Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Boston Scientific Corporation 35 162K
2: EX-10.20 2000 Long-Term Incentive Plan 9 48K
3: EX-10.30 Employee Agreement - Dr. Mohan 4 16K
4: EX-10.31 Agreement and General Release of All Claims 9 35K
5: EX-10.32 Consulting Agreement 8 30K
6: EX-12.1 Computation of Ratios 1 9K
7: EX-13.1 1999 Financials From Annual Report 64± 309K
8: EX-21 List of the Company's Subsidiaries 8 23K
9: EX-23.1 Consent of Ernst & Young LLP 1 8K
10: EX-27.1 Financial Data Schedule 1 7K
EX-13.1 — 1999 Financials From Annual Report
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Exhibit 13.1
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1999 CONSOLIDATED FINANCIAL STATEMENTS
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[GRAPHIC]
BOSTON
SCIENTIFIC
FINANCIAL TABLE OF CONTENTS
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[Download Table]
1-10 Management's Discussion and Analysis of
Financial Condition and Results of Operation
11 Consolidated Statements of Operations
12 Consolidated Balance Sheets
13 Consolidated Statements of Stockholders' Equity
14 Consolidated Statements of Cash Flows
15-32 Notes to Consolidated Financial Statements
33 Report of Independent Auditors
34 Five-Year Selected Financial Data
35 Quarterly Results of Operations
36 Market for the Company's Common Stock
and Related Matters
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net sales increased 27% in 1999 to $2,842 million as compared to $2,234 million
in 1998. The 1999 results include the operations of Schneider Worldwide
(Schneider) which was acquired in the third quarter of 1998. On a pro forma
basis, assuming Schneider revenues had been included in all of 1998, net sales
in 1999 increased approximately 14%. Net income for 1999 was $371 million or
$0.90 per share (diluted), including a special credit of $10 million ($7
million, net of tax), as compared to a reported net loss for 1998 of $264
million, or $0.68 per share, including merger-related charges and credits of
$667 million ($527 million, net of tax). Excluding merger-related charges and
credits, net income for 1999 increased 39% to $364 million, or $0.88 per share,
as compared to $262 million, or $0.66 per share, for the year ended December 31,
1998.
United States (U.S.) revenues increased approximately 25% to $1,741 million
during 1999, while international revenues increased approximately 31% to $1,101
million. Without the impact of foreign currency exchange rates on translation of
international revenues, worldwide sales for 1999 increased approximately 25%.
Worldwide vascular and nonvascular sales increased 30% and 21%, respectively,
compared to 1998. The increases in worldwide and vascular sales were primarily
attributable to the inclusion of Schneider sales for the entire year and the
Company's sales of coronary stents in the U.S. and Japan. U.S. coronary stent
revenues and worldwide coronary stent revenues, primarily sales of the NIR(R)
stent, were approximately $409 million and $604 million, respectively, during
1999, compared to $211 million and $324 million, respectively, during 1998.
Worldwide NIR(R) coronary stent sales as a percentage of worldwide sales were
approximately 20% in 1999 compared to approximately 13% in 1998 and are planned
to be approximately 21% of sales in 2000.
The worldwide coronary stent market is dynamic and highly competitive, with
significant market share volatility. In addition, technology and competitive
offerings in the market are constantly changing. The Company's reduction in
coronary stent revenues in the U.S. during the fourth quarter of 1999 to $92
million from $130 million recorded during the fourth quarter of 1998 reflects
this volatility. This reduction was partially offset by an increase in
international coronary stent revenues (primarily Japan sales) from $29 million
to $51 million during the same period. The reduction in coronary stent revenues
as well as the inclusion of Schneider's sales for the entire period of both
quarters resulted in 1999 fourth quarter sales being flat relative to those of
1998. Stent revenues for 2000 will be impacted by the timing of receipt of FDA
approvals to market several new coronary and peripheral stent platforms in the
U.S. In light of this environment, the Company expects 2000 sales growth to be
below the Company's historical rates.
Gross profit as a percentage of net sales decreased from 67.1% in 1998 to 65.3%
in 1999. The decrease in gross margin is primarily due to a provision recorded
in the third quarter of 1999 of $62 million ($41 million, net of tax) for excess
NIR(R) stent inventories and purchase commitments. The excess position was
driven primarily by a shortfall in planned third quarter NIR(R) stent revenues,
a reduction in NIR(R) stent sales forecasted for 1999 and 2000, and strategic
decisions regarding versions of the NIR(R) stent system to be launched. In the
third quarter of 1998, the Company provided $31 million ($21 million, net of
tax) for costs associated with the Company's decision to recall voluntarily the
NIR ON(R) Ranger(TM) with Sox(TM) coronary stent system in the U.S. Excluding
these charges, gross margins were 67.5% and 68.1% for 1999 and 1998,
respectively. Gross margins during 1999 were positively impacted compared to
1998 by a reduction in other inventory charges. However, the reduction was
offset by a decrease in average selling prices and increased manufacturing
costs.
As a result of multiple acquisitions, the Company's supply chain and
manufacturing processes have not yet been fully optimized, and therefore gross
margins have been negatively impacted. During 1998, the Company initiated a
program to focus on supply chain optimization, and, during 1999, the program has
been expanded to include a review of manufacturing processes. The program is
designed to lower inventory levels and the cost of manufacturing, improve
absorption and minimize inventory write-downs. The infrastructure related to the
supply chain aspect of the program is substantially in place. However, gross
margin benefits will be delayed until manufacturing processes are addressed, the
program has time to develop and until historical inventories are sold. The
Company continues to assess its plant network strategy.
Medinol Ltd. (Medinol) supplies the NIR(R) coronary stent, and unforeseen
delays, stoppages or interruptions in the supply and/or mix of the NIR(R) stent
could adversely affect future operating results of the Company. Generally, the
Company has less control over inventory manufactured by third parties as
compared to inventory manufactured internally. Furthermore, the purchase price
of NIR(R) coronary stents and the amount of NIR(R) coronary stent sales as a
percentage of worldwide sales could significantly impact gross margins. As
average selling prices for the NIR(R) stents fluctuate, the Company's cost to
purchase the stents will change, because cost is based on a constant percentage
of average selling prices. Therefore, if higher-costing NIR(R) stents
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
are being sold as average selling prices are declining, gross margins could be
negatively impacted. At December 31, 1999, the Company had approximately $143
million of net NIR(R) coronary stent inventory and was committed to purchase
approximately $53 million of NIR(R) stents from Medinol.
Selling, general and administrative expenses as a percentage of sales decreased
from 34% of sales in 1998 to 30% of sales in 1999 and increased approximately
$87 million from 1998 to $842 million. The decrease as a percent of sales is
primarily attributable to the launch of coronary stents in the U.S. and Japan,
the realization of synergies as the Company integrated Schneider into its
organization, and improved returns in Asia Pacific and Latin America as the
Company continues to leverage its direct sales infrastructure. The Company plans
to continue to leverage its infrastructure during 2000. The increase in expense
dollars is primarily attributable to higher selling expenses as a result of the
launch of coronary stents in the U.S., increased costs to expand the Company's
direct sales presence in Asia Pacific and Latin America, and increased legal
expenses.
Amortization expense increased from $53 million in 1998 to $92 million in 1999
and increased as a percentage of sales from 2% to 3%. The increase is primarily
a result of the amortization of intangibles related to the purchase
of Schneider.
Royalty expenses increased approximately 48% from $31 million in 1998
to $46 million in 1999. The increase in royalties is primarily due to royalty
obligations assumed in connection with the Schneider acquisition and payments
made to Medinol on sales of internally developed stent platforms. The Company
continues to enter into strategic technological alliances, some of which include
royalty commitments.
Research and development expenses decreased as a percentage of sales from 9% in
1998 to 7% in 1999. Research and development expenses were $200 million in 1998
and $197 million in 1999. The decrease as a percentage of sales is primarily
attributable to the launch of coronary stents in the U.S. and Japan and the
realization of synergies in connection with the Schneider acquisition. The
investment in research and development dollars reflects spending on new product
development programs as well as regulatory compliance 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.
During the third quarter of 1999, the Company identified and reversed
restructuring and merger-related charges of $10 million ($7 million, net of tax)
no longer deemed necessary. These amounts relate primarily to the restructuring
charges accrued in the fourth quarter of 1998 and reflect the reclassification
of assets from held-for-disposal to held-for-use resulting from management's
decision to resume a development program previously planned to be eliminated. In
addition, estimated severance costs for 1998 initiatives were reduced as a
result of attrition. During 1998, the Company recorded merger-related charges
and credits of $667 million ($527 million, net of tax) primarily related to
purchased research and development acquired in the $2.1 billion cash purchase of
Schneider. (See Results of Operations for the Years Ended December 31, 1998 and
1997 for further discussion.)
Interest expense increased from $68 million in 1998 to $118 million in 1999. The
overall increase in interest expense is primarily attributable to a higher
average outstanding debt balance borrowed in conjunction with the Schneider
acquisition.
The Company's effective tax rate, including the impact of merger-related charges
and credits, was approximately 4% in 1998 and 34% in 1999. The Company's pro
forma effective tax rate, excluding the impact of merger-related charges and
credits, increased from approximately 33% in 1998 to 34% in 1999. The increase
is primarily attributable to a shift in the mix of the Company's U.S. and
international business. The effective rate for 2000 is expected to decrease
slightly due to changes in the geographic mix of the Company's business.
Uncertainty remains with regard to future changes within the healthcare
industry. The trend toward managed care and economically motivated and more
sophisticated buyers in the U.S. may result in continued pressure on selling
prices of certain products and resulting compression on gross margins. In
addition to impacting selling prices, the trend to managed care in the U.S. has
also resulted in more complex billing and collection procedures. The Company's
ability to react effectively to the changing environment may impact its bad debt
and sales allowances in the future. Further, the U.S. marketplace is
increasingly characterized by consolidation among 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.
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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
international operations may have a material impact on revenues and profits. A
deterioration in the Japan and/or emerging markets economies may impact the
Company's ability to collect its outstanding receivables. 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, 1998 AND 1997
On September 10, 1998, the Company consummated its acquisition of 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.
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, 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
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,
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 in the U.S. of 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.
Gross profit as a percentage of sales was approximately 67.1% and 70.2% during
1998 and 1997, respectively. The decrease was a result of multiple acquisitions,
which weakened the Company's supply chain and pressured gross margins, resulting
in write-downs for excess and obsolete inventory and high manufacturing costs.
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 had lower gross margins than the corporate average.
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 recall voluntarily
the NIR ON(R) Ranger(TM) with Sox(TM) coronary stent system in the U.S.
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
percentage of sales is primarily attributable to the increase in net sales
related to the launch of coronary stents in the U.S. 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,
during 1998, the Company continued to expand its direct sales presence in Europe
and emerging markets. Finally, 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 $33 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 increase in overall royalty
expense is due to increased sales and royalties due under several strategic
alliances that the Company initiated in 1997 and prior years.
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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 aggregate purchase price of the Schneider acquisition has been
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The estimated excess of
purchase price over the fair value of the net tangible assets acquired was
allocated to specific intangible asset categories with the remainder assigned to
excess of cost over net assets acquired. At December 31, 1999, the net
intangibles recorded in connection with the Schneider acquisition, including the
excess of cost over net assets acquired, represented 40% and 83% of the
Company's total assets and stockholders' equity, respectively. Core technology,
developed technology, assembled workforce, trademarks and patents are being
amortized on a straight-line basis over periods ranging from 9 to 25 years. The
Company is amortizing the value assigned to customer lists (relationships) over
25 years because it has been the Company's experience that physician and
hospital relationships are built for the long term and fundamental to the
Company's business of bringing innovative products to market. The Company
realizes that maintaining these and similar relationships will require ongoing
efforts. However, both Schneider and the Company have over a 20-year history of
working closely with interventionalists and their institutions for both vascular
and nonvascular applications and management believes these relationships will
continue to benefit the Company. In addition, after considering the long term
prospects for the less invasive medical device industry and the fundamental role
of catheter-based interventional medicine, as well as, Schneider's competitive
position within the industry, management concluded that it is appropriate to
amortize the excess of the Schneider purchase price over the fair value of the
assets acquired over 40 years. Finally, the Company recorded a $671 million
($524 million, net of tax) charge to account for purchased research and
development. The valuation of purchased research and development, for which
management is primarily responsible, represents the estimated fair value at the
date of acquisition related to in-process projects. As of the date of
acquisition, the in-process projects had not yet reached technological
feasibility and had no alternative future uses. Accordingly, the value
attributable to these projects was immediately expensed at acquisition. If the
projects are not successful or completed in a timely manner, the Company may not
realize the financial benefits expected for these projects.
The income approach was used to establish the fair values of the purchased
research and development. This approach established the fair value of an asset
by estimating the after-tax cash flows attributable to the in-process project
over its useful life and then discounting these after-tax cash flows back to a
present value. Revenue estimates were based on estimates of relevant market
sizes, expected market growth rates, expected trends in technology and expected
product introductions by competitors. In arriving at the value of the in-process
research and development projects, the Company considered, among other factors,
the in-process project's stage of completion, the complexity of the work
completed as of the acquisition date, the costs already incurred, the projected
costs to complete, the contribution of core technologies and other acquired
assets, the expected introduction date, and the estimated useful life of the
technology. The discount rate used to arrive at a present value as of the date
of acquisition was based on the time value of money and medical technology
investment risk factors. For the Schneider purchased research and development
programs, a risk-adjusted discount rate of 28% was utilized to discount the
projected cash flows. The Company believes that the estimated purchased research
and development amounts so determined represent the fair value at the date of
acquisition and do not exceed the amount a third party would pay for the
projects.
The most significant Schneider purchased research and development projects that
were in-process at the date of acquisition were brachytherapy, devices for
aneurysmal disease and coronary stents, which represented approximately 26%, 20%
and 16% of the in-process value, respectively. Set forth below are descriptions
of these in-process projects, including their status at the end of 1999.
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 aneurysmal disease projects are endoluminal grafts for the treatment of late
stage vascular aneurysms and occlusions. The most significant of the projects in
this category at the date of acquisition was the endoluminal graft for the
treatment of abdominal aortic aneurysms. As of the date of acquisition, the
projects were expected to be completed and the products commercially available
in the U.S. within two to three years, with an estimated cost to complete of
approximately $10 to $15 million.
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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Coronary stent systems underway at the date of acquisition were stent systems
for native coronary artery disease, saphenous vein graft disease, and versions
with novel delivery systems. The Company believes that the stent systems will be
especially helpful in the treatment of saphenous vein graft disease. As of the
date of acquisition, the projects were expected to be completed and the products
commercially available for sale in the U.S. within one year with an estimated
cost to complete of approximately $1 to $3 million.
There have been no significant departures from the planned efforts and costs of
the brachytherapy project. As part of a subsequent project consolidation
program, the Schneider abdominal aortic aneurysm project has been integrated
with another internal project. As a result, the Company will pursue the
development of next generation products for aortic aneurysmal disease with an
integrated platform while minimizing duplicative research and development. The
cost of the development is still estimated to be in the range of approximately
$10 to $15 million. The coronary stent projects have been completed.
During 1998, the Company established a rationalization plan in conjunction with
the consummation of the Schneider acquisition, taking into consideration
duplicate capacity as well as opportunities for further leveraging of cost and
technology platforms. The Company's actions, approved and committed to in the
fourth quarter of 1998, included the planned displacement of approximately 2,000
positions, over half of which were manufacturing positions and would result in
annualized cost savings of approximately $50 to $75 million. During the fourth
quarter of 1998, the Company estimated the costs associated with these
activities, excluding transition costs, to be approximately $62 million, most of
which represented severance and related costs. Approximately $36 million of the
total was capitalized as part of the purchase price of Schneider. The remaining
$26 million ($17 million, net of tax) was charged to operations during 1998. In
addition, as part of the Schneider acquisition, the Company capitalized
estimated costs of approximately $16 million to cancel Schneider's contractual
obligations, primarily with its distributors.
The Company substantially completed its rationalization plan in 1999,
including the closure of five Schneider facilities as well as the transition of
manufacturing for selected Boston Scientific product lines to different sites.
Approximately 1,800 positions were eliminated (resulting in the termination of
approximately 1,500 employees) in connection with the rationalization plan and
the anticipated cost savings have been achieved. As noted previously, in the
third quarter of 1999, the Company identified and reversed restructuring and
merger-related charges of $10 million ($7 million, net of tax) no longer deemed
necessary. These amounts relate primarily to the rationalization plan recorded
in the fourth quarter of 1998 and reflect the reclassification of assets from
held-for-disposal to held-for-use resulting from management's decision to resume
a development program previously planned to be eliminated. In addition,
estimated severance costs for 1998 initiatives were reduced as a result of
attrition. During 1999, the costs related to the transition of manufacturing
operations were not significant and were recognized in operations as incurred.
The 1998 rationalization plan also resulted in the decision to expand, not
close, the Target Therapeutics, Inc. (Target) facilities originally provided for
in a 1997 merger-related charge and to relocate other product lines to those
Target facilities. In the fourth quarter of 1998, the Company reversed $21
million ($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-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 canceling 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).
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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 unusual 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 write-downs 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 whom 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, 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; 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. 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.
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.
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 was primarily attributable to a shift in the mix of
U.S. and international business.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments totaled $78 million at December 31, 1999
compared to $75 million at December 31, 1998. Working capital increased from
current liabilities exceeding current assets by $353 million at December 31,
1998 to current assets equaling current liabilities at December 31, 1999. Cash
proceeds during 1999 were generated primarily from operating activities, the
Company's public offering of 14.950 million shares of its common stock at a
price of $39.875 per share and the exercise of stock options. Cash proceeds
during the period were offset by the repayment of approximately $1.1 billion of
outstanding debt obligations, payments of $128 million of acquisition-related
obligations, purchases of the Company's stock for approximately $127 million and
capital expenditures of approximately $80 million. Cash provided by operating
activities increased from $259 million during
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CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1998 to $727 million during 1999. The improvement is primarily attributable to
increased net income and reductions in accounts receivable and inventory.
On June 30, 1999, the Company completed a public offering of 14.950 million
shares of its common stock at a price of $39.875 per share under a $1.2 billion
shelf registration filed with the Securities and Exchange Commission in
September 1998. The public offering reduced the amount available for the
issuance of various debt and equity securities under the shelf registration to
$604 million. The Company used the net proceeds from the public offering of
approximately $578 million to repay borrowings under its revolving credit
facilities. At December 31, 1999, the Company had approximately $421 million in
revolving credit facility borrowings outstanding at a weighted-average interest
rate of 6.66% and approximately $277 million of commercial paper outstanding at
a weighted-average interest rate of 6.70%, compared to $1.8 billion of
commercial paper outstanding at a weighted-average interest rate of 6.23% at
December 31, 1998. At December 31, 1999, the revolving credit facilities totaled
$1.65 billion, consisting of a $1.0 billion credit facility that terminates in
June 2002, a $600 million 364-day credit facility that terminates in September
2000 and a $50 million uncommitted credit facility. The revolving credit
facilities require the Company to maintain a specific ratio of consolidated
funded debt (as defined) to consolidated net worth (as defined) plus
consolidated funded debt of less than or equal to 60%. As of December 31, 1999,
the ratio was approximately 37%. The Company intends to continue to borrow under
its revolving credit facilities until it is able to issue sufficient commercial
paper at reasonable rates.
The Company has the ability to refinance a portion of its short-term debt on a
long-term basis through its revolving credit facilities and expects a minimum of
$108 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, 1999 compared to $800 million classified as long-term at
December 31, 1998.
In March 1998, the Company issued $500 million of seven-year senior notes. The
senior notes bear a coupon of 6.625% payable semi-annually, and are not
redeemable prior to maturity or subject to any sinking fund requirements.
The Company had 6.0 billion Japanese yen (translated to approximately $58
million and $53 million at December 31, 1999 and 1998, respectively) of
borrowings outstanding with a syndicate of Japanese banks. The interest rate on
the borrowings is 2.37% and the borrowings are payable in 2002. In addition, the
Company had approximately 1.2 billion Japanese yen (translated to approximately
$12 million and $11 million at December 31, 1999 and 1998, respectively) of
borrowings outstanding from a Japanese bank used to finance a facility
construction project. The interest rate on the borrowings is 2.1% and the
borrowings are payable in 2012.
The Company has uncommitted Japanese credit facilities with several Japanese
banks, which provided for borrowings and promissory notes discounting of up to
11.5 billion Japanese yen (translated to approximately $112 million) and 7.5
billion Japanese yen (translated to approximately $66 million) at December 31,
1999 and 1998, respectively. There were no borrowings outstanding under the
Japanese credit facilities at December 31, 1999 and 1998. During 1999, the
Company discounted approximately $442 million of notes receivable compared to
$266 million during 1998. At December 31, 1999, approximately $112 million of
notes receivable were discounted at average interest rates of approximately 1.4%
compared to $61 million of discounted notes receivable at average interest rates
of approximately 1.5% at December 31, 1998.
The Company has recognized net deferred tax assets aggregating $238 million at
December 31, 1999, and $199 million at December 31, 1998. The assets relate
principally to the establishment of inventory and product related reserves and
purchased research and development. In light of the Company's historical
financial performance, the Company believes that these assets will be
substantially recovered.
The Company is authorized to purchase on the open market up to approximately 40
million shares of the Company's common stock. Stock repurchased under the
Company's systematic plan will be used to satisfy its obligations pursuant to
employee benefit and incentive plans. During the fourth quarter of 1999, the
Company repurchased 5.9 million shares at an aggregate cost of $127 million. As
of December 31, 1999, a total of 25.9 million shares of the Company's common
stock were repurchased under the plan. The Company may also repurchase within
its authorization shares outside of the Company's systematic plan. These
additional shares would also be used to satisfy the Company's obligations
pursuant to employee benefit and incentive plans.
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
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
--------------------------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
base in future years, it is reasonable to assume that it will acquire additional
research and development platforms. As of December 31, 1999, the Company's cash
obligations required to complete the balance of its rationalization initiatives
to integrate businesses related to its mergers and acquisitions and its 1998
rationalization plan are estimated to be approximately $28 million.
Substantially all of these cash outlays will be completed by the first half of
2000. Further, the Company expects to incur capital expenditures of
approximately $100 million during 2000. The Company expects that its cash and
cash equivalents, marketable securities, cash flows from operating activities
and borrowing capacity will be sufficient to meet its projected operating cash
needs through the end of 2000.
YEAR 2000 READINESS
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expended in excess of $110 million to implement and operate a Year 2000
compliant global information system and on other costs relating to Year 2000
compliance. The Company is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or the
products and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
MARKET RISK DISCLOSURES
In the normal course of business, the Company is exposed to market risk from
changes in interest rates and foreign currency exchange rates. The Company
addresses these risks through a risk management program that includes the use of
derivative financial instruments. The program is operated pursuant to documented
corporate risk management policies. The Company does not enter into any
derivative transactions for speculative purposes.
The Company's floating and fixed rate 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 $7 million. 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 forward foreign exchange contracts to hedge
firmly committed foreign currency transactions for periods consistent with
commitments, generally one to six months. The Company had spot and forward
foreign exchange contracts outstanding in the notional amounts of $128 million
and $230 million as of December 31, 1999 and 1998, respectively. The short-term
nature of these contracts has resulted in these instruments having insignificant
fair values at December 31, 1999. The Company's 1999 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.
A sensitivity analysis of changes in the fair value of foreign currency exchange
contracts outstanding at December 31, 1999 indicates that, if the U.S. dollar
uniformly weakened by 10% against all currencies, the fair value of these
contracts would decrease by $9 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, 1999 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.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133),
which is required to be adopted for fiscal years beginning after June 15, 2000,
although earlier application is permitted as of the beginning of any fiscal
quarter. This statement requires the Company to recognize all derivatives on the
balance sheet at fair value. The Company adopted SFAS No. 133 as of
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
--------------------------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
January 1, 2000. The Company recorded an immaterial transition adjustment upon
adoption of this Statement and initiated a program to hedge certain forecasted
intercompany transactions with forward foreign exchange contracts.
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, forecast volatility and the movement
of exchange rates.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates among existing sovereign currencies and the
euro. The participating countries agreed to adopt the euro as their common legal
currency on that date. Fixed conversion rates among 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 euro will not have a material impact
related to its 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. Additionally, legal costs associated with asserting the Company's
patent portfolio and defending against claims that the Company's products
infringe the intellectual property of others are increasing. Similarly, legal
costs associated with non-patent litigation and compliance activities are also
rising. Depending upon the prevalence, significance and complexity of these
matters, the Company's legal provision could be adversely affected in the
future.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position. The Company is aware that the U.S Department of Justice is conducting
an investigation of matters that include the Company's decision to voluntarily
recall the NIR ON(R) Ranger(TM) with Sox(TM) coronary stent in the U.S. The
Company is cooperating fully in the investigation.
SEC REVIEW OF FINANCIAL REPORTING
Within the past three years, 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 SEC 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 transaction and other costs. The Company
supplemented its disclosures and provided the information requested. In June
1999, the SEC completed its review, without adjustment, of the purchase price
allocation for the acquisition of Schneider.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
--------------------------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 future
benefits from the 1998 rationalization plan and 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; (c) the successful implementation of the
Company's supply chain and manufacturing process initiatives and the Company's
ability to achieve manufacturing cost declines, gross margin benefits and
inventory reductions; (d) 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; (e) the potential impacts of continued consolidation among
healthcare providers, trends towards managed care, disease state management and
economically motivated buyers, healthcare cost containment, more stringent
regulatory requirements and more vigorous enforcement activities; (f) the
Company's belief that it is well positioned to take advantage of opportunities
for growth that exist in the markets it serves; (g) 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; (h) the Company's ability to fund development
of purchased technology at currently estimated costs and to realize value
assigned to in-process research and development and other intangible assets; (i)
the Company's ability to develop and launch products on a timely basis,
including products resulting from purchased research and development; (j) risks
associated with international operations; (k) the potential effect of foreign
currency fluctuations on revenues, expenses and resulting margins and the trend
toward increasing sales and expenses denominated in foreign currencies; (l) the
Company's belief that its effective tax rate for 2000 will decrease slightly
from 1999 and that its net deferred tax assets will be substantially recovered;
(m) the ability of the Company to meet its projected cash needs through the end
of 2000; (n) the Company's ability to continue to leverage its infrastructure;
(o) unforeseen delays, stoppages or interruptions in the supply and/or mix of
the NIR(R) coronary stent, difficulties in managing inventory relating to new
product introductions and the Company's cost to purchase the NIR(R) coronary
stent; (p) NIR(R) coronary stent sales as a percentage of worldwide sales in
2000; (q) volatility in the coronary stent market and the timing of regulatory
approvals to market new coronary and peripheral stent platforms; (r) the
development of competing or technologically advanced products by our
competitors; (s) the Company's expectation that a minimum of $108 million of
short-term debt supported by its revolving credit facilities will remain
outstanding through the next twelve months; (t) the effect of litigation and
compliance activities on the Company's legal provision; (u) 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; (v) the potential impact resulting from
the euro conversion, including adaptation of information technology systems,
competitive implications related to pricing and foreign currency considerations;
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 and growth rates of the Company and could cause those results and
rates to differ materially from those expressed in the forward-looking
statements contained herein. Such additional factors include, among other
things, future economic, competitive and regulatory conditions, demographic
trends, third-party intellectual property, financial market conditions and
future business decisions of Boston Scientific and its competitors, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of Boston Scientific. Therefore, the Company wishes to caution each
reader of this report to consider carefully these factors as well as the
specific factors discussed with each forward-looking statement in this report
and as disclosed in the Company's filings with the Securities and Exchange
Commission as such factors, in some cases, have affected, and in the future
(together with other factors) could affect, the ability of the Company to
implement its business strategy and may cause actual results to differ
materially from those contemplated by the statements expressed herein.
10
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
(In millions, except per share data)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31, 1999 1998 1997
-----------------------------------------------------------------------------------------------------
Net sales $ 2,842 $ 2,234 $ 1,831
Cost of products sold 986 735 546
------- ------- -------
Gross profit 1,856 1,499 1,285
Selling, general and administrative expenses 842 755 663
Amortization expense 92 53 33
Royalties 46 31 22
Research and development expenses 197 200 167
Purchased research and development 682 29
Restructuring and merger-related charges (credits) (10) (15) 146
------- ------- -------
1,167 1,706 1,060
======= ======= =======
Operating income (loss) 689 (207) 225
Other income (expense):
Interest and dividend income 4 5 4
Interest expense (118) (68) (14)
Other, net (13) (5)
------- ------- -------
Income (loss) before income taxes and cumulative
effect of change in accounting 562 (275) 215
Income taxes 191 (11) 84
------- ------- -------
Income (loss) before cumulative effect of change
in accounting 371 (264) 131
Cumulative effect of change in accounting (net of tax) (21)
------- ------- -------
Net income (loss) $ 371 $ (264) $ 110
======= ======= =======
Earnings (loss) per common share - basic:
Income (loss) before cumulative effect of change
in accounting $ 0.92 $ (0.68) $ 0.34
Cumulative effect of change in accounting (0.06)
------- ------- -------
Net income (loss) per common share - basic $ 0.92 $ (0.68) $ 0.28
======= ======= =======
Earnings (loss) per common share - assuming dilution:
Income (loss) before cumulative effect of change
in accounting $ 0.90 $ (0.68) $ 0.33
Cumulative effect of change in accounting (0.05)
------- ------- -------
Net income (loss) per common share - assuming dilution $ 0.90 $ (0.68) $ 0.28
======= ======= =======
See notes to consolidated financial statements.
11
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
(In millions, except share and per share data)
[Enlarge/Download Table]
DECEMBER 31, 1999 1998
--------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 64 $ 70
Short-term investments 14 5
Trade accounts receivable, net 445 538
Inventories 376 462
Deferred income taxes 121 130
Prepaid expenses and other current assets 35 62
------- -------
Total current assets 1,055 1,267
Property, plant and equipment, net 604 680
Other assets:
Excess of cost over net assets acquired, net 840 877
Technology - core and developed, net 570 607
Patents, trademarks and other, net 316 330
Deferred income taxes 117 69
Investments 55 34
Other assets 15 29
------- -------
$ 3,572 $ 3,893
======= =======
[Enlarge/Download Table]
DECEMBER 31, 1999 1998
--------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ 277 $ 1,016
Bank obligations 323 11
Accounts payable 92 109
Accrued expenses 286 245
Acquisition-related obligations 140
Accrual for restructuring and
merger-related charges 32 71
Income taxes payable 42 19
Other current liabilities 3 9
------- -------
Total current liabilities 1,055 1,620
Long-term debt 678 1,364
Other long-term liabilities 115 88
Commitments and contingencies
Stockholders' equity:
Preferred stock, $ .01 par value - authorized
50,000,000 shares, none issued and outstanding
Common stock, $ .01 par value - authorized
600,000,000 shares, 414,922,050 shares issued at
December 31, 1999; 394,185,781 shares issued at
December 31, 1998 4 4
Additional paid-in capital 1,210 507
Treasury stock, at cost - 5,872,857 shares
at December 31, 1999 (126)
Retained earnings 752 381
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (123) (72)
Unrealized gain on available-for-sale
securities, net 7 1
------- -------
Total stockholders' equity 1,724 821
------- -------
$ 3,572 $ 3,893
======= =======
See notes to consolidated financial statements.
12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
(In millions, except share data)
[Enlarge/Download Table]
Common Stock Contingent
----------------------------- Additional Stock
Shares Issued Par Paid-In Repurchase Treasury
(In thousands) Value Capital Obligation Stock
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 195,611 $2 $ 437 $25 $ (24)
Comprehensive income:
Net income
Other comprehensive expense, net of tax:
Net change in equity investments
Foreign currency translation adjustment
Issuance of common stock (48) 114
Purchase of common stock for treasury (188)
Sale of stock repurchase obligation (18) 18 2
Expiration of stock repurchase obligation 25 (25)
Tax benefit relating to stock option and
employee stock purchase plans 37
------- -- ------ --- -----
BALANCE AT DECEMBER 31, 1997 195,611 2 433 18 (96)
Comprehensive loss:
Net loss
Other comprehensive income (expense), net of tax:
Net change in equity investments
Foreign currency translation adjustment
Issuance of common stock 2,047 47 96
Stock split effected in the form of a
stock dividend 196,528 2
Expiration of stock repurchase obligation 18 (18)
Tax benefit relating to stock option and
employee stock purchase plans 9
------- -- ------ --- -----
BALANCE AT DECEMBER 31, 1998 394,186 4 507
Comprehensive income:
Net income
Other comprehensive income (expense), net of tax:
Net change in equity investments
Foreign currency translation adjustment
Issuance of common stock 20,736 654 1
Purchase of common stock for treasury (127)
Tax benefit relating to stock option and
employee stock purchase plans 49
------- -- ------ --- -----
BALANCE AT DECEMBER 31, 1999 414,922 $4 $1,210 $(126)
======= == ====== =====
[Enlarge/Download Table]
Accumulated Other
Comprehensive Comprehensive
Retained Income Income
Earnings (Loss) (Loss)
------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $574 $ (19)
Comprehensive income:
Net income 110 $ 110
Other comprehensive expense, net of tax:
Net change in equity investments (2) (2)
Foreign currency translation adjustment (56) (56)
Issuance of common stock (11)
Purchase of common stock for treasury
Sale of stock repurchase obligation
Expiration of stock repurchase obligation
Tax benefit relating to stock option and
employee stock purchase plans 5
---- ----- ----
BALANCE AT DECEMBER 31, 1997 678 (77) $ 52
=====
Comprehensive loss:
Net loss
(264) $(264)
Other comprehensive income (expense), net of tax:
Net change in equity investments (16) (16)
Foreign currency translation adjustment 22 22
Issuance of common stock (56)
Stock split effected in the form of a
stock dividend (2)
Expiration of stock repurchase obligation
Tax benefit relating to stock option and
employee stock purchase plans 25
---- ----- ----
BALANCE AT DECEMBER 31, 1998 381 (71) $(258)
=====
Comprehensive income:
Net income 371 $ 371
Other comprehensive income (expense), net of tax:
Net change in equity investments 6 6
Foreign currency translation adjustment (51) (51)
Issuance of common stock
Purchase of common stock for treasury
Tax benefit relating to stock option and
employee stock purchase plans
---- ----- -----
BALANCE AT DECEMBER 31, 1999 $752 $(116) $ 326
==== ===== =====
See notes to consolidated financial statements.
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
(In millions)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31, 1999 1998 1997
---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 371 $ (264) $ 110
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Gain on sale of equity investments (5) (11)
Depreciation and amortization 178 129 87
Deferred income taxes (29) (151) (52)
Noncash special charges (credits) (5) (36) 37
Purchased research and development 682 29
Exchange (gain) loss (2) 4
Increase (decrease) in cash flows from
operating assets and liabilities:
Trade accounts receivable 82 (95) (59)
Inventories 68 (26) (180)
Prepaid expenses and other
current assets 8 7 10
Accounts payable and accrued
expenses 38 36 101
Accrual for restructuring and
merger-related charges (45) (22) 28
Other liabilities 58 11 (17)
Other, net 3 (5) (7)
------- ------- -------
Cash provided by operating activities 727 259 80
INVESTING ACTIVITIES:
Purchases of property, plant
and equipment (80) (175) (224)
Proceeds from sale of property,
plant and equipment 21 1 4
Net maturities of held-to-maturity
short-term investments 29
Purchases of available-for-sale securities (8)
Sales of available-for-sale securities 5 11 5
Acquisitions of businesses,
net of cash acquired (2,060) (18)
Payments related to 1998 acquisition (128)
Payments for acquisitions of
and/or investments in certain
technologies, net (3) (2) (39)
------- ------- -------
Cash used in investing activities (185) (2,225) (251)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31, 1999 1998 1997
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FINANCING ACTIVITIES:
Net increase (decrease) in
commercial paper (1,539) 1,393 211
Net proceeds from borrowings
on revolving credit facilities 421
Proceeds from notes payable and
long-term debt, net of debt
issuance costs 8 522 52
Payments on notes payable,
capital leases and long-term borrowings (10) (33) (11)
Proceeds from issuances of
shares of common stock, net of tax
benefits 704 100 97
Acquisitions of treasury stock,
net of proceeds from put options (127) (187)
Other, net (1) (5)
------- ------- -------
Cash provided by (used for)
financing activities (544) 1,977 162
Effect of foreign exchange rates on cash (4) 1 (5)
------- ------- -------
Net increase (decrease) in cash
and cash equivalents (6) 12 (14)
------- ------- -------
Cash and cash equivalents at
beginning of period 70 58 72
------- ------- -------
Cash and cash equivalents at end of period $ 64 $ 70 $ 58
======= ======= =======
See notes to consolidated financial statements.
14
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 Target Therapeutics, Inc. (Target) acquired in 1997, accounted for as
a pooling-of-interests for all periods presented. The statements also include
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
22% ownership in Medinol Ltd. (Medinol). Income recorded in connection with
these investments did not have a material impact on the Company's operating
results during the periods presented. Investments in 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 of $1 million, $4 million and $5 million was
capitalized during 1999, 1998 and 1997, respectively. The Company receives grant
money equal to a percentage of expenditures on eligible capital equipment which
is recorded as deferred income and recognized ratably over the life of the
underlying assets. The grant money would be repayable, in whole or in part,
should the Company fail to meet certain employment goals.
INTANGIBLE ASSETS: Intangible assets are recorded at historical cost and
amortized using the straight-line method over the following lives: Patents and
trademarks (3 - 20 years); Licenses (2 - 20 years); Core and developed
technology (3 - 25 years); Excess of cost over net assets acquired (15 - 40
years); Other intangibles (various).
The Company reviews its excess of cost over net assets acquired and other
intangible assets to determine if any adverse conditions exist that would
indicate impairment. Conditions that would trigger an impairment assessment
include, but are not limited to, a significant adverse change in legal factors
or business climate that could affect the value of an asset or an adverse action
or assessment by a regulator. If the carrying amount of an asset exceeds the sum
of its undiscounted cash flows, the carrying value is written down to fair value
in the period identified. Fair value is calculated as the present value of
estimated future cash flows using a risk-adjusted discount rate commensurate
with the Company's weighted-average cost of capital.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE A CONTINUED
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, 1999, unremitted earnings of non-U.S. subsidiaries were $529 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. Net foreign currency transaction and translation gains (losses)
during 1999, reflected as other income (expense) on the Consolidated Statements
of Operations, were less than $1 million compared to net foreign exchange gains
of $2 million in 1998 and net foreign exchange losses of $4 million in 1997.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133),
which is required to be adopted for fiscal years beginning after June 15, 2000,
although earlier application is permitted as of the beginning of any fiscal
quarter. This statement requires the Company to recognize all derivatives on the
balance sheet at fair value. The Company adopted SFAS No. 133 as of January 1,
2000. The Company recorded an immaterial transition adjustment upon adoption of
this Statement and initiated a program to hedge certain forecasted intercompany
transactions with forward foreign exchange contracts.
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, forecast volatility and the movement
of exchange rates. Further, any significant changes in exchange rates and/or 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.
LEGAL COSTS: The Company accrues costs of settlement, damages and, under certain
conditions, costs of defense when such costs are probable and estimable.
Otherwise, such costs are expensed as incurred.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
STOCK COMPENSATION ARRANGEMENTS: The Company accounts for its stock compensation
arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and intends to continue to do so. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation."
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 STANDARD: In 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities," which requires costs of start-up activities and
organization costs to be expensed as incurred. The Company's adoption of this
statement had no material effect on the Company's reported results of operations
or financial position.
NET INCOME PER COMMON SHARE: Net income (loss) per common share is based upon
the weighted-average number of common shares, common share equivalents and the
dilutive effect of European put options, if applicable, outstanding each year.
The Company paid a two-for-one stock split on November 30, 1998. All historical
per share amounts have been restated to reflect the stock split.
RECLASSIFICATIONS: Certain prior years' amounts have been reclassified to
conform to the current year's presentation.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE B
NOTE B - OTHER BALANCE SHEET INFORMATION
Components of other selected captions in the Consolidated Balance Sheets at
December 31 consisted of:
[Download Table]
(In millions) 1999 1998
-----------------------------------------------------------------------
TRADE ACCOUNTS RECEIVABLE
Accounts receivable $508 $587
Less allowances 63 49
---- ----
$445 $538
==== ====
INVENTORIES
Finished goods $194 $249
Work-in-process 60 83
Raw materials 122 130
---- ----
$376 $462
==== ====
PROPERTY, PLANT AND EQUIPMENT
Land $ 56 $ 56
Buildings and improvements 376 411
Equipment, furniture and fixtures 508 478
---- ----
940 945
Less accumulated depreciation and amortization 336 265
---- ----
$604 $680
==== ====
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired $886 $898
Less accumulated amortization 46 21
---- ----
$840 $877
==== ====
[Download Table]
(In millions) 1999 1998
-----------------------------------------------------------------------
TECHNOLOGY - CORE AND DEVELOPED
Core technology $421 $421
Developed technology 222 220
---- ----
643 641
Less accumulated amortization 73 34
---- ----
$570 $607
==== ====
PATENTS, TRADEMARKS AND OTHER
Patents and trademarks $284 $273
Licenses 69 66
Other 75 77
---- ----
428 416
Less accumulated amortization 112 86
---- ----
$316 $330
==== ====
ACCRUED EXPENSES
Payroll and related liabilities $ 97 $ 84
Other 189 161
---- ----
$286 $245
==== ====
During 1999, the Company purchased approximately $214 million of NIR(R) coronary
stents from Medinol and had approximately $143 million of net NIR(R) inventory
on hand as of December 31, 1999. 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 the third quarter of 1999, the Company recorded a
provision of $62 million ($41 million, net of tax) for excess NIR(R) stent
inventories and purchase commitments. Worldwide NIR(R) coronary stent sales were
approximately 20% of 1999 worldwide sales.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE C TO NOTE D
NOTE C - CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents and investments, stated at fair market value, consisted
of the following:
[Enlarge/Download Table]
Fair Gross Gross
Market Unrealized Unrealized Amortized
(In millions) Value Gains Losses Cost
------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
AVAILABLE-FOR-SALE:
Cash and money market accounts $64 $64
Equity securities (with a readily
determinable fair value) 29 $17 $5 17
--- ---- -- ---
$93 $17 $5 $81
=== ==== == ===
DECEMBER 31, 1998
AVAILABLE-FOR-SALE:
Cash and money market accounts $70 $70
Equity securities (with a readily
determinable fair value) 21 $ 9 $7 19
Debt securities 5 5
--- ---- -- ---
$96 $ 9 $7 $94
=== ==== == ===
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, 1999 and 1998, the Company had investments totaling $40 million,
including $16 million representing its investment in Medinol, and $13 million,
respectively, in which the fair market value was not readily determinable.
During 1999, the Company received cash dividends of approximately $23 million,
net of tax, from Medinol.
NOTE D - BORROWINGS AND CREDIT ARRANGEMENTS
The Company's borrowings at December 31 consisted of:
[Download Table]
(In millions) 1999 1998
--------------------------------------------------------------------------------
Commercial paper $277 $1,016
Bank obligations - short-term 323 11
Long-term debt - fixed rate 570 564
Long-term debt - floating rate 108 800
At December 31, 1999, the Company had approximately $421 million in revolving
credit facility borrowings outstanding at a weighted-average interest rate of
6.66% and approximately $277 million of commercial paper outstanding at a
weighted-average interest rate of 6.70%, compared to $1.8 billion of commercial
paper outstanding at a weighted-average interest rate of 6.23% at December 31,
1998. At December 31, 1999, the revolving credit facilities totaled $1.65
billion, consisting of a $1.0 billion credit facility that terminates in June
2002, a $600 million 364-day credit facility that terminates in September 2000
and a $50 million uncommitted credit facility. The revolving credit facilities
also support the Company's commercial paper borrowings. Use of the borrowings is
unrestricted and the borrowings are unsecured. The revolving credit facilities
require the Company to maintain a specific ratio of consolidated funded debt (as
defined) to consolidated net worth (as defined) plus consolidated funded debt of
less than or equal to 60%. As of December 31, 1999, the ratio was approximately
37%. The Company intends to continue to borrow under its revolving credit
facilities until it is able to issue sufficient commercial paper at reasonable
rates.
The Company has the ability to refinance a portion of its short-term debt on
a long-term basis through its revolving credit facilities and expects a minimum
of $108 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, 1999 compared to $800 million classified as long-term at
December 31, 1998.
In March 1998, the Company issued $500 million of seven-year senior notes. The
senior notes bear a coupon of 6.625% payable semi-annually, and are not
redeemable prior to maturity or subject to any sinking fund requirements.
The Company had 6.0 billion Japanese yen (translated to approximately $58
million and $53 million at December 31, 1999 and 1998, respectively) of
borrowings outstanding with a syndicate of Japanese banks. The interest rate on
the borrowings is 2.37% and the borrowings are payable in 2002. In addition, the
Company had approximately 1.2 billion Japanese yen (translated to approximately
$12 million and $11 million at December 31, 1999 and 1998, respectively)of
borrowings outstanding from a Japanese bank used to finance a facility
construction project. The interest rate on the borrowings is 2.1% and the
borrowings are payable in 2012.
The Company has uncommitted Japanese credit facilities with several Japanese
banks, which provided for borrowings and promissory notes discounting of up to
11.5 billion Japanese yen (translated to approximately $112 million) and 7.5
billion Japanese yen (translated to approximately $66 million) at December 31,
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE D CONTINUED TO NOTE F
1999 and 1998, respectively. There were no borrowings outstanding under the
Japanese credit facilities at December 31, 1999 and 1998. During 1999, the
Company discounted approximately $442 million of notes receivable compared to
$266 million during 1998. At December 31, 1999, approximately $112 million of
notes receivable were discounted at average interest rates of approximately 1.4%
compared to $61 million of discounted notes receivable at average interest rates
of approximately 1.5% at December 31, 1998.
In addition, the Company had other outstanding bank obligations of $10 million
and $11 million at December 31, 1999 and 1998, respectively, at weighted-average
interest rates of 5.04% and 6.45%, respectively.
Interest paid, including interest paid under capital leases and mortgage loans,
amounted to $117 million in 1999, $65 million in 1998 and $19 million in 1997.
NOTE E - LEASES
Rent expense amounted to $37 million in 1999, $40 million in 1998 and $37
million in 1997. Future minimum rental commitments as of December 31, 1999 under
noncancelable capital and operating lease agreements are as follows:
[Enlarge/Download Table]
(In millions)
YEAR ENDING DECEMBER 31, Capital Leases Operating Leases
-----------------------------------------------------------------------------------------
2000 $ 2 $ 30
2001 2 28
2002 2 17
2003 3 10
2004 4 8
Thereafter 5 54
--- ----
Total minimum lease payments 18 $147
=== ====
Amount representing interest 7
---
Present value of minimum lease payments $11
===
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 $128
million and $230 million as of December 31, 1999 and 1998, respectively.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1999 and 1998 are as follows:
[Enlarge/Download Table]
1999 1998
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
-------------------------------------------------------------------------------------------------------
ASSETS:
Cash, cash equivalents and investments $ 93 $ 93 $ 96 $ 96
LIABILITIES:
Commercial paper 277 277 1,016 1,016
Bank obligations - short-term 323 323 11 11
Long-term debt - fixed rate 570 530 564 550
Long-term debt - floating rate 108 108 800 800
Forward foreign exchange contracts, net 7 8
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE G
NOTE G - INCOME TAXES
Income (loss) before income taxes and cumulative effect of change in accounting
consisted of:
[Download Table]
YEAR ENDED DECEMBER 31,
(In millions) 1999 1998 1997
--------------------------------------------------------------------------------
Domestic $422 $(346) $178
Foreign 140 71 37
---- ----- ----
$562 $(275) $215
==== ===== ====
The related provision (benefit) for income taxes consisted of:
[Download Table]
YEAR ENDED DECEMBER 31,
(In millions) 1999 1998 1997
--------------------------------------------------------------------------------
CURRENT:
Federal $164 $ 106 $ 97
State 17 21 15
Foreign 39 13 17
---- ----- ----
220 140 129
==== ===== ====
DEFERRED:
Federal (8) (112) (30)
State (1) (27) (6)
Foreign (20) (12) (9)
---- ----- ----
(29) (151) (45)
==== ===== ====
$191 $ (11) $ 84
==== ===== ====
The reconciliation of taxes on income at the federal statutory rate to the
actual provision (benefit) for income taxes is:
[Download Table]
YEAR ENDED DECEMBER 31,
(In millions) 1999 1998 1997
--------------------------------------------------------------------------------
Tax at statutory rate $197 $ (96) $ 75
State income taxes,
net of federal
benefit 11 8 8
Effect of foreign taxes (20) (25) (10)
Non-deductible merger-
related expenses and
purchased research
and development 93 15
Other, net 3 9 (4)
---- ------ ----
$191 $ (11) $ 84
==== ====== ====
Significant components of the Company's deferred tax assets and liabilities at
December 31 consisted of:
[Download Table]
(In millions) 1999 1998
--------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Inventory costs, intercompany
profit and related reserves $ 89 $ 85
Tax benefit of net operating
loss and tax credits 42 29
Reserves and accruals 21 29
Merger-related charges,
including purchased research
and development 230 201
Other, net 21 6
---- ----
403 350
Less valuation allowance on
deferred tax assets 38 25
---- ----
$365 $325
==== ====
DEFERRED TAX LIABILITIES:
Property, plant and equipment $ (3) $ (7)
Intangible assets (45) (51)
Unremitted earnings of subsidiaries (59) (56)
Other (15) (11)
---- ----
(122) (125)
==== ====
Deferred SFAS No. 115 adjustments (5) (1)
---- ----
$238 $199
==== ====
At December 31, 1999, the Company had U.S. tax net operating loss carryforwards
and tax credits of approximately $27 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 $38 million for these carryforwards that are primarily attributable
to the carryforwards acquired as part of the Company's prior mergers and
acquisitions.
Income taxes paid amounted to $93 million in 1999, $109 million in 1998 and $89
million in 1997. The income tax provision (benefit) of the unrealized gain or
loss component of other comprehensive income (loss) was approximately $4
million, $(11) million and $1 million for 1999, 1998 and 1997, respectively.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE H TO NOTE I
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, 1999, the Company had no shares of preferred stock outstanding.
COMMON STOCK: The Company is authorized to issue 600 million shares of common
stock, $.01 par value per share. Holders of common stock are entitled to one
vote per share. Holders of common stock are entitled to receive dividends when
and if declared by the Board of Directors and to share ratably in the assets of
the Company legally available for distribution to its stockholders in the event
of liquidation. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The holders of common stock do not have
cumulative voting rights. The holders of a majority of the shares of common
stock can elect all of the Directors and can control the management and affairs
of the Company.
The Company paid a two-for-one stock split on November 30, 1998. All historical
share and per share amounts have been restated to reflect the stock split except
for share amounts presented in the Consolidated Statements of Stockholders'
Equity which reflect the actual share amounts outstanding for each period
presented.
On June 30, 1999, the Company completed a public offering of 14.950 million
shares of its common stock at a price of $39.875 per share under a $1.2 billion
shelf registration filed with the Securities and Exchange Commission in
September 1998. The Company used the net proceeds from the public offering of
approximately $578 million to repay borrowings under the revolving credit
facilities. Approximately $604 million remain available for the issuance of
various debt or equity securities under the shelf registration.
The Company is authorized to purchase on the open market up to approximately 40
million shares of the Company's common stock. Stock repurchased under the
Company's systematic plan will be used to satisfy its obligations pursuant to
employee benefit and incentive plans. During the fourth quarter of 1999, the
Company repurchased 5.9 million shares at an aggregate cost of $127 million. As
of December 31, 1999, a total of 25.9 million shares of the Company's common
stock were repurchased under the plan. The Company may also repurchase within
its authorization shares outside of the Company's systematic plan. These
additional shares would also be used to satisfy the Company's obligations
pursuant to employee benefit and incentive plans.
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 of, employees of and consultants to
the Company and provide for the grant of various incentives, including qualified
and non-qualified options, stock grants, share appreciation rights and
performance awards. Options granted to purchase shares of common stock are
either immediately exercisable or exercisable in installments as determined by
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 and
15,000 shares were issued to employees during 1998 and 1997, respectively. No
stock grants were issued in 1999.
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.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE I CONTINUED
Shares reserved for future issuance under all of the Company's incentive plans
totaled approximately 33 million at December 31, 1999.
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:
[Download Table]
YEAR ENDED DECEMBER 31,
(In millions, except per share data) 1999 1998 1997
--------------------------------------------------------------------------------
Net income (loss)
As reported $ 371 $ (264) $ 110
Pro forma 329 (302) 83
----- ------ -----
Earnings (loss) per common share -
assuming dilution
As reported $0.90 $(0.68) $0.28
Pro forma 0.80 (0.77) 0.21
----- ------ -----
The weighted-average grant-date fair value per share of options granted during
1999, 1998 and 1997, calculated using the Black-Scholes options pricing model,
is $13.81, $13.13 and $9.08, 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:
[Download Table]
1999 1998 1997
--------------------------------------------------------------------------------
Dividend yield 0% 0% 0%
Expected volatility 48.60% 37.80% 35.90%
Risk-free interest rate 5.37% 5.64% 6.42%
Actual forfeitures 1,272,000 1,127,000 1,340,000
Expected life 4.2 3.7 4.0
The effects of expensing the estimated fair value of stock options on 1997 pro
forma amounts are not necessarily representative of the effects on reporting the
results of operations, as the period presented includes only three years of
option grants under the Company's plans.
Information related to stock options at December 31 under stock ownership plans
is as follows:
[Enlarge/Download Table]
(Option amounts in thousands) 1999 1998 1997
---------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------------------------------------------
Outstanding at January 1 32,048 $20.45 33,206 $15.76 29,078 $11.42
Granted 6,634 31.57 6,621 35.91 10,716 24.70
Exercised (5,195) 12.39 (5,557) 10.19 (5,106) 8.98
Canceled (1,976) 28.29 (2,222) 22.02 (1,482) 18.58
------ ------ ------ ------ ------ ------
Outstanding at December 31 31,511 23.63 32,048 20.45 33,206 15.76
====== ====== ====== ====== ====== ======
Exercisable at December 31 13,346 $16.22 13,053 $11.58 12,230 $ 9.08
====== ====== ====== ====== ====== ======
Below is additional information related to stock options outstanding and
exercisable at December 31, 1999:
[Enlarge/Download Table]
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 4,359 3.56 $ 5.76 4,359 $ 5.76
8.01-16.00 4,190 5.24 13.66 3,259 13.60
16.01-24.00 5,574 7.72 20.63 2,291 20.57
24.01-32.00 7,563 7.44 25.09 2,266 25.06
32.01-40.00 9,586 8.76 36.19 1,171 36.78
40.01-48.00 239 9.53 44.98
------ ---- ------ ------ ------
31,511 7.07 $23.63 13,346 $16.22
====== ==== ====== ====== ======
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE I CONTINUED TO NOTE J
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 1999, approximately 603,000 shares were issued at prices ranging from
$22.47 to $22.79 per share. During 1998, approximately 380,000 shares were
issued at $23.35 per share, and, during 1997, approximately 240,000 shares were
issued at prices ranging from $23.45 to $24.33 per share. At December 31, 1999,
there were approximately 1 million shares available for future issuance.
NOTE J - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
[Download Table]
(In millions, except share and per share data)
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997
--------------------------------------------------------------------------------
BASIC:
Net income (loss) $ 371 $ (264) $ 110
======= ======= =======
Weighted-average shares
outstanding (in thousands) 404,783 390,836 389,146
======= ======= =======
Net income (loss) per
common share $0.92 $(0.68) $0.28
======= ======= =======
ASSUMING DILUTION:
Net income (loss) $ 371 $ (264) $ 110
======= ======= =======
Weighted-average shares
outstanding (in thousands) 404,783 390,836 389,146
Net effect of dilutive
put options (in thousands) 28
Net effect of dilutive
stock options (in thousands) 6,568 10,602
------- ------- -------
Total 411,351 390,836 399,776
======= ======= =======
Net income (loss) per
common share $0.90 $(0.68) $ 0.28
======= ======= =======
During 1999, 1998 and 1997, approximately 7 million, 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. In addition, during 1998,
approximately 9 million stock options were not included in the computation of
earnings per share, assuming dilution, because they would have been
antidilutive.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE K
NOTE K - COMMITMENTS AND CONTINGENCIES
On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a subsidiary of the
Company, filed a suit for patent infringement against Advanced Cardiovascular
Systems, Inc. (ACS), alleging willful infringement of two of SCIMED's U.S.
patents by ACS's RX ELIPSE(TM) PTCA catheter. The suit was filed in the U.S.
District Court for the Northern District of California seeking monetary and
injunctive relief. In January 1998, the Company added the ACS RX MULTILINK(TM)
stent delivery system to its complaint. On June 6, 1999, the Court granted
summary judgment in favor of ACS affirming that ACS's patents were not
infringed. SCIMED has appealed the judgment.
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 the
merits was held on November 5, 1999. The court's decision is expected to be
announced on February 16, 2000.
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. A trial date has not yet been set.
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. A trial date is scheduled for August 2000.
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. On June 24,
1999, in the case involving the BANDIT PTCA catheter the Court granted ACS's
motions for summary judgment on the validity (with respect to certain issues)
and infringement of ACS's patent; the Court denied ACS's motion for summary
judgment on the enforceability of its patent and SCIMED's motions for summary
judgment on the invalidity of, and SCIMED's failure to willfully infringe, ACS's
patent. A trial date on the remaining issues with respect to the BANDIT PTCA
catheter is set for May 2000. A trial date with respect to the EXPRESS PLUS
catheters is set for August 2000.
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 of
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. A trial date has not yet
been set.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis,
alleging willful infringement of several SCIMED U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in
the U.S. District Court for the District of Minnesota, seeking monetary and
injunctive relief. The parties have agreed to add Cordis' CHARGER(TM) and
HELIX(TM) catheters to the suit. Cordis has answered, denying the allegations of
the complaint. A trial date has not yet been set.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE K CONTINUED
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 and a hearing was held January
31, 2000 through February 3, 2000. A decision is expected in March 2000. On
October 28, 1998, the Company's motion for a declaration of noninfringement in
France was dismissed for failure to satisfy statutory requirements; the French
invalidity suits were not affected.
On March 20, 21 and 22, 1997, the Company (through its subsidiaries) filed
additional suits against Johnson & Johnson (through its subsidiaries) in Sweden,
Italy and Spain, respectively, seeking a declaration of noninfringement for the
NIR(R) stent relative to one of the European patents licensed to Ethicon in
Sweden, Italy and Spain and a declaration of invalidity in Italy and Spain. In
Italy, following a July 9, 1999 hearing, a technical expert was appointed by the
court. A hearing is scheduled for March 21, 2000.
Ethicon and other Johnson & Johnson subsidiaries filed a cross-border suit in
The Netherlands on March 17, 1997, alleging that the NIR(R) stent infringes one
of the European patents licensed to Ethicon. In this action, the Johnson &
Johnson entities requested relief, including provisional relief (a preliminary
injunction), covering Austria, Belgium, France, Greece, Italy, The Netherlands,
Norway, Spain, Sweden, Switzerland and the United Kingdom. On April 2, 1997, the
Johnson & Johnson entities filed a similar cross-border proceeding in The
Netherlands with respect to a second European patent licensed to Ethicon.
Johnson & Johnson subsequently withdrew its request for cross-border relief in
the United Kingdom. In October, 1997, Johnson & Johnson's request for
provisional cross-border relief on both patents was denied by the Dutch court,
on the ground that it is "very likely" that the NIR(R) stent will be found not
to infringe the patents. Johnson & Johnson appealed this decision with respect
to the second patent; the appeal has been denied on the ground that there is a
"ready chance" that the patent will be declared null and void. In January 1999,
Johnson & Johnson amended the claims of the second patent, changed the action
from a cross-border case to a Dutch national action, and indicated its intent
not to pursue its action on the first patent. On June 23, 1999, the Dutch Court
affirmed that there were no remaining infringement claims with respect to either
patent. In late 1999, Johnson & Johnson appealed this decision and a hearing is
expected during the summer of 2000.
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.
Trial is expected to begin in late 2000.
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 November 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 two
patents 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 November 2000.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE K CONTINUED
On June 7, 1999, the Company, SCIMED and Medinol Ltd. filed suit for patent
infringement against Johnson & Johnson, Johnson & Johnson Interventional Systems
and Cordis, alleging two U.S. patents owned by Medinol Ltd. are infringed by at
least Cordis' CROWN(TM), MINI CROWN(TM) and CORINTHIAN(TM) stents. The suit was
filed in the U.S. District Court for the District of Minnesota seeking
injunctive and monetary relief. The case has been transferred to the U.S.
District Court for the District of Delaware. A trial date has not yet been
scheduled.
On August 13, 1998, Arterial Vascular Engineering, Inc., now named Medtronic AVE
Inc. (AVE), filed a suit for patent infringement against the Company and SCIMED
alleging that the Company's NIR(R) stent infringes two patents owned by AVE. The
suit was filed in the U.S. District Court for the District of Delaware seeking
injunctive and monetary relief. The Company and SCIMED have answered, denying
the allegations of the complaint. Trial is expected to begin in March 2001.
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 was held on October 22, 1999 and a decision is expected on
February 16, 2000.
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. A trial date is scheduled for September 25, 2000.
On March 2, 1999, AVE filed a cross-border suit in The Netherlands against the
Company and various subsidiaries of the Company including SCIMED, alleging that
the Company's MAXXUM(TM), MAXXUM(TM) ENERGY, MAXXUM(TM) 29 MM, NIR(R) Primo(TM),
VIVA!(TM), EXPRESS PLUS and EXPRESS PLUS II balloon dilatation catheters
infringe one of AVE's European patents. In this action, AVE requested relief
covering The Netherlands, Germany, the United Kingdom, France and Spain. The
Company has answered, denying the allegations of the complaint. A hearing was
held on January 7, 2000 and a decision is expected on February 16, 2000.
On March 10, 1999, the Company through its subsidiary Schneider (Europe)
AG filed suit against AVE alleging that AVE's AVE GFX, AVE GFX 2, AVE LTX,
CALYPSO RELY(TM), PRONTO SAMBA(TM) and SAMBA RELY(TM) rapid-exchange catheters
and stent delivery systems infringe one of the Company's German patents. The
suit was filed in the District Court of Dusseldorf, Germany seeking injunctive
and monetary relief. A hearing was held on January 27, 2000 and a decision is
expected on March 9, 2000.
On April 6, 1999, AVE filed suit against the Company and SCIMED alleging that
the Company's NIR(R) stent infringes one of AVE's European patents. The suit was
filed in the District Court of Dusseldorf, Germany seeking injunctive and
monetary relief. A hearing was held in Germany on September 23, 1999, and on
November 4, 1999, the court dismissed the complaint. On December 21, 1999, AVE
appealed the dismissal. A hearing date has not yet been scheduled.
On May 14, 1999, Medtronic, Inc. (Medtronic) filed suit against the Company and
SCIMED alleging that a variety of the Company's NIR(R) stent products infringe a
Medtronic patent. The suit was filed in the U.S. District Court for the District
of Minnesota seeking injunctive and monetary relief. The Company has answered,
denying the allegations of the complaint. A trial date is scheduled for May
2001.
On July 7, 1999, Medtronic filed suit against the Company and SCIMED, alleging
that SCIMED's RADIUS(TM) stent infringes two patents owned by Medtronic. The
suit was filed in the U.S. District Court for the District Court of Minnesota
seeking injunctive and monetary relief. The Company has answered, denying
allegations of the complaint. A trial date is scheduled for June 2001.
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 March 7, 1996, Cook Inc. (Cook) filed suit in the Regional Court, Munich
Division for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally
Invasive Technologies alleging that the Cragg EndoPro(TM) System I and
Stentor(TM) endovascular device infringe a certain Cook patent. Following the
purchase of the assets of the Endotech/MinTec companies by the Company,
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE K CONTINUED TO NOTE L
the Company assumed control of the litigation. A final hearing was held on May
12, 1999, and the court held no infringement of the Cook patents. The case was
dismissed in June 1999. Cook has appealed the decision. A hearing is scheduled
for May 4, 2001.
On June 30, 1998, Cook filed suit in the Regional Court, Dusseldorf Division for
Patent Disputes, in Dusseldorf, Germany against the Company alleging that the
Company's PASSAGER(TM) peripheral vascular stent graft and VANGUARD(TM)
endovascular aortic graft products infringe the same Cook patent. A hearing was
held on July 22, 1999 and a decision was received in September 1999 finding the
Company's products infringe the Cook patent. The Company appealed the decision.
A hearing is scheduled for April 26, 2001.
On March 18, 1999, Cook filed suit against the Company and SCIMED, alleging that
SCIMED's RADIUS(TM) coronary stent infringes a certain U.S. patent owned by
Cook. The suit was filed in the U.S. District Court for the Southern District of
Indiana seeking monetary damages and injunctive relief. On July 14, 1999, Cook
filed an amended complaint adding Meadox Medicals, Inc. (Meadox), a wholly owned
subsidiary of the Company, as a party to the suit, and adding a breach of
contract claim. The Company, SCIMED and Meadox have answered, denying the
allegations of the complaint. A trial date is scheduled for May 14, 2001.
The U.S. Federal Trade Commission (FTC) is investigating the Company's
compliance with a Consent Order dated May 5, 1995, pursuant to which the Company
licensed certain intravascular ultrasound technology to Hewlett-Packard Company
(HP). On February 1, 1999, HP 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 the
License Agreement entered into pursuant to the FTC Consent Order. The Company
has answered, denying the allegations of the complaint. A trial date has not yet
been set.
Beginning November 4, 1998, a number of shareholders of the Company, on behalf
of themselves and all others similarly situated, filed purported stockholders'
class action suits in the U.S. District Court for the District of Massachusetts
alleging that the Company and certain of its officers violated certain sections
of the Securities Exchange Act of 1934. The complaints principally alleged that
as a result of certain accounting irregularities involving the improper
recognition of revenue by the Company's subsidiary in Japan, the Company's
previously issued financial statements were materially false and misleading. In
August 1999, lead plaintiffs and lead counsel filed a purported consolidated
class action complaint adding allegations that the Company issued false and
misleading statements with respect to the launch of its NIR ON(R) Ranger(TM)
with Sox(TM) coronary stent delivery system and the system's subsequent recall.
The Company and its officers have filed a motion to dismiss the consolidated
complaint. The Plaintiffs have opposed the Company's motion to dismiss the
consolidated complaint, and the Company intends to file its response on February
11, 2000.
The Company is aware that the U.S. Department of Justice is conducting an
investigation of matters that include the Company's NIR ON(R) Ranger(TM) with
Sox(TM) coronary stent delivery system which was voluntarily recalled by the
Company in October 1998 following reports of balloon leaks. The Company is
cooperating fully in the investigation.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company. As of December 31, 1999, the potential
exposure for litigation-related accruable costs is estimated to range from $46
million to $56 million. The Company's total accrual as of December 31, 1999 and
1998 for litigation-related reserves was approximately $46 million and $38
million, respectively.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the Company
will prevail in any particular case. An adverse outcome in one or more cases in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company. Further, product liability claims may be
asserted in the future relative to events not known to management at the present
time. The Company has insurance coverage which management believes is adequate
to protect against product liability losses as could otherwise materially affect
the Company's financial position.
NOTE 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 to the assets
acquired and liabilities assumed based on their estimated fair values at
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE L CONTINUED
date of acquisition. The excess of purchase price over the fair value of net
tangible assets acquired was allocated to specific intangible asset categories.
These categories include core technology, developed technology, assembled
workforce, customer lists, trademarks and patents, which are being amortized on
a straight-line basis over periods ranging from 9 to 25 years and the excess of
cost over net assets acquired, which is being amortized on a straight-line basis
over 40 years.
In connection with the acquisition of Schneider, the Company recorded a charge
to account for purchased research and development. The valuation of purchased
research and development, for which management is primarily responsible,
represents the estimated fair value at the date of acquisition related to
in-process projects. As of the date of acquisition, the in-process projects had
not yet reached technological feasibility and had no alternative future uses.
Accordingly, the value attributable to these projects was immediately expensed
at acquisition. If the projects are not successful or completed in a timely
manner, the Company may not realize the financial benefits expected for these
projects.
The income approach was used to establish the fair values of the purchased
research and development. This approach established the fair value of an asset
by estimating the after-tax cash flows attributable to the in-process project
over its useful life and then discounting these after-tax cash flows back to a
present value. Revenue estimates were based on estimates of relevant market
sizes, expected market growth rates, expected trends in technology and expected
product introductions by competitors. In arriving at the value of the in-process
research and development projects, the Company considered, among other factors,
the in-process project's stage of completion, the complexity of the work
completed as of the acquisition date, the costs already incurred, the projected
costs to complete, the contribution of core technologies and other acquired
assets, the expected introduction date, and the estimated useful life of the
technology. The discount rate used to arrive at a present value as of the date
of acquisition was based on the time value of money and medical technology
investment risk factors. For the Schneider purchased research and development
programs, a risk-adjusted discount rate of 28% was utilized to discount the
projected cash flows. The Company believes that the estimated purchased research
and development amounts so determined represent the fair value at the date of
acquisition and do not exceed the amount a third party would pay for the
projects.
The most significant Schneider purchased research and development projects that
were in-process at the date of acquisition were brachytherapy, devices for
aneurysmal disease and coronary stents, which represented approximately 26%, 20%
and 16% of the in-process value, respectively. Set forth below are descriptions
of these in-process projects, including their status at the end of 1999.
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 aneurysmal disease projects are endoluminal graft devices for the treatment
of late stage vascular aneurysms and occlusions. The most significant of the
projects in this category at the date of acquisition was the endoluminal graft
for the treatment of abdominal aortic aneurysms. As of the date of acquisition,
the projects were expected to be completed and the products commercially
available in the U.S. within two to three years, with an estimated cost to
complete of approximately $10 to $15 million.
Coronary stent systems underway at the date of acquisition were stent systems
for native coronary artery disease, saphenous vein graft disease, and versions
with novel delivery systems. The Company believes that the stent systems will be
especially helpful in the treatment of saphenous vein graft disease. As of the
date of acquisition, the projects were expected to be completed and the products
commercially available for sale in the U.S. within one year with an estimated
cost to complete of approximately $1 to $3 million.
There have been no significant departures from the planned efforts and costs of
the brachytherapy project. As part of a subsequent project consolidation
program, the Schneider abdominal aortic aneurysm project has been integrated
with another internal project. As a result, the Company will pursue the
development of next generation products for aortic aneurysmal disease with an
integrated platform while minimizing duplicative research and development. The
cost of the development is still estimated to be in the range of approximately
$10 to $15 million. The coronary stent projects have been completed.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Schneider as if the
acquisition had occurred at the beginning of 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:
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE L CONTINUED TO NOTE M
[Download Table]
YEAR ENDED DECEMBER 31,
(In millions, except per share data) 1998 1997
--------------------------------------------------------------------------------
Net sales $2,483 $2,162
Net loss (303) (471)
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.
NOTE M - RESTRUCTURING AND MERGER-RELATED CHARGES
At December 31, 1999, the Company had an accrual for restructuring and
merger-related charges of $36 million, which is comprised of $20 million of
accrued severance and related costs primarily associated with integrating
Schneider and streamlining manufacturing operations, $6 million related to the
cost of canceling contractual commitments recorded in connection with the
Schneider acquisition and approximately $10 million of accruals remaining for
1997 and prior mergers (primarily costs associated with rationalized facilities
and statutory benefits which are subject to litigation).
During 1998, the Company established a rationalization plan in conjunction with
the consummation of the Schneider acquisition, taking into consideration
duplicate capacity as well as opportunities for further leveraging of cost and
technology platforms. The Company's actions, approved and committed to in the
fourth quarter of 1998, included the planned displacement of approximately 2,000
positions, over half of which were manufacturing positions. During the fourth
quarter of 1998, the Company estimated the costs associated with these
activities, excluding transition costs, to be approximately $62 million, most of
which represented severance and related costs. Approximately $36 million of the
total was capitalized as part of the purchase price of Schneider. The remaining
$26 million ($17 million, net of tax) was charged to operations during 1998. In
addition, as part of the Schneider acquisition, the Company capitalized
estimated costs of approximately $16 million to cancel Schneider's contractual
obligations, primarily with its distributors.
The Company substantially completed its rationalization plan in 1999,
including the closure of five Schneider facilities as well as the transition of
manufacturing for selected Boston Scientific product lines to different sites.
Approximately 1,800 positions were eliminated (resulting in the termination of
approximately 1,500 employees) in connection with the rationalization plan. In
the third quarter of 1999, the Company identified and reversed restructuring and
merger-related charges of $10 million ($7 million, net of tax) no longer deemed
necessary. These amounts relate primarily to the rationalization plan recorded
in the fourth quarter of 1998 and reflect the reclassification of assets from
held-for-disposal to held-for-use resulting from management's decision to resume
a development program previously planned to be eliminated. In addition,
estimated severance costs for 1998 initiatives were reduced as a result of
attrition. The Company also recorded additional costs of $6 million as part of
the purchase price of Schneider in 1999, representing revised estimates to
recorded liabilities. During 1999, the costs related to the transition of
manufacturing operations were not significant and were recognized in operations
as incurred.
The 1998 rationalization plan also resulted in the decision to expand, not
close, the Target facilities originally provided for in a 1997 merger-related
charge and to relocate other product lines to those Target facilities. In the
fourth quarter of 1998, the Company reversed $21 million ($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 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 canceling contractual commitments.
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 write-downs 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
admin-
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE M CONTINUED
istrative 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). 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. 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.
The activity impacting the accrual for restructuring and merger-related charges
during 1999, 1998 and 1997, net of reclassifications made by management based on
available information, is summarized in the table below:
[Enlarge/Download Table]
Purchase Charges
Balance at Charges to Charges Balance at Price (Credits) to Charges
December Operations Utilized December Adjustments Operations Utilized
(In millions) 31, 1996 in 1997 in 1997 31, 1997 in 1998 in 1998 in 1998
----------------------------------------------------------------------------------------------------------------------------
1995 AND 1996 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Facilities $19 $ 2 $ (7) $14 $ 2 $ (5)
Workforce reductions 26 10 (23) 13 (5) (4)
Contractual commitments 8 (6) 2 (1)
Asset write-downs 6 4 (8) 2 (1)
Direct transaction and
other costs 6 (4) 2 2 (2)
--- ----- ---- --- --- ----- ----
$65 $ 16 $(48) $33 $ (3) $(11)
=== ===== ==== === === ===== ====
1997 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Facilities $ 6 $ 6 $ (6)
Workforce reductions 14 $ (2) 12 (11) $ (1)
Contractual commitments 53 (25) 28 (7) (20)
Asset write-downs 24 (10) 14 (7) (6)
Direct transaction and
other costs 33 (24) 9 (7)
--- ----- ---- --- --- ----- ----
$130 $(61) $69 $(38) $(27)
=== ===== ==== === === ===== ====
1998 SCHNEIDER PURCHASE PRICE ADJUSTMENTS:
Workforce reductions $36 $ (9)
Contractual commitments 16
--- ----- ---- --- --- ----- ----
$52 $ (9)
=== ===== ==== === === ===== ====
Purchase
Balance at Price Credits to Charges Balance at
December Adjustments Operations Utilized December
(In millions) 31, 1998 in 1999 in 1999 in 1999 31, 1999
-----------------------------------------------------------------------------------------------
1995 AND 1996 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Facilities $ 11 $(1) $ (7) $ 3
Workforce reductions 4 4
Contractual commitments 1 1
Asset write-downs 1 (1)
Direct transaction and
other costs 2 2
--- ----- ---- --- ---
$19 $(1) $ (8) $10
=== ===== ==== === ===
1997 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Facilities
Workforce Reductions
Contractual commitments $ 1 $ (1)
Asset write-downs 1 (1)
Direct transaction and
other costs 2 $(1) (1)
--- ----- ---- --- ---
$ 4 $(1) $ (3)
=== ===== ==== === ===
1998 SCHNEIDER PURCHASE PRICE ADJUSTMENTS:
Workforce reductions $27 $3 $(17) $13
Contractual commitments 16 3 (13) 6
--- ----- ---- --- ---
$43 $6 $(30) $19
=== ===== ==== === ===
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE M CONTINUED TO NOTE N
[Enlarge/Download Table]
Purchase Charges
Balance at Charges to Charges Balance at Price (Credits) to
December Operations Utilized December Adjustments Operations
(In millions) 31, 1996 in 1997 in 1997 31, 1997 in 1998 in 1998
-------------------- ----------- ------------- ---------- ----------- ------------ -------------
1998 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Workforce reductions $ 14
Contractual commitments 1
Asset write-downs 9
Direct transaction and
other costs 2
--- ---- ----- ---- --- ----
$ 26
=== ==== ===== ==== === ====
TOTAL:
Facilities $19 $ 8 $ (7) $ 20 $ (4)
Workforce reductions 26 24 (25) 25 $36 (2)
Contractual commitments 8 53 (31) 30 16 (7)
Asset write-downs 6 28 (18) 16 1
Direct transaction and
other costs 6 33 (28) 11 (3)
--- ---- ----- ---- --- ----
$65 $146 $(109) $102 $52 $(15)
=== ==== ===== ==== === ====
Purchase
Charges Balance at Price Credits to Charges Balance at
Utilized December Adjustments Operations Utilized December
(In millions) in 1998 31, 1998 in 1999 in 1999 in 1999 31, 1999
-------------------- ---------- ------------ ----------- ------------- ----------- ------------
1998 RESTRUCTURING AND MERGER-RELATED INITIATIVES:
Workforce reductions $ (1) $13 $ (4) $ (7) $ 2
Contractual commitments (1)
Asset write-downs 9 (4) (1) 4
Direct transaction and
other costs (1) 1 1
---- --- -- ---- ---- ---
$ (3) $23 $ (8) $ (8) $ 7
==== === == ==== ==== ===
TOTAL:
Facilities $ (5) $11 $ (1) $ (7) $ 3
Workforce reductions (15) 44 $3 (4) (24) 19
Contractual commitments (21) 18 3 (14) 7
Asset write-downs (6) 11 (4) (3) 4
Direct transaction and
other costs (3) 5 (1) (1) 3
---- --- -- ---- ---- ---
$(50) $89 $6 $(10) $(49) $36
==== === == ==== ==== ===
The 1998, 1997 and prior restructuring and merger-related charges were
recognized under the provisions of EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The purchase price
adjustments were recognized under the provisions of APB 16, "Business
Combinations" and EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination."
Total facilities write-downs under the Company's restructuring and
merger-related charges provided for during 1996, 1997 and 1998 for owned assets
were measured as the difference between carrying value and fair value less cost
to sell (approximately $8 million, net of reversals). The charge for leased
facilities during the same periods was measured using the lease commitments
remaining after the facility was removed from service (approximately $3 million,
net of reversals). Write-downs of machinery and equipment, intangibles and other
assets were measured by the difference between the carrying value and fair
market value of the assets (approximately $28 million, net of reversals).
Reversals in 1998 and 1999 of previously recorded charges were primarily based
on the initial amount charged. To the extent that any of the above assets
continued to be used in operations before being sold, scrapped or abandoned,
depreciation and lease payments continued to be charged to operations.
Depreciation not charged to operations related to assets held for disposal was
less than $1 million during 1999 and was approximately $2 million in 1998.
As of December 31, 1999, 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 1998 rationalization strategy are estimated to
be approximately $28 million. As of December 31, 1999, the Company has completed
all significant actions of its plans and expects that substantially all of these
cash outlays (primarily severance) will be paid during the first half of 2000
from normal operations.
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
Inter-Continental (formerly 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.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE N CONTINUED
Sales and operating results of reportable segments are based on internally
derived standard foreign exchange rates, which may differ from year to year 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.
[Download Table]
UNITED INTER-
(In millions) STATES EUROPE JAPAN CONTINENTAL TOTAL
--------------------------------------------------------------------------------
1999:
Net sales $1,741 $465 $436 $171 $2,813
Depreciation
and amortization 60 19 3 3 85
Operating income excluding
special charges 662 87 265 30 1,044
Total assets 1,257 458 215 101 2,031
Purchases of property,
plant and equipment 50 21 6 3 80
------ ---- ---- ---- ------
1998:
Net sales $1,394 $381 $333 $119 $2,227
Depreciation
and amortization 64 17 2 1 84
Operating income excluding
special charges 463 54 178 10 705
Total assets 1,395 552 204 75 2,226
Purchases of property,
plant and equipment 97 51 19 8 175
------ ---- ---- ---- ------
1997:
Net sales $1,076 $326 $299 $ 88 $1,789
Depreciation
and amortization 57 9 2 68
Operating income excluding
special charges 373 62 155 17 607
Total assets 1,089 429 136 53 1,707
Purchases of property,
plant and equipment 138 70 14 2 224
------ ---- ---- ---- ------
A reconciliation of the totals reported for the reportable segments to the
applicable line items in the consolidated financial statements is as follows:
[Download Table]
(In millions) 1999 1998 1997
--------------------------------------------------------------------------------
NET SALES:
Total net sales for reportable segments $2,813 $2,227 $1,789
Foreign exchange 29 7 42
------ ------ ------
$2,842 $2,234 $1,831
====== ====== ======
DEPRECIATION AND AMORTIZATION:
Total depreciation and amortization allocated
to reportable segments $ 85 $ 84 $ 68
Corporate expenses and foreign exchange 93 45 19
------ ------ ------
$ 178 $ 129 $ 87
====== ====== ======
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING:
[Download Table]
Total operating income excluding special
charges for reportable segments $1,044 $ 705 $ 607
Corporate expenses and foreign exchange (365) (245) (207)
Purchased research and development (682) (29)
Restructuring and merger-related (charges)
credits 10 15 (146)
------ ------ ------
689 (207) 225
Other income (expense) (127) (68) (10)
------ ------ ------
$ 562 $ (275) $ 215
====== ====== ======
TOTAL ASSETS:
Total assets for reportable segments $2,031 $2,226 $1,707
Corporate assets 1,541 1,667 217
------ ------ ------
$3,572 $3,893 $1,924
====== ====== ======
Operating income (excluding special charges) for the U.S. and Europe for the
year ended December 31, 1999 would have been approximately $678 million and $102
million, respectively, if certain costs had been allocated between geographic
regions and corporate expenses consistent with the allocation method used in
1998.
[Download Table]
ENTERPRISE-WIDE INFORMATION
(In millions) 1999 1998 1997
--------------------------------------------------------------------------------
NET SALES:
Vascular $2,309 $1,777 $1,426
Nonvascular 516 426 377
Other 17 31 28
------ ------ ------
$2,842 $2,234 $1,831
====== ====== ======
LONG-LIVED ASSETS:
United States $ 446 $ 484 $ 378
Ireland 110 119 79
Other foreign countries 48 77 42
------ ------ ------
$ 604 $ 680 $ 499
====== ====== ======
32
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, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Boston Scientific
Corporation and subsidiaries at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
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.
[Ernst & Young LLP]
Boston, Massachusetts
February 4, 2000
33
FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
--------------------------------------------------------------------------------
(In millions, except share and per share data)
[Download Table]
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
OPERATING DATA:
Net sales $2,842 $2,234 $1,831 $1,551 $1,191
Gross profit 1,856 1,499 1,285 1,123 848
Selling, general and
administrative expenses 842 755 663 492 386
Amortization expense 92 53 33 24 6
Royalties 46 31 22 17 26
Research and development
expenses 197 200 167 135 106
Purchased research and
development 682 29 110 68
Restructuring and
merger-related charges
(credits) (10) (15) 146 32 204
Total operating expenses 1,167 1,706 1,060 810 796
Operating income (loss) 689 (207) 225 313 52
Income (loss) before
cumulative effect of
change in accounting 371 (264) 131 167 (18)
Cumulative effect of change
in accounting (net of tax) (21)
Net income (loss) $ 371 $ (264) $ 110 $ 167 $ (18)
[Download Table]
Income (loss) per common share before cumulative effect of change in accounting:
Basic $ 0.92 $ (0.68) $ 0.34 $ 0.43 $(0.05)
Assuming dilution 0.90 (0.68) 0.33 0.42 (0.05)
Net income (loss) per common share:
Basic $ 0.92 $ (0.68) $ 0.28 $ 0.43 $(0.05)
Assuming dilution 0.90 (0.68) 0.28 0.42 (0.05)
Weighted-average shares
outstanding - assuming
dilution (in thousands) 411,351 390,836 399,776 398,706 381,574
[Download Table]
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ (353) $ 227 $ 335 $ 345
Total assets $3,572 3,893 1,924 1,585 1,159
Commercial paper 277 1,016 423 213
Bank obligations-short-term 323 11 24 28 58
Long-term debt, net of
current portion 678 1,364 46 4
Stockholders' equity 1,724 821 957 995 808
Book value per
common share $ 4.21 $ 2.08 $ 2.47 $ 2.50 $ 2.12
The Company paid a two-for-one stock split on November 30, 1998. All historical
amounts have been restated to reflect the stock split.
See notes to consolidated financial statements.
34
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
(In millions, except per share data)
[Download Table]
THREE MONTHS ENDED MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
Net sales $ 708 $ 726 $ 691 $ 717
Gross profit 478 491 408 479
Operating income 189 202 115 183
Net income 100 109 55 107
Net income per common share -
basic $0.25 $0.27 $ 0.13 $0.26
Net income per common share -
assuming dilution $0.25 $0.27 $ 0.13 $0.26
YEAR ENDED DECEMBER 31, 1998
Net sales $ 453 $ 488 $ 576 $ 717
Gross profit 315 339 370 475
Operating income (loss) 96 110 (559) 146
Net income (loss) 60 67 (462) 71
Net income (loss) per common
share - basic $0.15 $0.17 $(1.18) $0.18
Net income (loss) per common
share - assuming dilution $0.15 $0.17 $(1.18) $0.18
During the third quarter of 1999, the Company recorded a provision of $62
million for excess NIR(R) stent inventories and purchase commitments. The excess
position was driven primarily by a shortfall in planned third quarter NIR(R)
stent revenues, a reduction in NIR(R) stent sales forecasted for 1999 and 2000,
and strategic decisions regarding versions of the NIR(R) stent system to be
launched. Additionally, the third quarter results include a provision for
increased legal costs of $22 million to cover certain costs of defense. These
expenses relate primarily to defense costs associated with stent-related
litigation. Further, during the third quarter of 1999, the Company identified
and reversed restructuring and merger-related charges of $10 million no longer
deemed necessary. These amounts relate primarily to the restructuring charges
accrued in the fourth quarter of 1998 and reflect the reclassification of assets
from held-for-disposal to held-for-use following management's decision to resume
a development program previously planned to be eliminated. In addition,
estimated severance costs for 1998 initiatives were reduced as a result of
attrition.
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. The 1998 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 recall voluntarily the NIR ON(R) 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 paid a two-for-one stock split on November 30, 1998. All historical
amounts have been restated to reflect the stock split.
See notes to consolidated financial statements.
35
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.
[Download Table]
1999 High Low
--------------------------------------------------------------------------------
First Quarter $43.000 $23.000
Second Quarter 44.875 33.625
Third Quarter 47.063 21.563
Fourth Quarter 26.000 17.563
[Download Table]
1998 High Low
--------------------------------------------------------------------------------
First Quarter $35.844 $21.125
Second Quarter 37.281 30.219
Third Quarter 40.844 25.125
Fourth Quarter 29.500 20.125
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, 1999, there were approximately 9,811 record holders of the
Company's common stock.
See notes to consolidated financial statements.
36
EXECUTIVE OFFICERS AND DIRECTORS
John E. Abele
Director, Founder Chairman
Lawrence C. Best
Senior Vice President, Finance and Administration
and Chief Financial Officer
Joseph A. Ciffolillo
Director, Private Investor
Paul Donovan
Vice President, Communications
*+# Joel L. Fleishman
Director, President of The Atlantic Philanthropic Service Company, Inc. and
Professor of Law and Public Policy, Duke University
+# Ray J. Groves
Director, Chairman of Legg Mason Merchant Banking, Inc.
*+ Lawrence L. Horsch
Director, Chairman of Eagle Management & Financial Corp.
Paul A. LaViolette
Senior Vice President, President, Boston Scientific
International, and Group President
Robert G. MacLean
Senior Vice President, Human Resources
Kshitij Mohan, Ph.D.
Senior Vice President and Chief Technology Officer
N.J. Nicholas, Jr.
Director, Private Investor
# Peter M. Nicholas
Director, Chairman of the Board
*# John E. Pepper
Director, Chairman, Executive Committee of the Board
of Directors, The Procter & Gamble Company
Arthur L. Rosenthal, Ph.D.
Senior Vice President and Chief Scientific Officer
+# Warren B. Rudman
Director, Former U.S. Senator, Partner, Paul, Weiss,
Rifkind, Wharton and Garrison
Paul W. Sandman
Senior Vice President, Secretary and General Counsel
James H. Taylor, Jr.
Senior Vice President, Corporate Operations
James R. Tobin
Director, President and Chief Executive Officer
* Member of the Audit Committee
+ Member of the Compensation and Human Resources Committee
# Member of the Corporate Governance Committee
CORPORATE HEADQUARTERS
Boston Scientific Corporation
One Boston Scientific Place
Natick, MA 01760-1537
508-650-8000
508-647-2200 (Investor Relations Facsimile)
www.bsci.com
REGIONAL HEADQUARTERS
Boston Scientific Argentina S.A.
Buenos Aires, Argentina
Boston Scientific Asia Pacific Pte. Ltd.
Singapore
Boston Scientific International B.V.
Paris, France
Boston Scientific Japan K.K.
Tokyo, Japan
TECHNOLOGY CENTERS
Cork, Ireland
Fremont, CA, U.S.A
Galway, Ireland
Glens Falls, NY, U.S.A
Maple Grove, MN, U.S.A
Miami, FL, U.S.A
Miyazaki, Japan
Natick, MA, U.S.A
Plymouth, MN, U.S.A
Redmond, WA, U.S.A
San Jose, CA, U.S.A
Spencer, IN, U.S.A
Tullamore, Ireland
Watertown, MA, U.S.A
Wayne, NJ, U.S.A
STOCKHOLDER INFORMATION
STOCK LISTING
Boston Scientific Corporation common stock is traded on the NYSE under the
symbol "BSX".
TRANSFER AGENT
Inquiries concerning the transfer or exchange of shares, lost stock
certificates, duplicate mailings or changes of address should be directed to the
Company's Transfer Agent at:
EQUISERVE, L.P.
Post Office Box 8040
Boston, MA 02266-8040
781-575-3100
www.equiserve.com
INDEPENDENT AUDITORS
Ernst & Young LLP
Boston, Massachusetts
ANNUAL MEETING
The annual meeting for shareholders will take place on Tuesday, May 9, 2000,
beginning at 10:00 a.m. at BankBoston, Corporate Headquarters, 100 Federal
Street, Boston.
INVESTOR INFORMATION REQUESTS
Investors, shareholders and security analysts seeking information about the
Company should refer to the Company's website at www.bsci.com or call Investor
Relations at (508) 650-8555.
A copy of the Form 10-K filed with the Securities and Exchange Commission may be
obtained upon written request to the Company.
Address requests to:
Investor Relations
Boston Scientific Corporation
One Boston Scientific Place
Natick, MA 01760-1537
(508) 650-8555
(508) 647-2200 (Facsimile)
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[BOSTON SCIENTIFIC LOGO]
Boston Scientific Corporation
One Boston Scientific Place
Natick, MA 01760-1537
508 650 8000
www.bsci.com
(C) 2000 Boston Scientific Corporation
1127-FRP-00
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-K405’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 7/1/02 | | 11 |
| | 1/1/02 | | 11 |
| | 5/14/01 | | 29 |
| | 5/4/01 | | 29 |
| | 4/26/01 | | 29 |
| | 9/25/00 | | 28 |
| | 6/15/00 | | 10 | | 18 |
| | 5/9/00 | | 39 | | | | | DEF 14A, S-8 |
| Filed on: | | 3/30/00 |
| | 3/21/00 | | 27 |
| | 3/9/00 | | 28 |
| | 2/22/00 | | 26 |
| | 2/16/00 | | 26 | | 28 |
| | 2/11/00 | | 29 |
| | 2/4/00 | | 35 |
| | 2/3/00 | | 27 |
| | 1/31/00 | | 27 |
| | 1/27/00 | | 28 |
| | 1/7/00 | | 28 |
| | 1/1/00 | | 11 | | 18 |
| For Period End: | | 12/31/99 | | 3 | | 38 | | | 11-K |
| | 12/21/99 | | 28 |
| | 11/5/99 | | 26 |
| | 11/4/99 | | 28 |
| | 10/22/99 | | 28 |
| | 9/23/99 | | 28 |
| | 7/22/99 | | 29 |
| | 7/14/99 | | 29 |
| | 7/9/99 | | 27 |
| | 7/7/99 | | 28 |
| | 6/30/99 | | 9 | | 23 | | | 10-Q, 11-K |
| | 6/24/99 | | 26 | | | | | 8-K |
| | 6/23/99 | | 27 |
| | 6/7/99 | | 28 |
| | 6/6/99 | | 26 |
| | 5/14/99 | | 28 |
| | 5/12/99 | | 29 |
| | 4/6/99 | | 28 |
| | 3/18/99 | | 29 |
| | 3/10/99 | | 28 |
| | 3/2/99 | | 28 |
| | 2/3/99 | | 28 |
| | 2/1/99 | | 29 |
| | 1/13/99 | | 26 |
| | 1/1/99 | | 11 |
| | 12/31/98 | | 3 | | 37 | | | 10-K, 10-K/A, 11-K |
| | 12/29/98 | | 26 |
| | 12/18/98 | | 28 |
| | 12/15/98 | | 28 |
| | 11/30/98 | | 18 | | 37 |
| | 11/4/98 | | 29 | | | | | DEF 14A, PRE 14A |
| | 10/28/98 | | 27 |
| | 9/10/98 | | 5 | | 29 | | | 8-K, 8-K/A |
| | 8/13/98 | | 28 |
| | 8/12/98 | | 26 |
| | 6/30/98 | | 29 | | | | | 10-Q, 10-Q/A, 11-K |
| | 6/26/98 | | 27 |
| | 6/23/98 | | 27 |
| | 4/13/98 | | 27 |
| | 12/31/97 | | 4 | | 5 | | | 10-K, 10-K/A, 11-K |
| | 10/22/97 | | 27 |
| | 9/16/97 | | 26 |
| | 8/22/97 | | 27 |
| | 6/16/97 | | 27 |
| | 5/6/97 | | 27 | | | | | DEF 14A |
| | 4/2/97 | | 27 |
| | 3/27/97 | | 26 |
| | 3/17/97 | | 27 |
| | 3/13/97 | | 27 |
| | 12/31/96 | | 15 | | | | | 10-K, 11-K |
| | 3/25/96 | | 26 |
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Filing Submission 0000950135-00-001894 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
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