-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F+1oltNjGhYPtyoX4BmQ91f8d6pprzT3ABL/YtYLYSctfv9Kbr7k6+AdqecByADG t2M3iQ3iHZwcnmRU672KTg== 0000950135-99-003034.txt : 19990603 0000950135-99-003034.hdr.sgml : 19990603 ACCESSION NUMBER: 0000950135-99-003034 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990602 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON SCIENTIFIC CORP CENTRAL INDEX KEY: 0000885725 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 042695240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-11083 FILM NUMBER: 99638837 BUSINESS ADDRESS: STREET 1: ONE BOSTON SCIENTIFIC PL CITY: NATICK STATE: MA ZIP: 01760-1537 BUSINESS PHONE: 5086508000 10-K/A 1 BOSTON SCIENTIFIC CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------- FORM 10-K/A2 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File No. 1-11083 -------------------------------------- BOSTON SCIENTIFIC CORPORATION (Exact name of Company as specified in its charter) DELAWARE 04-2695240 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537 (Address, including zip code, of principal executive offices) (508) 650-8000 (Company's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE (Title of class) Securities registered pursuant to Section 12(g) of the Act: NONE -------------------------------------- Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ] 2 The aggregate market value of Common Stock held by non-affiliates (persons other than directors, executive officers, and related family entities) of the Company was approximately $9.2 billion based on the closing price of the Common Stock on March 15, 1999. The number of shares outstanding of the Company's Common Stock as of March 15, 1999 was 394,872,509. INTRODUCTION This Amended Annual Report on Form 10-K/A2 for the year ended December 31, 1998 supplements the disclosure under Management's Discussion and Analysis of Financial Condition and Results of Operations and the notes to the consolidated financial statements of the Company and its subsidiaries contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. No modifications were made to Parts I and III of the Company's 1998 Annual Report on Form 10-K or to the results reported in the financial statements that are attached hereto as Exhibit 13.1 and incorporated herein. 3 PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Market for the Company's Common Stock and Related Matters" included in the Company's 1998 Consolidated Financial Information (Exhibit 13.1 filed herewith) is incorporated herein by reference. The closing price of the Company's Common Stock on March 15, 1999 was $33.75. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five-Year Selected Financial Data" included in the Company's 1998 Consolidated Financial Information (Exhibit 13.1 filed herewith) is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements and information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 1998 Consolidated Financial Information (Exhibit 13.1 filed herewith) are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the subcaption "Market Risk Disclosures" contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 1998 Consolidated Financial Information (Exhibit 13.1 filed herewith) is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and its subsidiaries included in the Company's 1998 Consolidated Financial Information (Exhibit 13.1 filed herewith) are incorporated herein by reference. The statements and information set forth under the caption "Quarterly Results of Operations" included in the Company's 1998 Consolidated Financial Information (Exhibit 13.1 filed herewith) are incorporated herein by reference. 4 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 5 PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The response to this portion of Item 14 is set forth under Item 8. (a)(2) Financial Schedules. The response to this portion of Item 14 is filed herewith as a separate attachment to this report. (a)(3) Exhibits (* documents filed herewith). EXHIBIT NO. TITLE ------- ----- 3.1 Second Restated Certificate of Incorporation of the Company (Exhibit 3.1, Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-11083). 3.2 Certificate of Amendment of the Second Restated Certificate of Incorporation of the Registrant (Exhibit 3.2, Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-11083). 3.3 Certificate of Second Amendment of the Second Restated Certificate of Incorporation of the Registrant (Exhibit 3.3, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). 3.4 Restated By-laws of the Company (Exhibit 3.2, Registration No. 33- 46980). 4.1 Specimen Certificate for shares of the Company's Common Stock (Exhibit 4.1, Registration No. 33-46980). 4.2 Description of Capital Stock contained in Exhibits 3.1, 3.2, 3.3 and 3.4. 4.3 Form of Debt Securities Indenture (Exhibit 4.4, Registration Statement on Form S-3 of the Company, BSC Capital Trust, BSC Capital Trust II and BSC Capital Trust III, File No. 333-64887) 10.1 Boston Scientific Corporation 1992 Long-Term Incentive Plan, as amended (Exhibit 10.1, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). 10.2 Boston Scientific Corporation 1992 Non-Employee Directors' Stock Option Plan, as amended (Exhibit 10.2, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). 10.3 Boston Scientific Corporation 1995 Long-Term Incentive Plan, as amended (Exhibit 10.3, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). 6 EXHIBIT NO. TITLE ------- ----- 10.4 SCIMED Life Systems, Inc. 1987 Non-Qualified Stock Option Plan, amended and restated (Exhibit 4.3, Registration No. 33-89772 which was incorporated by reference to Exhibit A to SCIMED's Proxy Statement dated May 23, 1991 for its 1991 Annual Meeting of Shareholders, Commission File No. 0-9301). 10.5 SCIMED Life Systems, Inc. 1991 Directors Stock Option Plan, as amended (Exhibit 4.2, Registration No. 33-89772 which was incorporated by reference to Exhibit A to SCIMED's Proxy Statement dated June 8, 1994 for its 1994 Annual Meeting of Shareholders, Commission File No. 0- 9301). 10.6 SCIMED Life Systems, Inc. 1992 Stock Option Plan (Exhibit 4.1, Registration No. 33-89772 which was incorporated by reference to Exhibit A to SCIMED's Proxy Statement dated May 26, 1992 for its 1992 Annual Meeting of Shareholders, Commission File No. 0-9301). 10.7 Heart Technology, Inc. Restated 1989 Stock Option Plan (Exhibit 4.5, Registration No. 33-99766 which was incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 of Heart Technology, Registration No. 33-45203). 10.8 Heart Technology, Inc. 1992 Stock Option Plan for Non-Employee Directors (Exhibit 4.6, Registration No. 33-99766 which was incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 of Heart Technology, Registration No. 33-45203). 10.9 Heart Technology, Inc. 1995 Stock and Incentive Plan (Exhibit 4.7, Registration No. 33-99766 which was incorporated by reference to Exhibit 10.4 to the Quarterly Report on 10-Q/A of Heart Technology for its fiscal quarter ended June 30, 1995, filed on August 30, 1995, File No. 0-19812). 10.10 Cardiovascular Imaging Systems, Inc. 1987 Incentive Stock Option Plan, as amended (Exhibit 4.2, Registration No. 33-93790 which was incorporated by reference to CVIS's Registration Statement on Form S-1 filed on March 11, 1992, Registration No. 33-46330). 10.11 EP Technologies, Inc. 1988 Stock Plan (Exhibit 4.7, Registration No. 33- 80265 which was incorporated by reference to EPT's Registration Statement on Form S-8, File No. 33-67020). 10.12 EP Technologies, Inc. 1991 Stock Option/Stock Issuance Plan (Exhibit 4.6, Registration No. 33-80265 which was incorporated by reference to EPT's Registration Statement on Form S-8, File No. 33-82140). 10.13 EP Technologies, Inc. 1992 Stock Option Grant to Dr. Terry E. Spraker, (Exhibit 4.8, Registration No. 33-80265 which was incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of EPT for the 1994 Fiscal Year, File No. 0-22060). 10.14 EP Technologies, Inc. 1993 Stock Option/Stock Issuance Plan, (Exhibit 4.5, Registration No. 33-80265 which was incorporated by reference to EPT's Registration Statement on Form S-8, File No. 33-93196). 7 EXHIBIT NO. TITLE ------- ----- 10.15 Target Therapeutics, Inc. 1988 Stock Option Plan, incorporated by reference to Exhibit 10.2 to Target Therapeutics, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-19801). 10.16 Target Therapeutics, Inc. 1988 Stock Option Plan, incorporated by reference to Exhibit 10.3 to Target Therapeutics, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-19801). 10.17 Boston Scientific Corporation 401(k) Savings Plan, Amended and Restated, Effective January 1, 1997 (Exhibit 10.17, Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-11083). 10.18 Boston Scientific Corporation Global Employee Stock Ownership Plan, as Amended and Restated (Exhibit 10.18, Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-11083). 10.19 Boston Scientific Corporation Deferred Compensation Plan, Effective January 1, 1996 (Exhibit 10.17, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). 10.20 Form of Second Amended and Restated Credit Agreement, dated September 4, 1998 among the Company, The Several Lenders and certain other parties (Exhibit 10.1 to the Company's Current Report on Form 8-K dated September 25, 1998, File No. 1-11083). 10.21 Form of Amendment dated February 23, 1999 to Second Amended and Restated Credit Agreement dated September 4, 1998 among the Company, The Several Lenders and certain other parties (Exhibit 10.21, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). 10.22 Form of Credit Agreement dated September 4, 1998 among Boston Scientific Corporation, The Several Lenders and certain other parties (Exhibit 10.2 to the Company's Current Report on Form 8-K dated September 25, 1998, File No. 1-11083). 10.23 Form of Amendment dated February 23, 1999 to the Credit Agreement dated September 4, 1998 among the Company, The Several Lenders and certain other parties (Exhibit 10.23, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). 10.24 Form of Credit Agreement dated September 9, 1998 among the Company, The Several Lenders and Merrill Lynch Capital Corporation (Exhibit 10.3 to the Company's Current Report on Form 8-K dated September 25, 1998, File No. 1-11083). 10.25 Form of Amendment No. 1 dated October 22, 1998 to the Credit Agreement dated September 9, 1998 among the Company, The Several Lenders and Merrill Lynch Capital Corporation (Exhibit 10.25, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). 10.26 Form of Amendment No. 2 dated February 23, 1999 to the Credit Agreement dated September 9, 1998 among the Company, The Several Lenders and Merrill Lynch Capital Corporation (Exhibit 10.26, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). 10.27 Form of Indemnification Agreement between the Company and certain Directors and Officers (Exhibit 10.16, Registration No. 33-46980). 8 10.28 Letter Agreement, dated June 22, 1992, between the Company and Lawrence C. Best (Exhibit 10.11, Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-11083). 10.29 Employment Agreement, dated as of November 8, 1995, among the Company, SCIMED and Dale A. Spencer (Exhibit 10, Registration No. 33- 88648), as amended by Amendment No. 1, dated as of November 22, 1995, to that certain Employment Agreement (Exhibit 10.19, Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-11083). 10.30 Amendment No. 2 to Employment Agreement, dated October 21, 1997, to the Employment Agreement, dated as of November 8, 1995, as amended, among the Company, SCIMED and Dale A. Spencer (Exhibit 10.24, Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-11083). 10.31 Form of Retention Agreement between the Company and certain Executive Officers (Exhibit 10.23, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). 10.32 Agreement and General Release of All Claims dated as of December 30, 1998 by and between James M. Corbett and the Company (Exhibit 10.32, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). 10.33 Agreement and General Release of All Claims dated as of January 4, 1999 by and between Charles M. Mabrey and the Company (Exhibit 10.33, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). 10.34 Letter Agreement dated March 17, 1999, between the Company and James R. Tobin (Exhibit 10.34, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). 10.35 Agreement Containing Consent Decree, dated as of February 23, 1995, between the Company and the Federal Trade Commission (Exhibit 10.16, Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-11083). 10.36 6.625% Promissory Notes due March 15, 2005 issued by the Company in the aggregate principal amount of $500 million, each dated as of March 10, 1998 (Exhibit Nos. 4.1, 4.2 and 4.3 to the Company's Current Report on Form 8-K dated March 10, 1998, File No. 1-11083). 11. Statement regarding computation of per share earnings (included in the Company's 1998 Consolidated Financial Information, filed as Exhibit 13.1 herewith). 12.1 Statement regarding computation of ratios of earnings to fixed charges (Exhibit 12.1, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). *13.1 The Company's 1998 Consolidated Financial Information. 13.2 Report of Independent Auditors, Ernst & Young LLP (included in the Company's 1998 Consolidated Financial Information, filed as Exhibit 13.1 herewith). 21. List of the Company's subsidiaries as of March 15, 1999. Each subsidiary does business under the corporate name indicated (Exhibit 21, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). *23.1 Consent of Independent Auditors, Ernst & Young LLP. 27.1 Financial Data Schedule, fiscal year ended December 31, 1998 (Exhibit 27.1, Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-11083). 9 (b) Reports on Form 8-K. Current Reports on Form 8-K/A and Form 8-K/A2, amending and supplementing the Company's Current Report on Form 8-K filed on September 25, 1998 with respect to the Item described below, were filed during the period covering the quarter ended December 31, 1998 and the quarter ended March 31, 1999: ITEM EVENT DATE DESCRIPTION - ---- ---------- ----------- 7 September 10, 1998 Schneider Worldwide Combined Financial Statements for the Years Ended December 31, 1997, 1996 and 1995 and Independent Auditor's Report; Schneider Worldwide Unaudited Combined Financial Statements for the Nine Months Ended September 10, 1998 and September 14, 1997; Unaudited Pro Forma Combined Condensed Statements of Operations of the Company and Schneider Worldwide for the year ended December 31, 1997 and the nine months ended September 30, 1998. 10 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 12b-15 promulgated by the Securities and Exchange Commission under the Exchange Act, the Company has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: June 1, 1999 BOSTON SCIENTIFIC CORPORATION By: /s/ LAWRENCE C. BEST ------------------------------------------------ Lawrence C. Best Senior Vice President--Finance and Administration and Chief Financial Officer 11 FINANCIAL STATEMENT SCHEDULE The following additional consolidated financial statement schedule should be considered in conjunction with the Company's 1998 Consolidated Financial Statements (contained in the Company's 1998 Consolidated Financial Information and included in Exhibit 13.1 filed herewith): Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted since the required information is not present or not sufficiently material to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. 12 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------------------------------------------------------------------------- (in thousands) YEAR ENDED DECEMBER 31, 1998 Reserves and allowances deducted from asset accounts: Allowances for uncollectible amounts and sales returns.................... $30,479 15,024 15,774 (1) 12,126 (2) $49,151 YEAR ENDED DECEMBER 31, 1997 Reserves and allowances deducted from asset accounts: Allowances for uncollectible amounts and sales returns.................... $14,850 10,718 7,356 (1) 2,445 (2) $30,479 YEAR ENDED DECEMBER 31, 1996 Reserves and allowances deducted from asset accounts: Allowances for uncollectible amounts and sales returns.................... $7,870 4,881 2,214 (1) 115 (2) $14,850
(1) Charges for sales return allowances, net of actual sales returns (2) Uncollectible accounts written off. Certain prior years' amounts have been reclassified to conform to the current years' presentation. EX-13.1 2 1998 CONSOLIDATED FINANCIAL INFORMATION 1 Exhibit 13.1 BOSTON SCIENTIFIC CORPORATION 1998 Consolidated Financial Information 2 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-36 Five-Year Selected Financial Data F-37 Quarterly Results of Operations F-38 Market for the Company's Common Stock F-39 and Related Matters
3 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 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------- RESULTS OF OPERATIONS On September 10, 1998, the Company consummated its acquisition of Schneider Worldwide (Schneider), formerly a member of the Medical Technology Group of Pfizer Inc., for $2.1 billion in cash. The acquisition was accounted for using the purchase method of accounting. The consolidated financial statements include Schneider's operating results from the date of acquisition. YEARS ENDED DECEMBER 31, 1998 AND 1997 Net sales increased 22% in 1998 to $2,234 million from $1,831 million in 1997. Without the impact of foreign currency exchange rates on translation of international revenues, net sales for 1998 increased 25%. International sales during 1998 were negatively impacted compared to 1997 by approximately $47 million of unfavorable exchange rate movements caused primarily by the strengthening of the United States (U.S.) dollar versus the Japanese yen. Net income for the year ended December 31, 1998, excluding merger-related and special charges, was $262 million or $0.66 per share (diluted) compared to $266 million or $0.67 per share in 1997. The Company for 1998 reported a net loss of $264 million or $0.68 per share (diluted), including merger-related and special charges of $527 million, net of tax, as compared to 1997 net income of $110 million, or $0.28 per share, including merger-related and special charges of $156 million, net of tax. U.S. revenues increased approximately 30% from 1997 to $1,394 million in 1998, while international revenues increased approximately 11% from 1997 to $840 million in 1998. U.S. sales as a percentage of worldwide sales increased from 59% in 1997 to 62% in 1998. Worldwide vascular and nonvascular sales increased 25% and 13%, respectively, from 1997 to 1998. The increases in U.S. sales as a percentage of worldwide sales and in vascular sales were primarily attributable to the Company's 1998 third quarter introduction of U.S. coronary stents. U.S. coronary stent revenues, primarily sales of the NIR(R) stent, were approximately $211 million during the second half of 1998. Worldwide NIR(R) coronary stent sales as a percentage of worldwide sales were approximately 13% in 1998 and could exceed 20% during 1999. The NIR(R) coronary stent is supplied by Medinol Ltd. (Medinol) and unforeseen delays, stoppages or interruptions in the supply and/or mix of the NIR(R) stent could adversely affect the operating results of the Company. On November 3, 1998, the Company announced it had detected the occurrence of business irregularities in the operations of its Japanese subsidiary. The irregularities detected involved shipments of products that were improperly recorded as sales to the subsidiary's dealer network in Japan. The Company has recently completed its investigation of the irregularities and believes that the irregularities were limited to the operations of the Japan subsidiary. The Company's financial statements reflect management's estimate of the timing and impact of the Japan business irregularities. Gross profit as a percentage of net sales was approximately 67.1% and 70.2% during 1998 and 1997, respectively. As a result of multiple acquisitions, the Company's supply chain has been weakened and there has been continued pressure on gross margins, including write-downs for excess and obsolete inventory and high manufacturing costs. During 1998, the Company initiated a full time global program to focus on supply chain optimization. The program is designed to lower inventory levels and the cost of manufacturing, improve absorption and minimize inventory write-downs. By addressing the entire supply chain, including application of lean manufacturing techniques, the Company seeks to return gross margins to more acceptable levels and to improve working capital. The program should be completed by the end of 1999. The decrease in gross margins during 1998 compared to 1997 was also attributable to a decline in average selling prices due to continuing pressure on healthcare costs and increased competition, and the significant increase in sales of the NIR(R) coronary stent which have lower gross margins than the corporate average. As average selling prices for the NIR(R) stents fluctuate, the Company's cost to purchase the stents will change because cost is based on a constant percentage of average selling prices. In the third quarter of 1998, the Company provided $31 million ($21 million, net of tax) for costs associated with the Company's decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent system in the U.S. Success of the global supply chain initiative is critical to realizing improved gross margins. In addition, gross margins could be significantly impacted by the purchase price of NIR(R) coronary stents and the amount of NIR(R) coronary stent sales as a percentage of worldwide sales. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-2 5 Selling, general and administrative expenses as a percentage of net sales decreased from 36% in 1997 to 34% in 1998, while increasing approximately $92 million from $663 million in 1997 to $755 million in 1998. The decrease as a percent of sales is primarily attributable to the increase in net sales related to the launch of coronary stents in the U.S. In addition, during the past three years, the Company has expanded its direct sales presence in Europe and Emerging Markets so as to be in a position to take advantage of market opportunities in those regions. The costs of expansion have negatively impacted the Company's operating margins. During the second half of 1998, the Company's rate of investment slowed and the Company has begun to realize improved returns in certain geographic regions. The Company believes that, during 1999, it will continue to leverage its direct sales infrastructure. Approximately $17 million of the 1998 increase in expense dollars is attributable to results of Schneider operations from the date of acquisition through December 31, 1998. In addition, the increase in expense dollars reflects costs to operate the Company's new global information system and increased costs of domestic distribution. Amortization expense increased 63% from $32 million in 1997 to $53 million in 1998 and increased as a percentage of sales from 1.8% to 2.4% of net sales. The increase is primarily a result of the amortization of intangibles related to the purchase of Schneider from the date of acquisition through December 31, 1998. Royalty expenses remained at approximately 1% of net sales while increasing 41% from $22 million in 1997 to $31 million in 1998. The Company continues to enter into strategic technological alliances, some of which include royalty commitments. Research and development expenses remained at 9% of net sales while increasing 20% from $167 million in 1997 to $200 million in 1998. Approximately $7 million of the increase in 1998 is attributable to research and development of Schneider from the date of acquisition through December 31, 1998. The increase in research and development reflects increased spending on new product development programs and regulatory and clinical research, and reflects the Company's continued commitment to refine existing products and procedures and to develop new technologies that provide simpler, less traumatic, less costly and more efficient diagnosis and treatment. The trend in countries around the world toward more stringent regulatory requirements for product clearance and more vigorous enforcement activities has generally caused or may cause medical device manufacturers to experience more uncertainty, greater risk and higher expenses. The aggregate purchase price of the Schneider acquisition has been allocated on a preliminary basis to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The estimated excess of purchase price over the fair value of the net tangible assets acquired was allocated to specific intangible asset categories with the remainder assigned to excess of cost over net assets acquired. Core technology, developed technology, assembled workforce, trademarks and patents are being amortized on a straight line basis over periods ranging from 9 to 25 years. The Company is amortizing the value assigned to customer lists (relationships) over 25 years because it has been the Company's experience that physician and hospital relationships are built for the long term and fundamental to the Company's business of bringing innovative products to market. The Company realizes that maintaining these and similar relationships will require ongoing efforts. However, both Schneider and the Company have over a 20 year history of working closely with interventionalists and their institutions for both vascular and nonvascular applications and management believes these relationships will continue to benefit the Company. In addition, after considering the long term prospects for the less invasive medical device industry and the fundamental role of catheter-based interventional medicine, as well as Schneider's competitive position within the industry, management has concluded that it is appropriate to amortize the excess of the Schneider purchase price over the fair value of the assets acquired over 40 years. Finally, the Company recorded a $671 million charge ($524 million, net-of-tax) to account for purchased research and development acquired. The valuation of purchased research and development represents the estimated fair value related to incomplete projects. At the date of the acquisition, the development of these projects had not reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the date of acquisition. The income approach was used to establish the fair values of the intangible assets. This approach establishes the fair value of an asset by estimating the after-tax cash flows attributable to the asset over its useful life and then discounting these after-tax cash flows back to a present value. The discounting process uses a rate of return commensurate with the time value of money and investment risk factors. Accordingly, for the purpose of establishing the fair value of each asset in the Schneider analysis, revenues for each future period were estimated, along with costs, expenses, taxes and other charges. Revenue estimates were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. With respect to the value of purchased research and development, the Company considered, among other factors, the research and development project's stage of completion, the complexity of the work completed to date, the costs already incurred, the projected costs to complete, the contribution of core technologies and other acquired assets, the projected product introduction date and the estimated useful life of the technology. The respective after-tax cash flows were then discounted back to present value using a risk-adjusted discount rate. The discount rates used in the Schneider analysis ranged from 16%-28% depending upon the risk profile of the particular asset. The Company believes that the assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project revenues, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, among others, actual results may vary from the projected results. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-3 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - --------------------- The in-process technology acquired in the Schneider acquisition consisted of 20 significant research and development projects, ranging in stage of completion from 46% to 95%. One project reached completion in late 1998, while the others are expected to reach completion in 1999, 2000 and 2001. New in-process technologies include brachytherapy for the prevention of restenosis, devices for the treatment of carotid disease, devices for the treatment of coronary artery disease, devices for peripheral vascular disease, devices for aneurysmal disease and devices for nonvascular disease. Remaining efforts to complete the projects include product validation, the successful completion of clinical trials and governmental regulatory approvals. Through the acquisition date, approximately $65 million had been spent by Schneider on the in-process research and development projects. The Company intends to incur in excess of $50 million, related primarily to salaries, materials, clinical trials and regulatory costs, to develop the in-process technology into commercially viable projects over the next three years. The value assigned to in-process research and development is reasonable in light of the amounts invested to date and expected to be incurred because the Company believes that the technologies associated with the purchased research and development are well positioned in high potential, high growth markets that are highly valued in the medical device industry. The degree of uncertainty regarding the future benefits of the acquired in-process research and development was lessened because of the advanced state of the projects at the date of acquisition. The Company also believes that the amount invested as of the acquisition date and/or the amount needed to complete the projects do not bear directly on the fair value of the underlying technologies. The Company expects to begin to realize significant revenue and cash flows from the in-process technology beginning in 1999. The most significant purchased research and development projects that were in-process at the date of acquisition were brachytherapy, devices for aneurysmal disease and coronary stents which in the aggregate represent over 60% of the in-process value. The brachytherapy project represents approximately 26% of the purchased research and development value. Key assumptions used in the analysis of brachytherapy included gross margins excluding depreciation of approximately 87% and a discount rate of 28%. The brachytherapy system is an intravascular radiation system designed to reduce clinical restenosis after PTCA and/or stenting. The system consists of a computer controlled afterloader, beta radiation source, centering catheter, source delivery wire and dummy wire. As of the date of acquisition, the project was expected to be completed and the products commercially available in the U.S. within two to three years, with an estimated cost to complete of approximately $5 to $10 million. The coronary stent projects represent approximately 16% of the purchased research and development value. Key assumptions used in the analysis of coronary stents included gross margins excluding depreciation of approximately 87% and a discount rate of 28%. Projects underway at the date of acquisition were stent systems for native coronary artery disease, saphenous vein graft disease, and versions with novel delivery systems. The stent systems in-process are designed to conform to the arterial anatomy resulting in remodeling of the vessel. An atraumatic tip reduces vessel trauma and enhances trackability, while position markers together with a high degree of stent radiopacity facilitate proper placement. The stent systems also use a unique reconstrainable delivery system. The Company believes that the stent systems will be especially helpful in the treatment of saphenous vein graft disease. As of the date of acquisition, the projects were expected to be completed and the products commercially available for sale in the U.S. within one year with an estimated cost to complete of approximately $1 to $3 million. The aneurysmal disease projects represent approximately 20% of the purchased research and development value. Key assumptions used in the analysis of the aneurysmal disease projects included gross margins excluding depreciation of approximately 86% and a discount rate of 28%. The objective of the projects is to develop endoluminal grafts for the treatment of late stage vascular aneurysms and occlusions. The most significant of the projects in this category at the date of acquisition was the endoluminal graft for the treatment of abdominal aortic aneurysms. The device consists of an endoluminal graft trunk where the lumen is formed into two sockets which, after placement of the trunk in the proximal neck of the aneurysm, accepts two endoluminal graft legs which extend to the iliac arteries. Valuable elements of the abdominal aortic device at the date of acquisition include the spun Corethane(R) graft covering, the self-expanding scaffold design, and the delivery systems. Other projects in this category included the endoluminal graft for thoracic aortic aneurysmal disease, which is a tubular endoluminal graft to be used in the aorta distal to the aortic arch. As of the date of acquisition, the projects were expected to be completed and the products commercially available in the U.S. within two to three years, with an estimated cost to complete of approximately $10 to $15 million. Management expects to continue supporting these research and development efforts and believes the Company has a reasonable chance of completing the in-process technology. However, the development of the in-process technology is subject to risks and uncertainties. These include the inherent difficulties in completing the projects on a timely basis, potential changes in future target markets, technology and governmental regulation, third party intellectual property, and product introductions or other actions by competitors. If the projects are not successfully developed, the Company may not realize the value assigned to the in-process technology. In addition, the value of the other acquired intangible assets may also become impaired. The Company is in the process of implementing a rationalization plan established in conjunction with the consummation of the Schneider acquisition. The rationalization plan takes into consideration duplicate capacity and opportunities for further leveraging of cost and technology platforms. The Company's actions approved and committed to in the fourth quarter of 1998 will result in the displacement in 1999 of approximately 2,000 current positions, over half of which are manufacturing positions. The Company has decided to close five Schneider facilities, as well as transition the manufacturing of selected Boston Scientific product lines to different sites. The Company expects that approximately 1,000 positions will be added in 1999 as a result of the transition plan. In addition, the Company will continue to challenge its plant network strategy during 1999. The Company estimates that the costs associated with these activities, excluding transition costs, will be approximately $62 million, most of which represent severance and related costs. Approximately $36 million of the total has been capitalized as part of the purchase price of Schneider. The remaining $26 million ($17 million, net of tax) has been charged to operations. The rationalization plan also resulted in the decision to expand, not close, certain Target Therapeutics, Inc. (Target) facilities originally provided for in a 1997 merger-related charge and to relocate other product lines to these Target facilities. These actions are anticipated to result in annualized cost savings of approximately $50 to $75 million. In the fourth quarter of 1998, the Company reversed $21 million ($14 million, net of tax) of previously recorded merger-related charges of which approximately $4 million related to facility costs and which also included revised estimates of contractual commitment payments, associated legal costs and other asset write-downs originally provided for in a 1997 merger-related charge. In the second quarter of 1998, the Company realigned its operating units and decided to operate Target independently instead of as a part of its vascular division as was planned at the date of the Target acquisition. Management believed that an independent Target would allow the business unit to develop its technologies and markets more effectively than it would as part of the vascular division. As a result of this decision, in the second quarter of 1998, the Company reversed $20 million ($13 million, net of tax) of 1997 Target merger-related charges primarily related to revised estimates for costs of workforce reductions and costs of cancelling contractual commitments. In addition, in the second quarter of 1998, the Company recorded purchased research and development of approximately $11 million in connection with another acquisition consummated during 1998 and in the fourth quarter of 1998, the Company recorded $30 million ($20 million, net of tax) of year-end adjustments related primarily to write-downs of assets no longer deemed to be strategic. The assets relate primarily to inventory, long lived and intangible assets that the Company does not believe will be sold or realized, respectively, because of revisions to and terminations of strategic alliances. The provisions have been recorded as costs of sales ($12 million), selling, general and administrative expenses ($12 million), amortization expenses ($2 million), royalties ($2 million), research and development expenses ($1 million) and other expenses ($1 million). As discussed previously, results for the year ended December 31, 1998 include a provision of $31 million for costs associated with the Company's decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent system in the U.S. The Company is aware that the U.S. Department of Justice is conducting an investigation of matters that include this recall. The Company is cooperating fully in the investigation. During 1997, the Company recorded merger-related charges of $146 million ($106 million, net of tax) primarily related to the Company's acquisition of Target, purchased research and development of $29 million, net of tax, in conjunction with accounting for its additional investment in Medinol and other strategic investments, and a charge of $31 million ($21 million, net of tax) to reflect the impact of implementing a new accounting standard. 1997 results also include provisions related to inventory write-downs of $19 million ($13 million, net of tax) and litigation-related reserves of $34 million ($23 million, net of tax). The Company's Target merger-related charges reflect estimated costs to integrate all aspects of the Target business into the vascular business, and include those costs typical in a merging of operations, such as rationalization of facilities, workforce reductions, unwinding of various contractual commitments, asset writedowns and other integration costs. The Target restructuring plan was initiated to gain expanded market opportunities and reduce costs. The Company planned to integrate the Target business into its vascular business, terminate the Target distributors in countries where the Company had a direct sales presence, move the Target manufacturing and research and development operations to Ireland and other vascular facilities, and manage Target's administrative and corporate activities at the Company's headquarters. Specifically, the Company planned to exit Target's leased headquarters, manufacturing and research locations in California, as well as terminate Target's sales offices in Germany, Japan and the United Kingdom. The lease terminations were planned to begin during 1997 and to be completed by the end of 1998. In conjunction with the exit plan, the Company planned to terminate approximately 500 people, of which approximately 100 were corporate/administrative, 300 were manufacturing and 100 were research and development personnel. At the date of the Target acquisition, the Company also provided for the excess cost over fair market value of selected Target leasehold improvements, machinery and computer equipment, and other assets ($8 million). As discussed above, the Company reversed its decision to integrate the Target business into the vascular division in the second quarter of 1998. The merger and integration activities, including the reversal of previously recorded charges related to the integration of Target into the vascular division were substantially completed during 1998. The most significant costs (approximately $50 million) relate to estimated costs to cancel contractual obligations with distributors. During 1996 and 1997, the Company expanded its direct sales presence outside the United States so as to be in position to take advantage of expanded market opportunities and the cancellation of Target distributor contractual obligations is consistent with this strategy. Benefits from the strategy began to be realized in 1998 as the Company was able to eliminate duplicate sales infrastructure and to transition the businesses to a seasoned sales force. In the second quarter of 1997, the Company decided not to reintroduce a vascular product that had been previously withdrawn from the European market. As a result, the Company determined that there would be no future sales of the product, thus no projected cash flows. The Company wrote off the intellectual property ($8 million) associated with the product as a result of this analysis. Finally, in conjunction with the implementation of a global information system, the Company provided for the estimated residual value of its legacy systems ($8 million), based on the date which the systems were planned to be removed from service. During 1996, the Company recorded merger-related and other unusual charges of approximately $32 million. Charges include estimated direct transaction costs ($5 million) of the merger with EP Technologies, Inc. (EPT) and estimated costs to be incurred in merging EPT with subsidiaries of the Company ($12 million). Estimated costs include those typical in merging of operations and relate to, among other things, rationalization of facilities, workforce reductions, unwinding of various contractual commitments, asset writedowns and other integration costs. The EPT restructuring plan was initiated to gain expanded market opportunities and reduce overhead related costs and the plan was substantially complete in 1997. The remaining $15 million, which is primarily nondeductible for tax purposes, represents primarily a change in prior year estimates of merger related charges ($7 million), and a provision related to costs associated with a joint venture arrangement ($8 million). Due to the revised estimates for costs of workforce reductions discussed previously, the number of Target employees actually displaced was approximately 40 (approximately 35 of whom were terminated in 1997 and the remainder subsequent to 1997) as compared to the original estimate of 500 employees. Less than 10 employees were terminated under the EPT plan. In 1996, the Company acquired Symbiosis Corporation (Symbiosis), an original equipment manufacturer and formerly a wholly-owned subsidiary of American Home Products Corporation, for approximately $153 million. In 1996, the Company also purchased the assets of Endotech/Mintec for approximately $72 million. Both acquisitions were cash transactions and were accounted for using the purchase method of accounting. Accordingly, the aggregate purchase prices have been allocated among the assets acquired based on their estimated fair values at the date of acquisition. The allocations of the purchase prices resulted in provision for in-process research and development of $39 million and $57 million, respectively. The valuations of the purchased research and development represent the estimated fair value related to incomplete projects at the dates of acquisition. At the dates of acquisition, in management's opinion, the development of these projects had not reached technological feasibility and the research and development in process had no alternative future uses. Accordingly, these costs were expensed at date of acquisition. The valuations of in-process research and development projects for both acquisitions were performed using the income approach. Each project's expected cash flows were evaluated separately and discounted back to the present at risk-adjusted discount rates. The most significant project valued for the Symbiosis acquisition related to a guidewire project (approximately 80% of the in-process value). Key assumptions used in the analysis of the guidewire project included gross margins excluding depreciation of approximately 65% and a discount rate of 18%. Other expenses were based on estimated costs to complete the project. Symbiosis' historical pricing, margin and expense levels were adjusted to reflect end user market rates. As of the date of acquisition, the Company expected to continue development of the Symbiosis guidewire project through the balance of 1996 at a cost of an additional $3 million. Product commercialization was anticipated in 1997. Delays have occurred which have lengthened the development period and increased the completion costs by approximately $1 million. Product launch is now expected to occur sometime in late 1999. The most significant Endotech/Mintec project related to an abdominal aortic aneurysm repair device (approximately 90% of the in-process value). Key assumptions used in the analysis of the project were gross margins excluding depreciation of approximately 80% and discount rates of 20-23%. Other expenses were based on estimated costs to complete the project. Endotech/Mintec was a start-up operation at the date of acquisition, thus, the valuation used estimated end user market prices. Initial market availability of the device was anticipated by the Company in Europe in 1996, Japan in 1999, and the U.S. in 2000. The staggered timing reflected the need to conduct clinical evaluations and receive regulatory approvals in the respective countries. Expected aggregate cost for completion was $17 million to be spent between 1996 and 2000. The Endotech/MinTec product provided a proprietary technology, however, additional development and clinical work was still necessary to address and improve product components, product performance and clinical efficacy. Product offering in Europe commenced approximately a year from the date of the acquisition. The timeline for product availability in the U.S. and Japan has slipped by approximately one year due to technology issues. Estimated costs to date have been approximately $11 million and total costs to complete the project are uncertain. Interest expense increased from $14 million in 1997 to $68 million in 1998. The overall increase in interest expense is primarily attributable to a higher outstanding debt balance, including the issuance of $2.1 billion in commercial paper on September 10, 1998 to finance the acquisition of Schneider and the issuance of $500 million in fixed rate debt securities during the first quarter of 1998. Other income (expense), net, changed from income of less than $1 million in 1997 to expense of $5 million in 1998. The change is primarily attributable to net gains on sales of equity investments in 1997 that were more significant than in 1998. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-4 7 The Company's effective tax rate, including the impact of special charges, was approximately 39% in 1997 and 4% in 1998. Excluding these special charges, the pro forma effective tax rate increased from approximately 32% during 1997 to 33% during 1998. The increase is primarily attributable to a shift in the mix of U.S. and international business. The effective rate for 1999 is expected to increase slightly due to the continued shift in the geographic mix of the Company's business. The Company has substantially completed the integration of all mergers and acquisitions consummated in 1996 and 1997. The Company expects to complete the integration of Schneider by the end of 1999. Management believes it has developed a sound plan for continuing and concluding the integration process, and that it will achieve that plan. However, in view of the number of major transactions undertaken by the Company, the dramatic change in the size of the Company and the complexity of its organization resulting from these transactions, management also believes that the successful implementation of its plan presents a significant degree of difficulty. The failure to integrate these businesses effectively could adversely affect the Company's operating results in the near term, and could impair the Company's ability to realize the strategic and financial objectives of these transactions. Uncertainty remains with regard to future changes within the healthcare industry. The trend towards managed care and economically motivated buyers in the U.S. may result in continued pressure on selling prices of certain products and resulting compression on gross margins. The U.S. marketplace is increasingly characterized by consolidation among healthcare providers and purchasers of medical devices that prefer to limit the number of suppliers from which they purchase medical products. There can be no assurance that these entities will continue to purchase products from the Company. In addition, international markets are also being affected by economic pressure to contain reimbursement levels and healthcare costs. The Company's ability to benefit from its international expansion may be limited by risks and uncertainties related to economic conditions in these regions, competitive offerings, infrastructure development, rights to intellectual property, and the ability of the Company to implement its overall business strategy. Any significant changes in the political, regulatory or economic environment where the Company conducts operations may have a material impact on revenues and profits. Although these factors may impact the rate at which Boston Scientific can grow, the Company believes that it is well positioned to take advantage of opportunities for growth that exist in the markets it serves. YEARS ENDED DECEMBER 31, 1997 AND 1996 Net sales increased 18% in 1997 to $1,831 million from $1,551 million in 1996. International sales for the year were adversely impacted by changes in foreign currency exchange rates. Without the impact of changes in exchange rates, net sales for the year increased approximately 23%. Net income for the year ended December 31, 1997, excluding merger-related and special charges, decreased approximately 10% to $266 million from $295 million during the year ended December 31, 1996. In 1997, the Company recorded merger-related charges of $146 million ($106 million, net of tax) and purchased research and development of $29 million, net of tax, and the Company recorded a charge of $31 million ($21 million, net of tax) to reflect the impact of implementing an accounting standard issued in 1997 related to business process reengineering. 1997 results also include provisions related to inventory write-downs of $19 million ($13 million, net of tax) and litigation-related reserves of $34 million ($23 million, net of tax). During 1996, the Company recorded merger-related charges of $32 million ($29 million, net of tax) and purchased research and development of $110 million ($99 million, net of tax). Reported net income for 1997 was $110 million, or $0.28 per share (diluted), as compared to $167 million, or $0.42 per share, for the prior year. U.S. revenues increased approximately 16% from 1996 to $1,076 million in 1997, while international revenues, increased approximately 20% from 1996 to $755 million in 1997. International sales as a percentage of worldwide sales increased from 40% in 1996 to 41% in 1997. International sales during 1997 were negatively impacted compared to 1996 by approximately $77 million of unfavorable exchange rate movements caused primarily by the strengthening of the U.S. dollar versus major European currencies and the Japanese yen. Worldwide vascular and nonvascular sales increased 16% and 26%, respectively, from 1996 to 1997. Gross profit as a percentage of net sales was approximately 70.2% and 72.4% during 1997 and 1996, respectively. The decline in gross margins during 1997 is primarily attributable to write-downs for excess and obsolete inventory and a decline in average selling prices as a result of continuing pressure on healthcare costs and increased competition. In addition, gross margins were negatively impacted by the unfavorable foreign exchange rate movements discussed above. The negative impact of the above conditions was partially offset by the Company's U.S. cost containment programs and the positive gross margin impact of selected new product offerings. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-5 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - --------------------- Selling, general and administrative expenses increased 35% from $492 million in 1996 to $663 million in 1997, and increased as a percentage of sales from 32% to 36% of net sales. The increase includes $34 million in litigation-related reserves recorded in 1997. In addition, the Company continued to expand its domestic and international sales and distribution organizations. Amortization expense increased 37% from $24 million in 1996 to $32 million in 1997, and increased as a percentage of sales from 1.5% to 1.8% of net sales. The increase in dollars is primarily a result of several strategic alliances initiated by the Company during 1997. Royalty expenses remained at approximately 1% of net sales while increasing 30% from $17 million in 1996 to $22 million in 1997. The increase in overall royalty expense dollars is due to increased sales and royalties due under several strategic alliances that the Company initiated in 1997 and prior years. Research and development expenses remained at approximately 9% of net sales while increasing 24% from $135 million in 1996 to $167 million in 1997. The increase in research and development dollars reflects increased spending in regulatory, clinical research and various other product development programs, and reflects the Company's continued commitment to refine existing products and procedures and to develop new technologies that provide simpler, less traumatic, less costly and more efficient diagnosis and treatment. Interest and dividend income was $4 million as compared to $6 million in 1996. The decrease is primarily attributable to a decrease in the Company's average cash and marketable securities balance resulting from the use of cash to fund the Company's working capital, finance several of the Company's recent acquisitions and alliances and to repurchase the Company's common stock. Interest expense increased from $12 million in 1996 to $14 million in 1997. The overall increase in interest expense is primarily attributable to a higher outstanding balance related to the Company's commercial paper borrowings. Other income (expense), net, changed from expense of $5 million in 1996 to less than $1 million of income in 1997. The change is primarily attributable to net gains on sales of equity investments of approximately $11 million compared to net gains of $1 million in 1996. The Company's effective tax rate, including the impact of special charges, was approximately 45% in 1996 and 39% in 1997. Excluding these special charges, the pro forma effective tax rate improved from approximately 34% during 1996 to 32% during 1997. The reduction in the Company's effective tax rate, excluding the impact of special charges, is primarily due to increased business in lower tax geographies and certain tax planning initiatives. LIQUIDITY AND CAPITAL RESOURCES Cash and short-term investments totaled $75 million at December 31, 1998 compared to $80 million at December 31, 1997. Cash flows provided by operating activities increased from $80 million in 1997 to $258 million during 1998. Cash used in investing and provided by financing activities during the same period increased from $251 million to $2,225 million and $162 million to $1,977 million, respectively. The increases are primarily the result of financing the Schneider acquisition with commercial paper and capital expenditures incurred to expand the Company's manufacturing facilities. In addition, cash was provided by the exercise of stock options. As a result, working capital decreased from $227 million at December 31, 1997 to current liabilities exceeding current assets by $353 million at December 31, 1998. Accounts receivable increased $172 million from December 31, 1997 to December 31, 1998. The increase is primarily attributable to recording approximately $65 million of Schneider accounts receivable as of the date of the acquisition, an increase in U.S. sales in the second half of 1998 compared to the second half of 1997, and an increase in international sales to countries where healthcare systems have longer payment terms. In addition to impacting selling prices, the trend to managed care in the U.S. has also resulted in more complex billing and collection procedures. The Company's ability to effectively react to the changing environment may impact its bad debt and sales return provisions in the future. In addition, the deterioration in the Japan economy may impact the Company's ability to collect its outstanding Japan receivables. Inventory increased $70 million from December 31, 1997 to December 31, 1998. The increase since December 31, 1997 is primarily attributable to recording $40 million of Schneider inventory as of the date of acquisition, continued stocking of the NIR(R) stent in the U.S. and Japan and an increase in U.S. finished goods. The Company is committed to purchase approximately $150 million of NIR(R) stents through 1999. Excluding the impact of Schneider inventory acquired, inventory has decreased since the second quarter of 1998. The Company expects inventory levels to continue to decline in 1999 as the Company's new global supply chain management system becomes fully operational. Successful implementation of the Company's supply chain initiative is necessary to reduce the Company's inventory to an acceptable level and to reduce manufacturing costs. In connection with the Schneider acquisition, the Company established $1.7 billion in additional revolving credit facilities. The Company's revolving credit facilities (Facilities) now total $2.2 billion and consist of a $1.0 billion facility that terminates in June 2002 and $1.2 billion in 364-day facilities that terminate in September 1999. The Company may extend the 364-day revolving credit facilities for an additional 364 days BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-6 9 under certain conditions. Use of the borrowings is unrestricted and the borrowings are unsecured. Commercial paper is supported by the Facilities and outstanding commercial paper reduces available borrowings under the Facilities. The Facilities require the Company to maintain a specific ratio of consolidated funded debt (as defined) to consolidated net worth (as defined) plus consolidated funded debt. The ratio requirement is 70% through December 31, 1999 and 60% thereafter. As of December 31, 1998, the ratio was approximately 64%. The Company currently intends to comply with the reduction in the ratio through an equity issuance, as discussed below. As noted, the Company financed the Schneider acquisition by issuing approximately $2.1 billion in commercial paper. At December 31, 1998, the Company had approximately $1.8 billion of commercial paper outstanding at a weighted average interest rate of 6.23%. The Company expects a minimum of $800 million will remain outstanding through the next twelve months and, accordingly, has classified this portion of borrowings as long-term at December 31, 1998. During the first quarter of 1999, the Company refinanced substantially all of its commercial paper with short-term borrowings under its Facilities due to the limited market for its commercial paper. The variable interest rates on the borrowings is approximately 5.75%. The Company intends to continue to borrow under its Facilities until it is able to issue commercial paper at reasonable rates. In 1999, the Company intends to refinance a portion of the outstanding credit facilities balance by raising more permanent financing through an issuance of convertible securities and additional equity securities. In September 1998, the Company filed a Public Registration Statement with the U.S. Securities and Exchange Commission. At December 31, 1998, the Company had no outstanding securities issued under this registration statement. In March 1998, the Company issued $500 million of 6.625% debt securities (Debt Securities) due March 2005 under a Public Debt Registration Statement filed with the U.S. Securities and Exchange Commission. The Debt Securities are not redeemable prior to maturity and are not subject to any sinking fund requirements. A significant portion of the net proceeds from the sale of the Debt Securities (approximately $496 million) was used for repayment of indebtedness under the Company's commercial paper program. During March 1998, the Company borrowed 1.2 billion yen (the equivalent of approximately $11 million) under a financing arrangement with a Japanese bank at a fixed interest rate of 2.1%. The term of the borrowing extends through 2012. At December 31, 1998, the Company had an additional 6 billion Japanese yen borrowings (approximately $53 million) outstanding with a syndicate of Japanese banks. The interest rate on the borrowings is 2.47%. The borrowings are payable in 2002. The Company had uncommitted Japanese credit facilities with several Japanese banks to provide for borrowings and promissory notes discounting of up to 7.5 billion Japanese yen (approximately $66 million). At December 31, 1998, there were no borrowings under these facilities and approximately $61 million of receivables were discounted at average interest rates of approximately 1.5%. Since early 1995, the Company has entered into several transactions involving acquisitions and alliances, certain of which have involved equity investments. As the healthcare environment continues to undergo rapid change, management expects that it will continue to focus on strategic initiatives and/or make additional investments in existing relationships. In connection with these acquisitions, the Company has acquired numerous in-process research and development projects. As the Company continues to build its research base in future years, it is reasonable to assume that it will acquire additional in-process research and development platforms. Management does not expect the acquisitions and alliances to be significant during 1999. As of December 31, 1998, the Company's cash obligations required to complete the balance of the Company's initiatives to integrate businesses related to its mergers and acquisitions and its fourth quarter rationalization plan are estimated to be approximately $70 million. In addition, the Company has outstanding $140 million of acquisition-related cash obligations. Substantially all of these cash outlays will occur during 1999. Further, the Company expects to incur capital expenditures of approximately $130 million during 1999. The Company expects that its cash and cash equivalents, marketable securities, cash flows from operating activities, proceeds from the issuance of debt and equity securities discussed previously and borrowing capacity will be sufficient to meet its projected operating cash needs, including integration costs through the end of 1999. As noted, the Company has $1.2 billion of 364-day credit facilities that expire in September 1999. An extension of these facilities will be needed if the Company does not obtain additional financing through an equity offering or other means. The Company intends to issue equity and other securities, but there are no assurances that additional financing can be or will be obtained. YEAR 2000 READINESS The inability of business processes to continue to function correctly after the beginning of the Year 2000 could have serious adverse effects on companies and entities throughout the world. The Company has undertaken a global effort to identify and mitigate Year 2000 issues in its information systems, products, facilities and suppliers. The Company established a multidisciplinary Year 2000 Task Force in 1998, comprised of management from each of the Company's principal functional areas, including Finance, Information Technology, Regulatory Affairs, Customer Service, Manufacturing, Distribution, Purchasing, Facilities, Legal and Communications. A core team and a program management office has also been established for coordinating and BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-7 10 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - --------------------- tracking all Year 2000 issues. This office is comprised of Company management and staff and representatives of an experienced Year 2000 consulting firm. These efforts report directly to members of the Company's Executive Committee. An independent consulting firm has been working with the Company for over two years to implement a global information system that is designed to be Year 2000 compliant. In addition to the Company's information systems project, other internal systems are being addressed largely through the replacement and testing of much of the Company's older systems. The efforts are both company-wide and site specific, spanning the range from the Information Technology department systems to manufacturing operations (including production facilities, support equipment, and process control) and infrastructure technologies. The vast majority of the Company's products do not perform date-sensitive operations and are therefore unaffected by Year 2000 issues. Steps have been taken to correct non-compliance which affects the functional performance of the few remaining products. Through December 31, 1998, the Company has expended in excess of $100 million to implement and operate a Year 2000 compliant global information system, and other costs relating to Year 2000 compliance. The Company does not anticipate that additional compliance costs will have a material impact on its business operations or its financial condition. The Company relies on third party providers for services such as telecommunications, Internet service, utilities, certain product components and other key services. Interruption of those services due to Year 2000 issues could affect the Company's operations. The Company has initiated an evaluation of the status of third party service providers' compliance efforts and of alternative and contingency requirements. While approaches to reducing risks of interruption of business operations vary by business unit, options include identification of alternative service providers available to provide such services if a service provider fails to become Year 2000 compliant within an acceptable time frame. Based on the Company's evaluation to date, management believes that in most cases redundant capacity exists at the supplier or that alternative sources of supply are available or could be developed within a reasonable amount of time should compliance become an issue for individual suppliers. The Company believes that its Year 2000 program will identify and correct all material non-compliant systems and operations before the end of 1999. Third party service providers are being assessed and the Company expects to have contingency plans that will avoid failures having a material effect on the Company's business operations or financial condition in place before the end of 1999. There can be no assurance that the Company's Year 2000 program will identify and correct all non-compliant systems of the Company and its third party service providers or that any such failure will not have a material effect on the Company's business operations or financial condition. MARKET RISK DISCLOSURES In the normal course of business, the Company is exposed to market risk from changes in interest rates and foreign currency exchange rates. The Company addresses these risks through a risk management program that includes the use of derivative financial instruments. The use of derivative financial instruments are initiated within the guidelines of documented corporate risk management policies. The Company does not enter into any derivative transactions for speculative purposes. The Company's floating and fixed rate debt obligations are subject to interest rate risk. A 100 basis point increase in interest rates related to the Company's floating rate borrowings, assuming the amount borrowed remains constant, would result in an annual increase in the Company's then current interest expense of approximately $18 million. The Company intends to refinance a portion of its floating rate borrowings through a combination of issuance of convertible securities and additional equity securities, which are subject to market risk. A 100 basis point increase in interest rates related to the Company's fixed long-term debt would not result in a material change in its fair value. The Company enters into foreign exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with commitments, generally one to six months. The Company does not engage in speculation. The Company's foreign exchange contracts should not subject the Company to material risk due to exchange rate movements because gains and losses on these contracts should offset losses and gains on the assets and liabilities being hedged. The Company had spot and forward foreign exchange contracts outstanding in the notional amounts of $230 million and $177 million as of December 31, 1998 and 1997, respectively. Although the Company engages in hedging transactions that may offset the effect of fluctuations in foreign currency exchange rates on foreign currency denominated assets and liabilities, financial exposure may nonetheless result, primarily from the timing of transactions and the movement of exchange rates. The short-term nature of these contracts has resulted in these instruments having insignificant fair values at December 31, 1998. A sensitivity analysis of changes in the fair value of foreign currency exchange contracts outstanding at December 31, 1998 indicates that, if the U.S. dollar uniformly weakened by 10% against all currencies, the fair value of these contracts BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-8 11 would decrease by $11 million. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by changes in the value of the underlying exposures being hedged. In addition, unhedged foreign currency balance sheet exposures as of December 31, 1998 are not expected to result in a significant loss of earnings or cash flows. As the Company has expanded its international operations, its sales and expenses denominated in foreign currencies have expanded and that trend is expected to continue. Therefore, most international sales and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations and these fluctuations may have an impact on margins. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency selling prices. EURO CONVERSION On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the euro. The participating countries agreed to adopt the euro as their common legal currency on that date. Fixed conversion rates between these participating countries' existing currencies (the legacy currencies) and the euro were established as of that date. The legacy currencies are scheduled to remain legal tender as denominations of the euro until at least January 1, 2002 (but not later than July 1, 2002). During this transition period, parties may settle transactions using either the euro or a participating country's legacy currency. The Company is addressing the potential impact resulting from the euro conversion, including adaptation of information technology systems, competitive implications related to pricing and foreign currency considerations. Management currently believes that the introduction of the euro will not have a material impact related to the adaptation of information technology systems or foreign currency exposures. The increased price transparency resulting from the use of a single currency in the eleven participating countries may affect the ability of the Company to price its products differently in the various European markets. A possible result of this is price harmonization at lower average prices for products sold in some markets. However, uncertainty exists as to the effects the euro will have on the marketplace. LITIGATION The Company is involved in various lawsuits, including patent infringement and product liability suits, from time to time in the normal course of business. In management's opinion, the Company is not currently involved in any legal proceeding other than those specifically identified in the notes to consolidated financial statements which, individually or in the aggregate, could have a material effect on the financial condition, operations and cash flows of the Company. The Company believes that it has meritorious defenses against claims that it has infringed patents of others. However, there can be no assurance that the Company will prevail in any particular case. An adverse outcome in one or more cases in which the Company's products are accused of patent infringement could have a material adverse effect on the Company. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. The Company has insurance coverage which management believes is adequate to protect against such product liability losses as could otherwise materially affect the Company's financial position. SEC REVIEW OF FINANCIAL REPORTING Within the past year, the Securities and Exchange Commission (SEC) has publicly stated its desire to focus on transparent financial reporting and potential earnings management issues, including restructuring charges, asset write-downs, acquired in-process research and development write-offs, materiality thresholds, revenue recognition, and general reserves. In connection with these efforts, the SEC sent out letters to approximately 150 public companies indicating that their 1998 financial statements may be subject to review. Following its receipt of one of these letters, the Company requested the SEC Staff to evaluate the Company's purchase price allocation of the Schneider acquisition, including the amount allocated to purchased research and development. Shortly thereafter, the Company informed the SEC of its intention to offer equity to refinance a portion of its outstanding credit facilities balance with more permanent financing. The Company's discussions with the SEC on the Schneider purchase price allocation are continuing. The SEC has also recently requested that the Company provide additional disclosures with respect to prior acquisitions and merger related and special charges and provide the SEC with additional information with respect to direct transactions and other costs. The Company has supplemented its disclosures and provided the information requested. There can be no assurance that the SEC will not require the Company to further expand or modify its disclosures relating to these or other issues or to make related changes in its financial reporting, including the restatement of prior reported results, which could materially impact future earnings per share of the Company. CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains forward-looking statements. The Company desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all forward-looking statements. Forward-looking statements contained in this report include, but are not limited to, statements with respect to, and the Company's performance may be affected by: (a) the Company's ability to obtain benefits from the Schneider acquisition, including purchased research and development and physician and hospital relationships; (b) the process, outlays and plan for the integration of businesses acquired by the Company, and the successful and timely implementation of the rationalization plan; (c) the impact and timing of successful implementation of the Company's supply chain initiatives; (d) the potential impacts of continued consolidation among healthcare providers, trends towards managed care and economically motivated buyers, healthcare cost containment, more stringent regulatory requirements and more vigorous enforcement activities; (e) the Company's belief that it is well positioned to take advantage of opportunities for growth that exist in the markets it serves; (f) the Company's continued commitment to refine existing products and procedures and to develop new technologies that provide simpler, less traumatic, less costly and more efficient diagnosis and treatment; (g) the Company's ability to launch products on a timely basis, including products resulting from purchased research and development; (h) risks associated with international operations; (i) the potential effect of foreign currency fluctuations on revenues, expenses and resulting margins and the trend toward increasing sales and expenses denominated in foreign currencies; (j) the Company's belief that its effective tax rate for 1999 will only increase slightly from 1998; (k) the ability of the Company to manage accounts receivable, manufacturing costs and inventory levels and mix and to react effectively to the changing managed care environment and worldwide economic conditions; (l) the ability of the Company to meet its projected cash needs through the end of 1999; (m) the ability BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-9 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - --------------------- of the global information systems to improve supply chain management; (n) costs and risks associated with implementing Year 2000 compliance and business process reengineering; (o) timely and uninterrupted supply of the NIR(R) coronary stent and increase in purchase price; (p) the ability to realize improved long-term returns on the Company's investments with a direct selling presence in Europe, Japan and Emerging Markets; (q) the ability of the Company to obtain more permanent financing to re-finance a portion of its commercial paper and amounts borrowed under the Facilities, to comply with its debt ratio through an equity issuance and to place its commercial paper at reasonable rates; (r) the Company's expectation that a minimum of $800 million of short-term debt supported by the Facilities will remain outstanding through the next twelve months; (s) the Company's ability to fund development of purchased technology and to realize value assigned to in-process research and development and other intangible assets; (t) the impact of stockholder class action, patent, product liability and other litigation, the outcome of the U.S. Department of Justice investigation, and the adequacy of the Company's product liability insurance; (u) the potential impact resulting from the euro conversion, including adaptation of information technology systems, competitive implications related to pricing and foreign currency considerations; (v) the final outcome of the Company's discussions with the SEC relating to the Schneider purchase price allocation and the SEC's request for additional information and the resulting impact on prior reported results as well as on future earnings per share of the Company; and (w) the timing, size and nature of strategic initiatives available to the Company. Several important factors, in addition to the specific factors discussed in connection with such forward-looking statements individually, could affect the future results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements contained herein. Such additional factors include, among other things, future economic, competitive and regulatory conditions, demographic trends, third-party intellectual property, financial market conditions and future business decisions of Boston Scientific and its competitors, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Boston Scientific. Therefore, the Company wishes to caution each reader of this report to consider carefully these factors as well as the specific factors discussed with each forward-looking statement in this report and as disclosed in the Company's filings with the Securities and Exchange Commission as such factors, in some cases, have affected, and in the future (together with other factors) could affect, the ability of the Company to implement its business strategy and may cause actual results to differ materially from those contemplated by the statements expressed herein. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-10 13 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 14 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 15 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 16 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 17 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 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE A) NOTE A - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Boston Scientific Corporation (Boston Scientific or the Company) and its subsidiaries, substantially all of which are wholly-owned, and include the results of EP Technologies, Inc. (EPT) and Target Therapeutics, Inc. (Target) acquired in 1996 and 1997, respectively, accounted for as poolings-of-interests for all periods presented. The statements also include the results of Symbiosis Corporation (Symbiosis), beginning in March 1996, the results of Endotech, Ltd. and MinTec, Inc., and certain related companies (Endotech/MinTec), beginning in May 1996 and the results of Schneider Worldwide (Schneider), beginning in September 1998. Investments in affiliates, representing 20% to 50% of the ownership of such companies, are accounted for under the equity method, including the Company's investment in Medinol Ltd. (Medinol). Income recorded in connection with these investments was not significant during the periods presented. Investments in affiliates, representing less than 20% of the ownership of such companies, are accounted for under the cost method. ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TRANSLATION OF FOREIGN CURRENCY: All assets and liabilities of foreign subsidiaries are translated at the rate of exchange at year end while sales and expenses are translated at the average rates in effect during the year. The net effect of these translation adjustments is shown in the accompanying financial statements as a component of stockholders' equity. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. SHORT-TERM INVESTMENTS: Short-term investments are recorded at fair value, which approximates cost. CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of temporary cash and cash equivalents, marketable securities, forward foreign exchange contracts and accounts receivable. The Company invests its excess cash primarily in high quality securities and limits the amount of credit exposure to any one financial institution. The Company's investment policy limits exposure to concentration of credit risk and changes in market conditions. The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. The Company transacts forward foreign exchange contracts with major financial institutions to limit its credit exposure. The Company provides credit, in the normal course of business, primarily to hospitals, private and governmental institutions and healthcare agencies and doctors' offices. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or market. PROPERTY, PLANT AND EQUIPMENT: Property, plant, equipment and leaseholds are stated at historical cost. Expenditures for maintenance and repairs are charged to expense; betterments are capitalized. The Company provides for depreciation and amortization by the straight-line method at rates which are intended to depreciate and amortize the cost of these assets over their estimated useful lives. Buildings and improvements are depreciated over a 15 to 40-year life; equipment, furniture and fixtures are depreciated over a 2 to 12-year life. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. The Company capitalizes interest incurred on funds used to construct property, plant and equipment. Interest capitalized was $4 million during 1998 and $5 million during 1997. The Company receives grant money equal to a percentage of expenditures on eligible capital equipment which is recorded as deferred income and recognized ratably over the life of the underlying assets. The grant money would be repayable, in whole or in part, should the Company fail to meet certain employment goals. INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line method over the following lives: Patents and trademarks (3 - 20 years); Licenses (2 - 20 years); Core and developed technology (3 - 25 years); Excess of cost over net assets acquired (15 - 40 years); Other intangibles (various). The Company examines the carrying value of its excess of cost over net assets acquired and other intangible assets to determine whether there are any impairment losses. If indicators of impairment were present in intangible assets used in operations, and future cash flows were not expected to be sufficient to recover the assets' carrying amount, an impairment loss would be charged to expense in the period identified. No event has been identified that would indicate an impairment of the value of material intangible assets recorded in the accompanying consolidated financial statements. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-16 19 INCOME TAXES: The Company utilizes the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Taxes are not provided on unremitted earnings of subsidiaries outside the United States (U.S.) where such earnings are permanently reinvested. At December 31, 1998, unremitted earnings of non-U.S. subsidiaries were $416 million. It is not practical to estimate the amount of taxes payable on these foreign earnings. Research and development tax credits are recorded as a reduction in income tax expense in the year realized. FORWARD FOREIGN EXCHANGE CONTRACTS: The Company enters into forward foreign exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with commitments. The Company does not engage in speculation. The Company's foreign exchange contracts do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the assets and liabilities being hedged. During 1998, net foreign currency transaction and translation gains (losses) that are reflected as other income (expense) on the Consolidated Statements of Operations totaled approximately $2 million of net foreign exchange gains compared to net foreign exchange losses of $4 million and $2 million in 1997 and 1996, respectively. Although the Company engages in hedging transactions that may offset the effect of fluctuations in foreign currency exchange rates on foreign currency denominated assets and liabilities, financial exposure may nonetheless result, primarily from the timing of transactions and the movement of exchange rates. Further, any significant changes in the political, regulatory or economic environment where the Company conducts international operations may have a material impact on revenues and profits. REVENUE RECOGNITION: The Company recognizes revenue from the sale of its products when the products are shipped to its customers. The Company allows its customers to return certain products for credit. The Company also allows customers to return defective or damaged products for credit or replacement. Accruals are made and evaluated for adequacy for all returns. RESEARCH AND DEVELOPMENT: Research and development costs are expensed as incurred. STOCK COMPENSATION ARRANGEMENTS:The Company accounts for its stock compensation arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and intends to continue to do so. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". ACCOUNTING CHANGE: In 1997, the Company implemented Emerging Issues Task Force (EITF) No. 97-13 "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation", the effect of which ($31 million or $21 million, net of tax) is reflected as a cumulative effect of change in accounting in 1997. NEW ACCOUNTING STANDARDS: In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company has not yet adopted the American Institute of Certified Public Accountants' Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", which will require adoption in 1999, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which will require adoption in 2000. The Company is in the process of determining the effect of adoption of these statements on its consolidated financial statements and related disclosures but does not believe the impact will be significant. NET INCOME PER COMMON SHARE: Net income (loss) per common share is based upon the weighted average number of common shares, common share equivalents and the dilutive effect of European put options, if applicable, outstanding each year. The Company paid a two-for-one stock split on November 30, 1998. All historical per share amounts have been restated to reflect the stock split. RECLASSIFICATIONS: Certain prior years' amounts have been reclassified to conform to the current years' presentation. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-17 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE B TO NOTE D) NOTE B - OTHER BALANCE SHEET INFORMATION Components of other selected captions in the Consolidated Balance Sheets at December 31 consisted of:
(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 21 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 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE D CONTINUED TO NOTE G) - ---------------------------- At December 31, 1998, the Company had an additional 6 billion Japanese yen borrowings (approximately $53 million) outstanding with a syndicate of Japanese banks. The interest rate on the borrowings is 2.47% and the borrowings are payable in 2002. The Company has uncommitted Japanese credit facilities with several Japanese banks to provide for borrowings and promissory notes discounting of up to 7.5 billion Japanese yen (approximately $66 million). At December 31, 1998, there were no borrowings outstanding under the Japanese credit facilities compared to 2.7 billion Japanese yen (approximately $21 million) at December 31, 1997. During 1998, approximately $266 million of receivables were discounted through promissory notes compared to $194 million during 1997. At December 31, 1998, approximately $61 million of receivables were discounted at average interest rates of approximately 1.5%. In September 1998, the Company filed a $1.2 billion shelf registration with the U.S. Securities and Exchange Commission under which the Company may from time to time issue various equity and debt securities. At December 31, 1998, the Company had no outstanding securities issued under this shelf registration. Interest paid, including interest paid under capital leases and mortgage loans, amounted to $65 million in 1998, $19 million in 1997, and $13 million in 1996. NOTE E - LEASES Rent expense amounted to $40 million in 1998, $37 million in 1997 and $22 million in 1996. Future minimum rental commitments as of December 31, 1998 under noncancelable capital and operating lease agreements are as follows:
(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 23
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 24 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 25 incorporation increasing the Company's authorized common stock from 300,000,000 shares to 600,000,000 shares and authorized preferred stock from 25,000,000 to 50,000,000 shares. The amendment allowed the two-for-one stock split announced on August 27, 1998 to go forward. The stock split was paid on November 30, 1998 to stockholders of record as of November 13, 1998. All historical share and per share amounts have been restated to reflect the stock split except for share amounts presented in the Consolidated Balance Sheets and the Consolidated Statements of Stockholders' Equity which reflect the actual share amounts outstanding for each period presented. NOTE I - STOCK OWNERSHIP PLANS EMPLOYEE AND DIRECTOR STOCK INCENTIVE PLANS Boston Scientific's 1992 and 1995 Long-Term Incentive Plans provide for the issuance of up to 40 million shares of common stock. The terms of these two plans are similar. The plans cover officers, employees and consultants of and to the Company and provide for the grant of various incentives, including qualified and non-qualified options, stock grants, share appreciation rights and performance awards. Options granted to purchase shares of common stock are either immediately exercisable or exercisable in installments as determined by an appointed committee consisting of two or more non-employee directors (the Committee), and, in the case of any qualified options, expire within ten years from date of grant. In the case of qualified options, if an employee owns more than 10% of the voting power of all classes of stock, the option granted will be at 110% of the fair market value of the Company's common stock on the date of grant and will expire over a period not to exceed five years. The Committee may also make stock grants in which shares of common stock may be issued to officers, employees and consultants at a purchase price less than fair market value. The terms and conditions of such issuances, including whether achievement of individual or Company performance targets is required for the retention of such awards, are determined by the Committee. The Committee may also issue shares of common stock and/or authorize cash awards under the incentive plans in recognition of the achievement of long-term performance objectives established by the Committee. Stock grants for 5,000 shares, 15,000 shares and 2,000 shares were issued to employees during 1998, 1997 and 1996, respectively. Boston Scientific's 1992 Non-Employee Directors' Stock Option Plan provides for the issuance of up to 200,000 shares of common stock and authorizes the automatic grant to outside directors of options to acquire 4,000 shares of common stock generally on the date of each annual meeting of the Stockholders of the Company. Options under this plan are exercisable ratably over a three-year period and expire ten years from the date of grant. Shares reserved for future issuance under all of the Company's plans totaled approximately 42 million at December 31, 1998. If the Company had elected to recognize compensation expense for the granting of options under stock option plans based on the fair values at the grant dates consistent with the methodology prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation", net income (loss) and earnings (loss) per share would have been reported as the following pro forma amounts:
(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 26 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 27 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 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE K CONTINUED) - --------------------- On September 16, 1997, ACS filed a suit for patent infringement against the Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter infringes two U.S. patents licensed to ACS and one U.S. patent owned by ACS. Suit was filed in the U.S. District Court for the Northern District of California seeking monetary damages, injunctive relief and that the patents be adjudged valid, enforceable and infringed. The Company and SCIMED have answered, denying the allegations in the complaint. A trial date has not yet been set. On August 12, 1998, ACS and an affiliate of ACS filed suit for patent infringement against the Company and SCIMED alleging that the Company's NIR(R) stent infringes five patents owned by ACS. The suit was filed in the U.S. District Court for the Southern District of Indiana seeking injunctive and monetary relief. The Company and SCIMED have answered, denying the allegations of the complaint. A trial date has been set for February 22, 2000. On March 25, 1996, Cordis Corporation (Cordis), a subsidiary of Johnson & Johnson Company (Johnson & Johnson), filed a suit for patent infringement against SCIMED, alleging the infringement of five U.S. patents by SCIMED's LEAP balloon material, used in certain SCIMED catheter products, including SCIMED's BANDIT and EXPRESS PLUS catheters. The suit was filed in the U.S. District Court for the District of Minnesota and seeks monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaint. Trial is expected to begin in 1999. On March 17, 1997, the Company, through its subsidiaries, filed suit against Cordis in France seeking a declaration of noninfringement for the Company's LEAP balloon in relation to a European patent owned by Cordis. A hearing on the pleadings is scheduled for May 11, 1999. On July 18, 1997, Cordis filed a cross border suit in The Netherlands against various subsidiaries of the Company, alleging that the LEAP balloon infringes one of Cordis' European patents. In this action, Cordis requested expedited relief, including an injunction, covering The Netherlands, Germany, France, the United Kingdom and Italy. The court posed certain questions to the European Patent Office (EPO). The Company appealed the court's decision to present questions to the EPO. A hearing on the appeal was held June 16, 1998. In November 1998, the Court of Appeals held that there was a "ready chance" that the Cordis patent would be found invalid and dismissed the action. On March 27, 1997, SCIMED filed suit for patent infringement against Cordis, alleging willful infringement of several SCIMED U.S. patents by Cordis' TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM), SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in the U.S. District Court for the District of Minnesota, Fourth District, seeking monetary and injunctive relief. The parties have agreed to add Cordis' CHARGER(TM) and HELIX(TM) catheters to the suit. Cordis has answered, denying the allegations of the complaint. Trial is expected to begin in 1999. On March 13, 1997, the Company (through its subsidiaries) filed suits against Johnson & Johnson (through its subsidiaries) in The Netherlands, the United Kingdom and Belgium, and on March 17, 1997 filed suit in France, seeking a declaration of noninfringement for the NIR(R) stent relative to two European patents licensed to Ethicon, Inc. (Ethicon), a Johnson & Johnson subsidiary, as well as a declaration of invalidity with respect to those patents. After a trial on the merits in the United Kingdom during March 1998, the Court ruled on June 26, 1998 that neither of the patents is infringed by the NIR(R) stent, and that both patents are invalid. Ethicon has appealed. On October 28, 1998, the Company's motion for a declaration of noninfringement in France was dismissed for failure to satisfy statutory requirements; the French invalidity suits were not affected. The Company has appealed the dismissal, and a hearing is scheduled for March 22, 1999. On March 20, 21 and 22, 1997, the Company (through its subsidiaries) filed additional suits against Johnson & Johnson (through its subsidiaries) in Sweden, Italy and Spain, respectively, seeking a declaration of noninfringement for the NIR(R) stent relative to one of the European patents licensed to Ethicon in Sweden, Italy and Spain and a declaration of invalidity in Italy and Spain. Ethicon and other Johnson & Johnson subsidiaries filed a cross-border suit in The Netherlands on March 17, 1997, alleging that the NIR(R) stent infringes one of the European patents licensed to Ethicon. In this action, the Johnson & Johnson entities requested relief, including provisional relief (a preliminary injunction), covering Austria, Belgium, France, Greece, Italy, The Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. On April 2, 1997, the Johnson & Johnson entities filed a similar cross-border proceeding in The Netherlands with respect to a second European patent licensed to Ethicon. Johnson & Johnson subsequently withdrew its request for cross-border relief in the United Kingdom. In October, 1997, Johnson & Johnson's request for provisional cross-border relief on both patents was denied by the Dutch court, on the ground that it is "very likely" that the NIR(R) stent will be found not to infringe the patents. Johnson & Johnson appealed this decision with respect to one of the patents; the appeal has been denied on the ground that there is a "ready chance" that the patent will be declared null and void. In January 1999, Johnson & Johnson amended the claims of one of the patents, changed the action from a cross-border case to a Dutch national action, and indicated its intent not to pursue its action on the second patent. A hearing has been set for March 26, 1999. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-26 29 On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf, Germany, alleging that the Company's NIR(R) stent infringes one of Ethicon's patents. On June 23, 1998, the case was stayed following a decision in an unrelated nullity action in which the Ethicon patent was found to be invalid. On June 16, 1997, the Company and SCIMED filed a suit against Johnson & Johnson, Ethicon and Johnson & Johnson International Systems Co. in the U.S. District Court for the District of Massachusetts seeking a declaratory judgment of noninfringement for the NIR(R) stent relative to two patents licensed to Johnson & Johnson and that the two patents are invalid and unenforceable. The Company subsequently amended its complaint to add a third patent. Johnson & Johnson answered, denying the allegations of the complaint, and counterclaiming for patent infringement. In October 1997, Johnson & Johnson's motion to dismiss the suit was denied. This action has been consolidated with the Delaware action described below. On August 22, 1997, Johnson & Johnson filed a suit for patent infringement against the Company alleging that the sale of the NIR(R) stent infringes certain Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court of Canada seeking a declaration of infringement, monetary damages and injunctive relief. The Company has answered, denying the allegations of the complaint. On October 22, 1997, Cordis filed a suit for patent infringement against the Company and SCIMED alleging that the importation and use of the NIR(R) stent infringes two patents owned by Cordis. The suit was filed in the U.S. District Court for the District of Delaware seeking monetary damages, injunctive relief and that the patents be adjudged valid, enforceable and infringed. The Company and SCIMED have answered the complaint, denying Cordis' allegations. The Massachusetts case described above has been consolidated with this action. A trial date has been set for March 6, 2000. On April 13, 1998, Cordis filed a suit for patent infringement against the Company and SCIMED alleging that the Company's NIR(R) stent infringes a third patent owned by Cordis. The suit was filed in the U.S. District Court for the District of Delaware seeking injunctive and monetary relief. The Company and SCIMED have answered, denying the allegations of the complaint. A trial date has been set for March 6, 2000. On August 13, 1998, Arterial Vascular Engineering, Inc. (AVE) filed a suit for patent infringement against the Company and SCIMED alleging that the Company's NIR(R) stent infringes two patents owned by AVE. The suit was filed in the U.S. District Court for the District of Delaware seeking injunctive and monetary relief. The Company and SCIMED have answered, denying the allegations of the complaint. A trial date has not yet been set. On December 15, 1998, the Company and SCIMED filed a cross-border suit against AVE in The Netherlands alleging that AVE's AVE GFX(TM), AVE GFX 2(TM), AVE LTX(TM) and USCI CALYPSO(TM) rapid exchange catheters and stent delivery systems infringe one of the Company's European patents. In this action, the Company requested relief covering The Netherlands, the United Kingdom, France, Germany and Italy. A hearing is set for October 22, 1999. On December 18, 1998, AVE filed a suit for patent infringement against the Company and SCIMED alleging that the Company's MAXXUM(TM) and VIVA!(TM) catheters infringe a patent owned by AVE. The suit was filed in the U.S. District Court for the District of Delaware seeking injunctive and monetary relief. The Company and SCIMED have answered, denying the allegations of the complaint. On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District Court for the District of Delaware alleging that certain Company products, including the Company's MaxForce TTS(TM) catheter, infringe a patent assigned to Bard. Following a trial and jury verdict, on February 3, 1999 the court entered a judgment that the Company infringed the Bard patent and awarded damages to Bard in the amount of $10.8 million. The Company was also enjoined from selling the product found to be infringing. The Company is appealing the judgment to the Court of Appeals for the Federal Circuit. The Company no longer markets the accused device. On May 12, 1998, Bard filed a cross-border suit in The Netherlands against various subsidiaries of the Company, alleging that the Company's VIVA!(TM) and MAXXUM(TM) rapid exchange catheters infringe one of Bard's European patents. In this action, Bard requested relief covering The Netherlands, Germany, France, Spain and the United Kingdom. On February 16, 1999, the suit was withdrawn for procedural reasons. The Company is aware that AVE, successor-in-interest to Bard's cardiovascular business, could file a similar suit against the Company, alleging infringement of the patent by one or more of the Company's products. On March 7, 1996, Cook Inc. (Cook) filed suit in the Regional Court, Munich Division for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally Invasive Technologies alleging that the Cragg EndoPro(TM) System I and Stentor(TM) endovascular device infringe a certain Cook patent. Since the purchase of the assets of the Endotech/MinTec companies by the Company, the Company has assumed control of the litigation. The defendant answered, denying the allegations. A court-appointed technical expert has provided the court with technical advice. A final hearing is scheduled to be held on May 12, 1999. On June 30, 1998, Cook filed suit in the Regional Court, Dusseldorf Division for Patent Disputes, in Dusseldorf, BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-27 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE K CONTINUED TO NOTE M) - ---------------------------- Germany against the Company alleging that the Company's PASSAGER(TM) peripheral vascular stent graft and VANGUARD(TM) endovascular aortic graft products infringe the same Cook patent. A hearing date has been set for July 22, 1999. On January 13, 1999, Medical Innovations Corporation (Innovations) filed a lawsuit in the U.S. District Court for the District of Utah alleging that certain Company products, including the Company's Ultratome(TM) XL sphinctertome product, infringe two patents assigned to Innovations. The suit also includes a claim of unfair trade practices. Innovations is seeking injunctive relief and monetary damages for both claims. The Company is preparing an answer, denying the allegations of the complaint. On February 1, 1999, Hewlett-Packard Company filed a suit in the U.S. District Court for the District of Massachusetts against the Company alleging violation of the Sherman Antitrust Act and Massachusetts General Laws Chapter 93A and breach of contract. The Company is preparing an answer, denying the allegations of the complaint. Beginning November 4, 1998, a number of shareholders of the Company, on behalf of themselves and all others similarly situated, filed purported stockholders' class action suits in the U.S. District Court for the District of Massachusetts alleging that the Company and certain of its officers violated certain sections of the Securities Exchange Act of 1934. The complaints principally allege that as a result of certain accounting irregularities involving the improper recognition of revenue by the Company's subsidiary in Japan, the Company's previously issued financial statements were materially false and misleading. In all, 16 purported class action suits have been filed. Plaintiffs have moved for the appointment of lead plaintiffs and lead counsel. The Company and its officers have not yet filed an answer, but intend to vigorously defend all actions. The Company is aware that the U.S. Department of Justice is conducting an investigation of matters that include the Company's NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent delivery system which was voluntarily recalled by the Company in October 1998 following reports of balloon leaks. The Company is cooperating fully in the investigation. The Company is involved in various other lawsuits from time to time. In management's opinion, the Company is not currently involved in any legal proceedings other than those specifically identified above which, individually or in the aggregate, could have a material effect on the financial condition, operations or cash flows of the Company. The Company believes that it has meritorious defenses against claims that it has infringed patents of others. However, there can be no assurance that the Company will prevail in any particular case. An adverse outcome in one or more cases in which the Company's products are accused of patent infringement could have a material adverse effect on the Company. At December 31, 1998 and 1997, the Company has accrued approximately $38 million and $42 million, respectively, of litigation-related reserves to cover certain costs of defense, settlement and damages. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. The Company has insurance coverage which management believes is adequate to protect against product liability losses as could otherwise materially affect the Company's financial position. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-28 31 NOTE L -- BUSINESS COMBINATIONS On September 10, 1998, the Company consummated its acquisition of Schneider Worldwide, formerly a member of the Medical Technology Group of Pfizer Inc., for $2.2 billion, net of assets acquired and liabilities assumed. The acquisition was accounted for using the purchase method of accounting. The consolidated financial statements include Schneider's operating results from the date of acquisition. The aggregate purchase price has been allocated on a preliminary basis to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition. The estimated excess of purchase price over the fair value of net tangible assets acquired was allocated to specific intangible asset categories as follows:
(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, for which management is primarily responsible, represents the estimated fair value related to incomplete projects. At the date of the acquisition, the development of these projects had not reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the date of acquisition. The Securities and Exchange Commission (SEC) recently has published guidelines for valuing in-process research and development. In that regard, in February 1999, the Company requested that the SEC review its preliminary allocation. Upon completion of the review the Company will finalize its purchase price allocation. The income approach was used to establish the fair values of the intangible assets. This approach establishes the fair value of an asset by estimating the after-tax cash flows attributable to the asset over its useful life and then discounting these after-tax cash flows back to a present value. The discounting process uses a rate of return commensurate with the time value of money BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-29 32 and investment risk factors. Accordingly, for the purpose of establishing the fair value of each asset in the Schneider analysis, revenues for each future period were estimated, along with costs, expenses, taxes and other charges. Revenue estimates were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. With respect to the value of purchased research and development, the Company considered, among other factors, the research and development project's stage of completion, the complexity of the work completed to date, the costs already incurred, the projected costs to complete, the contribution of core technologies and other acquired assets, the projected product introduction date and the estimated useful life of the technology. The respective after-tax cash flows were then discounted back to present value using a risk-adjusted discount rate. The discount rates used in the Schneider analysis ranged from 16%-28% depending upon the risk profile of the particular asset. The most significant purchased research and development projects that were in-process at the date of acquisition were brachytherapy, devices for aneurysmal disease and coronary stents which in the aggregate represent over 60% of the in-process value. The brachytherapy project represents approximately 26% of the purchased research and development value. Key assumptions used in the analysis of brachytherapy included gross margins excluding depreciation of approximately 87% and a discount rate of 28%. The brachytherapy system is an intravascular radiation system designed to reduce clinical restenosis after PTCA and/or stenting. The system consists of a computer controlled afterloader, beta radiation source, centering catheter, source delivery wire and dummy wire. As of the date of acquisition, the project was expected to be completed and the products commercially available in the U.S. within two to three years, with an estimated cost to complete of approximately $5 to $10 million. The coronary stent projects represent approximately 16% of the purchased research and development value. Key assumptions used in the analysis of coronary stents included gross margins excluding depreciation of approximately 87% and a discount rate of 28%. Projects underway at the date of acquisition were stent systems for native coronary artery disease, saphenous vein graft disease, and versions with novel delivery systems. The stent systems in-process are designed to conform to the arterial anatomy resulting in remodeling of the vessel. An atraumatic tip reduces vessel trauma and enhances trackability, while position markers together with a high degree of stent radiopacity facilitate proper placement. The stent systems also use a unique reconstrainable delivery system. The Company believes that the stent systems will be especially helpful in the treatment of saphenous vein graft disease. As of the date of acquisition, the projects were expected to be completed and the products commercially available for sale in the U.S. within one year with an estimated cost to complete of approximately $1 to $3 million. The aneurysmal disease projects represent approximately 20% of the purchased research and development value. Key assumptions used in the analysis of the aneurysmal disease projects included gross margins excluding depreciation of approximately 86% and a discount rate of 28%. The objective of the projects is to develop endoluminal grafts for the treatment of late stage vascular aneurysms and occlusions. The most significant of the projects in this category at the date of acquisition was the endoluminal graft for the treatment of abdominal aortic aneurysms. The device consists of an endoluminal graft trunk where the lumen is formed into two sockets which, after placement of the trunk in the proximal neck of the aneurysm, accepts two endoluminal graft legs which extend to the iliac arteries. Valuable elements of the abdominal aortic device at the date of acquisition include the spun Corethane(R) graft covering, the self-expanding scaffold design, and the delivery systems. Other projects in this category included the endoluminal graft for thoracic aortic aneurysmal disease, which is a tubular endoluminal graft to be used in the aorta distal to the aortic arch. As of the date of acquisition, the projects were expected to be completed and the products commercially available in the U.S. within two to three years, with an estimated cost to complete of approximately $10 to $15 million. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-30 33 The major risk associated with the timely completion and commercialization of these products is the ability to confirm the safety and efficacy of the technology based on long term clinical outcomes data. The Company believes that the assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project revenues, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, among others, actual results may vary from the projected results. The following unaudited pro forma information presents a summary of consolidated results of operations of the Company and Schneider as if the acquisition had occurred at the beginning of each year presented, with pro forma adjustments to give effect to amortization of intangibles, purchased research and development, an increase in interest expense on acquisition financing and certain other adjustments together with related tax effects:
Year Ended December 31, (in thousands, 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, an original equipment manufacturer and formerly a wholly-owned subsidiary of American Home Products Corporation, for approximately $153 million. In 1996, the Company also purchased the assets of Endotech/Mintec for approximately $72 million. Both acquisitions were cash transactions and are accounted for using the purchase method of accounting. Accordingly, the aggregate purchase prices have been allocated among the assets acquired based on their estimated fair values at the date of acquisition. The allocations of the purchase prices resulted in provision for in-process research and development of $39 million and $57 million, respectively. The valuations of the purchased research and development represent the estimated fair value related to incomplete projects at the dates of acquisition. At the dates of acquisition, in management's opinion, the development of these projects had not reached technological feasibility and the research and development in process had no alternative future uses. Accordingly, these costs were expensed at date of acquisition. The valuations of in-process research and development projects for both acquisitions were performed using the income approach. Each project's expected cash flows were evaluated separately and discounted back to the present at risk-adjusted discount rates. The most significant project valued for the Symbiosis acquisition related to a guidewire project (approximately 80% of the in-process value). Key assumptions used in the analysis of the guidewire project included gross margins excluding depreciation of approximately 65% and a discount rate of 18%. Other expenses were based on estimated costs to complete the project. Symbiosis' historical pricing, margin and expense levels were adjusted to reflect end user market rates. As of the date of acquisition, the Company expected to continue development of the Symbiosis guidewire project through the balance of 1996 at a cost of an additional $3 million. Product commercialization was anticipated in 1997. Delays have occurred which have lengthened the development period and increased the completion costs by approximately $1 million. Product launch is now expected to occur sometime in late 1999. The most significant Endotech/Mintec project related to an abdominal aortic aneurysm repair device (approximately 90% of the in-process value). Key assumptions used in the analysis of the project were gross margins excluding depreciation of approximately 80% and discount rates of 20-23%. Other expenses were based on estimated costs to complete the project. Endotech/Mintec was a start-up operation at the date of acquisition, thus, the valuation used estimated end user market prices. Initial market availability of the device was anticipated by the Company in Europe in 1996, Japan in 1999, and the U.S. in 2000. The staggered timing reflected the need to conduct clinical evaluations and receive regulatory approvals in the respective countries. Expected aggregate cost for completion was $17 million to be spent between 1996 and 2000. The Endotech/MinTec product provided a proprietary technology, however, additional development and clinical work was still necessary to address and improve product components, product performance and clinical efficacy. Product offering in Europe commenced approximately a year from the date of the acquisition. The timeline for product availability in the U.S. and Japan has slipped by approximately one year due to technology issues. Estimated costs to date have been approximately $11 million and total costs to complete the project are uncertain. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-31 34 NOTE M - RESTRUCTURING AND MERGER-RELATED CHARGES The Company is in the process of implementing a rationalization plan initiated in conjunction with the consummation of the Schneider acquisition. The rationalization plan takes into consideration duplicate capacity and opportunities for further leveraging of cost and technology platforms. The Company's actions approved and committed to in the fourth quarter of 1998 will result in the displacement in 1999 of approximately 2,000 current positions, over half of which are manufacturing positions. The Company has decided to close five Schneider facilities, as well as transition the manufacturing of selected Boston Scientific product lines to different sites. The Company estimates that the costs associated with these activities, excluding transition costs, will be approximately $62 million, most of which represent severance and related costs. The costs related to transitioning the manufacturing are not expected to be significant (less than $10 million) and will be recognized as incurred. Approximately $36 million of the total has been capitalized as part of the purchase price of Schneider. The remaining $26 million ($17 million, net of tax) has been charged to operations. The rationalization plan also resulted in the decision to expand, not close, the Target facilities originally provided for in a 1997 merger-related charge and to relocate other product lines to those Target facilities. In the fourth quarter, the Company reversed $21 million ($14 million, net of tax) of previously recorded merger-related charges of which $4 million related to facility costs and which also included reductions for revisions of estimates relating to contractual commitment payments, associated legal costs and other asset write-downs originally provided for as a 1997 merger charge. In addition, as part of the Schneider acquisition, in the fourth quarter of 1998, the Company recorded estimated costs of approximately $16 million to cancel contractual obligations, primarily with distributors. In the second quarter of 1998, the Company realigned its operating units and decided to operate Target independently instead of as a part of its vascular division as was planned at the date of the Target acquisition. As a result, in the second quarter of 1998, the Company reversed $20 million ($13 million, net of tax) of 1997 merger-related charges primarily related to revised estimates for costs of workforce reductions and costs of cancelling contractual commitments. At December 31, 1998, the Company had an accrual for restructuring and merger-related charges of $89 million, which is comprised of $50 million of accrued severance and related costs primarily associated with integrating Schneider and streamlining manufacturing operations, $16 million related to the cost of cancelling contractual commitments recorded in connection BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-32 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE M CONTINUED TO NOTE N) - ---------------------------- with the Schneider acquisition and $23 million of accruals remaining for 1997 and prior mergers (primarily costs associated with rationalized facilities and statutory benefits which are subject to litigation). During 1997, the Company recorded merger-related charges of $146 million ($106 million, net of tax) primarily related to the Company's acquisition of Target and purchased research and development of $29 million, net of tax, in conjunction with accounting for its additional investment in Medinol and other strategic investments. The Company's Target merger-related charges reflect estimated costs to integrate all aspects of the Target business into the vascular business, and include those costs typical in a merging of operations, such as rationalization of facilities, workforce reductions, unwinding of various contractual commitments, asset writedowns and other integration costs. The Company planned to integrate the Target business into its vascular business, terminate the Target distributors in countries where the Company had a direct sales presence, move the Target manufacturing and research and development operations to Ireland and other vascular facilities, and manage Target's administrative and corporate activities at the Company's headquarters. Specifically, the Company planned to exit Target's leased headquarters, manufacturing and research locations in California, as well as, terminate Target's sales offices in Germany, Japan and the United Kingdom. The lease terminations were planned to begin during 1997 and to be completed by the end of 1998. In conjunction with the exit plan, the Company planned to terminate approximately 500 people, of which approximately 100 were corporate/administrative, 300 were manufacturing and 100 were research and development personnel. At the date of the Target acquisition, the Company also provided for the excess cost over fair market value of selected Target lease hold improvements, machinery and computer equipment, and other assets ($8 million). In the second quarter of 1997, the Company decided not to reintroduce a vascular product that had been previously withdrawn from the European market. As a result, the Company determined that there would be no future sales of the product, thus no projected cash flows. The Company wrote off the intellectual property ($8 million) associated with the product as a result of this analysis. Finally, in conjunction with the implementation of a global information system the Company provided for the estimated residual value of its legacy systems ($8 million), based on the date which the systems were planned to be removed from service. During 1996, the Company recorded merger-related and other unusual charges of approximately $32 million. Charges include estimated direct transaction costs ($5 million) of the merger with EPT and estimated costs to be incurred in merging EPT with subsidiaries of the Company ($12 million). Estimated costs include those typical in merging of operations and relate to, among other things, rationalization of facilities, workforce reductions, unwinding of various contractual commitments, asset writedowns and other integration costs. The remaining $15 million, which is primarily nondeductible for tax purposes, represents primarily a change in prior year estimates of merger related charges ($7 million), and a provision related to costs associated with a joint venture arrangement ($8 million). Due to the revised estimates for costs of workforce reductions discussed previously, the number of Target employees actually displaced was approximately 40 (approximately 35 of whom were terminated in 1997 and the remainder subsequent to 1997) as compared to the original estimate of 500 employees. Less than 10 employees were terminated under the EPT plan. The activity impacting the accrual for restructuring and merger-related charges during 1998 and 1997, net of reclassifications made by management based on available information, is summarized in the table below:
Charges to Charges Charges to Charges Balance at Operations Utilized Balance at Operations Utilized 12/31/95 in 1996 in 1996 12/31/96 in 1997 in 1997 ----------------------------------------------------------------------------------------- 1995 RESTRUCTURING AND MERGER- RELATED INITIATIVES: Facilities $25,642 $5,300 $ (13,863) $17,079 $1,818 $ (5,103) Workforce reductions 31,863 2,000 (9,299) 24,564 10,164 (23,064) Contractual commitments 50,921 (43,932) 6,989 (6,365) Asset write-downs 7,541 (2,809) 4,732 3,418 (6,861) Direct and other 19,291 (14,947) 4,344 115 (4,204) ----------------------------------------------------------------------------------------- 135,258 7,300 (84,850) 57,708 15,515 (45,597) 1996 RESTRUCTURING AND MERGER- RELATED INITIATIVES: Facilities 1,818 1,818 (1,672) Workforce reductions 1,655 (322) 1,333 (138) Contractual commitments 1,940 (773) 1,167 (306) Asset write-downs 4,497 (2,981) 1,516 (750) Direct and other 15,131 (13,116) 2,015 (148) ----------------------------------------------------------------------------------------- 25,041 (17,192) 7,849 (3,014) 1997 RESTRUCTURING AND MERGER- RELATED INITIATIVES: Facilities 6,375 (326) Workforce reductions 14,491 (2,108) Contractual commitments 52,673 (24,824) Asset write-downs 24,184 (10,437) Direct and other 32,653 (23,484) ----------------------------------------------------------------------------------------- 130,376 (61,179) 1998 SCHNEIDER PURCHASE PRICE ADJUSTMENTS: Facilities Workforce reductions Contractual commitments Asset write-downs Direct and other ----------------------------------------------------------------------------------------- 1998 RESTRUCTURING AND MERGER- RELATED INITIATIVES: Facilities Workforce reductions Contractual commitments Asset write-downs Direct and other ----------------------------------------------------------------------------------------- TOTAL: Facilities 25,642 7,118 (13,863) 18,897 8,193 (7,101) Workforce reductions 31,863 3,655 (9,621) 25,897 24,655 (25,310) Contractual commitments 50,921 1,940 (44,705) 8,156 52,673 (31,495) Asset write-downs 7,541 4,497 (5,790) 6,248 27,602 (18,048) Direct and other 19,291 15,131 (28,063) 6,359 32,768 (27,836) ----------------------------------------------------------------------------------------- $135,258 $32,341 $(102,042) $65,557 $145,891 $(109,790) ========================================================================================= Purchase Charges Price (Credits) to Charges Balance at Adjustments Operations Utilized Balance at 12/31/97 in 1998 in 1998 in 1998 12/31/98 ------------------------------------------------------------------------- PRIOR RESTRUCTURING AND MERGER- RELATED INITIATIVES: Facilities $13,794 $ (2,231) $ (2,641) $8,922 Workforce reductions 11,664 (4,026) (3,271) 4,367 Contractual commitments 624 268 (156) 736 Asset write-downs 1,289 282 (1,071) 500 Direct and other 255 3,916 (1,824) 2,347 ------------------------------------------------------------------------- 27,626 (1,791) (8,963) 16,872 1996 RESTRUCTURING AND MERGER- RELATED INITIATIVES: Facilities 146 3,958 (2,181) 1,923 Workforce reductions 1,195 (1,195) Contractual commitments 861 (816) (45) Asset write-downs 766 (766) Direct and other 1,867 (1,865) (2) ------------------------------------------------------------------------- 4,835 (684) (2,228) 1,923 1997 RESTRUCTURING AND MERGER- RELATED INITIATIVES: Facilities 6,049 (5,970) (79) Workforce reductions 12,383 (10,700) (1,157) 526 Contractual commitments 27,849 (7,156) (19,236) 1,457 Asset write-downs 13,747 (7,079) (5,638) 1,030 Direct and other 9,169 (7,634) (645) 890 ------------------------------------------------------------------------- 69,197 (38,539) (26,755) 3,903 1998 SCHNEIDER PURCHASE PRICE ADJUSTMENTS: Facilities Workforce reductions $35,611 (8,439) 27,172 Contractual commitments 16,580 (773) 15,807 Asset write-downs Direct and other ------------------------------------------------------------------------- 52,191 (9,212) 42,979 1998 RESTRUCTURING AND MERGER- RELATED INITIATIVES: Facilities Workforce reductions 14,102 (1,561) 12,541 Contractual commitments 855 (755) 100 Asset write-downs 9,027 9,027 Direct and other 2,016 (241) 1,775 ------------------------------------------------------------------------- 26,000 (2,557) 23,443 TOTAL: Facilities 19,989 (4,243) (4,901) 10,845 Workforce reductions 25,242 35,611 (1,819) (14,428) 44,606 Contractual commitments 29,334 16,580 (6,849) (20,965) 18,100 Asset write-downs 15,802 1,464 (6,709) 10,557 Direct and other 11,291 (3,567) (2,712) 5,012 ------------------------------------------------------------------------- $101,658 $52,191 $(15,014) $(49,715) $89,120 =========================================================================
The 1998, 1997 and 1996 restructuring and merger-related charges were recognized under the provisions of EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The 1998 purchase price adjustment was recognized under the provisions of APB 16 "Business Combinations" and EITF 95-3 "Recognition of Liabilities in Connection with a Purchase Business Combination". Total facilities write-downs under the Company's previously discussed restructuring and merger-related charges provided for during 1996, 1997 and 1998 for owned assets were measured as the difference between carrying value and fair value less cost to sell (approximately $8 million net of reversals). The charge for leased facilities during the same periods was measured using the lease commitment remaining after the facility was removed from service (approximately $3 million net of reversals). Write-downs of machinery and equipment, intangibles and other assets were measured by the difference between the carrying value and fair market value of the assets (approximately $32 million net of reversals). Reversals in 1998 of previously recorded charges were primarily based on the initial amount charged. To the extent that any of the above assets continued to be used in operations before being sold, scrapped or abandoned, depreciation and lease payments continued to be charged to operations. Depreciation not charged to operations related to assets held for disposal during 1998 was approximately $2 million. The December 31, 1998 accrual for restructuring and merger-related charges is classified within the balance sheet as follows:
(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. The Company expects that substantially all restructuring and merger-related charges will be paid during 1999 with the exception of $4 million of 1997 and prior facility related costs and statutory benefits subject to litigation which are expected to be paid or settled subsequent to 1999. The ultimate costs to be incurred relating to the facilities cannot be determined until a willing buyer for the properties is found and the facilities are sold. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-33 36 NOTE N - SEGMENT REPORTING Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices for less invasive procedures. The Company has four reportable operating segments based on geographic regions: the United States, Europe, Japan and Emerging Markets. Each of the Company's reportable segments generates revenues from the sale of minimally invasive medical devices. The reportable segments represent an aggregate of operating divisions. Sales and operating results of reportable segments are based on internally derived standard foreign exchange rates and do not include inter-segment profits. Because of the interdependence of the reportable segments, the operating profit as presented may not be representative of the geographic distribution that would occur if the segments were not interdependent. Total assets and purchases of property, plant and equipment are based on foreign exchange rates used in the Company's consolidated financial statements.
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-34 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE N CONTINUED) - --------------------- A reconciliation of the totals reported for the reportable segments to the applicable line items in the consolidated financial statements is as follows:
(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-35 38 REPORT OF INDEPENDENT AUDITORS - -------------------- BOARD OF DIRECTORS BOSTON SCIENTIFIC CORPORATION We have audited the accompanying consolidated balance sheets of Boston Scientific Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boston Scientific Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As more fully described in Note A, in 1997, the Company changed its accounting policy to conform to the consensus reached by the FASB Emerging Issues Task Force on its Issue No. 97-13. /s/ Ernst & Young LLP Boston, Massachusetts February 16, 1999 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-36 39 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-37 40 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-38 41 MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS (UNAUDITED) - ------------------------ The following table shows the market range for the Company's common stock based on reported sales prices on the New York Stock Exchange. All amounts below reflect the impact of the Company's two-for-one common stock split which was effected in the form of a 100% stock dividend paid in the fourth quarter of 1998.
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-39 EX-23.1 3 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 Consent of Independent Auditors We consent to the use of our report dated February 16, 1999 with respect to the consolidated financial statements of Boston Scientific Corporation, as amended, which are incorporated by reference in this Form 10-K/A2 from Exhibit 13.1 thereto. Our audits also included the financial statement schedule of Boston Scientific Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Forms S-8 Nos. 33-57242, 33-89772, 33-93790, 33-99766, 33-80265, 333-02256, 333-25033, and 333-25037) and in the Registration Statements (Forms S-3 Nos. 333-37255, 333-64887 and 333-64991) of our report dated February 16, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K/A2) of Boston Scientific Corporation. /s/ Ernst & Young LLP ERNST & YOUNG LLP Boston, Massachusetts June 1, 1999 -----END PRIVACY-ENHANCED MESSAGE-----