed technology, assembled workforce,
customer lists, trademarks and patents, which are being amortized on a
straight-line basis over periods ranging from 9 to 25 years and the excess of
cost over net assets acquired, which is being amortized on a straight-line basis
over 40 years.
In connection with the acquisition of Schneider, the Company recorded a charge
to account for purchased research and development. The valuation of purchased
research and development, for which management is primarily responsible,
represents the estimated fair value at the date of acquisition related to
in-process projects. As of the date of acquisition, the in-process projects had
not yet reached technological feasibility and had no alternative future uses.
Accordingly, the value attributable to these projects was immediately expensed
at acquisition. If the projects are not successful or completed in a timely
manner, the Company may not realize the financial benefits expected for these
projects.
The income approach was used to establish the fair values of the purchased
research and development. This approach established the fair value of an asset
by estimating the after-tax cash flows attributable to the in-process project
over its useful life and then discounting these after-tax cash flows back to a
present value. Revenue estimates were based on estimates of relevant market
sizes, expected market growth rates, expected trends in technology and expected
product introductions by competitors. In arriving at the value of the in-process
research and development projects, the Company considered, among other factors,
the
BOSTON SCIENTIFIC AND SUBSIDIARIES F-35
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in-process project's stage of completion, the complexity of the work completed
as of the acquisition date, the costs already incurred, the projected costs to
complete, the contribution of core technologies and other acquired assets, the
expected introduction date, and the estimated useful life of the technology. The
discount rate used to arrive at a present value as of the date of acquisition
was based on the time value of money and medical technology investment risk
factors. For the Schneider purchased research and development programs, a
risk-adjusted discount rate of 28% was utilized to discount the projected cash
flows. The Company believes 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.
The most significant Schneider purchased research and development projects that
were in-process at the date of acquisition were brachytherapy, devices for
aneurysmal disease and coronary stents, which represented approximately 26%, 20%
and 16% of the in-process value, respectively. Set forth below are descriptions
of these in-process projects, including their status at the end of 2000.
The brachytherapy system is an intravascular radiation system designed to reduce
clinical restenosis after a balloon angioplasty and/or a stent procedure. The
system consists of a computer-controlled afterloader, beta radiation source,
centering catheter, source delivery wire and dummy wire. As of the date of
acquisition, the project was expected to be completed and the products
commercially available in the U.S. within two to three years, with an estimated
cost to complete of approximately $5 million to $10 million.
The aneurysmal disease projects are endoluminal graft devices for the treatment
of late stage vascular aneurysms and occlusions. The most significant of the
projects in this category at the date of acquisition was the endoluminal graft
for the treatment of abdominal aortic aneurysms. As of the date of acquisition,
the projects were expected to be completed and the products commercially
available in the U.S. within two to three years, with an estimated cost to
complete of approximately $10 million to $15 million.
Coronary stent systems underway at the date of acquisition were stent systems
for native coronary artery disease, saphenous vein graft disease, and versions
with novel delivery systems. The Company believes that the stent systems will be
especially helpful in the treatment of saphenous vein graft disease. As of the
date of acquisition, the projects were expected to be completed and the products
commercially available for sale in the U.S. within one year with an estimated
cost to complete of approximately $1 million to $3 million.
In the second quarter of 2000, the brachytherapy project was discontinued due to
system performance issues. However, the Company recently outsourced this project
to a third party in which it holds a minority interest. As part of a subsequent
project consolidation program, the Schneider abdominal aortic aneurysm project
has been integrated with another internal project. As a result, the Company will
pursue the development of next generation products for aortic aneurysmal disease
with an integrated platform while minimizing duplicative research and
development. The cost of the development is still estimated to be in the range
of approximately $10 million to $15 million. The coronary stent projects have
been completed.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Schneider as if the acquisition had
occurred at the beginning of 1998, with pro forma adjustments to give effect to
amortization of intangibles, purchased research and development, an increase in
interest expense on acquisition financing and certain other adjustments together
with related tax effects:
YEAR ENDED DECEMBER 31,
(In millions, except per share data) 1998
- ------------------------------------ -------
Net sales $ 2,483
Net loss (303)
Net loss per share - assuming dilution (0.77)
-------
F-36 BOSTON SCIENTIFIC AND SUBSIDIARIES
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N - RESTRUCTURING AND MERGER-RELATED CHARGES
At December 31, 2000, the Company had an accrual for restructuring and
merger-related charges of $73 million, which is comprised of $58 million of
accrued severance and related costs associated with the Company's 2000 plant
optimization initiative, $8 million for costs accrued in connection with the
Schneider acquisition (primarily costs for canceling contractual commitments and
for severance and related costs) and $7 million of accruals remaining for 1998
and prior restructuring and merger-related initiatives (primarily costs
associated with rationalized facilities and statutory benefits that are subject
to litigation).
During 2000, the Company approved and committed to a global operations plan
which encompasses a series of strategic initiatives to increase productivity and
enhance innovation. The plan includes manufacturing process and supply chain
programs and a plant optimization initiative. The intent of the plant
optimization initiative is to better allocate the Company's resources by
creating a more effective network of manufacturing and research and development
facilities. The Company's plan includes the discontinuation of manufacturing
activities at two facilities in the U.S. and the closure of a third facility.
The Company expects that the plan will be substantially completed over the next
twelve months. During 2000, the Company recorded a pre-tax special charge of
approximately $58 million associated with the plant optimization initiative. The
charge relates to severance and outplacement costs for the approximately 1,950
manufacturing, manufacturing support and management employees who are expected
to be affected by the plan over the next twelve months. Less than $1 million had
been charged against the related accrual for the approximately 10 employees
terminated pursuant to the plan as of December 31, 2000.
The Company expects that it will make total cash outlays, net of proceeds from
building and fixed asset sales, of approximately $115 million for the plant
optimization initiative, $85 million of which the Company expects to make during
2001 with the remainder being primarily severance costs for employees terminated
during 2001 but paid out in 2001 and 2002.
During 1998, the Company established a rationalization plan in conjunction with
the consummation of the Schneider acquisition, taking into consideration
duplicate capacity as well as opportunities for further leveraging of cost and
technology platforms. The Company's actions, approved and committed to in the
fourth quarter of 1998, included the planned displacement of approximately 2,000
positions, over half of which were manufacturing positions. During the fourth
quarter of 1998, the Company estimated the costs associated with these
activities, excluding transition costs, to be approximately $62 million, most of
which represented severance and related costs. Approximately $36 million of the
total was capitalized as part of the purchase price of Schneider. The remaining
$26 million was charged to operations during 1998. In addition, as part of the
Schneider acquisition, the Company capitalized estimated costs of approximately
$16 million to cancel Schneider's contractual obligations, primarily with its
distributors.
The Company substantially completed its rationalization plan in 1999, including
the closure of five Schneider facilities as well as the transition of
manufacturing for selected Boston Scientific product lines to different sites.
Approximately 1,800 positions were eliminated (resulting in the termination of
approximately 1,500 employees) in connection with the rationalization plan. In
1999, the Company identified and reversed restructuring and merger-related
charges of $10 million no longer deemed necessary. These amounts relate
primarily to the rationalization plan recorded in the fourth quarter of 1998 and
reflect the reclassification of assets from held-for-disposal to held-for-use
resulting from management's decision to resume a development program previously
planned to be eliminated. In addition, estimated severance costs for 1998
initiatives were reduced as a result of attrition. The Company also recorded
additional costs of $6 million as part of the purchase price of Schneider in
1999, representing revised estimates to recorded liabilities. During 2000 and
1999, the costs related to the transition of manufacturing operations were not
significant and were recognized in operations as incurred.
The 1998 rationalization plan also resulted in the decision to expand, not
close, the Target facilities originally provided for in a 1997 merger-related
charge and to relocate other product lines to those Target facilities. In the
fourth quarter of 1998, the Company reversed $21 million of previously recorded
merger-related charges of which $4 million related to facility costs and which
also included reductions for revisions of estimates relating to contractual
commitment payments, associated legal costs and other asset
BOSTON SCIENTIFIC AND SUBSIDIARIES F-37
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
write-downs originally provided for as a 1997 merger charge. In the second
quarter of 1998, the Company realigned its operating units and decided to
operate Target independently instead of as a part of its vascular division as
was planned at the date of the Target acquisition. As a result, in the second
quarter of 1998, the Company reversed $20 million of 1997 merger-related charges
primarily related to revised estimates for costs of workforce reductions and
costs of canceling contractual commitments.
The activity impacting the accrual for restructuring and merger-related charges
during 2000, 1999 and 1998, net of reclassifications made by management based on
available information, is summarized in the table below:
Purchase Charges Purchase
Balance at Price (Credits) to Charges Balance at Price
December 31, Adjustments Operations Utilized December 31, Adjustment
(In millions) 1997 in 1998 in 1998 in 1998 1998 in 1999
- ------------- ------------ ----------- ------------ -------- ------------ ----------
1998 AND PRIOR
RESTRUCTURING AND
MERGER-RELATED
INITIATIVES AND
ADJUSTMENTS
Facilities $ 20 $ (4) $ (5) $11
Workforce reductions 25 $36 (2) (15) 44 $ 3
Contractual commitments 30 16 (7) (21) 18 3
Asset write-downs 16 1 (6) 11
Direct transaction and
other costs 11 (3) (3) 5
---- --- ---- ---- --- ---
$102 $52 $(15) $(50) $89 $ 6
==== === ==== ==== === ===
2000 RESTRUCTURING
INITIATIVE:
Workforce reductions
- ----------------------- ---- --- ---- ---- --- ---
TOTAL:
Facilities $20 $ (4) $(5) $11
Workforce reductions 25 $36 (2) (15) 44 $ 3
Contractual commitments 30 16 (7) (21) 18 3
Asset write-downs 16 1 (6) 11
Direct transaction and
other costs 11 (3) (3) 5
---- --- ---- ---- --- ---
$102 $52 $(15) $(50) $89 $ 6
==== === ==== ==== === ===
F-38 BOSTON SCIENTIFIC AND SUBSIDIARIES
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Credits to Charges Balance at Charges to Charges Balance at
Operations Utilized December 31, Operations Utilized December 31,
(In millions) in 1999 in 1999 1999 in 2000 in 2000 2000
- ------------- ---------- -------- ------------ ---------- -------- ------------
1998 AND PRIOR
RESTRUCTURING AND
MERGER-RELATED
INITIATIVES AND
ADJUSTMENTS
Facilities $ (1) $ (7) $ 3 $ (1) $ 2
Workforce reductions (4) (24) 19 (14) 5
Contractual commitments (14) 7 (1) 6
Asset write-downs (4) (3) 4 (4)
Direct transaction and
other costs (1) (1) 3 (1) 2
---- ---- --- ---- ---
$(10) $(49) $36 $(21) $15
==== ==== === ==== ===
2000 RESTRUCTURING
INITIATIVE:
Workforce reductions $58 $58
- -------------------------- ---- ---- --- === ---- ===
TOTAL:
Facilities $ (1) $ (7) $ 3 $ (1) $ 2
Workforce reductions (4) (24) 19 $58 (14) 63
Contractual commitments (14) 7 (1) 6
Asset write-downs (4) (3) 4 (4)
Direct transaction and
other costs (1) (1) 3 (1) 2
---- ---- --- --- ---- ---
$(10) $(49) $36 $58 $(21) $73
==== ==== === === ==== ===
The 1998 and prior restructuring and merger-related charges were recognized
under the provisions of EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The purchase price adjustments were
recognized under the provisions of APB 16, "Business Combinations" and EITF
95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination." The 2000 restructuring charge was recognized in accordance with
EITF 94-3 and SAB 100, "Topic 5p. Restructuring Charges."
Total facilities write-downs under the Company's restructuring and
merger-related charges provided for during 1996, 1997 and 1998 for owned assets
were measured as the difference between carrying value and fair value less cost
to sell (approximately $8 million, net of reversals). The charge for leased
facilities during the same periods was measured using the lease commitments
remaining after the facility was removed from service (approximately $3 million,
net of reversals). Write-downs of machinery and equipment, intangibles and other
assets were measured by the difference between the carrying value and fair
market value of the assets (approximately $28 million, net of reversals).
Reversals in 1998 and 1999 of previously recorded charges were primarily based
on the initial amount charged. To the extent that any of the above assets
continued to be used in operations before being sold, scrapped or abandoned,
depreciation and lease payments continued to be charged to operations.
Depreciation not charged to operations related to assets held for disposal was
less than $1 million during 2000 and 1999 and was approximately $2 million in
1998.
BOSTON SCIENTIFIC AND SUBSIDIARIES F-39
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O - SEGMENT REPORTING
Boston Scientific is a worldwide developer, manufacturer and marketer of medical
devices for less invasive procedures. The Company has four reportable operating
segments based on geographic regions: the United States, Europe, Japan and
Inter-Continental. Each of the Company's reportable segments generates revenues
from the sale of minimally invasive medical devices. The reportable segments
represent an aggregate of operating divisions.
Sales and operating results of reportable segments are based on internally used
standard foreign exchange rates, which may differ from year to year and do not
include inter-segment profits. The segment information for 1999 and 1998 sales
and operating results has been restated based on the Company's standard foreign
exchange rates used for 2000. Because of the interdependence of the reportable
segments, the operating profit as presented may not be representative of the
geographic distribution that would occur if the segments were not
interdependent. Total assets and purchases of property, plant and equipment are
based on foreign exchange rates used in the Company's consolidated financial
statements.
United Inter-
(In millions) States Europe Japan Continental Total
- ------------- ------ ------ ------ ----------- ------
2000:
Net sales $1,577 $ 406 $ 544 $ 170 $2,697
Depreciation and amortization 63 20 4 3 90
Operating income excluding
special charges 592 131 342 9 1,074
Total assets 1,251 391 201 101 1,944
Purchases of property, plant
and equipment 51 16 5 4 76
------ ------ ------ ------ ------
1999:
Net sales $1,741 $ 422 $ 517 $ 165 $2,845
Depreciation and amortization 60 17 3 3 83
Operating income excluding
special charges 662 129 315 23 1,129
Total assets 1,257 458 215 101 2,031
Purchases of property, plant
and equipment 50 21 6 3 80
------ ------ ------ ------ ------
1998:
Net sales $1,394 $ 370 $ 404 $ 115 $2,283
Depreciation and amortization 64 16 3 1 84
Operating income excluding
special charges 463 73 230 9 775
Total assets 1,395 552 204 75 2,226
Purchases of property, plant
and equipment 97 51 19 8 175
------ ------ ------ ------ ------
F-40 BOSTON SCIENTIFIC AND SUBSIDIARIES
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the totals reported for the reportable segments to the
applicable line items in the consolidated financial statements is as follows:
YEAR ENDED DECEMBER 31,
(In millions) 2000 1999 1998
- ------------- ------- ------- -------
NET SALES:
Total net sales for reportable segments $ 2,697 $ 2,845 $ 2,283
Foreign exchange (33) (3) (49)
------- ------- -------
$ 2,664 $ 2,842 $ 2,234
======= ======= =======
DEPRECIATION AND AMORTIZATION:
Total depreciation and amortization
allocated to reportable segments $ 90 $ 83 $ 84
Corporate expenses and foreign exchange 91 95 45
------- ------- -------
$ 181 $ 178 $ 129
======= ======= =======
INCOME (LOSS) BEFORE INCOME TAXES:
Total operating income excluding special charges
for reportable segments $ 1,074 $ 1,129 $ 775
Corporate expenses and foreign exchange (436) (450) (315)
Purchased research and development (682)
Restructuring and merger-related (charges) credits (58) 10 15
------- ------- -------
580 689 (207)
Other income (expense) (53) (127) (68)
------- ------- -------
$ 527 $ 562 $ (275)
======= ======= =======
TOTAL ASSETS:
Total assets for reportable segments $ 1,944 $ 2,031 $ 2,226
Corporate assets 1,483 1,541 1,667
------- ------- -------
$ 3,427 $ 3,572 $ 3,893
======= ======= =======
Enterprise-wide Information
(In millions) 2000 1999 1998
- ------------- ------- ------- -------
NET SALES:
Vascular $ 2,097 $ 2,309 $ 1,777
Nonvascular 567 516 426
Other 17 31
------- ------- -------
$ 2,664 $ 2,842 $ 2,234
======= ======= =======
LONG-LIVED ASSETS:
United States $ 422 $ 446 $ 484
Ireland 103 110 119
Other foreign countries 42 48 77
------- ------- -------
$ 567 $ 604 $ 680
======= ======= =======
BOSTON SCIENTIFIC AND SUBSIDIARIES F-41
42
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
BOSTON SCIENTIFIC CORPORATION
We have audited the accompanying consolidated balance sheets of Boston
Scientific Corporation and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Boston Scientific
Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 1, 2001
F-42 BOSTON SCIENTIFIC AND SUBSIDIARIES
43
FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED) (IN MILLIONS, EXCEPT SHARE AND PER
SHARE DATA)
YEAR ENDED DECEMBER 31, 2000 1999 1998 1997 1996
- ----------------------- --------- --------- --------- --------- ---------
OPERATING DATA:
Net sales $ 2,664 $ 2,842 $ 2,234 $ 1,831 $ 1,551
Gross profit 1,832 1,856 1,499 1,285 1,123
Selling, general and administrative
expenses 867 842 755 663 492
Amortization expense 91 92 53 33 24
Royalties 37 46 31 22 17
Research and development expenses 199 197 200 167 135
Purchased research and development 682 29 110
Restructuring and merger-related
charges (credits) 58 (10) (15) 146 32
Total operating expenses 1,252 1,167 1,706 1,060 810
Operating income (loss) 580 689 (207) 225 313
Income (loss) before cumulative effect
of change in accounting 373 371 (264) 131 167
Cumulative effect of change in
accounting (net of tax) (21)
--------- --------- --------- --------- ---------
Net income (loss) $ 373 $ 371 $ (264) $ 110 $ 167
========= ========= ========= ========= =========
Income (loss) per common share before
cumulative effect of change in accounting:
Basic $ 0.92 $ 0.92 $ (0.68) $ 0.34 $ 0.43
Assuming dilution $ 0.91 $ 0.90 $ (0.68) $ 0.33 $ 0.42
Net income (loss) per common share:
Basic $ 0.92 $ 0.92 $ (0.68) $ 0.28 $ 0.43
Assuming dilution $ 0.91 $ 0.90 $ (0.68) $ 0.28 $ 0.42
Weighted-average shares outstanding -
assuming dilution (in thousands) 408,322 411,351 390,836 399,776 398,706
--------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 31, 2000 1999 1998 1997 1996
- ----------------------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital $ 173 $ (353) $ 227 $ 335
Total assets 3,427 $ 3,572 3,893 1,924 1,585
Commercial paper 56 277 1,016 423 213
Bank obligations - short-term 204 323 11 24 28
Long-term debt, net of current portion 562 678 1,364 46
Stockholders' equity 1,935 1,724 821 957 995
Book value per common share $ 4.84 $ 4.21 $ 2.08 $ 2.47 $ 2.50
--------- --------- --------- --------- ---------
The Company paid a two-for-one stock split on November 30, 1998.
All historical amounts have been restated to reflect the stock split.
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
BOSTON SCIENTIFIC AND SUBSIDIARIES F-43
44
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED March 31, June 30, Sept. 30, Dec. 31,
- ------------------ --------- -------- --------- --------
YEAR ENDED DECEMBER 31, 2000
Net sales $ 679 $ 695 $ 652 $ 638
Gross profit 466 478 452 436
Operating income 169 182 132 97
Net income 106 122 85 60
Net income per common share - basic $0.26 $0.30 $0.21 $0.15
Net income per common share - assuming dilution $0.26 $0.30 $0.21 $0.15
----- ----- ----- -----
YEAR ENDED DECEMBER 31, 1999
Net sales $ 708 $ 726 $ 691 $ 717
Gross profit 478 491 408 479
Operating income 189 202 115 183
Net income 100 109 55 107
Net income per common share - basic $0.25 $0.27 $0.13 $0.26
Net income per common share - assuming dilution $0.25 $0.27 $0.13 $0.26
----- ----- ----- -----
During the third and fourth quarters of 2000, the Company recorded pre-tax
charges of $23 million and $35 million, respectively, representing estimated
severance and other related costs associated with the global operations plan.
(See Note N)
During the third quarter of 1999, the Company recorded a provision of $62
million for excess NIR(R) stent inventories and purchase commitments. The excess
position was driven primarily by a shortfall in planned third quarter NIR(R)
stent revenues, a reduction in NIR(R) stent sales forecasted for 1999 and 2000,
and strategic decisions regarding versions of the NIR(R) stent system to be
launched. Additionally, the 1999 third quarter results include a provision for
increased legal costs of $22 million to cover certain costs of defense. These
expenses relate primarily to defense costs associated with stent-related
litigation. Further, during the third quarter of 1999, the Company identified
and reversed restructuring and merger-related charges of $10 million no longer
deemed necessary. These amounts relate primarily to the restructuring charges
accrued in the fourth quarter of 1998 and reflect the reclassification of assets
from held-for-disposal to held-for-use following management's decision to resume
a development program previously planned to be eliminated. In addition,
estimated severance costs for 1998 initiatives were reduced as a result of
attrition.
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
F-44 BOSTON SCIENTIFIC AND SUBSIDIARIES
45
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS (UNAUDITED)
The following table shows the market range for the Company's common stock based
on reported sales prices on the New York Stock Exchange.
2000 High Low
---- ---- ---
First Quarter $25.875 $17.625
Second Quarter 29.188 19.375
Third Quarter 26.813 15.500
Fourth Quarter 16.875 12.188
------ ------
1999 High Low
---- ---- ---
First Quarter $43.000 $23.000
Second Quarter 44.875 33.625
Third Quarter 47.063 21.563
Fourth Quarter 26.000 17.563
------ ------
The Company has not paid a cash dividend during the past five years. The Company
currently intends to retain all of its earnings to finance the continued growth
of its business. Boston Scientific may consider declaring and paying a dividend
in the future; however, there can be no assurance that it will do so.
At December 31, 2000, there were approximately 10,082 record holders of the
Company's common stock.
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
BOSTON SCIENTIFIC AND SUBSIDIARIES F-45