1
Exhibit 13.1
BOSTON SCIENTIFIC 1998 ANNUAL REPORT
VISION EXECUTION
[GRAPHIC] [GRAPHIC]
INNOVATION PEOPLE
[GRAPHIC] [GRAPHIC]
BOSTON SCIENTIFIC
2
[BLANK PAGE]
3
EXECUTIVE OFFICERS AND DIRECTORS
JOHN E. ABELE
Director, Founder Chairman
(+)*CHARLES J. ASCHAUER, JR.
Director, Retired Executive Vice President
and Director of Abbott Laboratories
(+)RANDALL F. BELLOWS
Director, Retired Executive Vice President
of Cobe Laboratories, Inc.
MICHAEL BERMAN
Senior Vice President and
President - Scimed
LAWRENCE C. BEST
Senior Vice President -
Finance & Administration and
Chief Financial Officer
JOSEPH A. CIFFOLILLO
Director, Private Investor
(+)*JOEL L. FLEISHMAN
Director, President of The Atlantic
Philanthropic Service Company, Inc. and
Professor of Law and Public Policy,
Duke University
*LAWRENCE L. HORSCH
Director, Chairman of Eagle Management
and Financial Corp.
PAUL A. LAVIOLETTE
Senior Vice President and President,
Boston Scientific International
PHILIP P. LE GOFF
Senior Vice President and Group President
- - Vascular and Nonvascular
Businesses
C. MICHAEL MABREY
Senior Vice President - Operations
ROBERT G. MACLEAN
Senior Vice President - Human Resources
N.J. NICHOLAS, JR.
Director, Private Investor
PETER M. NICHOLAS
Director, Founder, President,
Chief Executive Officer and
Chairman of the Board
ARTHUR L. ROSENTHAL
Senior Vice President and
Chief Development Officer
PAUL W. SANDMAN
Senior Vice President,
Secretary and General Counsel
DALE A. SPENCER
Director, Former Executive Vice President
of Boston Scientific Corporation
CORPORATE HEADQUARTERS
Boston Scientific Corporation
One Boston Scientific Place
Natick, MA 01760-1537
508-650-8000
508-647-2200 (Investor Relations Facsimile)
www.bsci.com
SHAREHOLDER INFORMATION
STOCK LISTING
Boston Scientific Corporation common stock is traded on the NYSE under the
symbol "BSX".
TRANSFER AGENT
Inquiries concerning the transfer or exchange of shares, lost stock
certificates, duplicate mailings or changes of address should be directed to the
Company's Transfer Agent at:
BANKBOSTON, N.A.
c/o Equiserve, L.P.
Post Office Box 8040
Boston, MA 02266-8040
781-575-3100
www.EquiServe.com
INDEPENDENT AUDITORS
Ernst & Young LLP
Boston, Massachusetts
ANNUAL MEETING
The annual meeting for shareholders will take place on Tuesday, May 4, 1999,
beginning at 10:00 a.m. at BankBoston, Corporate Headquarters, 100 Federal
Street, Boston.
INVESTOR INFORMATION REQUESTS
Investors, shareholders and security analysts seeking information about the
Company should refer to the Company's website at www.bsci.com or call Investor
Relations at (508) 650-8555.
A COPY OF FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION MAY BE
OBTAINED UPON WRITTEN REQUEST TO THE COMPANY.
ADDRESS REQUESTS TO:
Investor Relations
Boston Scientific Corporation
One Boston Scientific Place
Natick, MA 01760-1537
(508) 650-8555
(508) 647-2200 (Facsimile)
REGIONAL HEADQUARTERS
BOSTON SCIENTIFIC ARGENTINA S.A.
Buenos Aires, Argentina
BOSTON SCIENTIFIC INTERNATIONAL B.V.
Paris, France
BOSTON SCIENTIFIC ASIA PACIFIC PTE. LTD.
Singapore
BOSTON SCIENTIFIC JAPAN K.K.
Tokyo, Japan
TECHNOLOGY CENTERS
Bulach, Switzerland Natick, MA, USA
Cork, Ireland Plymouth, MN, USA
Fremont, CA, USA Redmond, WA, USA
Galway, Ireland San Jose, CA, USA
Glens Falls, NY, USA Spencer, IN, USA
Maple Grove, MN, USA Watertown, MA, USA
Miami, FL, USA Wayne, NJ, USA
Miyazaki, Japan
*Member of the Audit Committee
(+)Member of the Compensation Committee
4
CHAIRMAN'S LETTER
1998 was a year of growth on many fronts. We are stronger in several key areas.
We are clear about our future path, and we have the confidence and capability to
follow it successfully.
The year just completed was also a year of reckoning. While we took significant
steps forward in building the Strategic Mass we need to achieve our vision, we
also stumbled a few times. The recall of the NIR ON(TM) Ranger(TM) with SOX(TM)
stent system focuses attention on the need for relentless quality assurance. We
are cooperating fully with the Department of Justice investigation begun in the
wake of that recall, and believe the government will agree that the Company
acted appropriately. The discovery of business irregularities in our Japanese
operation makes us realize that, as we grow, we must develop better safeguards
to prevent such occurrences. And we must do a better job of communicating and
instilling our corporate values, including personal integrity and
accountability, throughout the global organization. Lastly, our failure to meet
earnings expectations highlights the overall problem that confronts us and about
which we have talked much: execution. We need to improve processes,
competencies, and leverage in order to come together as a single, unified
company and strengthen our overall business performance.
These are issues that often accompany rapid growth. We do not view them lightly;
we are learning from our experiences and incorporating those lessons into our
plans for the future. However, as we reflect upon our experiences in 1998, we
should not allow a few unfortunate events to overshadow the substantial
successes and great progress that occurred during the year-marked by the
favorable trends that emerged in the fourth quarter and are continuing into this
year.
ACQUISITIONS AND NEW PRODUCTS DRIVE GROWTH
Among our most significant achievements are two acquisitions made last year
which support our strategy of strengthening leadership in chosen fields through
increased sales volume, market presence and technological superiority.
Certainly, the most significant event was the acquisition of Schneider
Worldwide, a leader in catheter-based and stent technologies used in less
invasive treatment of cardiovascular, peripheral vascular and nonvascular
disease. Early in the year, the timing of the decision by Pfizer Inc. to divest
its worldwide medical device operations created an unexpected opportunity to
accelerate our Strategic Mass strategy. Combining our businesses was a natural
fit for two pioneering companies in the field of less invasive medicine, both
with strong traditions of innovation, complementary research efforts and a
genuine commitment to customer service.
Further, Schneider brought a rich pipeline of new development projects as well
as an attractive patent portfolio which at last permits Boston Scientific to
make available to physicians, in the United States, the Schneider-pioneered
Monorail(TM) catheter systems which we had developed into a leading franchise
outside the United States over the past 10-plus years. Access to this technology
not only enables Boston Scientific to introduce powerful new PTCA balloon
catheter and catheter-based stent delivery systems into the United States, but
also enables us to standardize product offerings in this market segment
worldwide.
Our second strategic acquisition, CardioGene Therapeutics, Inc., a development
stage company exploring the role and use of gene therapy to treat cardiovascular
and other diseases, represented an investment in the future by bringing Boston
Scientific the technologies and know-how we believe will enable us to remain on
the therapeutic frontier of a disease state where we already have developed a
well-established presence.
These companies bring technological expertise and strength, and deepen our
commitment in high-growth areas of interventional medicine. And, as important,
Schneider brings skilled and dedicated employees, many of whom have assumed key
leadership positions throughout the corporation. The recognized scientific and
commercial leadership positions Schneider possesses demonstrates the commitment
of its employees to excellence and less invasive medicine. We welcome them to
the Boston Scientific family.
We also grew internally, with continuing special emphasis on the emerging
markets in Asia Pacific, Latin America, Canada and Middle East/Africa. We are
well aware of the opportunities that lie in many of these countries where less
5
invasive medicine is still in its infancy, and we are continuing, through market
development programs, to build our presence and leadership in these important
markets outside of the United States, Western Europe and Japan. Our goal is to
understand the unique needs of all of our different markets and to develop
long-term, direct relationships and partnerships with physicians around the
globe.
Media attention on the recall of our NIR ON(TM) Ranger(TM) with SOX(TM) stent
system has tended to eclipse the fact that the U.S. launches of the NIR ON(TM)
Ranger(TM) without SOX(TM) stent system and our Radius(TM) self-expanding stent
have been received with great enthusiasm. We hope to be able to relaunch the
SOX(TM) system in the United States once the balloon leakage problem has been
rectified and FDA approval has been received. Our efforts in the highly
competitive U.S. coronary stent market were also fortified by the introduction
of the Magic WALLSTENT(R) stent system toward the end of the year. Used
successfully in Europe since its 1997 introduction, the Magic WALLSTENT stent
system comes to us through the Schneider acquisition and gives us a second
self-expanding coronary stent platform, further broadening our offerings for the
treatment of both peripheral vascular and nonvascular disease. As a result of a
conscious strategy, Boston Scientific now offers five distinct stent technology
platforms which are selectively applied to the management of multiple
disease-specific states throughout the human anatomy.
RESHAPING OUR COMPANY FOR FUTURE SUCCESS
To say that we have grown dramatically in the past few years is an
understatement. Boston Scientific has become a much larger and interdependent
organization with greater geographic reach and broader, deeper product lines
continuously strengthened by an impressive and growing technology portfolio. The
process of assimilating this growth and developing and integrating new processes
and systems is a critical--and daunting--task. Although that process was well
underway when the opportunity to acquire Schneider Worldwide presented itself,
that acquisition enabled us to refine and further improve the rationalization
strategy for our worldwide organization and operations. Our goal has always been
to eliminate duplication and incompatibility, and encourage cooperation and the
achievement of cross-divisional synergies. This is happening. We have identified
and implemented improved ways of working-and working together-that will enable
our vastly larger and more complex company to sustain superior growth and return
to our high standards of overall business excellence and profitability.
Several 1998 efforts mark the beginning of this endeavor. We are rightsizing,
streamlining and integrating our European organization and facilities and now
believe we have a viable leadership blueprint for the future. We are
consolidating the worldwide Schneider Team into our global business model and
are already acting as one company. We have restructured and consolidated several
of our core business units to form a new U.S. Vascular division comprising
Medi-tech, Meadox, and the vascular group within Schneider. This enables us to
combine and leverage technologies more effectively, achieve more comprehensive
market coverage and operate from a disease management state, rather than a
medical specialty perspective. This vascular business unit model was already in
practice outside the United States and adopting this strategy in our domestic
markets gives us the added benefit of planning and executing our business on a
global basis.
All these efforts when combined focus on rationalizing our size and structure to
improve performance and efficiency worldwide. They are, however, only part of
the picture. Other essential work focuses on revamping our systems and processes
to provide the flexibility, coordination and leverage a multi-billion dollar
company needs for success. For example, in 1998 we began to reap the benefits of
our new global information system. While the efficiency
[PHOTOGRAPH]
6
improvements and cost savings we anticipate will not be fully felt in 1999, this
powerful enterprise-wide system, a work-in-progress since 1997, has enabled us
to achieve transparency of timely data worldwide on a need-to-know basis to
support our objectives of business excellence.
Another outgrowth of our recognition of the need for improvement has been the
formation in mid-1998 of four global task forces focused on mission-critical
areas of the company: supply chain optimization, innovation, quality and
organizational development. Each is charged with evaluating the current
organization and processes, identifying best practices, then formulating and
implementing revised structures and systems appropriate for a world class
operation. Each is also charged with promoting a greater sense of who we now
are, what we stand for and what we can accomplish together. By more efficiently
sharing our competencies, experience and commitments, we can leverage our many
separate strengths for the benefit of the divisions and the corporation as a
whole. The specific focus, scope and examples of the task force assignments are
discussed in the editorial section that follows this letter. Needless to say, I
consider these task forces among the most crucial undertakings of 1998. Their
work, continuing into and beyond 1999, is essential to our future success. It
will improve planning and execution, dramatically reduce working capital
requirements and improve gross margins for which performance metrics have now
become a daily way of life.
SUCCEEDING IN A CHANGING INDUSTRY
Although we still have work to do, we should take pride in our accomplishments.
Boston Scientific has an unparalleled portfolio of less invasive technologies
and products for treatment of specific disease states. Our business units are
today the clear market leaders worldwide in the markets within which they
compete. Despite the setbacks we experienced, sales and earnings momentum is
excellent, and the trends I spoke of earlier are a clear signal of what can be
achieved in 1999.
We have made some changes in the responsibilities of our management team to
ensure that the positive momentum continues to build. Philip Le Goff has taken
on the expanded responsibility of directing both our vascular and nonvascular
operations. Paul LaViolette's assignments within the company highlight the
growth we have undergone. He joined us in 1994 as President of Boston Scientific
International, moved on to other responsibilities and now returns to that
position, taking charge of an organization that is today larger and more complex
than Boston Scientific itself when Paul joined the company. Paul succeeds Jim
Corbett who has resigned to pursue interests elsewhere. Jim was the architect
and force behind the creation of our current International organization for
which we give him our thanks. Finally, Mike Mabrey, Senior Vice President,
Operations, has elected to retire after twelve years of service. During this
period, we acquired and merged with 10 major companies where Mike was
specifically responsible for developing and overseeing the manufacturing
operations integration strategy and execution. The Team thanks Mike for his
solid record of achievement and exemplary behavior over the years as a senior
Boston Scientific executive. We wish both Mike and Jim well as they look forward
to futures beyond Boston Scientific.
Most significantly, on March 18, 1999, I announced the appointment of James R.
Tobin as President and Chief Executive Officer of Boston Scientific. This is a
landmark event in the history of our Company. Eighteen months ago, we began a
process to put in place an effective succession plan to ensure continued
leadership of our great Company. In May of 1998, we launched a formal search for
a strong, seasoned leader. I am pleased that we discovered Jim Tobin and that he
agreed to join us and will immediately assume leadership of our organization. I
am confident that he is the right person to lead our Team. Jim is an
accomplished executive who has an outstanding record of success in leading
complex global organizations and brings to this position a proven reputation of
operational excellence and global execution. I will remain fully engaged as
Chairman of the Board and look forward to continuing to work with Jim and the
Team.
7
We greatly value and need the talents and hard work of all our employees as we
seek continued success in a global healthcare industry marked by continuing
dramatic transformation and realignment. Fundamental issues involving health
policy, consolidation, cost, quality and organization of health providers
continue to drive significant change in how healthcare is delivered and paid for
throughout the world. None of these issues will be completely resolved in the
near future. In fact, emerging issues, including the organization of payers
along with providers, increased consumer involvement in healthcare decision
making, and medical disease management, will also grow in importance.
All of these issues will challenge the conventional wisdom of how we compete
successfully in our segment of the healthcare business. For example, succeeding
in today's economic climate requires us to assess the reimbursement situation
early in the new product development process and, based on this assessment,
bring the right clinical and economic information to healthcare purchasers. As a
result, we have strengthened our core competencies in this area enabling us to
better optimize the market adoption of our new technologies. Investment in this
new competency is symbolic of our commitment to listen to our customers and our
willingness to be open to change.
Another example of this commitment is our creation of an advisory council
comprised of opinion leaders representing major segments of the healthcare
industry. The primary goal of this group is to provide a platform for
constructive dialogue among healthcare leaders who have a vested interest in
clarifying complex issues and identifying potential solutions to healthcare
dilemmas. These are but two examples of the many ways in which we are responding
to a rapidly changing landscape to ensure we remain a relevant force in the
healthcare arena.
THE POWER OF ONE
This letter reports some of our achievements, calls for a strong commitment to
improvement and emphasizes the need to rebalance our vision with renewed ability
to execute to plan. We must be attentive to our own values and mindful of the
financial health of our company. This will require that we continue making tough
decisions in the year ahead, and we will do it. Our long-term strategic vision
is sound, and we have a strong, committed management team. We bring a robust
tradition of innovation, clearly defined values and a true "can do" spirit to
the tasks at hand.
Our biggest asset, however, remains the cadre of immensely talented, dedicated
and hardworking men and women who are Boston Scientific's employees. Challenges
are not new to them, as their history of pioneering accomplishments affirms. The
extra effort of a single employee to execute better may seem inconsequential;
multiplied by 12,000, the power of one becomes the power of Boston Scientific
and the promise of our future. It has been that way from the beginning.
Respectfully,
/s/ Pete M. Nicholas
--------------------
Pete M. Nicholas
[PHOTOGRAPH]
8
BAL-ANCE (BAL'ENS)
1. PAYING EQUAL ATTENTION TO CRITICAL SUCCESS FACTORS
REQUIRED TO MAINTAIN A BEST-IN-CLASS LEADERSHIP POSITION.
As Boston Scientific has grown, it has changed. Our much
larger global enterprise demands different processes from those
that served us well in the past. Employees who have joined the
company in the last year or two may not have fully internalized
the values that guide our organization. This is normal. Growth is
organic. It means change. It means constantly redefining who
we are, what we stand for, what we want to accomplish and how
we will do so. It means constantly striving to balance the
factors on which our success depends. Our strength lies in our
vision.and in our ability to execute it. It lies in the spirit of
innovation which permeates our culture and in having people
who can translate that vision and spirit into reality.
The four words on the front cover -
Vision, Execution, Innovation, People
- tell a story.
This annual report is about the process of
defining what those words mean to us today and about the
process of balancing them for continued success in a
changing and challenging world.
Boston
Scientific
9
VI-SION (VIZH'EN)
[GRAPHIC]
1. A clear mental image of how we will achieve our mission. 2. A definition of
success specific to Boston Scientific Corporation. 3. A tangible picture of
success capable of inspiring employees to contribute to its realization.
Boston Scientific's "ship-in-the-balloon" symbol is the medical analogy of the
"ship-in-the-bottle." It represents the challenging task of diagnosing and
treating damaged organs or vessels through tiny openings from a remote
location...the essence of minimally invasive procedures.
[BACKGROUND GRAPHIC]
*The Wallgraft stent is not approved for sale in the U.S.
10
(UNWAVERING) MISSION AND VISION
Since our founding in 1979, our mission has been to improve the quality of
patient care and productivity of healthcare delivery. It is a goal that is as
relevant today as it was 20 years ago. Our vision-to become the biggest, the
best and the fastest medical device company in the world-derives its meaning
from our mission. Stripped of their strategic context, these are merely business
buzzwords; within the context of our mission, however, they define what we must
be in order to fully achieve that mission: a supplier of the best technology and
products that enable our physician customers to deliver the most effective
diagnosis and treatment, with the greatest clinical and economic outcomes, to
the patients they treat. Our vision continues to drive our success.
(VALUES) A VISION WITH INTEGRITY
The vitality of our vision depends on the values it embodies. Values provide
integrity and enable us--as individuals and as a corporation--to achieve amazing
things. It is fair to say that we have influenced how healthcare is delivered
with our pioneering efforts in less invasive medicine. And the values that made
this possible--willingness to take risks, a strong commitment to thinking like
our customers and working hard on their behalf, for instance--continue to guide
our efforts. They are also the same values that have helped to make the
companies we have acquired successful. As we continue to focus on integrating
our acquisitions into a unified organization, our shared value system forms a
foundation on which we will build an even stronger company.
Our values are timeless. The first solo circumnavigation of the globe in 1898 by
Joshua Slocum was possible because of his ability to persevere, to strike out on
his own, and to trust others to help him achieve his goal. A century later, the
same values enabled us to chart a groundbreaking course in less invasive
medicine. The image of Slocum's sloop, Spray, in a balloon catheter, reminds us
of these shared values and symbolizes the seeming impossibility of both putting
a ship in a bottle and performing surgery through minute openings with
sophisticated instruments. It is a fitting symbol for our company.
(RESPONSIVE) REDEFINING HOW VISION BECOMES REALITY
As constant as our vision is, it must also be responsive to changing times. We
are no longer a lone pioneer on the frontier of less invasive medicine, but a
leader in a highly competitive and rapidly evolving healthcare landscape. We
have responded proactively with the concept of Strategic Mass--developing
breadth and depth through external event strategies and internal development to
reinforce our leadership position in our chosen fields. Now we must assimilate
the people, cultures, processes and strengths of our acquisitions, and, at the
same time, continue to drive and manage the internal growth spurred by the
success of our unparalleled product portfolio. Will Boston Scientific remain
unchanged? No. We will all change...together.
[GRAPHIC]
While we must focus on performing basic business functions superbly, we must not
lose sight of maintaining close relationships with our physician customers and
responding to their needs. The reality of our vision is validated by the smile
of a child whose physician asked us for help in a time of need. Kimberly
Stuntzner (left) received a compassionate use of our Wallgraft(R) stent. The
Wallgraft stent was used to hold open her pulmonary artery while doctors
repaired a large pseudo aneurysm that threatened her life.
11
EX-E-CU-TION (EK'SI-KYOO'SHEN)
1. Demonstrating relentless attention to business fundamentals. 2. The means by
which our vision becomes reality.
[GRAPHIC]
Beek Customer Fulfillment Center
[BACKGROUND GRAPHIC]
The work of Dr. James Spies and employee Dr. Sujha Subramanian, in evaluating
the clinical and economic outcomes of the UAE prodecure, represents our
commitment to introduce products that benefit physician and patient, and satisfy
global demands for economic value among healthcare purchasers.
12
(BALANCE) VISION AND EXECUTION
Vision demands execution. As strong and inspiring as the Boston Scientific
vision is, it depends on Boston Scientific employees to make it happen. This is
not a lofty, esoteric event; it is performing daily tasks consistently
well--developing and delivering products where and when our customers need them,
continuing to seek and achieve manufacturing efficiencies and superior quality.
It demands relentless attention to detail.
(FUNDAMENTALS) FOCUS THROUGH TASK FORCES
We continue to change and improve. After four years and $6 billion in
acquisitions, we are intently focused on integrating our operations and bringing
both costs and the physical organization into better alignment. We are
developing the world class systems and processes befitting a worldwide
enterprise. Our awareness of what we need to do has resulted in establishing
four task forces, each charged with improving our execution in a
mission-critical area: supply chain, quality, innovation and organizational
development. Their work has begun, and the benefits, such as those offered by
improvements in supply chain management achievable with the installation of our
new global information system, are beginning to be felt.
(SPECIFICS) TACKLING THE ISSUES
Some issues are strictly internal-improving processes or realizing our goal of
being able to deliver any product anywhere we operate within one day. To gain
this efficiency, we have integrated our customer fulfillment centers into four
primary locations around the world capable of handling the increased product and
transactional volume driven by our growth. Our ability to integrate the entire
Schneider European distribution network in 68 days into our facility in Beek,
the Netherlands, depended on our global information system. It exemplifies the
kind of speed, power and flexibility for which we are striving throughout the
organization.
Other opportunities, such as reimbursement and outcomes planning, relate to our
external environment. It is no longer enough for new products to be better; they
must also be more cost-effective. We have taken a proactive approach to this by
internally establishing a strong team focused exclusively on building the
economic case for new products and gathering the data to support outcomes and
improved treatment claims.
Boston Scientific employee Dr. Sujha Subramanian and Dr. James Spies of
Georgetown University Medical Center are studying the potential advantages of a
minimally invasive procedure, uterine artery embolization (UAE), for treating
uterine fibroid tumors. UAE may offer a faster, less traumatic and easier to
perform procedure than traditional surgical treatment. But for women who hope to
have children, its biggest benefit is that it is a therapy that preserves
fertility. The efforts of Drs. Spies and Subramanian today are intended to
facilitate market acceptance of the procedure and allow Boston Scientific to
apply an existing technology that offers both physician and patient a less
invasive alternative to surgery.
[GRAPHIC]
Order volume growth through consolidated distribution centers
[GRAPHIC]
13
IN-NO-VA-TION (IN'E'VA'SHEN)
1. The process of developing new technologies and products that will result in
better patient outcomes and more accessible and cost-effective healthcare
delivery. 2. The reengineering of systems to bring new products to market.
[GRAPHIC]
The highly-radiopaque, gold-plated *NIROYAL(TM) is part of our strong
portfolio of cardiovascular stents.
Boston Scientific/Target plays a prominent role in the development of the
neurointerventional market. Microcatheter-based therapies allow physicians to
access remote sites deep within the brain and deliver coils that enable
physicians to prevent and treat diseases such as aneurysms and stroke.
[BACKGROUND GRAPHIC]
*NIROYAL is not approved for sale in the U.S.
14
(STRENGTH) EXECUTION AND INNOVATION
Boston Scientific was born and continues to grow on the strength of its ability
to innovate. Today, we continue to demonstrate our leadership in this arena with
our steady introduction of improvements to existing products, our introduction
of new devices and our investment in technologies for the future. Much of this
work is the direct outgrowth of our close relationships with physicians whose
specific needs often provide the impetus for new products. But it is not enough.
By extending our emphasis on execution to the actual process of innovation, we
can improve speed to market, focus on the highest potential products and
positively influence the lives of more people.
(FOCUS) MANAGING PROJECTS, SETTING PRIORITIES
Melding execution and innovation is the mandate of the Innovation Task Force.
Like the other task forces, its membership crosses disciplines and brings
together people from all divisions to develop a common approach to product
development that will be understood by everyone and will help us to leverage
skills, resources and knowledge across the corporation. Its goal is to improve
how we manage both individual research projects and our entire research
portfolio. One aspect of this effort is already being implemented. Boston
Scientific/Vascular has recognized the challenge and has developed a new design
control and quality training program to drive innovation and excellence in the
concept, development and launch phases of product development execution. These
types of efforts, and others, are expanding throughout the company.
(LEADERSHIP) EXPLORING NEW FRONTIERS
Worldwide, we have approximately 2,500 patent applications pending and our
current research efforts will undoubtedly bring this number even higher. In the
highly competitive coronary stent market, we enjoy a commanding presence. In
1998, in partnership with Medinol Ltd., we launched the NIR(R) stent in the
United States and Japan. The NIR(R) stent has rapidly ascended to a leadership
position. Also in 1998, we were the first to offer in the United States a
self-expanding coronary stent, the Radius(TM) stent, and followed up with a
second, the Magic WALLSTENT(R) stent system.
Our innovative work in interventional neuroradiology is less well known, but no
less important. Devices such as the Tracker(R) Excel(TM) and Renegade(TM)
microcatheters make it possible to track tortuous neurovasculature and treat
diseases in the brain. And we are breaking new ground in other areas. Boston
Scientific/Microvasive Urology is exploring and investing in fields such as
brachytherapy, which eliminates multiple beam radiation treatment by implanting
radioactive pellets or "seeds" to treat prostate cancer today and perhaps other,
localized cancers tomorrow. In the field of electrophysiology, Boston
Scientific/EP Technologies is investigating a new Loop catheter that uses
radiofrequency energy to treat atrial fibrillation. Atrial fibrillation, an
irregular heartbeat, affects approximately 5 million people worldwide and is a
leading cause of stroke. Our acquisition of CardioGene Therapeutics, Inc. puts
us on the frontier of using gene therapy to stimulate the growth of new blood
vessels and tissue. These technologies, and others in our robust pipeline,
provide great momentum for the Boston Scientific vision and for less invasive
medicine in the years to come.
[GRAPHIC]
15
PEO-PLE (PE'PEL)
1. A group united by common interest, who must work together to develop common
processes, beliefs and commitment to a shared goal. 2. Those who enable us to
fulfill our mission. 3. An engine to growth if properly nurtured.
[GRAPHIC]
The Boston Scientific/Microvasive Endoscopy CRE(TR) balloon team.
Pam Jerdee (left), Manager, College Recruiting and Deanna Capobianco,
Development Engineer, Boston Scientific/Microvasive
[BACKGROUND GRAPHIC]
16
(INTEGRATION) DIVERSITY AND UNITY
Our employees bring a wealth of diverse skills and knowledge that will be
essential to our future success. Regardless of where within the corporation they
work, Boston Scientific employees are people of commitment, and we appreciate
the divisional loyalties they hold. At the same time, we are focused on becoming
one company with common values and a common vision. Only in this way can we
fulfill our promise as a corporation and our commitment to providing growth
opportunities for our employees.
[GRAPHIC]
(TASK FORCE) DEVELOPING THE ORGANIZATION
The appointment of the Organizational Development Task Force testifies to the
urgency and importance of having an enterprise-wide system for ensuring the
availability of people at all levels with the right skills and experience to
manage our business and fuel our future growth. There is no more important task
in the corporation than getting people to their greatest potential.
We took a significant interdivisional first step in formulating a set of
leadership competencies that define the skills and abilities we need to develop
in all employees at all levels of the organization moving forward. Communicating
this framework, essentially the new foundation of our people systems, and
implementing developmental solutions to support it, are major endeavors for the
immediate future, along with the formulation of functional competencies that
will help define our employee development requirements.
(TEAMWORK) THE POWER OF ONE
One need not look far to find people throughout our organization who embody the
traits we value. Some are experienced professionals like Pam Jerdee. After
working in sales and training for Medi-tech, Microvasive Urology, Microvasive
Endoscopy and Corporate Sales, who better than Pam to now head our college
recruiting program and share our values with prospective employees? Others are
new employees, like engineer Deanna Capobianco, who volunteered to help Pam with
recruitment because she is energized by the Boston Scientific mission and eager
to share her enthusiasm with others.
Teamwork is an attribute we value and want to foster further in both
cross-divisional and cross-functional ways. For example, it takes many people to
develop, manufacture and distribute our controlled radial expansion (CRE(TM))
balloon dilators. This Microvasive Endoscopy product dramatically improves
physicians' ability to control placement, inflation and dilatation of the
balloon and minimize patient trauma while treating strictures throughout the
gastrointestinal tract. Members of the CRE dilator team cross all functions,
from research and development engineers to product managers, sales
representatives, and those responsible for the actual manufacture of the device.
The combination of their individual efforts generates a powerful force able to
achieve great things.
We also need more people capable of working across the organization, like Bob
Skribiski, Principal Engineer in our Corporate Technology department. Bob was
charged with the task of establishing a cross-divisional team that examines and
encourages communication with various technology and engineering staffs. Bob
enlisted technical personnel from the divisions and the result has been a team
that shares a common approach to engineering ideas, tooling and material
resources so all can do their jobs more efficiently and effectively. In
addition, new materials and processes are quickly communicated across divisional
and product lines, keeping the team poised for superior performance.
We can manufacture products, and we can develop programs to improve the skills
and value of our employees, but there is one thing we cannot manufacture:
enthusiasm and dedication. These come from within, and it is through the renewed
commitment and effort on the part of every Boston Scientific employee that we
will achieve our mission.
[GRAPHIC]
17
BOS-TON SCI-EN-TIF-IC
1. A company committed to improving the quality of
patient care and the productivity of healthcare delivery
through the development and advocacy of less invasive
medical devices and procedures. 2. A company whose
perseverance on behalf of products and techniques helped
pioneer the field of less invasive medicine. 3. More than
12,000 employees worldwide. 4. The sum of the global
divisions comprising the corporation: EP Technologies,
Microvasive Endoscopy, Microvasive Urology,
Scimed, Target Therapeutics, Vascular (Medi-tech, Meadox,
Schneider). 5. A company whose vision is to
be the biggest, the fastest, the best medical device company
in the world. 6. A values-based company. 7. A company
intently focused on operational excellence.
18
BOSTON SCIENTIFIC CORPORATION
AND SUBSIDIARIES
1998
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FINANCIAL TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Financial Highlights F-1
Management's Discussion and Analysis of F-2
Financial Condition and Results of Operations
Consolidated Statements of Operations F-11
Consolidated Balance Sheets F-12
Consolidated Statements of Stockholders' Equity F-14
Consolidated Statements of Cash Flows F-15
Notes to Consolidated Financial Statements F-16
Report of Independent Auditors F-33
Five-Year Selected Financial Data F-34
Quarterly Results of Operations F-35
Market for the Company's Common Stock F-36
and Related Matters
19
FINANCIAL HIGHLIGHTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Net sales $2,233,576 $1,830,778 $1,551,238
Gross profit 1,498,735 1,285,237 1,123,400
Operating income (loss) (207,435) 225,455 313,171
Net income (loss) (264,369) 110,400 167,094
Net income (loss) per common share - basic $ (0.68) $ 0.28 $ 0.43
Net income (loss) per common share - assuming dilution (0.68) 0.28 0.42
The above amounts include special charges of $667 million ($527 million, net of
tax), $206 million ($156 million, net of tax) and $142 million ($128 million,
net of tax) recorded in 1998, 1997 and 1996, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-1
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------
RESULTS OF OPERATIONS
On September 10, 1998, the Company consummated its acquisition of Schneider
Worldwide (Schneider), formerly a member of the Medical Technology Group of
Pfizer Inc., for $2.1 billion in cash. The acquisition was accounted for using
the purchase method of accounting. The consolidated financial statements include
Schneider's operating results from the date of acquisition.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net sales increased 22% in 1998 to $2,234 million from $1,831 million in 1997.
Without the impact of foreign currency exchange rates on translation of
international revenues, net sales for 1998 increased 25%. International sales
during 1998 were negatively impacted compared to 1997 by approximately $47
million of unfavorable exchange rate movements caused primarily by the
strengthening of the United States (U.S.) dollar versus the Japanese yen. Net
income for the year ended December 31, 1998, excluding merger-related and
special charges, was $262 million or $0.66 per share (diluted) compared to $266
million or $0.67 per share in 1997. The Company for 1998 reported a net loss of
$264 million or $0.68 per share (diluted), including merger-related and special
charges of $527 million, net of tax, as compared to 1997 net income of $110
million, or $0.28 per share, including merger-related and special charges of
$156 million, net of tax.
U.S. revenues increased approximately 30% from 1997 to $1,394 million in 1998,
while international revenues increased approximately 11% from 1997 to $840
million in 1998. U.S. sales as a percentage of worldwide sales increased from
59% in 1997 to 62% in 1998. Worldwide vascular and nonvascular sales increased
25% and 13%, respectively, from 1997 to 1998. The increases in U.S. sales as a
percentage of worldwide sales and in vascular sales were primarily attributable
to the Company's 1998 third quarter introduction of U.S. coronary stents. U.S.
coronary stent revenues, primarily sales of the NIR(R) stent, were approximately
$211 million during the second half of 1998. Worldwide NIR(R) coronary stent
sales as a percentage of worldwide sales were approximately 13% in 1998 and
could exceed 20% during 1999. The NIR(R) coronary stent is supplied by Medinol
Ltd. (Medinol) and unforeseen delays, stoppages or interruptions in the supply
and/or mix of the NIR(R) stent could adversely affect the operating results of
the Company.
On November 3, 1998, the Company announced it had detected the occurrence of
business irregularities in the operations of its Japanese subsidiary. The
irregularities detected involved shipments of products that were improperly
recorded as sales to the subsidiary's dealer network in Japan. The Company has
recently completed its investigation of the irregularities and believes that the
irregularities were limited to the operations of the Japan subsidiary. The
Company's financial statements reflect management's estimate of the timing and
impact of the Japan business irregularities.
Gross profit as a percentage of net sales was approximately 67.1% and 70.2%
during 1998 and 1997, respectively. As a result of multiple acquisitions, the
Company's supply chain has been weakened and there has been continued pressure
on gross margins, including write-downs for excess and obsolete inventory and
high manufacturing costs. During 1998, the Company initiated a full time global
program to focus on supply chain optimization. The program is designed to lower
inventory levels and the cost of manufacturing, improve absorption and minimize
inventory write-downs. By addressing the entire supply chain, including
application of lean manufacturing techniques, the Company seeks to return gross
margins to more acceptable levels and to improve working capital. The program
should be completed by the end of 1999.
The decrease in gross margins during 1998 compared to 1997 was also attributable
to a decline in average selling prices due to continuing pressure on healthcare
costs and increased competition, and the significant increase in sales of the
NIR(R) coronary stent which have lower gross margins than the corporate average.
As average selling prices for the NIR(R) stents fluctuate, the Company's cost to
purchase the stents will change because cost is based on a constant percentage
of average selling prices. In the third quarter of 1998, the Company provided
$31 million ($21 million, net of tax) for costs associated with the Company's
decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary
stent system in the U.S.
Success of the global supply chain initiative is critical to realizing improved
gross margins. In addition, gross margins could be significantly impacted by the
purchase price of NIR(R) coronary stents and the amount of NIR(R) coronary stent
sales as a percentage of worldwide sales.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-2
21
Selling, general and administrative expenses as a percentage of net sales
decreased from 36% in 1997 to 34% in 1998, while increasing approximately $92
million from $663 million in 1997 to $755 million in 1998. The decrease as a
percent of sales is primarily attributable to the increase in net sales related
to the launch of coronary stents in the U.S. In addition, during the past three
years, the Company has expanded its direct sales presence in Europe and Emerging
Markets so as to be in a position to take advantage of market opportunities in
those regions. The costs of expansion have negatively impacted the Company's
operating margins. During the second half of 1998, the Company's rate of
investment slowed and the Company has begun to realize improved returns in
certain geographic regions. The Company believes that, during 1999, it will
continue to leverage its direct sales infrastructure.
Approximately $17 million of the 1998 increase in expense dollars is
attributable to results of Schneider operations from the date of acquisition
through December 31, 1998. In addition, the increase in expense dollars reflects
costs to operate the Company's new global information system and increased costs
of domestic distribution.
Amortization expense increased 63% from $32 million in 1997 to $53 million in
1998 and increased as a percentage of sales from 1.8% to 2.4% of net sales. The
increase is primarily a result of the amortization of intangibles related to the
purchase of Schneider from the date of acquisition through December 31, 1998.
Royalty expenses remained at approximately 1% of net sales while increasing 41%
from $22 million in 1997 to $31 million in 1998. The Company continues to enter
into strategic technological alliances, some of which include royalty
commitments.
Research and development expenses remained at 9% of net sales while increasing
20% from $167 million in 1997 to $200 million in 1998. Approximately $7 million
of the increase in 1998 is attributable to research and development of Schneider
from the date of acquisition through December 31, 1998. The increase in research
and development reflects increased spending on new product development programs
and regulatory and clinical research, and reflects the Company's continued
commitment to refine existing products and procedures and to develop new
technologies that provide simpler, less traumatic, less costly and more
efficient diagnosis and treatment. The trend in countries around the world
toward more stringent regulatory requirements for product clearance and more
vigorous enforcement activities has generally caused or may cause medical device
manufacturers to experience more uncertainty, greater risk and higher expenses.
The aggregate purchase price of the Schneider acquisition has been allocated on
a preliminary basis to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The estimated excess of
purchase price over the fair value of the net tangible assets acquired was
allocated to specific intangible asset categories with the remainder assigned to
excess of cost over net assets acquired. Core technology, developed technology,
assembled workforce, customer lists, trademarks and patents are being amortized
on a straight-line basis over periods ranging from 9 to 25 years, and the
estimated excess of cost over net assets acquired is being amortized on a
straight-line basis over 40 years. In addition, the Company recorded a $671
million charge ($524 million, net of tax) to account for purchased research and
development acquired. The valuation of purchased research and development
represents the estimated fair value related to incomplete projects. At the date
of the acquisition, the development of these projects had not reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the date
of acquisition.
The income approach was used to establish the fair values of the intangible
assets. This approach establishes the fair value of an asset by estimating the
after-tax cash flows attributable to the asset over its useful life and then
discounting these after-tax cash flows back to a present value. The discounting
process uses a rate of return commensurate with the time value of money and
investment risk factors. Accordingly, for the purpose of establishing the fair
value of each asset in the Schneider analysis, revenues for each future period
were estimated, along with costs, expenses, taxes and other charges. Revenue
estimates were based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. With respect to the value of
purchased research and development, the Company considered, among other factors,
the research and development project's stage of completion, the complexity of
the work completed to date, the costs already incurred, the projected costs to
complete, the contribution of core technologies and other acquired assets, the
projected introduction date and the estimated useful life. The respective
after-tax cash flows were then discounted back to present value using a
risk-adjusted discount rate. The discount rates used in the Schneider analysis
ranged from 16%-28% dependent upon the risk profile of the asset.
The Company believes that the assumptions used in the forecasts were reasonable
at the time of the acquisition. No assurance can be given, however, that the
underlying assumptions used to estimate expected project revenues, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. For these reasons, among others, actual results may vary
from the projected results.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-3
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
The in-process technology acquired in the Schneider acquisition consisted of 20
significant research and development projects, ranging in stage of completion
from 46% to 95%. One project reached completion in late 1998, while the others
are expected to reach completion in 1999, 2000 and 2001. New in-process
technologies include brachytherapy for the prevention of restenosis, devices for
the treatment of carotid disease, devices for the treatment of coronary artery
disease, devices for peripheral vascular disease, devices for aneurysmal disease
and devices for nonvascular disease. Remaining efforts to complete the projects
include product validation, the successful completion of clinical trials and
governmental regulatory approvals. Through the acquisition date, approximately
$63 million had been spent by Schneider on the in-process research and
development projects. The Company intends to incur in excess of $50 million,
related primarily to salaries, materials, clinical trials and regulatory costs,
to develop the in-process technology into commercially viable projects over the
next three years. The Company expects to begin to realize significant revenue
and cash flows from the in-process technology beginning in 1999.
Management expects to continue supporting these research and development efforts
and believes the Company has a reasonable chance of completing the in-process
technology. However, the development of the in-process technology is subject to
risks and uncertainties. These include the inherent difficulties in completing
the projects on a timely basis, potential changes in future target markets,
technology and governmental regulation, third party intellectual property, and
product introductions or other actions by competitors. If the projects are not
successfully developed, the Company may not realize the value assigned to the
in-process technology. In addition, the value of the other acquired intangible
assets may also become impaired.
The Company is in the process of implementing a rationalization plan established
after acquiring Schneider. The rationalization plan takes into consideration
duplicate capacity and opportunities for further leveraging of cost and
technology platforms. The Company's actions approved and committed to in the
fourth quarter of 1998 will result in the displacement in 1999 of approximately
2,000 current positions, over half of which are manufacturing positions. The
Company has decided to close five Schneider facilities, as well as transition
the manufacturing of selected Boston Scientific product lines to different
sites. The Company expects that approximately 1,000 positions will be added in
1999 as a result of the transition plan. The Company estimates that the costs
associated with these activities will be approximately $62 million, most of
which represent severance and related costs. Approximately $36 million of the
total has been capitalized as part of the purchase price of Schneider. The
remaining $26 million ($17 million, net of tax) has been charged to operations.
These actions are anticipated to result in annualized cost savings of
approximately $50 to $75 million. The rationalization plan also resulted in the
decision to expand, not close, a facility originally provided for in a 1997
merger-related charge; thus, in the fourth quarter, the Company reversed $21
million ($14 million, net of tax) of previously recorded merger-related charges.
The reversal also includes revised estimates of contractual commitment payments,
associated legal costs and other asset write-downs originally provided for in a
1997 merger-related charge. The Company will continue to challenge its plant
network strategy during 1999. In the second quarter of 1998, the Company
reorganized certain U.S. sales organizations differently than was originally
contemplated at the time of the Target Therapeutics, Inc. (Target) acquisition.
As a result, the Company reversed $20 million ($13 million, net of tax) of 1997
merger-related charges. In addition, the Company recorded purchased research and
development of approximately $11 million in connection with another acquisition
consummated during 1998 and $30 million ($20 million, net of tax) of year-end
adjustments related primarily to write-downs of assets no longer deemed to be
strategic.
As discussed previously, results for the year ended December 31, 1998 include a
provision of $31 million for costs associated with the Company's decision to
voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent system
in the U.S. The Company is aware that the U.S. Department of Justice is
conducting an investigation of matters that include this recall. The Company is
cooperating fully in the investigation.
During 1997, the Company recorded merger-related charges of $146 million ($106
million, net of tax) primarily related to the Company's acquisition of Target,
purchased research and development of $29 million, net of tax, in conjunction
with accounting for its additional investment in Medinol and other strategic
investments, and a charge of $31 million ($21 million, net of tax) to reflect
the impact of implementing a new accounting standard. 1997 results also include
provisions related to inventory write-downs of $19 million ($13 million, net of
tax) and litigation-related reserves of $34 million ($23 million, net of tax).
Interest expense increased from $14 million in 1997 to $68 million in 1998. The
overall increase in interest expense is primarily attributable to a higher
outstanding debt balance, including the issuance of $2.1 billion in commercial
paper on September 10, 1998 to finance the acquisition of Schneider and the
issuance of $500 million in fixed rate debt securities during the first quarter
of 1998. Other income (expense), net, changed from income of less than $1
million in 1997 to expense of $5 million in 1998. The change is primarily
attributable to net gains on sales of equity investments in 1997 that were more
significant than in 1998.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-4
23
The Company's effective tax rate, including the impact of special charges, was
approximately 39% in 1997 and 4% in 1998. Excluding these special charges, the
pro forma effective tax rate increased from approximately 32% during 1997 to 33%
during 1998. The increase is primarily attributable to a shift in the mix of
U.S. and international business. The effective rate for 1999 is expected to
increase slightly due to the continued shift in the geographic mix of the
Company's business.
The Company has substantially completed the integration of all mergers and
acquisitions consummated in 1996 and 1997. The Company expects to complete the
integration of Schneider by the end of 1999. Management believes it has
developed a sound plan for continuing and concluding the integration process,
and that it will achieve that plan. However, in view of the number of major
transactions undertaken by the Company, the dramatic change in the size of the
Company and the complexity of its organization resulting from these
transactions, management also believes that the successful implementation of its
plan presents a significant degree of difficulty. The failure to integrate these
businesses effectively could adversely affect the Company's operating results in
the near term, and could impair the Company's ability to realize the strategic
and financial objectives of these transactions.
Uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers in
the U.S. may result in continued pressure on selling prices of certain products
and resulting compression on gross margins. The U.S. marketplace is increasingly
characterized by consolidation among healthcare providers and purchasers of
medical devices that prefer to limit the number of suppliers from which they
purchase medical products. There can be no assurance that these entities will
continue to purchase products from the Company. In addition, international
markets are also being affected by economic pressure to contain reimbursement
levels and healthcare costs. The Company's ability to benefit from its
international expansion may be limited by risks and uncertainties related to
economic conditions in these regions, competitive offerings, infrastructure
development, rights to intellectual property, and the ability of the Company to
implement its overall business strategy. Any significant changes in the
political, regulatory or economic environment where the Company conducts
operations may have a material impact on revenues and profits. Although these
factors may impact the rate at which Boston Scientific can grow, the Company
believes that it is well positioned to take advantage of opportunities for
growth that exist in the markets it serves.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales increased 18% in 1997 to $1,831 million from $1,551 million in 1996.
International sales for the year were adversely impacted by changes in foreign
currency exchange rates. Without the impact of changes in exchange rates, net
sales for the year increased approximately 23%. Net income for the year ended
December 31, 1997, excluding merger-related and special charges, decreased
approximately 10% to $266 million from $295 million during the year ended
December 31, 1996.
In 1997, the Company recorded merger-related charges of $146 million ($106
million, net of tax) and purchased research and development of $29 million, net
of tax, and the Company recorded a charge of $31 million ($21 million, net of
tax) to reflect the impact of implementing an accounting standard issued in 1997
related to business process reengineering. 1997 results also include provisions
related to inventory write-downs of $19 million ($13 million, net of tax) and
litigation-related reserves of $34 million ($23 million, net of tax). During
1996, the Company recorded merger-related charges of $32 million ($29 million,
net of tax) and purchased research and development of $110 million ($99 million,
net of tax). Reported net income for 1997 was $110 million, or $0.28 per share
(diluted), as compared to $167 million, or $0.42 per share, for the prior year.
U.S. revenues increased approximately 16% from 1996 to $1,076 million in 1997,
while international revenues, increased approximately 20% from 1996 to $755
million in 1997. International sales as a percentage of worldwide sales
increased from 40% in 1996 to 41% in 1997. International sales during 1997 were
negatively impacted compared to 1996 by approximately $77 million of unfavorable
exchange rate movements caused primarily by the strengthening of the U.S. dollar
versus major European currencies and the Japanese yen. Worldwide vascular and
nonvascular sales increased 16% and 26%, respectively, from 1996 to 1997.
Gross profit as a percentage of net sales was approximately 70.2% and 72.4%
during 1997 and 1996, respectively. The decline in gross margins during 1997 is
primarily attributable to write-downs for excess and obsolete inventory and a
decline in average selling prices as a result of continuing pressure on
healthcare costs and increased competition. In addition, gross margins were
negatively impacted by the unfavorable foreign exchange rate movements discussed
above. The negative impact of the above conditions was partially offset by the
Company's U.S. cost containment programs and the positive gross margin impact of
selected new product offerings.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-5
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
Selling, general and administrative expenses increased 35% from $492 million in
1996 to $663 million in 1997, and increased as a percentage of sales from 32% to
36% of net sales. The increase includes $34 million in litigation-related
reserves recorded in 1997. In addition, the Company continued to expand its
domestic and international sales and distribution organizations.
Amortization expense increased 37% from $24 million in 1996 to $32 million in
1997, and increased as a percentage of sales from 1.5% to 1.8% of net sales. The
increase in dollars is primarily a result of several strategic alliances
initiated by the Company during 1997.
Royalty expenses remained at approximately 1% of net sales while increasing 30%
from $17 million in 1996 to $22 million in 1997. The increase in overall royalty
expense dollars is due to increased sales and royalties due under several
strategic alliances that the Company initiated in 1997 and prior years.
Research and development expenses remained at approximately 9% of net sales
while increasing 24% from $135 million in 1996 to $167 million in 1997. The
increase in research and development dollars reflects increased spending in
regulatory, clinical research and various other product development programs,
and reflects the Company's continued commitment to refine existing products and
procedures and to develop new technologies that provide simpler, less traumatic,
less costly and more efficient diagnosis and treatment.
Interest and dividend income was $4 million as compared to $6 million in 1996.
The decrease is primarily attributable to a decrease in the Company's average
cash and marketable securities balance resulting from the use of cash to fund
the Company's working capital, finance several of the Company's recent
acquisitions and alliances and to repurchase the Company's common stock.
Interest expense increased from $12 million in 1996 to $14 million in 1997. The
overall increase in interest expense is primarily attributable to a higher
outstanding balance related to the Company's commercial paper borrowings. Other
income (expense), net, changed from expense of $5 million in 1996 to less than
$1 million of income in 1997. The change is primarily attributable to net gains
on sales of equity investments of approximately $11 million compared to net
gains of $1 million in 1996.
The Company's effective tax rate, including the impact of special charges, was
approximately 45% in 1996 and 39% in 1997. Excluding these special charges, the
pro forma effective tax rate improved from approximately 34% during 1996 to 32%
during 1997. The reduction in the Company's effective tax rate, excluding the
impact of special charges, is primarily due to increased business in lower tax
geographies and certain tax planning initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments totaled $75 million at December 31, 1998
compared to $80 million at December 31, 1997. Cash flows provided by operating
activities increased from $80 million in 1997 to $258 million during 1998. Cash
used in investing and provided by financing activities during the same period
increased from $251 million to $2,225 million and $162 million to $1,977
million, respectively. The increases are primarily the result of financing the
Schneider acquisition with commercial paper and capital expenditures incurred to
expand the Company's manufacturing facilities. In addition, cash was provided by
the exercise of stock options. As a result, working capital decreased from $227
million at December 31, 1997 to current liabilities exceeding current assets by
$353 million at December 31, 1998.
Accounts receivable increased $172 million from December 31, 1997 to December
31, 1998. The increase is primarily attributable to recording approximately $65
million of Schneider accounts receivable as of the date of the acquisition, an
increase in U.S. sales in the second half of 1998 compared to the second half of
1997, and an increase in international sales to countries where healthcare
systems have longer payment terms. In addition to impacting selling prices, the
trend to managed care in the U.S. has also resulted in more complex billing and
collection procedures. The Company's ability to effectively react to the
changing environment may impact its bad debt and sales return provisions in the
future. In addition, the deterioration in the Japan economy may impact the
Company's ability to collect its outstanding Japan receivables.
Inventory increased $70 million from December 31, 1997 to December 31, 1998. The
increase since December 31, 1997 is primarily attributable to recording $40
million of Schneider inventory as of the date of acquisition, continued stocking
of the NIR(R) stent in the U.S. and Japan and an increase in U.S. finished
goods. The Company is committed to purchase approximately $150 million of NIR(R)
stents through 1999. Excluding the impact of Schneider inventory acquired,
inventory has decreased since the second quarter of 1998. The Company expects
inventory levels to continue to decline in 1999 as the Company's new global
supply chain management system becomes fully operational. Successful
implementation of the Company's supply chain initiative is necessary to reduce
the Company's inventory to an acceptable level and to reduce manufacturing
costs.
In connection with the Schneider acquisition, the Company established $1.7
billion in additional revolving credit facilities. The Company's revolving
credit facilities (Facilities) now total $2.2 billion and consist of a $1.0
billion facility that terminates in June 2002 and $1.2 billion in 364-day
facilities that terminate in September 1999. The Company may extend the 364-day
revolving credit facilities for an additional 364 days
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-6
25
under certain conditions. Use of the borrowings is unrestricted and the
borrowings are unsecured. Commercial paper is supported by the Facilities and
outstanding commercial paper reduces available borrowings under the Facilities.
The Facilities require the Company to maintain a specific ratio of consolidated
funded debt (as defined) to consolidated net worth (as defined) plus
consolidated funded debt. The ratio requirement is 70% through December 31, 1999
and 60% thereafter. As of December 31, 1998, the ratio was approximately 64%.
The Company currently intends to comply with the reduction in the ratio through
an equity issuance, as discussed below.
As noted, the Company financed the Schneider acquisition by issuing
approximately $2.1 billion in commercial paper. At December 31, 1998, the
Company had approximately $1.8 billion of commercial paper outstanding at a
weighted average interest rate of 6.23%. The Company expects a minimum of $800
million will remain outstanding through the next twelve months and, accordingly,
has classified this portion of borrowings as long-term at December 31, 1998.
During the first quarter of 1999, the Company refinanced substantially all of
its commercial paper with short-term borrowings under its Facilities due to the
limited market for its commercial paper. The variable interest rates on the
borrowings is approximately 5.75%. The Company intends to continue to borrow
under its Facilities until it is able to issue commercial paper at reasonable
rates.
In 1999, the Company intends to refinance a portion of the outstanding credit
facilities balance by raising more permanent financing through an issuance of
convertible securities and additional equity securities. In September 1998, the
Company filed a Public Registration Statement with the U.S. Securities and
Exchange Commission. At December 31, 1998, the Company had no outstanding
securities issued under this registration statement.
In March 1998, the Company issued $500 million of 6.625% debt securities (Debt
Securities) due March 2005 under a Public Debt Registration Statement filed with
the U.S. Securities and Exchange Commission. The Debt Securities are not
redeemable prior to maturity and are not subject to any sinking fund
requirements. A significant portion of the net proceeds from the sale of the
Debt Securities (approximately $496 million) was used for repayment of
indebtedness under the Company's commercial paper program.
During March 1998, the Company borrowed 1.2 billion yen (the equivalent of
approximately $11 million) under a financing arrangement with a Japanese bank at
a fixed interest rate of 2.1%. The term of the borrowing extends through 2012.
At December 31, 1998, the Company had an additional 6 billion Japanese yen
borrowings (approximately $53 million) outstanding with a syndicate of Japanese
banks. The interest rate on the borrowings is 2.47%. The borrowings are payable
in 2002.
The Company had uncommitted Japanese credit facilities with several Japanese
banks to provide for borrowings and promissory notes discounting of up to 7.5
billion Japanese yen (approximately $66 million). At December 31, 1998, there
were no borrowings under these facilities and approximately $61 million of
receivables were discounted at average interest rates of approximately 1.5%.
Since early 1995, the Company has entered into several transactions involving
acquisitions and alliances, certain of which have involved equity investments.
As the healthcare environment continues to undergo rapid change, management
expects that it will continue to focus on strategic initiatives and/or make
additional investments in existing relationships, although management does not
expect that such investments will be significant during 1999. As of December 31,
1998, the Company's cash obligations required to complete the balance of the
Company's initiatives to integrate businesses related to its mergers and
acquisitions and its fourth quarter rationalization plan are estimated to be
approximately $70 million. In addition, the Company has outstanding $140 million
of acquisition-related cash obligations. Substantially all of these cash outlays
will occur during 1999. Further, the Company expects to incur capital
expenditures of approximately $130 million during 1999.
The Company expects that its cash and cash equivalents, marketable securities,
cash flows from operating activities, proceeds from the issuance of debt and
equity securities discussed previously and borrowing capacity will be sufficient
to meet its projected operating cash needs, including integration costs through
the end of 1999. As noted, the Company has $1.2 billion of 364-day credit
facilities that expire in September 1999. An extension of these facilities will
be needed if the Company does not obtain additional financing through an equity
offering or other means. The Company intends to issue equity and other
securities, but there are no assurances that additional financing can be or will
be obtained.
YEAR 2000 READINESS
The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. The Company has undertaken a global effort to
identify and mitigate Year 2000 issues in its information systems, products,
facilities and suppliers.
The Company established a multidisciplinary Year 2000 Task Force in 1998,
comprised of management from each of the Company's principal functional areas,
including Finance, Information Technology, Regulatory Affairs, Customer Service,
Manufacturing, Distribution, Purchasing, Facilities, Legal and Communications. A
core team and a program management office has also been established for
coordinating and
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-7
26
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
- ---------------------
tracking all Year 2000 issues. This office is comprised of Company management
and staff and representatives of an experienced Year 2000 consulting firm. These
efforts report directly to members of the Company's Executive Committee.
An independent consulting firm has been working with the Company for over two
years to implement a global information system that is designed to be Year 2000
compliant. In addition to the Company's information systems project, other
internal systems are being addressed largely through the replacement and testing
of much of the Company's older systems. The efforts are both company-wide and
site specific, spanning the range from the Information Technology department
systems to manufacturing operations (including production facilities, support
equipment, and process control) and infrastructure technologies.
The vast majority of the Company's products do not perform date-sensitive
operations and are therefore unaffected by Year 2000 issues. Steps have been
taken to correct non-compliance which affects the functional performance of the
few remaining products.
Through December 31, 1998, the Company has expended in excess of $100 million to
implement and operate a Year 2000 compliant global information system, and other
costs relating to Year 2000 compliance. The Company does not anticipate that
additional compliance costs will have a material impact on its business
operations or its financial condition.
The Company relies on third party providers for services such as
telecommunications, Internet service, utilities, certain product components and
other key services. Interruption of those services due to Year 2000 issues could
affect the Company's operations. The Company has initiated an evaluation of the
status of third party service providers' compliance efforts and of alternative
and contingency requirements. While approaches to reducing risks of interruption
of business operations vary by business unit, options include identification of
alternative service providers available to provide such services if a service
provider fails to become Year 2000 compliant within an acceptable time frame.
Based on the Company's evaluation to date, management believes that in most
cases redundant capacity exists at the supplier or that alternative sources of
supply are available or could be developed within a reasonable amount of time
should compliance become an issue for individual suppliers.
The Company believes that its Year 2000 program will identify and correct all
material non-compliant systems and operations before the end of 1999. Third
party service providers are being assessed and the Company expects to have
contingency plans that will avoid failures having a material effect on the
Company's business operations or financial condition in place before the end of
1999.
There can be no assurance that the Company's Year 2000 program will identify and
correct all non-compliant systems of the Company and its third party service
providers or that any such failure will not have a material effect on the
Company's business operations or financial condition.
MARKET RISK DISCLOSURES
In the normal course of business, the Company is exposed to market risk from
changes in interest rates and foreign currency exchange rates. The Company
addresses these risks through a risk management program that includes the use of
derivative financial instruments. The use of derivative financial instruments
are initiated within the guidelines of documented corporate risk management
policies. The Company does not enter into any derivative transactions for
speculative purposes.
The Company's floating and fixed rate debt obligations are subject to interest
rate risk. A 100 basis point increase in interest rates related to the Company's
floating rate borrowings, assuming the amount borrowed remains constant, would
result in an annual increase in the Company's then current interest expense of
approximately $18 million. The Company intends to refinance a portion of its
floating rate borrowings through a combination of issuance of convertible
securities and additional equity securities, which are subject to market risk. A
100 basis point increase in interest rates related to the Company's fixed
long-term debt would not result in a material change in its fair value.
The Company enters into foreign exchange contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with commitments,
generally one to six months. The Company does not engage in speculation. The
Company's foreign exchange contracts should not subject the Company to material
risk due to exchange rate movements because gains and losses on these contracts
should offset losses and gains on the assets and liabilities being hedged. The
Company had spot and forward foreign exchange contracts outstanding in the
notional amounts of $230 million and $177 million as of December 31, 1998 and
1997, respectively. Although the Company engages in hedging transactions that
may offset the effect of fluctuations in foreign currency exchange rates on
foreign currency denominated assets and liabilities, financial exposure may
nonetheless result, primarily from the timing of transactions and the movement
of exchange rates. The short-term nature of these contracts has resulted in
these instruments having insignificant fair values at December 31, 1998.
A sensitivity analysis of changes in the fair value of foreign currency exchange
contracts outstanding at December 31, 1998 indicates that, if the U.S. dollar
uniformly weakened by 10% against all currencies, the fair value of these
contracts
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-8
27
would decrease by $11 million. While these hedging instruments are subject to
fluctuations in value, such fluctuations are generally offset by changes in the
value of the underlying exposures being hedged. In addition, unhedged foreign
currency balance sheet exposures as of December 31, 1998 are not expected to
result in a significant loss of earnings or cash flows. As the Company has
expanded its international operations, its sales and expenses denominated in
foreign currencies have expanded and that trend is expected to continue.
Therefore, most international sales and expenses have been, and are expected to
be, subject to the effect of foreign currency fluctuations and these
fluctuations may have an impact on margins. The Company's sensitivity analysis
of the effects of changes in foreign currency exchange rates does not factor in
a potential change in sales levels or local currency selling prices.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the euro. The participating countries agreed to adopt the euro as their
common legal currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the legacy currencies) and the
euro were established as of that date. The legacy currencies are scheduled to
remain legal tender as denominations of the euro until at least January 1, 2002
(but not later than July 1, 2002). During this transition period, parties may
settle transactions using either the euro or a participating country's legacy
currency. The Company is addressing the potential impact resulting from the euro
conversion, including adaptation of information technology systems, competitive
implications related to pricing and foreign currency considerations.
Management currently believes that the introduction of the euro will not have a
material impact related to the adaptation of information technology systems or
foreign currency exposures. The increased price transparency resulting from the
use of a single currency in the eleven participating countries may affect the
ability of the Company to price its products differently in the various European
markets. A possible result of this is price harmonization at lower average
prices for products sold in some markets. However, uncertainty exists as to the
effects the euro will have on the marketplace.
LITIGATION
The Company is involved in various lawsuits, including patent infringement and
product liability suits, from time to time in the normal course of business. In
management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in the notes to consolidated
financial statements which, individually or in the aggregate, could have a
material effect on the financial condition, operations and cash flows of the
Company. The Company believes that it has meritorious defenses against claims
that it has infringed patents of others. However, there can be no assurance that
the Company will prevail in any particular case. An adverse outcome in one or
more cases in which the Company's products are accused of patent infringement
could have a material adverse effect on the Company.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements contained in this report
include, but are not limited to, statements with respect to, and the Company's
performance may be affected by: (a) the Company's ability to obtain benefits
from the Schneider acquisition; (b) the process, outlays and plan for the
integration of businesses acquired by the Company, and the successful and timely
implementation of the rationalization plan; (c) the impact and timing of
successful implementation of the Company's supply chain initiatives; (d) the
potential impacts of continued consolidation among healthcare providers, trends
towards managed care and economically motivated buyers, healthcare cost
containment, more stringent regulatory requirements and more vigorous
enforcement activities; (e) the Company's belief that it is well positioned to
take advantage of opportunities for growth that exist in the markets it serves;
(f) the Company's continued commitment to refine existing products and
procedures and to develop new technologies that provide simpler, less traumatic,
less costly and more efficient diagnosis and treatment; (g) risks associated
with international operations; (h) 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; (i) the
Company's belief that its effective tax rate for 1999 will only increase
slightly from 1998; (j) the ability of the Company to manage accounts
receivable, manufacturing costs and inventory levels and mix and to react
effectively to the changing managed care environment and worldwide economic
conditions; (k) the ability of the Company to meet its projected cash needs
through the end of 1999; (l) the ability
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-9
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
of the global information systems to improve supply chain management; (m) costs
and risks associated with implementing Year 2000 compliance and business process
reengineering; (n) timely and uninterrupted supply of the NIR(R) coronary stent
and increase in purchase price; (o) the ability to realize improved long-term
returns on the Company's investments with a direct selling presence in Emerging
Markets; (p) the ability of the Company to obtain more permanent financing to
re-finance a portion of its commercial paper and amounts borrowed under the
Facilities, to comply with its debt ratio through an equity issuance and to
place its commercial paper at reasonable rates; (q) the Company's expectation
that a minimum of $800 million of short-term debt supported by the Facilities
will remain outstanding through the next twelve months; (r) the Company's
ability to fund development of purchased technology and to realize value
assigned to in-process research and development and other intangible assets; (s)
the impact of stockholder class action, patent, product liability and other
litigation, the outcome of the U.S. Department of Justice investigation, and the
adequacy of the Company's product liability insurance; (t) the potential impact
resulting from the euro conversion, including adaptation of information
technology systems, competitive implications related to pricing and foreign
currency considerations; (u) the effects of finalization of accounting for the
purchase of Schneider; and (v) the timing, size and nature of strategic
initiatives available to the Company.
Several important factors, in addition to the specific factors discussed in
connection with such forward-looking statements individually, could affect the
future results of the Company and could cause those results to differ materially
from those expressed in the forward-looking statements contained herein. Such
additional factors include, among other things, future economic, competitive and
regulatory conditions, demographic trends, third-party intellectual property,
financial market conditions and future business decisions of Boston Scientific
and its competitors, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of Boston Scientific.
Therefore, the Company wishes to caution each reader of this report to consider
carefully these factors as well as the specific factors discussed with each
forward-looking statement in this report and as disclosed in the Company's
filings with the Securities and Exchange Commission as such factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the ability of the Company to implement its business strategy and may
cause actual results to differ materially from those contemplated by the
statements expressed herein.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-10
29
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Net sales $2,233,576 $1,830,778 $1,551,238
Cost of products sold 734,841 545,541 427,838
-------------------------------------------------
Gross profit 1,498,735 1,285,237 1,123,400
Selling, general and administrative expenses 754,970 662,647 492,332
Amortization expense 52,662 32,398 23,576
Royalties 31,315 22,177 17,061
Research and development expenses 200,285 167,194 134,919
Purchased research and development 681,952 29,475 110,000
Restructuring and merger-related charges (credits) (15,014) 145,891 32,341
-------------------------------------------------
1,706,170 1,059,782 810,229
-------------------------------------------------
Operating income (loss) (207,435) 225,455 313,171
Other income (expense):
Interest and dividend income 4,835 3,706 6,297
Interest expense (67,573) (14,285) (11,518)
Other, net (5,141) 255 (4,620)
-------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting (275,314) 215,131 303,330
Income taxes (10,945) 83,651 136,236
-------------------------------------------------
Income (loss) before cumulative effect of change
in accounting (264,369) 131,480 167,094
Cumulative effect of change in accounting (net of tax) (21,080)
-------------------------------------------------
Net income (loss) $ (264,369) $ 110,400 $ 167,094
=================================================
Earnings (loss) per common share - basic:
Income (loss) before cumulative effect
of change in accounting $ (0.68) $ 0.34 $ 0.43
Cumulative effect of change in accounting (0.06)
-------------------------------------------------
Net income (loss) per common share - basic $ (0.68) $ 0.28 $ 0.43
=================================================
Earnings (loss) per common share - assuming dilution:
Income (loss) before cumulative effect
of change in accounting $ (0.68) $ 0.33 $ 0.42
Cumulative effect of change in accounting (0.05)
-------------------------------------------------
Net income (loss) per common share - assuming dilution $ (0.68) $ 0.28 $ 0.42
=================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-11
30
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- -------------------------------
DECEMBER 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 70,330 $ 57,993
Short-term investments 5,073 22,316
Trade accounts receivable, net 537,786 365,463
Inventories 461,981 391,580
Deferred income taxes 129,922 146,956
Prepaid expenses and other current assets 61,535 36,176
-----------------------------
Total current assets 1,266,627 1,020,484
Property, plant and equipment, net 679,882 498,967
Other assets:
Excess of cost over net assets acquired, net 876,843 100,382
Technology - core and developed, net 606,475 70,694
Patents, trademarks and other intangibles, net 330,217 142,270
Deferred income taxes 69,346
Investments 34,058 66,239
Other assets 29,263 25,234
-----------------------------
$3,892,711 $1,924,270
=============================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-12
31
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- -------------------------------
DECEMBER 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $1,016,163 $423,250
Bank obligations 11,324 23,958
Accounts payable 108,597 98,878
Accrued expenses 245,022 161,236
Acquisition-related obligations 139,623
Accrual for restructuring and merger-related charges 71,231 68,358
Income taxes payable 18,821 11,436
Other current liabilities 8,877 6,292
-----------------------------
Total current liabilities 1,619,658 793,408
Long-term debt 1,363,822 46,325
Deferred income taxes 58,034
Other long-term liabilities 88,094 69,205
Commitments and contingencies
Stockholders' equity:
Preferred stock, $ .01 par value - authorized 50,000,000 shares,
none issued and outstanding
Common stock, $ .01 par value - authorized 600,000,000 shares,
394,185,781 shares issued at December 31, 1998;
authorized 300,000,000 shares, 195,611,491 shares
issued at December 31, 1997 3,942 1,956
Additional paid-in capital 506,750 432,556
Contingent stock repurchase obligation 18,295
Treasury stock, at cost - 1,800,627 shares at December 31, 1997 (96,260)
Retained earnings 381,246 677,608
Accumulated other comprehensive income (expense):
Foreign currency translation adjustment (72,289) (94,279)
Unrealized gain on available-for-sale securities, net 1,488 17,422
-----------------------------
Total stockholders' equity 821,137 957,298
-----------------------------
$3,892,711 $1,924,270
=============================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-13
32
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
- --------------------
Common Stock Contingent Accumulated
--------------- Additional Stock Other
Shares Par Paid-In Repurchase Treasury Retained Comprehensive Comprehensive
Issued Value Capital Obligation Stock Earnings Income(Expense) Income(Loss)
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 195,035 $1,950 $431,052 $(26,296) $406,957 $ (5,746)
Comprehensive income:
Net income 167,094 $ 167,094
Other comprehensive income (expense),
net of tax:
Net change in equity investments 10,053 10,053
Foreign currency translation
adjustment (23,385) (23,385)
Issuance of common stock 576 6 (5,500) 66,385
Purchase of common stock for treasury (66,355)
Sale of stock repurchase obligation (24,855) $24,855 2,523
Tax benefit relating to stock option and
employee stock purchase plans 36,377
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 195,611 1,956 437,074 24,855 (23,743) 574,051 (19,078) $ 153,762
Comprehensive income: ==========
Net income 110,400 $ 110,400
Other comprehensive expense, net of tax:
Net change in equity investments (1,464) (1,464)
Foreign currency translation adjustment (56,315) (56,315)
Issuance of common stock (47,713) 114,134 (11,758)
Purchase of common stock for treasury (188,159)
Sale of stock repurchase obligation (18,295) 18,295 1,508
Expiration of stock repurchase obligation 24,855 (24,855)
Tax benefit relating to stock option and
employee stock purchase plans 36,635 4,915
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 195,611 1,956 432,556 18,295 (96,260) 677,608 (76,857) $ 52,621
Comprehensive loss: ==========
Net loss (264,369) $(264,369)
Other comprehensive income (expense),
net of tax:
Net change in equity investments (15,934) (15,934)
Foreign currency translation adjustment 21,990 21,990
Issuance of common stock 2,047 20 47,444 96,260 (55,492)
Stock split effected in the
form of a stock dividend 196,528 1,966 (1,966)
Expiration of stock repurchase obligation 18,295 (18,295)
Tax benefit relating to stock option and
employee stock purchase plans 8,455 25,465
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 394,186 $3,942 $506,750 $381,246 $(70,801) $(258,313)
=======================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-14
33
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ (264,369) $110,400 $167,094
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Gain on sale of equity investments (4,933) (10,526) (827)
Depreciation and amortization 128,605 86,692 66,317
Deferred income taxes (151,424) (52,214) (11,749)
Noncash special charges (credits) (35,464) 37,104 14,378
Purchased research and development 681,952 29,475 110,000
Exchange (gain) loss (2,411) 4,212 2,115
Increase (decrease) in cash flows from
operating assets and liabilities:
Trade accounts receivable (94,823) (59,462) (105,370)
Inventories (25,664) (179,951) (90,980)
Prepaid expenses and other current assets 7,004 9,751 (19,399)
Accounts payable and accrued expenses 35,792 101,378 31,342
Accrual for restructuring and merger-related charges (22,107) 28,489 (60,420)
Other liabilities 11,412 (17,075) 32,175
Other, net (5,105) (7,779) 7,303
----------------------------------
Cash provided by operating activities 258,465 80,494 141,979
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment, net (174,039) (220,097) (145,332)
Net maturities of held-to-maturity
short-term investments 28,555 28,152
Purchases of available-for-sale securities (7,834) (74,947)
Sales of available-for-sale securities 11,562 5,351 70,260
Acquisitions of businesses, net of cash acquired (2,059,979) (18,076) (264,493)
Payments for acquisitions of and/or investments
in certain technologies, net (2,314) (39,066) (8,564)
Other, net 205 (6,379)
----------------------------------
Cash used in investing activities (2,224,770) (250,962) (401,303)
FINANCING ACTIVITIES:
Net increase in commercial paper 1,392,913 210,750 212,500
Proceeds from notes payable and long-term debt,
net of debt issuance costs 522,850 52,005
Payments on notes payable, capital leases and
long-term borrowings (33,231) (10,929) (27,816)
Proceeds from issuances of shares of common stock,
net of tax benefits 99,795 96,213 77,642
Acquisitions of treasury stock,
net of proceeds from put options (186,651) (63,832)
Other, net (4,959) 484 762
----------------------------------
Cash provided by financing activities 1,977,368 161,872 199,256
Effect of foreign exchange rates on cash 1,274 (5,586) (2,588)
----------------------------------
Net increase (decrease) in cash and cash equivalents 12,337 (14,182) (62,656)
Cash and cash equivalents at beginning of period 57,993 72,175 134,831
----------------------------------
Cash and cash equivalents at end of period $ 70,330 $ 57,993 $ 72,175
==================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-15
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE A)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Boston Scientific Corporation (Boston Scientific or the Company) and
its subsidiaries, substantially all of which are wholly-owned, and include the
results of EP Technologies, Inc. (EPT) and Target Therapeutics, Inc. (Target)
acquired in 1996 and 1997, respectively, accounted for as poolings-of-interests
for all periods presented. The statements also include the results of Symbiosis
Corporation (Symbiosis), beginning in March 1996, the results of Endotech, Ltd.
and MinTec, Inc., and certain related companies (Endotech/MinTec), beginning in
May 1996 and the results of Schneider Worldwide (Schneider), beginning in
September 1998. Investments in affiliates, representing 20% to 50% of the
ownership of such companies, are accounted for under the equity method,
including the Company's investment in Medinol Ltd. (Medinol). Income recorded in
connection with these investments was not significant during the periods
presented. Investments in affiliates, representing less than 20% of the
ownership of such companies, are accounted for under the cost method.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCY: All assets and liabilities of foreign
subsidiaries are translated at the rate of exchange at year end while sales and
expenses are translated at the average rates in effect during the year. The net
effect of these translation adjustments is shown in the accompanying financial
statements as a component of stockholders' equity.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS: Short-term investments are recorded at fair value, which
approximates cost.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the
Company to concentration of credit risk consist primarily of temporary cash and
cash equivalents, marketable securities, forward foreign exchange contracts and
accounts receivable. The Company invests its excess cash primarily in high
quality securities and limits the amount of credit exposure to any one financial
institution. The Company's investment policy limits exposure to concentration of
credit risk and changes in market conditions. The Company is exposed to
credit-related losses in the event of non-performance by counterparties to
financial instruments. The Company transacts forward foreign exchange contracts
with major financial institutions to limit its credit exposure.
The Company provides credit, in the normal course of business, primarily to
hospitals, private and governmental institutions and healthcare agencies and
doctors' offices. The Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market.
PROPERTY, PLANT AND EQUIPMENT: Property, plant, equipment and leaseholds are
stated at historical cost. Expenditures for maintenance and repairs are charged
to expense; betterments are capitalized. The Company provides for depreciation
and amortization by the straight-line method at rates which are intended to
depreciate and amortize the cost of these assets over their estimated useful
lives. Buildings and improvements are depreciated over a 15 to 40-year life;
equipment, furniture and fixtures are depreciated over a 2 to 12-year life.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease.
The Company capitalizes interest incurred on funds used to construct property,
plant and equipment. Interest capitalized was $4 million during 1998 and $5
million during 1997. The Company receives grant money equal to a percentage of
expenditures on eligible capital equipment which is recorded as deferred income
and recognized ratably over the life of the underlying assets. The grant money
would be repayable, in whole or in part, should the Company fail to meet certain
employment goals.
INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line
method over the following lives: Patents and trademarks (3 - 20 years); Licenses
(2 - 20 years); Core and developed technology (3 - 25 years); Excess of cost
over net assets acquired (15 - 40 years); Other intangibles (various).
The Company examines the carrying value of its excess of cost over net assets
acquired and other intangible assets to determine whether there are any
impairment losses. If indicators of impairment were present in intangible assets
used in operations, and future cash flows were not expected to be sufficient to
recover the assets' carrying amount, an impairment loss would be charged to
expense in the period identified. No event has been identified that would
indicate an impairment of the value of material intangible assets recorded in
the accompanying consolidated financial statements.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-16
35
INCOME TAXES: The Company utilizes the asset and liability method for accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
the enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Taxes are not provided on unremitted earnings of subsidiaries outside the United
States (U.S.) where such earnings are permanently reinvested. At December 31,
1998, unremitted earnings of non-U.S. subsidiaries were $416 million. It is not
practical to estimate the amount of taxes payable on these foreign earnings.
Research and development tax credits are recorded as a reduction in income tax
expense in the year realized.
FORWARD FOREIGN EXCHANGE CONTRACTS: The Company enters into forward foreign
exchange contracts to hedge foreign currency transactions on a continuing basis
for periods consistent with commitments. The Company does not engage in
speculation. The Company's foreign exchange contracts do not subject the Company
to material balance sheet risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the assets and liabilities
being hedged. During 1998, net foreign currency transaction and translation
gains (losses) that are reflected as other income (expense) on the Consolidated
Statements of Operations totaled approximately $2 million of net foreign
exchange gains compared to net foreign exchange losses of $4 million and $2
million in 1997 and 1996, respectively.
Although the Company engages in hedging transactions that may offset the effect
of fluctuations in foreign currency exchange rates on foreign currency
denominated assets and liabilities, financial exposure may nonetheless result,
primarily from the timing of transactions and the movement of exchange rates.
Further, any significant changes in the political, regulatory or economic
environment where the Company conducts international operations may have a
material impact on revenues and profits.
REVENUE RECOGNITION: The Company recognizes revenue from the sale of its
products when the products are shipped to its customers. The Company allows its
customers to return certain products for credit. The Company also allows
customers to return defective or damaged products for credit or replacement.
Accruals are made and evaluated for adequacy for all returns.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
STOCK COMPENSATION ARRANGEMENTS:The Company accounts for its stock compensation
arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and intends to continue to do so. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation".
ACCOUNTING CHANGE: In 1997, the Company implemented Emerging Issues Task Force
(EITF) No. 97-13 "Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project that Combines Business Process Reengineering and
Information Technology Transformation", the effect of which ($31 million or $21
million, net of tax) is reflected as a cumulative effect of change in accounting
in 1997.
NEW ACCOUNTING STANDARDS: In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
The Company has not yet adopted the American Institute of Certified Public
Accountants' Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities", which will require adoption in 1999, or SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which will require adoption
in 2000. The Company is in the process of determining the effect of adoption of
these statements on its consolidated financial statements and related
disclosures but does not believe the impact will be significant.
NET INCOME PER COMMON SHARE: Net income (loss) per common share is based upon
the weighted average number of common shares, common share equivalents and the
dilutive effect of European put options, if applicable, outstanding each year.
The Company paid a two-for-one stock split on November 30, 1998. All historical
per share amounts have been restated to reflect the stock split.
RECLASSIFICATIONS: Certain prior years' amounts have been reclassified to
conform to the current years' presentation.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-17
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE B TO NOTE D)
NOTE B - OTHER BALANCE SHEET INFORMATION
Components of other selected captions in the Consolidated Balance Sheets at
December 31 consisted of:
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------
TRADE ACCOUNTS RECEIVABLE
Accounts receivable $586,937 $395,942
Less allowances 49,151 30,479
---------------------------
$537,786 $365,463
===========================
INVENTORIES
Finished goods $248,925 $209,506
Work-in-process 82,861 45,683
Raw materials 130,195 136,391
---------------------------
$461,981 $391,580
===========================
PROPERTY, PLANT AND EQUIPMENT
Land $ 48,233 $ 45,213
Buildings and improvements 418,669 306,958
Equipment, furniture and fixtures 478,437 354,344
---------------------------
945,339 706,515
Less accumulated depreciation and amortization 265,457 207,548
---------------------------
$679,882 $498,967
===========================
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired $897,805 $115,638
Less accumulated amortization 20,962 15,256
---------------------------
$876,843 $100,382
===========================
TECHNOLOGY - CORE AND DEVELOPED
Core technology $420,960
Developed technology 219,985 $ 89,004
---------------------------
640,945 89,004
Less accumulated amortization 34,470 18,310
---------------------------
$606,475 $ 70,694
===========================
PATENTS, TRADEMARKS AND OTHER INTANGIBLES
Patents and trademarks $273,364 $129,610
Licenses 66,404 58,040
Other intangibles 76,069 13,768
---------------------------
415,837 201,418
Less accumulated amortization 85,620 59,148
---------------------------
$330,217 $142,270
===========================
ACCRUED EXPENSES
Payroll and related liabilities $ 83,763 $ 40,547
Other 161,259 120,689
---------------------------
$245,022 $161,236
===========================
Inventories as of December 31, 1998 include approximately $123 million of NIR(R)
coronary stents which are supplied by Medinol. Delays, stoppages, or
interruptions in the supply and/or mix of the NIR(R) stent could adversely
affect the operating results of the Company. During 1998, worldwide NIR(R)
coronary stent sales were approximately 13% of worldwide sales.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-18
37
NOTE C - CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents, and investments, stated at fair market value, consisted of the following:
FAIR GROSS GROSS
MARKET UNREALIZED UNREALIZED AMORTIZED
(IN THOUSANDS) VALUE GAINS LOSSES COST
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
AVAILABLE-FOR-SALE:
Cash and money market accounts $ 70,330 $70,330
Equity securities (with a readily determinable fair value) 20,567 $ 9,159 $6,684 18,092
Debt securities 5,073 5,073
-------------------------------------------------
$ 95,970 $ 9,159 $6,684 $93,495
=================================================
DECEMBER 31, 1997
AVAILABLE-FOR-SALE:
Cash and money market accounts $ 57,993 $57,993
Equity securities (with a readily determinable fair value) 47,828 $31,079 $2,090 18,839
Debt securities 16,607 16,607
-------------------------------------------------
$122,428 $31,079 $2,090 $93,439
=================================================
The Company has no trading securities. Unrealized gains and temporary losses for
available-for-sale securities are excluded from earnings and are reported, net
of tax, as a separate component of stockholders' equity until realized. The cost
of available-for-sale securities is based on the specific identification method.
At December 31, 1998 and 1997, the Company had investments totaling $13 million
and $24 million, respectively, in which the fair market value was not readily
determinable.
NOTE D - BORROWINGS AND CREDIT ARRANGEMENTS
The Company's borrowings at December 31 consisted of:
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------
Commercial paper $1,016,163 $423,250
Bank obligations 11,324 23,958
Long-term debt - fixed rate 563,822 46,325
Long-term debt - floating rate 800,000
At December 31, 1998, the Company had approximately $1.8 billion of commercial
paper outstanding at a weighted average interest rate of 6.23% compared to $423
million at a weighted average interest rate of 6.46% at December 31, 1997. The
Company's commercial paper borrowings are supported by revolving credit
facilities with certain domestic and foreign financial institutions. At December
31, 1998, the revolving credit facilities totaled $2.2 billion. The credit
facilities consist of a $1.0 billion credit facility which terminates in June
2002 and $1.2 billion in 364-day facilities which terminate in September 1999
and can be extended for an additional 364 days under certain conditions. The
Company has the ability to refinance a portion of its short-term debt on a
long-term basis through its credit facilities and expects a minimum of $800
million will remain outstanding through the next twelve months and, accordingly,
the Company has classified this portion of borrowings as long-term at December
31, 1998. Under the revolving credit facilities, the Company has the option to
borrow amounts at various interest rates. Use of the borrowings is unrestricted
and the borrowings are unsecured. The revolving credit facilities require the
Company to maintain a specific ratio of consolidated funded debt (as defined) to
consolidated net worth (as defined) plus consolidated funded debt. In the first
quarter of 1999, the Company refinanced substantially all of the outstanding
commercial paper borrowings with proceeds of borrowings under the revolving
credit facilities. The Company had other outstanding bank obligations of $11
million and $24 million at December 31, 1998 and 1997, respectively, at weighted
average interest rates of 6.45% and 2.55%, respectively.
In March 1998, the Company issued $500 million of seven-year senior notes. The
senior notes bear a coupon of 6.625% payable semiannually, and are not
redeemable prior to maturity or subject to any sinking fund requirements.
During March 1998, the Company borrowed 1.2 billion Japanese yen (approximately
$11 million) at a fixed interest rate of 2.1% from a Japanese bank to finance a
facility construction project. The term of the borrowing extends through 2012.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-19
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE D CONTINUED TO NOTE G)
- ----------------------------
At December 31, 1998, the Company had an additional 6 billion Japanese yen
borrowings (approximately $53 million) outstanding with a syndicate of Japanese
banks. The interest rate on the borrowings is 2.47% and the borrowings are
payable in 2002.
The Company has uncommitted Japanese credit facilities with several Japanese
banks to provide for borrowings and promissory notes discounting of up to 7.5
billion Japanese yen (approximately $66 million). At December 31, 1998, there
were no borrowings outstanding under the Japanese credit facilities compared to
2.7 billion Japanese yen (approximately $21 million) at December 31, 1997.
During 1998, approximately $266 million of receivables were discounted through
promissory notes compared to $194 million during 1997. At December 31, 1998,
approximately $61 million of receivables were discounted at average interest
rates of approximately 1.5%.
In September 1998, the Company filed a $1.2 billion shelf registration with the
U.S. Securities and Exchange Commission under which the Company may from time to
time issue various equity and debt securities. At December 31, 1998, the Company
had no outstanding securities issued under this shelf registration.
Interest paid, including interest paid under capital leases and mortgage loans,
amounted to $65 million in 1998, $19 million in 1997, and $13 million in 1996.
NOTE E - LEASES
Rent expense amounted to $40 million in 1998, $37 million in 1997 and $22
million in 1996. Future minimum rental commitments as of December 31, 1998 under
noncancelable capital and operating lease agreements are as follows:
(IN THOUSANDS)
- ---------------------------------------------------------------------------
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ---------------------------------------------------------------------------
1999 $ 3,425 $ 32,427
2000 2,274 29,247
2001 2,282 15,508
2002 2,299 11,460
2003 2,323 7,437
Thereafter 8,872 50,002
------------------------
Total minimum lease payments 21,475 $146,081
========================
Amount representing interest 8,799
-------
Present value of minimum
lease payments $12,676
=======
NOTE F - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments. However, considerable judgment
is required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheets
for cash and cash equivalents are valued at cost which approximates their fair
value.
INVESTMENTS: The fair values for marketable debt and equity securities are based
on quoted market prices when readily determinable.
COMMERCIAL PAPER AND BANK OBLIGATIONS: The carrying amounts of the Company's
borrowings under its commercial paper program and its financing agreements
approximate their fair value.
LONG-TERM DEBT: The fair value of the Company's fixed rate long-term debt is
estimated based on quoted market prices. The carrying amounts of the Company's
floating rate long-term debt approximate their fair value.
FORWARD FOREIGN EXCHANGE CONTRACTS: The fair values of forward foreign exchange
contracts are estimated based on the amount that the Company would receive or
pay to terminate the agreements at the reporting date. The Company had spot and
forward foreign exchange contracts outstanding in the notional amounts of $230
million and $177 million as of December 31, 1998 and 1997, respectively.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-20
39
The carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows:
1998 1997
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
Assets:
Cash, cash equivalents and investments $ 95,970 $ 95,970 $122,428 $122,428
Forward foreign exchange contracts, net 3,038 2,476
Liabilities:
Commercial paper 1,016,163 1,016,163 423,250 423,250
Bank obligations -short-term 11,324 11,324 23,958 23,958
Long-term debt - fixed rate 563,822 549,522 46,325 47,255
Long-term debt - floating rate 800,000 800,000
Forward foreign exchange contracts, net 7,436 7,501
NOTE G - INCOME TAXES
Income (loss) before income taxes and cumulative effect of change in accounting consisted of:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Domestic $(346,518) $178,381 $253,239
Foreign 71,204 36,750 50,091
-----------------------------------------
$(275,314) $215,131 $303,330
=========================================
The related provision (benefit) for income taxes consisted of:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Current:
Federal $106,177 $97,237 $116,191
State 20,903 14,567 9,108
Foreign 13,399 16,614 22,686
----------------------------------------
140,479 128,418 147,985
========================================
Deferred:
Federal (112,024) (30,123) 4,175
State (27,127) (5,648) 522
Foreign (12,273) (8,996) (16,446)
----------------------------------------
(151,424) (44,767) (11,749)
========================================
$(10,945) $83,651 $136,236
========================================
The reconciliation of taxes on income at the federal statutory rate to the actual provision (benefit) for income taxes is:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Tax at statutory rate $(96,360) $75,296 $106,166
State income taxes, net of federal benefit 8,368 7,760 8,778
Effect of foreign taxes (24,849) (9,981) 3,641
Non-deductible merger-related expenses and
purchased research and development 93,247 14,957 19,902
Other, net 8,649 (4,381) (2,251)
----------------------------------------
$(10,945) $83,651 $136,236
========================================
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-21
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE G CONTINUED TO NOTE I)
- ----------------------------
SIGNIFICANT COMPONENTS OF THE COMPANY'S DEFERRED TAX ASSETS AND LIABILITIES AT DECEMBER 31 CONSISTED OF:
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Inventory costs, intercompany profit and related reserves $ 84,942 $ 98,636
Tax benefit of net operating loss and tax credits 29,013 28,808
Reserves and accruals 29,148 31,937
Merger-related charges, including purchased research
and development 201,006 44,302
Other, net 5,875 23,669
------------------------
349,984 227,352
Less valuation allowance on deferred tax assets 24,698 23,250
------------------------
$325,286 $204,102
========================
Deferred tax liabilities:
Property, plant and equipment $ (7,222) $ (8,509)
Intangible assets (51,415) (33,593)
Unremitted earnings of subsidiaries (55,980) (52,104)
Other (10,414) (9,407)
------------------------
(125,031) (103,613)
========================
Deferred SFAS No. 115 adjustment (987) (11,567)
------------------------
$199,268 $ 88,922
========================
At December 31, 1998, the Company had U.S. tax net operating loss carryforwards
and research and development tax credits of approximately $14 million that will
expire periodically beginning in the year 2006. In addition, the Company had
foreign tax net operating loss carryforwards of approximately $15 million that
will expire periodically beginning in the year 2000. The Company established a
valuation allowance of $25 million for these carryforwards primarily
attributable to the carryforwards acquired as part of the Company's 1995, 1996
and 1997 mergers and acquisitions.
Income taxes paid amounted to $109 million in 1998, $89 million in 1997 and $85
million in 1996. The income tax provision (benefit) of the unrealized gain or
loss component of other comprehensive income (expense) was approximately $(11)
million, $1 million and $7 million for 1998, 1997 and 1996, respectively.
NOTE H - STOCKHOLDERS' EQUITY
PREFERRED STOCK: The Company is authorized to issue 50 million shares of
preferred stock in one or more series and to fix the powers, designations,
preferences and relative, participating, option or other rights thereof,
including dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences and the number of shares constituting any series,
without any further vote or action by the Company's stockholders. At December
31, 1998, the Company had no shares of preferred stock outstanding.
COMMON STOCK: The Company is authorized to issue 600 million shares of common
stock, $.01 par value per share. Holders of common stock are entitled to one
vote per share. Holders of common stock are entitled to receive dividends when
and if declared by the Board of Directors and to share ratably in the assets of
the Company legally available for distribution to its stockholders in the event
of liquidation. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The holders of common stock do not have
cumulative voting rights. The holders of a majority of the shares of common
stock can elect all of the Directors and can control the management and affairs
of the Company.
The Company is authorized to purchase on the open market up to approximately 40
million shares of the Company's common stock. Purchases will be made at
prevailing prices as market conditions and cash availability warrant. Stock
repurchased under the Company's systematic plan will be used to satisfy its
obligations pursuant to employee benefit and incentive plans. The Company did
not repurchase any shares of its common stock during 1998. Prior to 1998, a
total of 20 million shares of the Company's common stock was repurchased under
the program.
On August 27, 1998, the Company announced that its Board of Directors approved a
two-for-one stock split, to be effected in the form of a 100 percent stock
dividend. On November 4, 1998, the Company announced that its stockholders had
approved an amendment to the Company's certificate of
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-22
41
incorporation increasing the Company's authorized common stock from 300,000,000
shares to 600,000,000 shares and authorized preferred stock from 25,000,000 to
50,000,000 shares. The amendment allowed the two-for-one stock split announced
on August 27, 1998 to go forward. The stock split was paid on November 30, 1998
to stockholders of record as of November 13, 1998. All historical share and per
share amounts have been restated to reflect the stock split except for share
amounts presented in the Consolidated Balance Sheets and the Consolidated
Statements of Stockholders' Equity which reflect the actual share amounts
outstanding for each period presented.
NOTE I - STOCK OWNERSHIP PLANS
EMPLOYEE AND DIRECTOR STOCK INCENTIVE PLANS
Boston Scientific's 1992 and 1995 Long-Term Incentive Plans provide for the
issuance of up to 40 million shares of common stock. The terms of these two
plans are similar. The plans cover officers, employees and consultants of and to
the Company and provide for the grant of various incentives, including qualified
and non-qualified options, stock grants, share appreciation rights and
performance awards. Options granted to purchase shares of common stock are
either immediately exercisable or exercisable in installments as determined by
an appointed committee consisting of two or more non-employee directors (the
Committee), and, in the case of any qualified options, expire within ten years
from date of grant. In the case of qualified options, if an employee owns more
than 10% of the voting power of all classes of stock, the option granted will be
at 110% of the fair market value of the Company's common stock on the date of
grant and will expire over a period not to exceed five years.
The Committee may also make stock grants in which shares of common stock may be
issued to officers, employees and consultants at a purchase price less than fair
market value. The terms and conditions of such issuances, including whether
achievement of individual or Company performance targets is required for the
retention of such awards, are determined by the Committee. The Committee may
also issue shares of common stock and/or authorize cash awards under the
incentive plans in recognition of the achievement of long-term performance
objectives established by the Committee. Stock grants for 5,000 shares, 15,000
shares and 2,000 shares were issued to employees during 1998, 1997 and 1996,
respectively.
Boston Scientific's 1992 Non-Employee Directors' Stock Option Plan provides for
the issuance of up to 200,000 shares of common stock and authorizes the
automatic grant to outside directors of options to acquire 4,000 shares of
common stock generally on the date of each annual meeting of the Stockholders of
the Company. Options under this plan are exercisable ratably over a three-year
period and expire ten years from the date of grant.
Shares reserved for future issuance under all of the Company's plans totaled
approximately 42 million at December 31, 1998.
If the Company had elected to recognize compensation expense for the granting of
options under stock option plans based on the fair values at the grant dates
consistent with the methodology prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation", net income (loss) and earnings (loss) per share would
have been reported as the following pro forma amounts:
(IN THOUSANDS, YEAR ENDED DECEMBER 31,
EXCEPT PER SHARE DATA) 1998 1997 1996
- ---------------------------------------------------------------------
Net income (loss)
As reported $(264,369) $110,400 $167,094
Pro forma (302,455) 82,974 151,820
- ---------------------------------------------------------------------
Earnings (loss) per common share -
assuming dilution
As reported $ (0.68) $ 0.28 $ 0.42
Pro forma (0.77) 0.21 0.38
- ---------------------------------------------------------------------
The weighted average grant-date fair value per share of options granted during
1998, 1997 and 1996, calculated using the Black-Scholes options pricing model,
is $13.13, $9.08 and $7.21, respectively.
The fair value of the stock options used to calculate the pro forma net income
(loss) and earnings (loss) per share amounts above is estimated using the
Black-Scholes options pricing model with the following weighted average
assumptions:
1998 1997 1996
- ---------------------------------------------------------------------
Dividend yield 0% 0% 0%
Expected volatility 37.80% 35.90% 37.70%
Risk-free interest rate 5.64 6.42% 6.12%
Actual forfeitures 1,127,000 1,340,000 682,000
Expected life 3.7 4.0 3.7
The effects of expensing the estimated fair value of stock options on 1997 and
1996 pro forma amounts are not necessarily representative of the effects on
reporting the results of operations, as the periods presented include only three
and two years, respectively, of option grants under the Company's plans.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-23
42
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (NOTE I CONTINUED TO NOTE K)
Information related to stock options at December 31 under stock ownership plans is as follows:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
(OPTION AMOUNTS IN THOUSANDS) OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ------------------------------------------------------------------------------------------------------
Outstanding at January 1 33,206 $15.76 29,078 $11.42 29,398 $8.28
Granted 6,621 35.91 10,716 24.70 6,654 20.52
Exercised (5,557) 10.19 (5,106) 8.98 (5,948) 6.23
Canceled (2,222) 22.02 (1,482) 18.58 (1,026) 10.36
-------------------------------------------------------------------
Outstanding at December 31 32,048 20.45 33,206 15.76 29,078 11.42
===================================================================
Exercisable at December 31 13,053 $11.58 12,230 $ 9.08 10,784 $7.93
===================================================================
Below is additional information related to stock options outstanding and exercisable at December 31, 1998:
STOCK OPTIONS STOCK OPTIONS
(OPTION AMOUNTS IN THOUSANDS) OUTSTANDING EXERCISABLE
- -------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- -------------------------------------------------------------------------------------------
$0.00- 8.00 7,082 4.49 $ 5.71 6,898 $ 5.67
8.01-16.00 5,179 6.18 13.63 2,907 13.47
16.01-24.00 4,890 7.60 20.64 1,999 20.46
24.01-32.00 8,976 8.42 25.10 1,186 25.14
32.01-40.00 5,921 9.32 36.85 63 34.16
---------------------------------------------------------
32,048 7.23 $20.45 13,053 $11.58
=========================================================
STOCK PURCHASE PLAN
Boston Scientific's Global Employee Stock Ownership Plan (Stock Purchase Plan)
provides for the granting of options to purchase up to 3 million shares of the
Company's common stock to all eligible employees. Under the Stock Purchase Plan,
each eligible employee is granted, at the beginning of each period designated by
the Committee as an offering period, an option to purchase shares of the
Company's common stock equal to not more than 10% of the employee's eligible
compensation. Such options may be exercised generally only to the extent of
accumulated payroll deductions at the end of the offering period, at a purchase
price equal to 85% of the fair market value of the Company's common stock at the
beginning or end of each offering period, whichever is less.
During 1998, approximately 380,000 shares were issued at $23.35 per share.
During 1997, approximately 240,000 shares were issued at prices ranging from
$23.45 to $24.33 per share, and, during 1996, approximately 240,000 shares were
issued at prices ranging from $18.06 to $19.71 per share. At December 31, 1998,
there were approximately 1.6 million shares available for future issuance.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-24
43
NOTE J - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------
BASIC:
Net income (loss) $(264,369) $110,400 $167,094
====================================
Weighted average
shares outstanding 390,836 389,146 387,018
====================================
Net income (loss) per
common share $ (0.68) $ 0.28 $ 0.43
====================================
ASSUMING DILUTION:
Net income (loss) $(264,369) $110,400 $167,094
====================================
Weighted average
shares outstanding 390,836 389,146 387,018
Net effect of dilutive
put options 28
Net effect of dilutive
stock options 10,602 11,688
------------------------------------
Total 390,836 399,776 398,706
====================================
Net income (loss) per
common share $ (0.68) $ 0.28 $ 0.42
====================================
During 1998, approximately 9 million stock options were not included in the
computation of earnings per share, assuming dilution, because they would have
been antidilutive. In addition, during 1998 and 1997, approximately 7 million
and 10 million stock options, respectively, were not included in the computation
of earnings per share, assuming dilution, because exercise prices were greater
than the average market price of the common shares.
NOTE K - COMMITMENTS AND CONTINGENCIES
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a wholly owned subsidiary
of the Company, filed a suit for patent infringement against Advanced
Cardiovascular Systems, Inc. (ACS), alleging willful infringement of two of
SCIMED's U.S. patents by ACS's RX ELIPSE(TM) PTCA catheter. The suit was filed
in the U.S. District Court for the Northern District of California seeking
monetary and injunctive relief. In January 1998, the Company added the ACS RX
MULTILINK(TM) stent delivery system to its complaint. ACS has answered, denying
the allegations of the complaint. Trial is expected to begin in 1999.
On December 29, 1998, the Company and SCIMED filed a cross-border suit against
ACS, Guidant Corporation (Guidant) and various foreign subsidiaries in The
Netherlands alleging ACS's MULTILINK(TM), RX ELIPSE, RX MULTILINK HP(TM) and RX
DUET(TM) catheters and stent delivery systems infringe one of the Company's
European patents. In this action, the Company requested relief covering The
Netherlands, the United Kingdom, France, Germany and Italy. A hearing on
cross-border jurisdiction will be held on March 12, 1999. A hearing on the
merits is set for November 5, 1999.
On January 13, 1999, SCIMED filed a suit for patent infringement against ACS,
Guidant and Guidant Sales Corporation alleging willful infringement of two of
SCIMED's U.S. patents by ACS's RX MULTILINK HP and RX DUET stent delivery
systems and one of SCIMED's U.S. patents by ACS's RX MULTILINK stent delivery
system. The suit was filed in the U.S. District Court for the Northern District
of California seeking monetary and injunctive relief. ACS has answered, denying
the allegations of the complaint.
On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,
alleging willful infringement by SCIMED'S EXPRESS PLUS(TM) and EXPRESS PLUS
II(TM) PTCA catheters of four U.S. patents licensed to ACS. Suit was filed in
the U.S. District Court for the Northern District of California and seeks
monetary and injunctive relief. SCIMED has answered, denying the allegations of
the complaint. Trial is expected to begin in 1999.
On March 12, 1996, ACS filed two suits for patent infringement against SCIMED,
alleging in one case the willful infringement of a U.S. patent by SCIMED's
EXPRESS PLUS, EXPRESS PLUS II and LEAP(R) EXPRESS PLUS PTCA catheters, and in
the other case the willful infringement of a U.S. patent by SCIMED's BANDIT(TM)
PTCA catheter. The suits were filed in the U.S. District Court for the Northern
District of California and seek monetary and injunctive relief. SCIMED has
answered, denying the allegations of the complaints. Both trials are expected to
begin in 1999.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-25
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE K CONTINUED)
- ---------------------
On September 16, 1997, ACS filed a suit for patent infringement against the
Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter infringes two
U.S. patents licensed to ACS and one U.S. patent owned by ACS. Suit was filed in
the U.S. District Court for the Northern District of California seeking monetary
damages, injunctive relief and that the patents be adjudged valid, enforceable
and infringed. The Company and SCIMED have answered, denying the allegations in
the complaint. A trial date has not yet been set.
On August 12, 1998, ACS and an affiliate of ACS filed suit for patent
infringement against the Company and SCIMED alleging that the Company's NIR(R)
stent infringes five patents owned by ACS. The suit was filed in the U.S.
District Court for the Southern District of Indiana seeking injunctive and
monetary relief. The Company and SCIMED have answered, denying the allegations
of the complaint. A trial date has been set for February 22, 2000.
On March 25, 1996, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson Company (Johnson & Johnson), filed a suit for patent infringement
against SCIMED, alleging the infringement of five U.S. patents by SCIMED's LEAP
balloon material, used in certain SCIMED catheter products, including SCIMED's
BANDIT and EXPRESS PLUS catheters. The suit was filed in the U.S. District Court
for the District of Minnesota and seeks monetary and injunctive relief. SCIMED
has answered, denying the allegations of the complaint. Trial is expected to
begin in 1999.
On March 17, 1997, the Company, through its subsidiaries, filed suit against
Cordis in France seeking a declaration of noninfringement for the Company's LEAP
balloon in relation to a European patent owned by Cordis. A hearing on the
pleadings is scheduled for May 11, 1999.
On July 18, 1997, Cordis filed a cross border suit in The Netherlands against
various subsidiaries of the Company, alleging that the LEAP balloon infringes
one of Cordis' European patents. In this action, Cordis requested expedited
relief, including an injunction, covering The Netherlands, Germany, France, the
United Kingdom and Italy. The court posed certain questions to the European
Patent Office (EPO). The Company appealed the court's decision to present
questions to the EPO. A hearing on the appeal was held June 16, 1998. In
November 1998, the Court of Appeals held that there was a "ready chance" that
the Cordis patent would be found invalid and dismissed the action.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis,
alleging willful infringement of several SCIMED U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in
the U.S. District Court for the District of Minnesota, Fourth District, seeking
monetary and injunctive relief. The parties have agreed to add Cordis'
CHARGER(TM) and HELIX(TM) catheters to the suit. Cordis has answered, denying
the allegations of the complaint. Trial is expected to begin in 1999.
On March 13, 1997, the Company (through its subsidiaries) filed suits against
Johnson & Johnson (through its subsidiaries) in The Netherlands, the United
Kingdom and Belgium, and on March 17, 1997 filed suit in France, seeking a
declaration of noninfringement for the NIR(R) stent relative to two European
patents licensed to Ethicon, Inc. (Ethicon), a Johnson & Johnson subsidiary, as
well as a declaration of invalidity with respect to those patents. After a trial
on the merits in the United Kingdom during March 1998, the Court ruled on June
26, 1998 that neither of the patents is infringed by the NIR(R) stent, and that
both patents are invalid. Ethicon has appealed. On October 28, 1998, the
Company's motion for a declaration of noninfringement in France was dismissed
for failure to satisfy statutory requirements; the French invalidity suits were
not affected. The Company has appealed the dismissal, and a hearing is scheduled
for March 22, 1999.
On March 20, 21 and 22, 1997, the Company (through its subsidiaries) filed
additional suits against Johnson & Johnson (through its subsidiaries) in Sweden,
Italy and Spain, respectively, seeking a declaration of noninfringement for the
NIR(R) stent relative to one of the European patents licensed to Ethicon in
Sweden, Italy and Spain and a declaration of invalidity in Italy and Spain.
Ethicon and other Johnson & Johnson subsidiaries filed a cross-border suit in
The Netherlands on March 17, 1997, alleging that the NIR(R) stent infringes one
of the European patents licensed to Ethicon. In this action, the Johnson &
Johnson entities requested relief, including provisional relief (a preliminary
injunction), covering Austria, Belgium, France, Greece, Italy, The Netherlands,
Norway, Spain, Sweden, Switzerland and the United Kingdom. On April 2, 1997, the
Johnson & Johnson entities filed a similar cross-border proceeding in The
Netherlands with respect to a second European patent licensed to Ethicon.
Johnson & Johnson subsequently withdrew its request for cross-border relief in
the United Kingdom. In October, 1997, Johnson & Johnson's request for
provisional cross-border relief on both patents was denied by the Dutch court,
on the ground that it is "very likely" that the NIR(R) stent will be found not
to infringe the patents. Johnson & Johnson appealed this decision with respect
to one of the patents; the appeal has been denied on the ground that there is a
"ready chance" that the patent will be declared null and void. In January 1999,
Johnson & Johnson amended the claims of one of the patents, changed the action
from a cross-border case to a Dutch national action, and indicated its intent
not to pursue its action on the second patent. A hearing has been set for
March 26, 1999.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-26
45
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that the Company's NIR(R) stent infringes one of Ethicon's
patents. On June 23, 1998, the case was stayed following a decision in an
unrelated nullity action in which the Ethicon patent was found to be invalid.
On June 16, 1997, the Company and SCIMED filed a suit against Johnson & Johnson,
Ethicon and Johnson & Johnson International Systems Co. in the U.S. District
Court for the District of Massachusetts seeking a declaratory judgment of
noninfringement for the NIR(R) stent relative to two patents licensed to Johnson
& Johnson and that the two patents are invalid and unenforceable. The Company
subsequently amended its complaint to add a third patent. Johnson & Johnson
answered, denying the allegations of the complaint, and counterclaiming for
patent infringement. In October 1997, Johnson & Johnson's motion to dismiss the
suit was denied. This action has been consolidated with the Delaware action
described below.
On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR(R) stent infringes certain
Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court
of Canada seeking a declaration of infringement, monetary damages and injunctive
relief. The Company has answered, denying the allegations of the complaint.
On October 22, 1997, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the importation and use of the NIR(R) stent
infringes two patents owned by Cordis. The suit was filed in the U.S. District
Court for the District of Delaware seeking monetary damages, injunctive relief
and that the patents be adjudged valid, enforceable and infringed. The Company
and SCIMED have answered the complaint, denying Cordis' allegations. The
Massachusetts case described above has been consolidated with this action. A
trial date has been set for March 6, 2000.
On April 13, 1998, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's NIR(R) stent infringes a third
patent owned by Cordis. The suit was filed in the U.S. District Court for the
District of Delaware seeking injunctive and monetary relief. The Company and
SCIMED have answered, denying the allegations of the complaint. A trial date has
been set for March 6, 2000.
On August 13, 1998, Arterial Vascular Engineering, Inc. (AVE) filed a suit for
patent infringement against the Company and SCIMED alleging that the Company's
NIR(R) stent infringes two patents owned by AVE. The suit was filed in the U.S.
District Court for the District of Delaware seeking injunctive and monetary
relief. The Company and SCIMED have answered, denying the allegations of the
complaint. A trial date has not yet been set.
On December 15, 1998, the Company and SCIMED filed a cross-border suit against
AVE in The Netherlands alleging that AVE's AVE GFX(TM), AVE GFX 2(TM), AVE
LTX(TM) and USCI CALYPSO(TM) rapid exchange catheters and stent delivery systems
infringe one of the Company's European patents. In this action, the Company
requested relief covering The Netherlands, the United Kingdom, France, Germany
and Italy. A hearing is set for October 22, 1999.
On December 18, 1998, AVE filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's MAXXUM(TM) and VIVA!(TM)
catheters infringe a patent owned by AVE. The suit was filed in the U.S.
District Court for the District of Delaware seeking injunctive and monetary
relief. The Company and SCIMED have answered, denying the allegations of the
complaint.
On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District
Court for the District of Delaware alleging that certain Company products,
including the Company's MaxForce TTS(TM) catheter, infringe a patent assigned to
Bard. Following a trial and jury verdict, on February 3, 1999 the court entered
a judgment that the Company infringed the Bard patent and awarded damages to
Bard in the amount of $10.8 million. The Company was also enjoined from selling
the product found to be infringing. The Company is appealing the judgment to the
Court of Appeals for the Federal Circuit. The Company no longer markets the
accused device.
On May 12, 1998, Bard filed a cross-border suit in The Netherlands against
various subsidiaries of the Company, alleging that the Company's VIVA!(TM) and
MAXXUM(TM) rapid exchange catheters infringe one of Bard's European patents. In
this action, Bard requested relief covering The Netherlands, Germany, France,
Spain and the United Kingdom. On February 16, 1999, the suit was withdrawn for
procedural reasons. The Company is aware that AVE, successor-in-interest to
Bard's cardiovascular business, could file a similar suit against the Company,
alleging infringement of the patent by one or more of the Company's products.
On March 7, 1996, Cook Inc. (Cook) filed suit in the Regional Court, Munich
Division for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally
Invasive Technologies alleging that the Cragg EndoPro(TM) System I and
Stentor(TM) endovascular device infringe a certain Cook patent. Since the
purchase of the assets of the Endotech/MinTec companies by the Company, the
Company has assumed control of the litigation. The defendant answered, denying
the allegations. A court-appointed technical expert has provided the court with
technical advice. A final hearing is scheduled to be held on May 12, 1999.
On June 30, 1998, Cook filed suit in the Regional Court, Dusseldorf Division
for Patent Disputes, in Dusseldorf,
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-27
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE K CONTINUED TO NOTE M)
- ----------------------------
Germany against the Company alleging that the Company's PASSAGER(TM) peripheral
vascular stent graft and VANGUARD(TM) endovascular aortic graft products
infringe the same Cook patent. A hearing date has been set for July 22, 1999.
On January 13, 1999, Medical Innovations Corporation (Innovations) filed a
lawsuit in the U.S. District Court for the District of Utah alleging that
certain Company products, including the Company's Ultratome(TM) XL sphinctertome
product, infringe two patents assigned to Innovations. The suit also includes a
claim of unfair trade practices. Innovations is seeking injunctive relief and
monetary damages for both claims. The Company is preparing an answer, denying
the allegations of the complaint.
On February 1, 1999, Hewlett-Packard Company filed a suit in the U.S. District
Court for the District of Massachusetts against the Company alleging violation
of the Sherman Antitrust Act and Massachusetts General Laws Chapter 93A and
breach of contract. The Company is preparing an answer, denying the allegations
of the complaint.
Beginning November 4, 1998, a number of shareholders of the Company, on behalf
of themselves and all others similarly situated, filed purported stockholders'
class action suits in the U.S. District Court for the District of Massachusetts
alleging that the Company and certain of its officers violated certain sections
of the Securities Exchange Act of 1934. The complaints principally allege that
as a result of certain accounting irregularities involving the improper
recognition of revenue by the Company's subsidiary in Japan, the Company's
previously issued financial statements were materially false and misleading. In
all, 16 purported class action suits have been filed. Plaintiffs have moved for
the appointment of lead plaintiffs and lead counsel. The Company and its
officers have not yet filed an answer, but intend to vigorously defend all
actions.
The Company is aware that the U.S. Department of Justice is conducting an
investigation of matters that include the Company's NIR ON(TM) Ranger(TM) with
Sox(TM) coronary stent delivery system which was voluntarily recalled by the
Company in October 1998 following reports of balloon leaks. The Company is
cooperating fully in the investigation.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the Company
will prevail in any particular case. An adverse outcome in one or more cases in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company.
At December 31, 1998 and 1997, the Company has accrued approximately $38 million
and $42 million, respectively, of litigation-related reserves to cover certain
costs of defense, settlement and damages.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against product
liability losses as could otherwise materially affect the Company's financial
position.
NOTE L - BUSINESS COMBINATIONS
On September 10, 1998, the Company consummated its acquisition of Schneider
Worldwide, formerly a member of the Medical Technology Group of Pfizer Inc., for
$2.2 billion, net of assets acquired and liabilities assumed. The acquisition
was accounted for using the purchase method of accounting. The consolidated
financial statements include Schneider's operating results from the date of
acquisition. The aggregate purchase price has been allocated on a preliminary
basis to the assets acquired and liabilities assumed based on their estimated
fair values at date of acquisition. The estimated excess of purchase price over
the fair value of net tangible assets acquired was allocated to specific
intangible asset categories as follows:
(IN THOUSANDS)
- --------------------------------------------------------------
Excess of cost over net assets acquired $ 781,232
Purchased research and development 671,000
Core technology 420,960
Developed technology 126,940
Assembled workforce, customer lists,
trademarks and patents 194,780
----------
$2,194,912
==========
Core technology, developed technology, assembled workforce, customer lists,
trademarks and patents are being amortized on a straight-line basis over periods
ranging from 9 to 25 years and the excess of cost over net assets acquired is
being amortized on a straight-line basis over 40 years.
The Company recorded a $671 million ($524 million, net of tax) charge to account
for purchased research and development acquired. The valuation of purchased
research and development represents the estimated fair value related to
incomplete projects. At the date of the acquisition, the development of these
projects had not reached technological feasibility and the research and
development in progress had no alternative future uses. Accordingly, these costs
were expensed as of the date of acquisition.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-28
47
The income approach was used to establish the fair values of the intangible
assets. This approach establishes the fair value of an asset by estimating the
after-tax cash flows attributable to the asset over its useful life and then
discounting these after-tax cash flows back to a present value. The discounting
process uses a rate of return commensurate with the time value of money and
investment risk factors. Accordingly, for the purpose of establishing the fair
value of each asset in the Schneider analysis, revenues for each future period
were estimated, along with costs, expenses, taxes and other charges. Revenue
estimates were based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. With respect to the value of
purchased research and development, the Company considered, among other factors,
the research and development project's stage of completion, the complexity of
the work completed to date, the costs already incurred, the projected costs to
complete, the contribution of core technologies and other acquired assets, the
projected introduction date and the estimated useful life. The respective
after-tax cash flows were then discounted back to present value using a
risk-adjusted discount rate. The discount rates used in the Schneider analysis
ranged from 16%-28% dependent upon the risk profile of the asset.
The Company believes that the assumptions used in the forecasts were reasonable
at the time of the acquisition. No assurance can be given, however, that the
underlying assumptions used to estimate expected project revenues, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. For these reasons, among others, actual results may vary
from the projected results.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Schneider as if the acquisition had
occurred at the beginning of each year presented, with pro forma adjustments to
give effect to amortization of intangibles, purchased research and development,
an increase in interest expense on acquisition financing and certain other
adjustments together with related tax effects:
(IN THOUSANDS, YEAR ENDED DECEMBER 31,
EXCEPT PER SHARE DATA) 1998 1997
- --------------------------------------------------------------------
Net sales $2,482,809 $2,161,626
Net loss (302,683) (471,186)
Net loss per share -
assuming dilution (0.77) (1.21)
In 1997, the Company completed its merger with Target in a tax-free,
stock-for-stock transaction accounted for as a pooling-of-interests. In
conjunction with this merger, Target's stockholders received 1.07 shares of the
Company's common stock in exchange for each share of Target common stock.
Approximately 33 million shares of the Company's common stock were issued in
connection with the Target merger.
In 1996, the Company completed its merger with EPT in a stock-for-stock
transaction. The transaction, which is accounted for as a pooling-of-interests,
was effected through the exchange of 0.297 shares of the Company's common stock
for each EPT share held. Approximately 6.8 million shares of the Company's
common stock were issued in conjunction with the EPT merger.
In 1996, the Company acquired Symbiosis, formerly a wholly-owned subsidiary of
American Home Products Corporation, for approximately $153 million in a cash
transaction. The acquisition was accounted for using the purchase method of
accounting.
In 1996, the Company purchased the assets of Endotech/MinTec for approximately
$72 million in a cash transaction accounted for using the purchase method of
accounting.
NOTE M - RESTRUCTURING AND
MERGER-RELATED CHARGES
The Company is in the process of implementing a rationalization plan established
after acquiring Schneider. The rationalization plan takes into consideration
duplicate capacity and opportunities for further leveraging of cost and
technology platforms. The Company's actions approved and committed to in the
fourth quarter of 1998 will result in the displacement in 1999 of approximately
2,000 current positions, over half of which are manufacturing positions. The
Company has decided to close five Schneider facilities, as well as transition
the manufacturing of selected Boston Scientific product lines to different
sites. The Company estimates that the costs associated with these activities
will be approximately $62 million, most of which represent severance and related
costs. Approximately $36 million of the total has been capitalized as part of
the purchase price of Schneider. The remaining $26 million ($17 million, net of
tax) has been charged to operations. The rationalization plan also resulted in
the decision to expand, not close, a facility originally provided for in a 1997
merger-related charge; thus, in the fourth quarter, the Company reversed $21
million ($14 million, net of tax) of previously recorded merger-related charges.
The reversal also includes estimated reductions in contractual commitment
payments, associated legal costs and other asset write-downs originally provided
for as a 1997 merger charge. In the second quarter of 1998, the Company
reorganized certain U.S. sales organizations differently than was originally
contemplated at the time of the Target acquisition. As a result, the Company
reversed $20 million ($13 million, net of tax) of 1997 merger-related charges.
At December 31, 1998, the Company had an accrual for restructuring and
merger-related charges of $89 million, which is comprised of $50 million of
accrued severance and related costs associated with integrating Schneider and
streamlining manufacturing operations, $16 million related to the cost of
cancelling contractual commitments recorded in connection
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-29
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE M CONTINUED TO NOTE N)
- ----------------------------
with the Schneider acquisition and $23 million of accruals remaining for 1997
and prior mergers (primarily costs associated with rationalized facilities).
During 1997, the Company recorded merger-related charges of $146 million ($106
million, net of tax) primarily related to the Company's acquisition of Target.
At December 31, 1995, the Company's accrual for restructuring and merger-related
charges was $136 million. During 1996, the Company recorded merger-related
charges of $32 million ($29 million, net of tax) related primarily to the
Company's acquisition of EPT. Charges utilized in 1996 were approximately $102
million.
The restructuring and merger-related charges were determined based on formal
plans approved by the Company's management using the best information available
to it at the time. The amounts the Company may ultimately incur may change as
the balance of the Company's initiative to integrate the businesses related to
these mergers and acquisitions is executed.
The activity impacting the accrual for restructuring and merger-related charges
during 1998 and 1997, net of reclassifications made by management based on
available information, is summarized in the table below:
PURCHASE
BALANCE AT CHARGES TO CHARGES PRICE CHARGES TO CHARGES BALANCE AT
DECEMBER 31, OPERATIONS IN UTILIZED IN ADJUSTMENTS OPERATIONS IN UTILIZED IN CHANGE IN DECEMBER 31
(IN THOUSANDS) 1996 1997 1997 IN 1998 1998 1998 ESTIMATES 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Facilities $18,897 $ 8,193 $ (7,101) $ (4,901) $ (4,243) $10,845
Workforce reductions 25,897 24,655 (25,310) $35,611 $14,102 (14,428) (15,921) 44,606
Contractual
commitments 8,156 52,673 (31,495) 16,580 855 (20,965) (7,704) 18,100
Asset write-downs 6,248 27,602 (18,048) 9,027 (6,709) (7,563) 10,557
Direct transaction
and other costs 6,359 32,768 (27,836) 2,016 (2,712) (5,583) 5,012
-------------------------------------------------------------------------------------------------------
Total $65,557 $145,891 $(109,790) $52,191 $26,000 $(49,715) $(41,014) $89,120
=======================================================================================================
The December 31, 1998 accrual for restructuring and merger-related charges is
classified within the balance sheet as follows:
(IN THOUSANDS)
- ---------------------------------------------------
Accrual for restructuring and
merger-related charges $71,231
Property, plant and equipment, net 13,848
Other long-term liabilities 4,041
-------
$89,120
=======
As of December 31, 1998, the Company's cash obligations required to complete the
balance of the Company's initiatives to integrate businesses related to its
mergers and acquisitions and announced rationalization strategy are estimated to
be approximately $70 million. Further, the Company has outstanding $140 million
of acquisition-related cash obligations. Substantially all of these cash outlays
will occur during 1999.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-30
49
NOTE N - SEGMENT REPORTING
Boston Scientific is a worldwide developer, manufacturer and marketer of medical
devices for less invasive procedures. The Company has four reportable operating
segments based on geographic regions: the United States, Europe, Japan and
Emerging Markets. Each of the Company's reportable segments generates revenues
from the sale of minimally invasive medical devices. The reportable segments
represent an aggregate of operating divisions.
Sales and operating results of reportable segments are based on internally
derived standard foreign exchange rates and do not include inter-segment
profits. Because of the interdependence of the reportable segments, the
operating profit as presented may not be representative of the geographic
distribution that would occur if the segments were not interdependent. Total
assets and purchases of property, plant and equipment are based on foreign
exchange rates used in the Company's consolidated financial statements.
UNITED EMERGING
(IN THOUSANDS) STATES EUROPE JAPAN MARKETS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
1998:
Net sales $1,394,222 $381,130 $332,465 $118,751 $2,226,568
Depreciation and amortization 63,676 17,389 2,457 826 84,348
Operating income excluding special charges 462,830 54,220 178,180 9,453 704,683
Total assets 1,394,769 551,682 203,841 75,540 2,225,832
Purchases of property, plant and
equipment, net 96,632 50,132 18,857 8,418 174,039
--------------------------------------------------------------------
1997:
Net sales $1,076,292 $325,960 $298,639 $ 88,042 $1,788,933
Depreciation and amortization 56,884 8,960 2,083 280 68,207
Operating income excluding special charges 373,226 62,346 154,975 16,835 607,382
Total assets 1,088,463 429,157 135,835 53,257 1,706,712
Purchases of property, plant and
equipment, net 138,587 65,918 13,684 1,908 220,097
--------------------------------------------------------------------
1996:
Net sales $ 924,205 $294,139 $196,450 $ 65,668 $1,480,462
Depreciation and amortization 43,515 6,854 1,305 214 51,888
Operating income excluding special charges 296,444 99,876 122,482 32,989 551,791
--------------------------------------------------------------------
The Company's results for Europe and Emerging Markets reflect investments in
people and infrastructure made to transition from distributors to direct sales
in most markets. The direct sales model should benefit operating margins in
future years (refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations).
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-31
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE N CONTINUED)
- ---------------------
A reconciliation of the totals reported for the reportable segments to the
applicable line items in the consolidated financial statements is as follows:
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Net sales:
Total net sales for reportable segments $2,226,568 $1,788,933 $1,480,462
Foreign exchange 7,008 41,845 70,776
---------------------------------------
$2,233,576 $1,830,778 $1,551,238
=======================================
Depreciation and amortization:
Total depreciation and amortization allocated
to reportable segments $ 84,348 $ 68,207 $ 51,888
Corporate expenses and foreign exchange 44,257 18,485 14,429
---------------------------------------
$ 128,605 $ 86,692 $ 66,317
=======================================
Income (loss) before income taxes and cumulative
effect of change in accounting:
Total operating income excluding special
charges for reportable segments $ 704,683 $ 607,382 $ 551,791
Corporate expenses and foreign exchange (245,180) (206,561) (96,279)
Purchased research and development (681,952) (29,475) (110,000)
Restructuring and merger-related (charges) credits 15,014 (145,891) (32,341)
---------------------------------------
(207,435) 225,455 313,171
Other income (expense) (67,879) (10,324) (9,841)
---------------------------------------
$ (275,314) $ 215,131 $ 303,330
=======================================
Total assets:
Total assets for reportable segments $2,225,832 $1,706,712
Corporate assets 1,666,879 217,558
-------------------------
$3,892,711 $1,924,270
=========================
ENTERPRISE-WIDE INFORMATION
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Net sales:
Vascular $1,777,204 $1,426,129 $1,228,414
Nonvascular 425,287 376,992 299,698
Other 31,085 27,657 23,126
---------------------------------------
$2,233,576 $1,830,778 $1,551,238
=======================================
Long-lived assets:
United States $ 484,298 $ 377,749
Ireland 118,825 78,776
Other foreign countries 76,759 42,442
-------------------------
$ 679,882 $ 498,967
=========================
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-32
51
REPORT OF INDEPENDENT AUDITORS
- --------------------
BOARD OF DIRECTORS
BOSTON SCIENTIFIC CORPORATION
We have audited the accompanying consolidated balance sheets of Boston
Scientific Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Boston Scientific
Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As more fully described in Note A, in 1997, the Company changed its accounting
policy to conform to the consensus reached by the FASB Emerging Issues Task
Force on its Issue No. 97-13.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 16, 1999
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-33
52
FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Net sales $2,233,576 $1,830,778 $1,551,238 $1,190,821 $932,969
Gross profit 1,498,735 1,285,237 1,123,400 848,074 638,872
Selling, general and administrative expenses 754,970 662,647 492,332 385,338 309,702
Amortization expense 52,662 32,398 23,576 6,210 1,594
Royalties 31,315 22,177 17,061 26,233 25,682
Research and development expenses 200,285 167,194 134,919 105,788 86,320
Purchased research and development 681,952 29,475 110,000 67,946
Restructuring and merger-related charges (credits) (15,014) 145,891 32,341 204,448
Total operating expenses 1,706,170 1,059,782 810,229 795,963 423,298
Operating income (loss) (207,435) 225,455 313,171 52,111 215,574
Income (loss) before cumulative effect of
change in accounting (264,369) 131,480 167,094 (18,419) 142,274
Cumulative effect of change in accounting (net of tax) (21,080)
Net income (loss) $ (264,369) $ 110,400 $ 167,094 $ (18,419) $142,274
Income (loss) per common share before cumulative
effect of change in accounting:
Basic $ (0.68) $ 0.34 $ 0.43 $ (0.05) $ 0.38
Assuming dilution (0.68) 0.33 0.42 (0.05) 0.38
Net income (loss) per common share:
Basic $ (0.68) $ 0.28 $ 0.43 $ (0.05) $ 0.38
Assuming dilution (0.68) 0.28 0.42 (0.05) 0.38
Weighted average shares outstanding -
assuming dilution 390,836 399,776 398,706 381,574 379,126
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET
DATA:
Working capital $(353,031) $ 227,076 $ 335,001 $ 344,609 $ 475,255
Total assets 3,892,711 1,924,270 1,585,045 1,159,445 1,114,433
Commercial paper 1,016,163 423,250 212,500
Bank obligations - short-term 11,324 23,958 28,056 57,520 88,948
Long-term debt, net of current portion 1,363,822 46,325 4,162 16,800
Stockholders' equity 821,137 957,298 995,115 807,917 794,190
Book value per common share $ 2.08 $ 2.47 $ 2.50 $ 2.12 $ 2.10
The Company paid a two-for-one stock split on November 30, 1998. All historical
amounts above have been restated to reflect the stock split.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-34
53
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Net sales $453,465 $488,032 $575,390 $716,689
Gross profit 315,160 338,572 370,290 474,713
Operating income (loss) 96,122 110,369 (559,199) 145,273
Net income (loss) 59,641 67,460 (461,928) 70,458
Net income (loss) per common share -
assuming dilution $ 0.15 $ 0.17 $ (1.18) $ 0.18
--------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Net sales $425,892 $463,312 $461,646 $479,928
Gross profit 305,986 332,901 327,052 319,298
Operating income (loss) 102,556 (28,365) 112,537 38,727
Income (loss) before cumulative effect of
change in accounting 68,518 (33,189) 80,123 16,028
Net income (loss) 68,518 (33,189) 80,123 (5,052)
Net income (loss) per common share -
assuming dilution $ 0.17 $ (0.09) $ 0.20 $ (0.01)
During the fourth quarter of 1998, the Company recorded a charge of $26 million
representing estimated severance and other related cost associated with
integrating Schneider and streamlining manufacturing operations and reversed $21
million of merger-related amounts no longer required. Fourth quarter results
also include adjustments of $30 million related primarily to write-downs of
assets no longer deemed to be strategic. During the third quarter of 1998, the
Company recorded a $671 million charge to account for purchased research and
development acquired in the purchase of Schneider. Further, the third quarter
results include a provision of $31 million for costs associated with the
Company's decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM)
coronary stent system in the U.S. During the second quarter of 1998, the Company
reversed approximately $20 million of merger-related amounts no longer required
and recorded purchased research and development of $11 million in connection
with another acquisition consummated during the period.
The Company recorded merger-related charges and purchased research and
development totaling $158 million and $17 million during the second and fourth
quarters of 1997, respectively. In addition, during the fourth quarter of 1997,
the Company recorded provisions for inventory write-downs ($19 million),
litigation-related reserves ($34 million) and implemented EITF No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology Transformation", the effect of which ($31 million) is reflected as a
cumulative effect of change in accounting.
On November 3, 1998, the Company announced it had detected the occurrence of
business irregularities in the operations of its Japanese subsidiary. As a
result, the Company has restated its quarterly results for the first three
quarters of 1998 which allows for more accurate period to period comparisons.
The restatement resulted in a decrease in revenues of $34 million for the six
months ended June 30, 1998. Revenues, as previously reported, were $470 million
and $506 million for the quarters ended March 31, 1998, and June 30, 1998,
respectively. Net income (loss), previously reported, was $67 million, $79
million, and $(509) million for the quarters ended March 31, 1998, June 30,
1998, and September 30, 1998, respectively.
The Company paid a two-for-one stock split on November 30, 1998. All historical
amounts above have been restated to reflect the stock split.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-35
54
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS
(UNAUDITED)
- ------------------------
The following table shows the market range for the Company's common stock based
on reported sales prices on the New York Stock Exchange. All amounts below
reflect the impact of the Company's two-for-one common stock split which was
effected in the form of a 100% stock dividend paid in the fourth quarter of
1998.
High Low
- ---------------------------------------------------------
1998
First Quarter $35.844 $21.125
Second Quarter 37.281 30.219
Third Quarter 40.844 25.125
Fourth Quarter 29.500 20.125
High Low
- ---------------------------------------------------------
1997
First Quarter $35.750 $29.313
Second Quarter 31.469 20.500
Third Quarter 39.219 26.625
Fourth Quarter 29.875 20.500
The Company has not paid a cash dividend during the past five years. The Company
currently intends to retain all of its earnings to finance the continued growth
of its business. Boston Scientific may consider declaring and paying a dividend
in the future; however, there can be no assurance that it will do so.
At December 31, 1998, there were approximately 8,600 record holders of the
Company's common stock.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
F-36
55
Boston Scientific Corporation
One Boston Scientific Place
Natick, MA 01760-1537
Tel 508.650.8000
www.bsci.com