-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PoaWbbwQdjIrBbQXjv6HfDLiVCGfUvP4NKFwcmT7W3wzcL7beEN0P0x/Ken78EOj xH9CFW95rIlK9bV7AEUI0Q== 0000950135-99-001755.txt : 19990402 0000950135-99-001755.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950135-99-001755 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON SCIENTIFIC CORP CENTRAL INDEX KEY: 0000885725 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 042695240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11083 FILM NUMBER: 99582393 BUSINESS ADDRESS: STREET 1: ONE BOSTON SCIENTIFIC PL CITY: NATICK STATE: MA ZIP: 01760-1537 BUSINESS PHONE: 5086508000 10-K 1 BOSTON SCIENTIFIC CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File No. 1-11083 -------------------------------------- BOSTON SCIENTIFIC CORPORATION (Exact name of Company as specified in its charter) DELAWARE 04-2695240 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537 (Address, including zip code, of principal executive offices) (508) 650-8000 (Company's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE (Title of class) Securities registered pursuant to Section 12(g) of the Act: NONE -------------------------------------- Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ] 2 The aggregate market value of Common Stock held by non-affiliates (persons other than directors, executive officers, and related family entities) of the Company was approximately $9.2 billion based on the closing price of the Common Stock on March 15, 1999. The number of shares outstanding of the Company's Common Stock as of March 15, 1999 was 394,872,509. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's 1998 Annual Report to Shareholders which is filed with the Securities and Exchange Commission as an exhibit hereto and the Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1999 are incorporated by reference into Parts I, II and III. 2 3 PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS THE COMPANY Boston Scientific Corporation (the "Company") is a worldwide developer, manufacturer and marketer of minimally invasive medical devices. The Company's products are used in a broad range of interventional medical specialties, including cardiology, electrophysiology, gastroenterology, neuro-endovascular therapy, pulmonary medicine, radiology, urology and vascular surgery. The Company's products are generally inserted into the human body through natural openings or small incisions in the skin and can be guided to most areas of the anatomy to diagnose and treat a wide range of medical problems. These products provide effective alternatives to traditional surgery by reducing procedural trauma, complexity, risk to the patient, cost and recovery time. The Company's history began in the late 1960s when the Company's co-founder, John Abele, acquired an equity interest in Medi-tech, Inc., a development company. Medi-tech's initial products, a family of steerable catheters, were introduced in 1969. They were used in some of the first minimally invasive procedures performed, and versions of these catheters are still being sold today. In 1979, John Abele joined with Pete Nicholas to form the Company, which indirectly acquired Medi-tech, Inc. This acquisition began a period of active, focused marketing, new product development and organizational growth. Since then, the Company's net sales have increased substantially, growing from $1.8 million in 1979 to $2.2 billion in 1998. The Company's growth in the past few years has been fueled in part by strategic acquisitions and alliances, designed to improve the ability of the Company to take advantage of future growth opportunities in less invasive medicine. In 1998, the Company completed two acquisitions. On June 30, 1998, the Company acquired CardioGene Therapeutics, Inc., a development stage company focused on the application of gene therapy for treatment of cardiovascular diseases, and on September 10, 1998, the Company acquired Schneider Worldwide, a pioneer in less invasive medicine and formerly a member of the Medical Technology Group of Pfizer Inc. These acquisitions, together with the Company's earlier acquisitions and alliances, have helped to achieve a strategic mass which allows the Company to offer one of the broadest product lines in the world for use in minimally invasive procedures. The Company now maintains leadership positions in each of the markets in which it competes. The Company's strategic mass has also enabled it to compete more effectively in, and better absorb the pressures of, the current healthcare environment of cost containment, managed care, large buying groups and hospital consolidations. 3 4 The Company has substantially completed the integration of all mergers and acquisitions consummated in 1996 and 1997. The Company expects to complete the integration of Schneider by the end of 1999. Management believes it has developed a sound plan for continuing and concluding the integration process, and that it will achieve that plan. However, in view of the number of major transactions undertaken by the Company, the dramatic change in the size of the Company and the complexity of its organization resulting from these transactions, management also believes that the successful implementation of its plan presents a significant degree of difficulty. The failure to integrate these businesses effectively could adversely affect the Company's operating results in the near term, and could impair the Company's ability to realize the strategic and financial objectives of these transactions. BUSINESS STRATEGY The Company's mission is to improve the quality of patient care and the productivity of healthcare delivery through the development and advocacy of minimally invasive medical devices and procedures. The Company seeks to accomplish this mission through the continuing refinement of existing products and procedures and the investigation and development, as well as the acquisition, of new technologies which can reduce risk, trauma, cost, procedure time and the need for aftercare. The Company's strategy has been, and will continue to be, to grow by identifying those specific therapeutic and diagnostic areas which satisfy the Company's mission and provide attractive opportunities for long-term growth and by making the investments necessary to capitalize on these opportunities. Key elements of this strategy are as follows: Product Diversity. The Company offers products in numerous product categories which are used by physicians throughout the world in a broad range of diagnostic and therapeutic vascular and nonvascular procedures. The breadth and diversity of the Company's product lines permit medical specialists to satisfy many of their minimally invasive medical device requirements from a single source. The scope of its products and markets also reduces the Company's vulnerability to change in the competitive, regulatory and technological environments for any single product or market. Product Innovation. The Company maintains an aggressive product development program designed to introduce new products and new applications for existing technologies on a regular basis. The specifications and features of new products are often developed from market information generated through the interaction of the Company's product management teams and sales representatives with the worldwide medical community. The Company seeks to expedite the design and development of new products by leveraging its proprietary core technologies and applications knowledge across its product lines. Technological innovations developed for a particular application are often applied to procedures used in other markets served by the Company. 4 5 Focused Marketing. The Company markets its products through six principal divisions: Scimed, EP Technologies, Boston Scientific Vascular (formerly operating as Medi-tech, Meadox and Schneider), Target Therapeutics, Microvasive Endoscopy and Microvasive Urology. Each of the Company's divisions focuses on physicians who specialize in the diagnosis and treatment of different medical conditions and offers products to satisfy their needs. The Company believes that this focused marketing approach enables it to develop highly knowledgeable and dedicated sales representatives and to foster close professional relationships with physicians. International Presence. Maintaining and expanding its international presence is an important component of the Company's long term growth plan. In 1998, international sales accounted for approximately 38% of the Company's net sales. Currently, the Company operates three international manufacturing facilities in Ireland and one in Switzerland, has direct marketing and sales subsidiaries in more than 35 countries and has distribution arrangements in more than 45 countries. Through its international presence, the Company seeks to increase net sales and market share, accelerate the time within which new products can be brought to market and gain access to worldwide technological developments that may be implemented across its product lines. Active Participation in the Medical Community. The Company believes that it has excellent working relationships with physicians and others in the medical industry which enable it to gain a detailed understanding of new therapeutic and diagnostic alternatives, and to respond quickly to the changing needs of physicians and patients. The Company enhances its presence in the medical community through active participation in medical meetings, by conducting comprehensive training and educational activities and through employee-authored articles in medical journals and textbooks. Each year, numerous scientific papers are published and presentations are made describing clinical applications of the Company's products. The Company believes that these activities and its advocacy positions contribute to the medical community's understanding and adoption of minimally invasive techniques and the expansion of these techniques into new therapeutic and diagnostic areas. Corporate Culture. Management believes that success and leadership evolves from a motivating corporate culture which rewards achievement, respects and values individual employees and customers, and has a long-term focus on quality, technology, integrity and service. The Company believes that its success is attributable in large part to the high caliber of its employees and the Company's commitment to maintaining the values on which its success has been based. Strategic Acquisitions and Alliances. In recent years, the Company has sought out strategic acquisitions, alliances and venture opportunities which complement or expand its existing product lines or enhance its technological position. Although the Company does not expect to make any significant acquisitions in 1999, the Company expects that it will continue to seek out and review opportunities for acquisitions and strategic alliances consistent with its corporate mission. 5 6 PRODUCTS The Company's products are broadly categorized as vascular or nonvascular, depending on the anatomical system and procedure in which a product is intended to be used. Generally, vascular products are employed in procedures affecting the heart and systems which carry blood, and nonvascular products are employed in procedures affecting other systems and organs. In 1998, approximately 80% of the Company's net sales were derived from its vascular business, approximately 19% from its nonvascular business and approximately 1% from other business. The Company's principal vascular and nonvascular products are offered in the following medical areas: VASCULAR Coronary Revascularization. The Company markets a broad line of products used to treat patients with atherosclerosis. Atherosclerosis, a coronary vessel disease and a principal cause of heart attacks, is characterized by a thickening of the walls of the arteries and a narrowing of arterial lumens (openings) caused by the progressive development of deposits of plaque. Atherosclerosis results in reduced blood flow to the muscle of the heart. The majority of the Company's products in this market are used in percutaneous transluminal coronary angioplasty ("PTCA") and percutaneous transluminal coronary rotational atherectomy ("PTCRA"). The Company's products in this market include PTCA balloon catheters, the Rotablator(R) rotational atherectomy system, guide wires, guide catheters, diagnostic catheters and fluid management systems. Coronary Stents. The Company markets both balloon-expandable and self-expanding coronary stent systems. The Company's most important products in this category incorporate the NIR(R) balloon-expandable coronary stent developed and manufactured by Medinol Ltd., with which the Company has an exclusive worldwide distribution agreement for stent products. These products were introduced in Europe in 1996 and in the United States and Japan in 1998. The Company hopes to introduce the NIR ON(TM) VIVA!(TM) stent using Monorail(TM) rapid exchange technology in the United States in 1999, pending approval from the United States Food and Drug Administration ("FDA"). The Company also hopes to reintroduce the NIR ON(TM) Ranger(TM) with SOX(TM) stent delivery system in the United States later in 1999, pending FDA approval. Through a strategic alliance with Angiotech Pharmaceuticals, Inc., the Company holds a co-exclusive license for the use of paclitaxel on intraluminal devices to inhibit restenosis. Peripheral Vascular Intervention and Vascular Access. The Company sells various products designed to treat patients with peripheral vascular disease (disease which appears in blood vessels other than in the heart), including a broad line of catheters used in percutaneous transluminal angioplasty ("PTA"). Additionally, the Company's peripheral vascular product line includes medical devices used in thrombolysis (the catheter-based delivery of clot dissolving agents directly to the site of a blood clot) and thrombectomy catheters. The Company also offers stents to maintain patency of peripheral lumens, including the WALLSTENT(R) endoprosthesis, the only stent approved by the FDA for more than two peripheral indications. 6 7 Caval Interruption Systems. The Company markets the Greenfield(R) vena cava filter system for use in patients who are at risk of developing a pulmonary embolism due to an existing medical condition or post-surgical complications. Once the filter is implanted, circulating emboli (blood clots) can be captured and held by the lattice design of the filter, allowing the clots to dissolve naturally before they can reach the pulmonary system. Surgical and Endovascular Grafts. The Company markets vascular grafts and endovascular stent grafts for the treatment of thoracic dissection, abdominal aortic aneurysms and peripheral vascular occlusive diseases. Intraluminal Ultrasound Imaging. The Company markets a family of intraluminal catheter-directed ultrasound imaging systems for diagnostic use in blood vessels, heart chambers and coronary arteries, as well as certain nonvascular systems. Electrophysiology ("EP"). The Company's electrophysiology product offerings include catheters and systems for use in minimally invasive procedures to diagnose and treat tachyarrhythmias (abnormally fast heart rhythms). The Company markets RF generators and steerable ablation catheters, many of which incorporate proprietary steering, temperature monitoring and control technology, as well as a line of diagnostic catheters and associated accessories. Neuro-Endovascular Therapy. The Company markets a line of micro-guidewires, micro-catheters, guiding catheters and embolics to treat diseases of the neurovascular system. The Company also markets the Guglielmi Detachable Coil(TM) system to treat and prevent the rupture of cerebral aneurysms that are otherwise either considered to be inoperable or high risk for surgery. NONVASCULAR Esophageal, Gastric and Duodenal Intervention. The Company markets a broad range of products to diagnose, treat and palliate a variety of esophageal, gastric and duodenal diseases, including esophogitis, gastric esophageal reflux disease, portal hypertension, peptic ulcers and esophageal cancer. The Company's products in this area include disposable single and multiple biopsy forceps, balloon dilatation catheters, banding ligation devices and enteral feeding devices. The Company also markets a family of esophogeal stents designed to offer improved dilatation force and greater resistance to tumor in-growth. Colorectal Intervention. The Company markets a line of hemostatic catheters, polypectomy snares and dilatation catheters for the diagnosis and treatment of polyps, inflammatory bowel disease, diverticulitis and colon cancer. Pancreatico - Biliary Intervention. The Company sells a variety of products to diagnose, treat and palliate benign and malignant strictures of the pancreatico-biliary system (the gall bladder, common bile duct, hepatic duct, pancreatic duct and the pancreas) and to remove stones found in the common bile and hepatic ducts. The Company's products include diagnostic catheters used with contrast media, balloon dilatation catheters and sphincterotomes. The Company also markets a temporary biliary stent for palliation and drainage of the common bile duct. 7 8 Pulmonary Intervention. The Company markets devices to diagnose, treat and palliate chronic bronchitis and lung cancer, including pulmonary biopsy forceps and balloon catheters used to dilate strictures or for tumor management. Urinary Tract Intervention. The Company sells a variety of products designed primarily to treat patients with urinary stone disease, either via ureteroscopy or percutaneous nephrolithotomy. Products within this category include ureteral dilatation balloons used to dilate strictures or openings for scope access; stone baskets used to manipulate, crush, or remove the stone; intracorporeal shock wave lithotripsy devices and holmium laser systems used to disintegrate stones ureteroscopically; ureteral stents implanted temporarily in the urinary tract to provide either short-term or long-term drainage; and a wide variety of guidewires used to gain access to a specific site. Prostate Intervention. For the treatment of Benign Prostatic Hypertrophy ("BPH"), the Company currently markets electro-surgical resection devices designed to resect large diseased tissue sites and reduce the bleeding attributable to the resection procedure (a major cause of patient morbidity in connection with traditional surgical treatments for BPH) and an automatic disposable needle biopsy system, designed to take rapid core prostate biopsies. Urinary Incontinence and Bladder Disease. The Company markets a line of minimally invasive devices and sling materials to treat stress urinary incontinence. This affliction is commonly treated with various surgical procedures. The Company's Vesica(R) system offers less invasive alternatives for treating incontinence. The Company has also developed other devices to diagnose and treat bladder cancer and bladder obstruction. INTERNATIONAL OPERATIONS In 1998, international sales accounted for approximately 38% of the Company's net sales. Net sales, operating income and identifiable assets attributable to significant geographic areas are presented in Note N to the Company's 1998 Consolidated Financial Statements, included within the Company's 1998 Annual Report to Shareholders which is filed with the Securities and Exchange Commission as an exhibit hereto. As of December 31, 1998, the Company had direct marketing and sales operations in more than 35 countries. During the past three years, the Company has expanded its direct sales presence in Europe and Emerging Markets so as to be in a position to take advantage of market opportunities in those regions. The Company believes that, during 1999, it will continue to leverage its direct sales infrastructure and will continue to use distributors in those smaller markets where it is not economical or strategic to establish a direct presence. The Company has three international manufacturing facilities in Ireland and one in Switzerland. Presently, approximately 50% of the Company's products sold internationally are manufactured at these facilities. The Company also maintains an international research and development facility in Galway, Ireland and a training center in Miyazaki, Japan. 8 9 The Company's expanded international presence exposes it to certain financial and other risks. Principal among these is the potentially negative impact of foreign currency fluctuations on the Company's sales and expenses. Although the Company engages in hedging transactions that may offset the effect of fluctuations in foreign currency exchange rates on foreign currency denominated assets and liabilities, financial exposure may nonetheless result, primarily from the timing of transactions and the movement of exchange rates. 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. Further, any significant changes in the political, regulatory or economic environment where the Company conducts international operations could have a material impact on revenues and profits. MARKETING AND SALES The Company markets its products through six principal divisions, each focusing upon physicians who specialize in the diagnosis and treatment of different medical conditions. VASCULAR - -------- Scimed: markets devices to cardiologists for the nonsurgical diagnosis and treatment of coronary and peripheral vascular disease and other cardiac disorders. EP offers a line of electrophysiology catheters and Technologies: systems for use by interventional electrophysiologists in the diagnosis and treatment of cardiac tachyarrhythmias. Boston markets therapeutic and diagnostic devices to Scientific physicians who perform interventional image-guided Vascular: procedures primarily in the fields of radiology, pulmonary medicine and vascular surgery, and markets woven, knitted and collagen-sealed vascular and endovascular grafts to vascular, cardiothoracic and general surgeons for use in patients with vessels damaged by artherosclerosis or aneurysms which need to be bypassed or replaced. Target: markets a line of micro-guidewires, micro-catheters, coils, embolics and other medical devices which aid neuroradiologists and neurosurgeons in the treatment of neurovascular diseases. 9 10 NONVASCULAR - ----------- Microvasive markets therapeutic and diagnostic devices which aid Endoscopy: gastroenterologists and pulmonologists in performing flexible endoscopic procedures involving the digestive tract and lungs. Microvasive offers a line of therapeutic and diagnostic devices Urology: which aid urologists in performing ureteroscopic and other minimally invasive endoscopic procedures as well as devices to treat urinary incontinence. A dedicated sales force of in excess of 1900 individuals, including over 800 in the United States, markets the Company's products worldwide. This dedicated sales force accounted for approximately 99% of the Company's net sales during 1998. A network of over 70 dealers who offer the Company's products in more than 45 countries worldwide accounts for the remaining sales. The Company has also established a dedicated U.S. corporate sales organization focused principally on selling to major buying groups and large integrated healthcare networks. The Company's worldwide customer base includes interventional medical specialists, including cardiologists, radiologists, neuroradiologists, neurosurgeons, gastroenterologists, urologists, electrophysiologists, pulmonologists, vascular surgeons and gynecologists. In 1998, the Company sold its products to over 10,000 hospitals, clinics, out-patient facilities and medical offices. The Company is not dependent on any single institution and no single institution accounted for more than 10% of the Company's net sales in 1998. Large group purchasing organizations, hospital networks and other buying groups are, however, becoming increasingly important to the Company's business. These organizations have exerted increased pressure on selling prices throughout the medical device industry. There can be no assurance that the impact of doing business with such organizations will not adversely impact future Company sales margins, or that such organizations will continue to do business with the Company. The Company markets the NIR ON(TM) Ranger(TM) and NIR(R) Primo(TM) coronary stent systems which, together with other NIR(R) stent systems, represented approximately 13% of the Company's 1998 worldwide sales. These stent systems include the NIR(R) coronary stent which is developed and manufactured by Medinol Ltd. and a balloon delivery system which is developed and manufactured by the Company. The Company also distributes several other products for third parties, including RF generators, an introducer sheath and certain guidewires. None of these other products represented more than 10% of the Company's 1998 net sales. Leveraging its sales and marketing strength, the Company expects to continue to seek out new opportunities for distributing complementary products as well as new technologies. Certain of the products distributed by the Company, such as the NIR(R) stent, are very important to the Company strategically. Unforeseen delays, stoppages or interruptions in the supply and/or mix of the NIR(R) stent or certain other distributed products could adversely affect the Company's operating results. Uncertainty remains with regard to future changes within the healthcare industry. The trend towards managed care and economically motivated buyers in the United States may result in continued pressure on selling prices of certain products and resulting compression on gross 10 11 margins. The United States marketplace is also increasingly characterized by consolidation among healthcare providers and purchasers of medical devices who prefer to limit the number of suppliers from whom they purchase medical products. There can be no assurance that these entities will continue to purchase products from the Company. In addition, international markets are also being affected by economic pressure to contain healthcare costs. Throughout the world, delays in product approval processes, changes in reimbursement policies and competitive pricing pressures remain unpredictable. The Company cannot predict what future economic, reimbursement and pricing environments will exist in domestic and international markets for its healthcare products. It is possible that such environments could adversely affect the Company's product pricing and ability to sell products. The Company believes that such factors will continue to impact the rate at which the Company can grow, but management believes that it is well positioned to take advantage of opportunities for growth that exist in the markets it serves. MANUFACTURING; RAW MATERIALS The Company designs and manufactures the majority of its products in 16 manufacturing sites around the world. The majority of the raw materials used in the manufacture of the Company's products are off-the-shelf items readily available from several supply sources. Several items are, however, custom made for the Company to meet its specifications. The Company believes that, in most of these cases, redundant capacity exists at the supplier and that alternative sources of supply are available or could be developed within a reasonable period of time. The Company has generally been able to obtain adequate supplies of all materials, parts and components in a timely manner from existing sources. However, the inability to develop alternative sources, if required, or a reduction or interruption in supply or a significant increase in the price of materials, parts or components could adversely affect the Company's operations and financial condition. During 1998, the Company initiated a full time global program to focus on supply chain optimization. The program is designed to lower inventory levels and the cost of manufacturing, improve absorption, enhance customer service levels and minimize inventory write-downs. By addressing the entire supply chain, including application of lean manufacturing techniques, the Company seeks to return gross margins to more acceptable levels and to improve working capital. The program should be implemented by the end of 1999. COMPETITION The Company encounters significant competition from various entities across its product lines and in each market in which its products are sold. The Company's primary competitors include C.R. Bard, Inc., Cook, Inc., Guidant Corporation, Johnson & Johnson (including its subsidiary, Cordis Corporation), and Medtronic, Inc. (including its subsidiary, Medtronic AVE, Inc., formerly known as Arterial Vascular Engineering Inc.), as well as a wide range of companies which sell a single or limited number of competitive products. In addition, the Company faces competition from non-medical device companies, such as pharmaceutical companies, which may offer non-surgical alternative therapies for disease states which are currently treated using the Company's products. 11 12 The Company believes that its products compete primarily on the basis of their ability to perform safely and effectively diagnostic and therapeutic procedures in a minimally invasive manner, ease of product use, product reliability and physician familiarity. In the current environment of managed care, economically motivated buyers, consolidation among health care providers, increased competition and declining reimbursement rates, the Company has also been increasingly required to compete on the basis of price. The Company believes that its continued competitive success will depend upon its ability to create or acquire scientifically advanced technology, apply its technology cost-effectively across product lines and markets, develop or acquire proprietary products, attract and retain skilled development personnel, obtain patent or other protection for its products, obtain required regulatory approvals, and manufacture and successfully market its products either directly or through outside parties. There can be no assurance that the Company will be able to accomplish these objectives or that it will be able to compete successfully in the future against existing or new competitors. There can also be no assurance that the Company's operating results will not be adversely affected by increased price competition or competition from purveyors of alternative therapies. RESEARCH AND DEVELOPMENT The Company maintains an active program of new product and technology research and development. By leveraging the technical and applications knowledge gained in one medical specialty to other specialties, the Company believes that its product development process is accelerated and made more cost effective. Enhancements of existing products or expansions of existing product lines, which are typically developed within the Company's manufacturing and marketing operations, account for a significant portion of each year's sales growth. In 1998, the Company expended $200 million on research and development, representing approximately 9% of the Company's 1998 net sales. These expenditures funded clinical research, licensed technology, regulatory activities and various product development programs, including, without limitation, carotid stenting, molecular intervention technology (using paclitaxel, radiation, angiogenesis technology and gene therapy) and stent grafting. The Company maintains several research and development facilities around the globe. See "Properties". In addition to internal development, the Company works with hundreds of leading research institutions, universities and clinicians around the world in developing, evaluating and clinically testing its products. The Company believes its future success will depend upon the strength of its development efforts. There can be no assurance that the Company will realize financial benefit from its development programs, will continue to be successful in identifying, developing and marketing new products or enhancing its existing products, or that products or technologies developed by others will not render the Company's products or technologies non-competitive or obsolete. 12 13 REGULATION The medical devices manufactured and marketed by the Company are subject to regulation by numerous regulatory bodies, including the FDA and comparable international regulatory agencies. These agencies require manufacturers of medical devices to comply with applicable laws and regulations governing the testing, manufacturing, labeling, marketing and distribution of medical devices. Devices are generally subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation program be conducted before a device receives approval for commercial distribution. In the United States, permission to distribute a new device generally can be met in one of two ways. The first, less rigorous, process applies to any new device that is substantially equivalent to a device first marketed prior to May 1976 and does not require pre-market approval ("PMA"). In this case, FDA permission to distribute the device can be accomplished by submission of a pre-market notification submission (a "510(k) Submission"), and issuance by the FDA of an order permitting commercial distribution. A 510(k) Submission must provide information supporting its claim of substantial equivalence. If clinical data from human experience is required to support a 510(k) Submission, this data must be gathered in compliance with investigational device exemption ("IDE") regulations for investigations performed in the United States. The FDA must issue an order finding substantial equivalence before commercial distribution can occur. Changes to existing devices which do not significantly affect safety or effectiveness can generally be made by the Company without additional 510(k) Submissions. The second, more comprehensive, approval process applies to a new device that is not substantially equivalent to an existing product. In this case, two steps of FDA approval are generally required before marketing in the United States can begin. First, the Company must comply with IDE regulations in connection with any clinical investigation of the device in the United States. Second, the FDA must review the Company's PMA application which contains, among other things, clinical information acquired under the IDE. The FDA will approve the PMA application if it finds that there is a reasonable assurance that the device is safe and effective for its intended purpose. The FDA can ban certain medical devices, detain or seize adulterated or misbranded medical devices, order repair, replacement or refund of these devices, and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA may also enjoin and restrain certain violations of the Food, Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical devices, or initiate action for criminal prosecution of such violations. International sales of medical devices manufactured in the United States that are not approved by the FDA for use in the United States, or are banned or deviate from lawful performance standards, are subject to FDA export requirements. The Export Reform Act of 1996 has simplified the process of exporting devices which have not been approved for sale in the United States. Exported devices are subject to the regulatory requirements of each country to which the device is exported. In many foreign countries, all regulated medical products are treated as drugs and the majority of 13 14 the Company's products are expected to be so regulated in these countries. Frequently, regulatory approval may first be obtained in a foreign country prior to application in the United States to take advantage of differing regulatory requirements. The Company has achieved International Standards Organization or European Union certification for its Irish and most of its United States manufacturing facilities. In addition, the Company has completed CE Mark registrations for most of its products in accordance with the implementation of various medical device directives in the European Union. The process of obtaining clearance to market products is costly and time-consuming in virtually all of the major markets in which the Company sells products and can delay the marketing and sale of new products. Countries around the world have recently adopted more stringent regulatory requirements which are expected to add to the delays and uncertainties associated with new product releases, as well as the clinical and regulatory costs of supporting such releases. No assurance can be given that any of the Company's new medical devices will be approved on a timely basis, if at all. In addition, regulations regarding the manufacture and sale of medical devices are subject to future change. The Company cannot predict what impact, if any, such changes might have on its business. Failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also subject to environmental laws and regulations both in the United States and abroad. The operations of the Company, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. The Company believes that compliance with such laws will not have a material impact on its financial position, results of operations, or liquidity. Given the scope and nature of such laws, there can, however, be no assurance that such laws will not have a material impact on the Company. THIRD-PARTY REIMBURSEMENT The Company's products are purchased by hospitals, doctors and other health care providers, who are reimbursed for the health care services provided to their patients by third-party payors, such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care programs. These third-party payors may deny reimbursement if they should determine that a device used in a procedure was not used in accordance with cost-effective treatment methods, as determined by such third-party payor, or was used for an unapproved indication. Also, third-party payors are increasingly challenging the prices charged for medical products and services. There can be no assurance that the Company's products will be considered cost-effective by third-party payors, that reimbursement will be available or, if available, that the third-party payors' reimbursement policies will not adversely affect the Company's ability to sell its products profitably. 14 15 PATENTS AND PROPRIETARY RIGHTS The Company relies on a combination of patents, trade secrets and non-disclosure agreements to protect its intellectual property. The Company holds in excess of 1,000 patents in the United States and abroad and has pending in excess of 2,500 patent applications that cover various aspects of its technology. In addition, the Company holds exclusive and non-exclusive licenses to a variety of third party technologies covered by patents and patent applications. There can be no assurance that pending patents will result in issued patents, that patents issued to or licensed by the Company will not be challenged or circumvented by competitors, or that such patents will be found to be valid or sufficiently broad to protect the Company's technology or to provide the Company with a competitive advantage. The Company relies on non-disclosure and non-competition agreements with certain employees, consultants and other parties to protect, in part, trade secrets and other proprietary technology. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, that others will not independently develop equivalent proprietary information or that third-parties will not otherwise gain access to the Company's trade secrets and proprietary knowledge. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry generally, particularly in the areas in which the Company competes. The Company has defended, and will likely continue to defend, itself against claims and legal actions alleging infringement of the patent rights of others. Adverse determinations in any such litigation could subject the Company to significant liabilities to third parties, could require the Company to seek licenses from third parties and could, if such licenses are not available, prevent the Company from manufacturing, selling or using certain of its products, any of which could have a material adverse effect on the Company. Additionally, the Company may find it necessary to initiate litigation to enforce its patent rights, to protect its trade secrets or know-how and to determine the scope and validity of the proprietary rights of others. Patent litigation can be costly and time-consuming, and there can be no assurance that the Company's litigation expenses will not be significant in the future or that the outcome of such litigation will be favorable to the Company. PRODUCT LIABILITY The testing, marketing and sale of human health care products entails an inherent risk of product liability claims. The Company is involved in various lawsuits arising in the normal course of business from product liability claims, and 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. However, there can be no assurance that product liability claims will not exceed such insurance coverage limits or that such insurance will be available in the future on commercially reasonable terms, if at all. 15 16 EMPLOYEES As of December 31, 1998, the Company had nearly 14,000 employees, including approximately 8,800 in operations, 900 in administration, 1,400 in research and development and 2,600 in selling, marketing, distribution and related administrative support. Of these employees, approximately 4,000 were employed in the Company's international operations. The Company believes that the continued success of its business will depend, in part, on its ability to attract and retain qualified personnel. Competition for qualified, skilled personnel is intense in the medical device industry. There can be no assurance that the Company will be able in the future to attract and retain such personnel. The Company is in the process of implementing a rationalization plan established after acquiring Schneider. The rationalization plan takes into consideration duplicate capacity and opportunities for further leveraging of cost and technology platforms. The Company's actions approved and committed to in the fourth quarter of 1998 will result in the displacement in 1999 of approximately 2,000 current positions, over half of which are manufacturing positions. The Company expects that approximately 1,000 positions will be added in 1999 as a result of the transition plan. SEASONALITY The Company's business, taken as a whole, is not materially affected by seasonal factors. CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1993 appearing on pages F-9 and F-10 of the Company's 1998 Annual Report to Shareholders (included as Exhibit 13.1 hereto) is incorporated herein by reference. ITEM 2. PROPERTIES The Company's world headquarters are in Natick, Massachusetts. It maintains regional headquarters in Tokyo, Japan; Paris, France; Singapore and Buenos Aires, Argentina. As of December 31, 1998, the Company's worldwide facilities (including administration, research, manufacturing, distribution and sales and marketing space) totaled approximately 5.2 million square feet, of which approximately 85% was owned by the Company and the balance was leased. As of December 31, 1998, the Company's principal research facilities were located in Massachusetts, Indiana, Minnesota, New Jersey, Florida, California, Washington, New York, Ireland and Switzerland, and its major distribution centers were located in Massachusetts, The Netherlands, Japan and Singapore. As of December 31, 1998, the Company maintained 16 manufacturing facilities, 11 in the United States, three in Ireland, one in Switzerland and one in Puerto Rico. Many of these manufacturing facilities produce and manufacture products for more than one of the Company's divisions. 16 17 As part of the rationalization plan established after acquiring Schneider, the Company has decided to close five Schneider facilities, as well as transition the manufacturing of selected Boston Scientific product lines to different sites. The Company believes that its facilities are adequate to meet its current needs. ITEM 3. LEGAL PROCEEDINGS Note K to the Company's 1998 Consolidated Financial Statements, appearing on pages F-25 through F-28 thereto (contained in the Company's 1998 Annual Report to Shareholders included as Exhibit 13.1 hereto), is incorporated herein by reference. RECENT PATENT PROCEEDINGS On March 2, 1999, Medtronic AVE Inc., formerly known as Arterial Vascular Engineering Inc. (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 dilation 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 not yet filed its answer, but intends to deny the allegations of the complaint. On March 18, 1999, Cook, Inc. 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. The Company has not yet been served. The Company is involved in various 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 or in Note K to the Company's 1998 Consolidated Financial Statements which, individually or in the aggregate, could have a material effect on the financial condition, operations or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A Special Meeting of Stockholders of the Company was held on November 4, 1998 to consider and vote upon a proposal to amend the Second Restated Certificate of Incorporation, as amended, of the Company to increase the authorized number of shares of Common Stock from 300,000,000 to 600,000,000 and the authorized number of shares of Preferred Stock from 25,000,000 to 50,000,000. The amendment allowed the Company's November 30, 1998 2-for-1 common stock split, effected in the form of a 100% stock dividend, to occur. On September 15, 1998, the record date for the Special Meeting, there were 196,367,418 shares of Common Stock outstanding on a pre-stock split basis. The amendment was approved by a vote of 137,891,227 for, 9,618,374 against, 303,358 abstaining and 0 broker non-votes. 17 18 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The Directors and executive officers of the Company as of December 31, 1998 are as follows:
NAME AGE POSITION - ---- --- -------- John E. Abele 61 Director, Founder Chairman Charles J. Aschauer, Jr. 70 Director, Retired Executive Vice President and Director of Abbott Laboratories Randall F. Bellows 70 Director, Retired Executive Vice President of Cobe Laboratories, Inc. Michael Berman 41 Senior Vice President and Group President--Cardiology Businesses, and President--SCIMED Life Systems, Inc. Lawrence C. Best 48 Senior Vice President--Finance & Administration and Chief Financial Officer Joseph A. Ciffolillo 60 Director, Private Investor Joel L. Fleishman 64 Director, President of The Atlantic Philanthropic Service Company, Inc. and Professor of Law and Public Policy, Duke University Lawrence L. Horsch 64 Director, Chairman of Eagle Management & Financial Corp. Paul A. LaViolette 41 Senior Vice President and President, Boston Scientific International Philip P. LeGoff 48 Senior Vice President and Group President--Vascular and Nonvascular Businesses C. Michael Mabrey 56 Senior Vice President--Operations Robert G. MacLean 55 Senior Vice President--Human Resources N.J. Nicholas, Jr. 59 Director, Private Investor Pete M. Nicholas 57 Director, Founder, Chief Executive Officer and Chairman of the Board Arthur L. Rosenthal 52 Senior Vice President and Chief Development Officer Paul W. Sandman 51 Senior Vice President, Secretary and General Counsel Dale A. Spencer 53 Director, Former Executive Vice President of Boston Scientific Corporation
On March 18, 1999, the Company announced the appointment of James R. Tobin as President and Chief Executive Officer. In addition to serving as President and Chief Executive Officer, Mr. Tobin will serve on the Board of Directors. Pete M. Nicholas will continue as Chairman of the Board. 18 19 COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors of the Company has standing Audit, Executive Compensation and Human Resources, and Governance Committees. Mr. Aschauer , Mr. Fleishman, and Mr. Horsch currently serve on the Audit Committee. Mr. Aschauer, Mr. Bellows and Mr. Fleishman currently serve on the Executive Compensation and Human Resources Committee. Mr. Aschauer, Mr. Bellows, Mr. Fleishman, Mr. Horsch and Mr. Nicholas currently serve on the Governance Committee. A description of the committees of the Board of Directors of the Company is set forth in the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 1999 and is incorporated herein by reference. BIOGRAPHICAL SUMMARIES John E. Abele, a co-founder of the Company, has been a Director of the Company since 1979, Founder Chairman since 1995 and was Co-Chairman from 1979 to 1995. As of February 1995, Mr. Abele held the position of Vice Chairman and Founder, Office of the Chairman from February 1995 to March 1996 and Treasurer from 1979 to 1992. He was President of Medi-tech, Inc. from 1970 to 1983, and prior to that served in sales, technical and general management positions for Advanced Instruments, Inc. Mr. Abele received a B.A. degree from Amherst College. Charles J. Aschauer, Jr. joined the Company in May 1992, as a Director. Mr. Aschauer has been retired since April 1989. From 1971 to 1989, Mr. Aschauer was responsible for Abbott Laboratories' Hospital Products business and retired as an Executive Vice President and director of Abbott Laboratories. Mr. Aschauer also serves as a director of Linc Capital, Inc. Mr. Aschauer received a B.B.A. degree from Northwestern University, and a certificate in International Business Administration from Centre d'Etudes Industrielles in Geneva, Switzerland. Randall F. Bellows joined the Company as a Director in February 1995. Mr. Bellows is a retired Founder and Executive Vice President of Cobe Laboratories, Inc., a medical device manufacturer, a post he held from 1964 to 1990, and served as a director of Cobe from 1964 to 1996. He was also a director of SCIMED from 1992 to February 1995, and of Ultimate Electronics Inc. since January 1995. Mr. Bellows received a B.A. degree from the University of Minnesota. Michael Berman joined the Company as Vice President of Sales and Marketing of SCIMED in February 1995, and in May 1997 became Senior Vice President and Group President - Cardiology Businesses. In June 1995, Mr. Berman became President of SCIMED and in December 1996, he was elected to the position of Group President--Cardiology Businesses. Mr. Berman served as SCIMED's Vice President of Sales and Marketing, from January 1995 to June 1995, Vice President and Business Manager of New Modalities, from July 1993 to January 1995, and Vice President of Marketing, from July 1989 to June 1993. Mr. Berman received B.S. and M.B.A. degrees from Cornell University. 19 20 Lawrence C. Best joined the Company in August 1992 as Senior Vice President--Finance & Administration and Chief Financial Officer. Previously, Mr. Best had been a partner at Ernst & Young, certified public accountants, since 1981. From 1979 to 1981, Mr. Best served a two year term as a Professional Accounting Fellow in the Office of Chief Accountant at the Securities and Exchange Commission in Washington, D.C. Mr. Best received a B.B.A. degree from Kent State University. Joseph A. Ciffolillo joined the Company in 1983 as President of Medi-tech, Inc.. In 1988, he was also named President of Microvasive, Inc. (a former subsidiary merged into the Company), and in 1989 he became Executive Vice President and Chief Operating Officer of the Company. In 1992, Mr. Ciffolillo became a Director of the Company. In April 1996, he retired from his position as an executive officer of the Company, but continues to serve as a Director. Mr. Ciffolillo also serves as a director of CompDent Corporation, CardioThoracic Systems, Inc. and Innovasive Devices, Inc. Mr. Ciffolillo received a B.A. degree from Bucknell University. He is also a trustee for Bucknell University. Joel L. Fleishman joined the Company in October 1992 as a Director. Mr. Fleishman became President of The Atlantic Philanthropic Service Company, Inc. in September 1993. He is also Professor of Law and Public Policy and has served in various administrative positions, including First Senior Vice President, at Duke University, since 1971. Mr. Fleishman is a founding member of the governing board of the Duke Center for Health Policy Research and Education and was the founding director of Duke University's Terry Sanford Institute of Public Policy. He is the director of the Samuel and Ronnie Heyman Center for Ethics, Public Policy and the Professions. Mr. Fleishman also serves as Vice-Chairman of the Board of Trustees of the Urban Institute. Mr. Fleishman also serves as a director of Polo Ralph Lauren Corporation. Mr. Fleishman received A.B., M.A. and J.D. degrees from the University of North Carolina at Chapel Hill, and an L.L.M. degree from Yale University. Lawrence L. Horsch joined the Company as a Director in February 1995. Previously, he had been Chairman of the Board of SCIMED Life Systems, Inc. from 1977 to June 1994 and a Director through February 1995. Since 1990, Mr. Horsch has served as Chairman of Eagle Management & Financial Corp. He was Chairman and Chief Executive Officer of Munsingwear, Inc., from 1987 to 1990. Mr. Horsch received a B.A. degree from the University of St. Thomas and an M.B.A. degree from Northwestern University. Paul A. LaViolette joined the Company in January 1994 as President, Boston Scientific International, and Vice President--International. In February 1995, Mr. LaViolette was elected to the position of Senior Vice President and Group President--Nonvascular Businesses. In October, 1998, Mr. LaViolette was appointed President, Boston Scientific International. Prior to joining the Company, he was employed by C.R. Bard, Inc. in various capacities, including President, U.S.C.I. Division, from July 1993 to November 1993, President, U.S.C.I. Angioplasty Division, from January 1993 to July 1993, Vice President and General Manager, U.S.C.I. Angioplasty Division, from August 1991 to January 1993, and Vice President U.S.C.I. Division, from January 1990 to August 1991. Mr. LaViolette received his B.A. degree from Fairfield University and an M.B.A. degree from Boston College. 20 21 Philip P. LeGoff joined the Company in November 1997 as Senior Vice President and Group President -- Vascular Businesses. In October, 1998, Mr. LeGoff assumed the additional responsibilities of Group President--Nonvascular Businesses. Prior to joining Boston Scientific, he was Head of Strategy and External Affairs and Member of the Global Executive Committee at Novartis Phaarma AG of Basel, Switzerland since 1996. Between 1981 and 1993 he held various executive management positions at Sanofi Inc. of Paris, including Director Research and Development Planning, Director Corporate Planning and Chief Executive Officer of the Bio-Industries Division. In 1994 he became President and Chief Executive Officer of Sanofi, North America. Before joining Sanofi, Dr. LeGoff held a variety of management and executive positions with Ciba-Geigy Corporation. Dr. LeGoff received a Masters Degree in Organic Chemistry and Pharmacy from the University of Rennes; a Ph.D. in Healthcare Law from the University of Paris; and a Masters Degree in Business Administration from Stanford University, Palo Alto. Dr. LeGoff has served on a number of for-profit and non-profit boards, including the Council of the International Federation of Pharmaceutical Manufacturers Associations (IFPMA, Geneva) and the Policy Board of the Center for Medicines Research (London). C. Michael Mabrey joined the Company in 1987 as Vice President--Operations of the Medi-tech division. From March 1988 to February 1989, he was the Vice President, Operations of the Medical Device Group of the Company. Mr. Mabrey is currently Senior Vice President--Operations of the Company, a position he has held since February 1989. Prior to joining the Company, Mr. Mabrey was Vice President, Operations of the Medical Products Group of Baxter Healthcare Corporation. Mr. Mabrey received a B.S. degree from Southwest Missouri State University. Robert G. MacLean joined the Company in April 1996 as Senior Vice President--Human Resources. Prior to joining the Company, he was Vice President--Worldwide Human Resources for National Semiconductor Corporation in Santa Clara, California from October 1992 to March 1996. Mr. MacLean has held various human resources management positions in the U.S. and Europe during his career. Prior to his business endeavors, he was Economics Professor at the University of the Pacific. Mr. MacLean received his bachelor and master degrees and completed his doctoral studies in economics from Stanford University. N.J. Nicholas, Jr. joined the Company as a Director in October 1994. Mr. Nicholas served as President of Time, Inc. from September 1986 to May 1990 and Co-Chief Executive Officer of Time Warner, Inc. from May 1990 until February 1992. N.J. Nicholas, Jr. is a director of Xerox Corporation and of Bankers Trust Corporation. Mr. Nicholas received an A.B. degree from Princeton University and an M.B.A. degree from Harvard Business School. He is also the brother of Pete Nicholas, Chairman of the Board and Chief Executive Officer of the Company. Pete M. Nicholas, a co-founder of the Company, has been the Chairman of the Board of the Company since 1995. He has been a Director since 1979 and served as the Chief Executive Officer from 1979 to March 1998 and Co-Chairman of the Board from 1979 to 1995. Prior to joining the Company, he was corporate director of marketing and general manager of the Medical Products Division at Millipore Corporation, a medical device company, and served in various sales, marketing and general management positions at Eli Lilly and Company. He is also a trustee of Duke University. Mr. Nicholas received a B.A. degree from Duke University, and an M.B.A. 21 22 degree from The Wharton School of the University of Pennsylvania. He is also the brother of N.J. Nicholas, Jr., a Director of the Company. Dr. Arthur L. Rosenthal joined the Company in January 1994 as Senior Vice President and Chief Development Officer. Prior to joining the Company, he was Vice President--Research & Development, at Johnson & Johnson Medical, Inc., in Arlington, Texas, where he was responsible for new products, research, clinical, regulatory and quality assurance from April 1990 to January 1994. From August 1982 through April 1990, Dr. Rosenthal worked at Davol, Inc., a division of C.R. Bard, first as Vice President--Research & Development until June 1989, and then as Vice President--Specialty Access Products from June 1989 through April 1990. Dr. Rosenthal received his B.A. in bacteriology from the University of Connecticut, and his Ph.D. in biochemistry from the University of Massachusetts. Paul W. Sandman joined the Company in May 1993 as Senior Vice President, Secretary and General Counsel. From March 1992 through April 1993, he was Senior Vice President, General Counsel and Secretary of Wang Laboratories, Inc. where he was responsible for legal affairs. Prior to March 1992, Mr. Sandman was Vice President and Corporate Counsel of Wang Laboratories, Inc., where he was responsible for corporate and international legal affairs. Mr. Sandman received his A.B. from Boston College, and his J.D. from Harvard Law School. Dale A. Spencer joined the Company as a Director and Executive Vice President in February 1995. Previously, he had been Chairman of the Board since 1994, Chief Executive Officer since 1986, and President since 1982, of SCIMED Life Systems, Inc. Mr. Spencer retired from his position as an executive officer of the Company, but continues to serve as a Director and a part-time employee of the Company. Mr. Spencer received a B.S.E. degree from the University of Maine and an M.B.A. degree from Southern Illinois University. James R. Tobin joined the Company on March 17, 1999 as Director, President and Chief Executive Officer. Prior to joining Boston Scientific, Mr. Tobin served as President and Chief Executive Officer of Biogen, Inc. from 1997 to 1998 and Chief Operating Officer of Biogen from 1994 to 1997. From 1972 to 1994, Mr. Tobin was a career executive with Baxter International, rising from financial analyst to President and Chief Operating Officer in 1992. Before becoming Baxter's President and Chief Operating Officer, he served as Managing Director in Japan, Managing Director in Spain, President of Baxter's I.V. Systems Group and Executive Vice President, responsible for running Baxter's worldwide business groups and then its U.S. manufacturing and distribution operations. Mr. Tobin currently serves on the Board of Directors of Creative Biomolecules, Inc. and PathoGenesis Corporation. Mr. Tobin holds an A.B. from Harvard College and an M.B.A. from Harvard Business School. Mr. Tobin also served as a lieutenant in the U.S. Navy from 1968 to 1972. 22 23 PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Market for the Company's Common Stock and Related Matters" included in the Company's 1998 Annual Report to Shareholders (Exhibit 13.1 filed herewith) is incorporated herein by reference. The closing price of the Company's Common Stock on March 15, 1999 was $33.75. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five-Year Selected Financial Data" included in the Company's 1998 Annual Report to Shareholders (Exhibit 13.1 filed herewith) is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements and information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 1998 Annual Report to Shareholders (Exhibit 13.1 filed herewith) are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the subcaption "Market Risk Disclosures" contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 1998 Annual Report to Shareholders (Exhibit 13.1 filed herewith) is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and its subsidiaries included in the Company's 1998 Annual Report to Shareholders (Exhibit 13.1 filed herewith) are incorporated herein by reference. The statements and information set forth under the caption "Quarterly Results of Operations" included in the Company's 1998 Annual Report to Shareholders (Exhibit 13.1 filed herewith) are incorporated herein by reference. 23 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 25 PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The required information concerning directors and executive officers set forth in the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 1999 is incorporated herein by reference. See also "Directors and Executive Officers of the Company" following Item 4 herein. ITEM 11. EXECUTIVE COMPENSATION The required information concerning executive compensation set forth in the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 1999 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The required statements concerning security ownership of certain beneficial owners and management set forth in the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 1999 are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The required statements concerning certain relationships and related transactions set forth in the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 1999 are incorporated herein by reference. 25 26 PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The response to this portion of Item 14 is set forth under Item 8. (a)(2) Financial Schedules. The response to this portion of Item 14 is filed herewith as a separate attachment to this report. (a)(3) Exhibits (* documents filed herewith). EXHIBIT NO. TITLE ------- ----- 3.1 Second Restated Certificate of Incorporation of the Company (Exhibit 3.1, Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-11083). 3.2 Certificate of Amendment of the Second Restated Certificate of Incorporation of the Registrant (Exhibit 3.2, Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-11083). *3.3 Certificate of Second Amendment of the Second Restated Certificate of Incorporation of the Registrant. 3.4 Restated By-laws of the Company (Exhibit 3.2, Registration No. 33- 46980). 4.1 Specimen Certificate for shares of the Company's Common Stock (Exhibit 4.1, Registration No. 33-46980). 4.2 Description of Capital Stock contained in Exhibits 3.1, 3.2, 3.3 and 3.4. 4.3 Form of Debt Securities Indenture (Exhibit 4.4, Registration Statement on Form S-3 of the Company, BSC Capital Trust, BSC Capital Trust II and BSC Capital Trust III, File No. 333-64887) 10.1 Boston Scientific Corporation 1992 Long-Term Incentive Plan, as amended (Exhibit 10.1, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). 10.2 Boston Scientific Corporation 1992 Non-Employee Directors' Stock Option Plan, as amended (Exhibit 10.2, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). 10.3 Boston Scientific Corporation 1995 Long-Term Incentive Plan, as amended (Exhibit 10.3, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). 26 27 EXHIBIT NO. TITLE ------- ----- 10.4 SCIMED Life Systems, Inc. 1987 Non-Qualified Stock Option Plan, amended and restated (Exhibit 4.3, Registration No. 33-89772 which was incorporated by reference to Exhibit A to SCIMED's Proxy Statement dated May 23, 1991 for its 1991 Annual Meeting of Shareholders, Commission File No. 0-9301). 10.5 SCIMED Life Systems, Inc. 1991 Directors Stock Option Plan, as amended (Exhibit 4.2, Registration No. 33-89772 which was incorporated by reference to Exhibit A to SCIMED's Proxy Statement dated June 8, 1994 for its 1994 Annual Meeting of Shareholders, Commission File No. 0- 9301). 10.6 SCIMED Life Systems, Inc. 1992 Stock Option Plan (Exhibit 4.1, Registration No. 33-89772 which was incorporated by reference to Exhibit A to SCIMED's Proxy Statement dated May 26, 1992 for its 1992 Annual Meeting of Shareholders, Commission File No. 0-9301). 10.7 Heart Technology, Inc. Restated 1989 Stock Option Plan (Exhibit 4.5, Registration No. 33-99766 which was incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 of Heart Technology, Registration No. 33-45203). 10.8 Heart Technology, Inc. 1992 Stock Option Plan for Non-Employee Directors (Exhibit 4.6, Registration No. 33-99766 which was incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 of Heart Technology, Registration No. 33-45203). 10.9 Heart Technology, Inc. 1995 Stock and Incentive Plan (Exhibit 4.7, Registration No. 33-99766 which was incorporated by reference to Exhibit 10.4 to the Quarterly Report on 10-Q/A of Heart Technology for its fiscal quarter ended June 30, 1995, filed on August 30, 1995, File No. 0-19812). 10.10 Cardiovascular Imaging Systems, Inc. 1987 Incentive Stock Option Plan, as amended (Exhibit 4.2, Registration No. 33-93790 which was incorporated by reference to CVIS's Registration Statement on Form S-1 filed on March 11, 1992, Registration No. 33-46330). 10.11 EP Technologies, Inc. 1988 Stock Plan (Exhibit 4.7, Registration No. 33- 80265 which was incorporated by reference to EPT's Registration Statement on Form S-8, File No. 33-67020). 10.12 EP Technologies, Inc. 1991 Stock Option/Stock Issuance Plan (Exhibit 4.6, Registration No. 33-80265 which was incorporated by reference to EPT's Registration Statement on Form S-8, File No. 33-82140). 10.13 EP Technologies, Inc. 1992 Stock Option Grant to Dr. Terry E. Spraker, (Exhibit 4.8, Registration No. 33-80265 which was incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of EPT for the 1994 Fiscal Year, File No. 0-22060). 10.14 EP Technologies, Inc. 1993 Stock Option/Stock Issuance Plan, (Exhibit 4.5, Registration No. 33-80265 which was incorporated by reference to EPT's Registration Statement on Form S-8, File No. 33-93196). 27 28 EXHIBIT NO. TITLE ------- ----- 10.15 Target Therapeutics, Inc. 1988 Stock Option Plan, incorporated by reference to Exhibit 10.2 to Target Therapeutics, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-19801). 10.16 Target Therapeutics, Inc. 1988 Stock Option Plan, incorporated by reference to Exhibit 10.3 to Target Therapeutics, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-19801). 10.17 Boston Scientific Corporation 401(k) Savings Plan, Amended and Restated, Effective January 1, 1997 (Exhibit 10.17, Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-11083). 10.18 Boston Scientific Corporation Global Employee Stock Ownership Plan, as Amended and Restated (Exhibit 10.18, Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-11083). 10.19 Boston Scientific Corporation Deferred Compensation Plan, Effective January 1, 1996 (Exhibit 10.17, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). 10.20 Form of Second Amended and Restated Credit Agreement, dated September 4, 1998 among the Company, The Several Lenders and certain other parties (Exhibit 10.1 to the Company's Current Report on Form 8-K dated September 25, 1998, File No. 1-11083). *10.21 Form of Amendment dated February 23, 1999 to Second Amended and Restated Credit Agreement dated September 4, 1998 among the Company, The Several Lenders and certain other parties. 10.22 Form of Credit Agreement dated September 4, 1998 among Boston Scientific Corporation, The Several Lenders and certain other parties (Exhibit 10.2 to the Company's Current Report on Form 8-K dated September 25, 1998, File No. 1-11083). *10.23 Form of Amendment dated February 23, 1999 to the Credit Agreement dated September 4, 1998 among the Company, The Several Lenders and certain other parties. 10.24 Form of Credit Agreement dated September 9, 1998 among the Company, The Several Lenders and Merrill Lynch Capital Corporation (Exhibit 10.3 to the Company's Current Report on Form 8-K dated September 25, 1998, File No. 1-11083). *10.25 Form of Amendment No. 1 dated October 22, 1998 to the Credit Agreement dated September 9, 1998 among the Company, The Several Lenders and Merrill Lynch Capital Corporation. *10.26 Form of Amendment No. 2 dated February 23, 1999 to the Credit Agreement dated September 9, 1998 among the Company, The Several Lenders and Merrill Lynch Capital Corporation. 10.27 Form of Indemnification Agreement between the Company and certain Directors and Officers (Exhibit 10.16, Registration No. 33-46980). 28 29 10.28 Letter Agreement, dated June 22, 1992, between the Company and Lawrence C. Best (Exhibit 10.11, Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-11083). 10.29 Employment Agreement, dated as of November 8, 1995, among the Company, SCIMED and Dale A. Spencer (Exhibit 10, Registration No. 33- 88648), as amended by Amendment No. 1, dated as of November 22, 1995, to that certain Employment Agreement (Exhibit 10.19, Annual Report Form 10-K for the year ended December 31, 1995, File No. 1-11083). 10.30 Amendment No. 2 to Employment Agreement, dated October 21, 1997, to the Employment Agreement, dated as of November 8, 1995, as amended, among the Company, SCIMED and Dale A. Spencer to the Company's Current Report on Form 8-K dated September 25, 1998. 10.31 Form of Retention Agreement between the Company and certain Executive Officers (Exhibit 10.23, Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-11083). *10.32 Agreement and General Release of All Claims dated as of December 30, 1998 by and between James M. Corbett and the Company. *10.33 Agreement and General Release of All Claims dated as of January 4, 1999 by and between Charles M. Mabrey and the Company. *10.34 Letter Agreement dated March 17, 1999, between the Company and James R. Tobin. 10.35 Agreement Containing Consent Decree, dated as of February 23, 1995, between the Company and the Federal Trade Commission (Exhibit 10.16, Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-11083). 10.36 6.625% Promissory Notes due March 15, 2005 issued by the Company in the aggregate principal amount of $500 million, each dated as of March 10, 1998 (Exhibit Nos. 4.1, 4.2 and 4.3 to the Company's Current Report on Form 8-K dated March 10, 1998, File No. 1-11083). 11. Statement regarding computation of per share earnings (included in Exhibit 13.1, Note J to the Company's Annual Report to Shareholders for the year ended December 31, 1998). *12.1 Statement regarding computation of ratios of earnings to fixed charges. *13.1 The Company's 1998 Annual Report to Shareholders for the year ended December 31, 1998. 13.2 Report of Independent Auditors, Ernst & Young LLP (included in the Company's Annual Report to Shareholders for the year ended December 31, 1998, filed as Exhibit 13.1 hereto). *21. List of the Company's subsidiaries as of March 15, 1999. Each subsidiary does business under the corporate name indicated. *23.1 Consent of Independent Auditors, Ernst & Young LLP. *27.1 Financial Data Schedule, fiscal year ended December 31, 1998. 29 30 (b) Reports on Form 8-K. Current Reports on Form 8-K/A and Form 8-K/A2, amending and supplementing the Company's Current Report on Form 8-K filed on September 25, 1998 with respect to the Item described below, were filed during the period covering the quarter ended December 31, 1998 and the quarter ended March 31, 1999: ITEM EVENT DATE DESCRIPTION - ---- ---------- ----------- 7 September 10, 1998 Schneider Worldwide Combined Financial Statements for the Years Ended December 31, 1997, 1996 and 1995 and Independent Auditor's Report; Schneider Worldwide Unaudited Combined Financial Statements for the Nine Months Ended September 10, 1998 and September 14, 1997; Unaudited Pro Forma Combined Condensed Statements of Operations of the Company and Schneider Worldwide for the year ended December 31, 1997 and the nine months ended September 30, 1998. 30 31 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 1999 BOSTON SCIENTIFIC CORPORATION By: /s/ LAWRENCE C. BEST ------------------------------------------------ Lawrence C. Best Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Dated: March 30, 1999 /s/ JOHN E. ABELE ---------------------------------------------------- John E. Abele Director, Founder Dated: March 30, 1999 /s/ CHARLES J. ASCHAUER, JR. ---------------------------------------------------- Charles J. Aschauer, Jr. Director Dated: March 30, 1999 /s/ RANDALL F. BELLOWS ---------------------------------------------------- Randall F. Bellows Director Dated: March 30, 1999 /s/ LAWRENCE C. BEST ---------------------------------------------------- Lawrence C. Best Senior Vice President--Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: March 30, 1999 /s/ JOSEPH A. CIFFOLILLO ---------------------------------------------------- Joseph A. Ciffolillo Director Dated: March 30, 1999 /s/ JOEL L. FLEISHMAN ---------------------------------------------------- Joel L. Fleishman Director 31 32 Dated: March 30, 1999 /s/ LAWRENCE L. HORSCH ---------------------------------------------------- Lawrence L. Horsch Director Dated: March 30, 1999 /s/ N.J. NICHOLAS, JR. ---------------------------------------------------- N.J. Nicholas, Jr. Director Dated: March 30, 1999 /s/ PETER M. NICHOLAS ---------------------------------------------------- Peter M. Nicholas Director, Founder, Chairman of the Board (Principal Executive Officer) Dated: March 30, 1999 /s/ DALE A. SPENCER ---------------------------------------------------- Dale A. Spencer Director Dated: March 30, 1999 ---------------------------------------------------- James R. Tobin Director, President and Chief Executive Officer 32 33 FINANCIAL STATEMENT SCHEDULE The following additional consolidated financial statement schedule should be considered in conjunction with the Company's 1998 Consolidated Financial Statements (contained in the Company's 1998 Annual Report to Shareholders and included in Exhibit 13.1 filed herewith): Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted since the required information is not present or not sufficiently material to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. 33 34 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------------------------------------------------------------------------- (in thousands) YEAR ENDED DECEMBER 31, 1998 Reserves and allowances deducted from asset accounts: Allowances for uncollectible amounts and sales returns.................... $30,479 15,024 15,774 (1) 12,126 (2) $49,151 YEAR ENDED DECEMBER 31, 1997 Reserves and allowances deducted from asset accounts: Allowances for uncollectible amounts and sales returns.................... $14,850 10,718 7,356 (1) 2,445 (2) $30,479 YEAR ENDED DECEMBER 31, 1996 Reserves and allowances deducted from asset accounts: Allowances for uncollectible amounts and sales returns.................... $7,870 4,881 2,214 (1) 115 (2) $14,850
(1) Charges for sales return allowances, net of actual sales returns (2) Uncollectible accounts written off. Certain prior years' amounts have been reclassified to conform to the current years' presentation. EX-3.3 2 CERTIFICATE OF AMENDMENT 1 EXHIBIT 3.3 CERTIFICATE OF SECOND AMENDMENT OF THE SECOND RESTATED CERTIFICATE OF INCORPORATION OF BOSTON SCIENTIFIC CORPORATION BOSTON SCIENTIFIC CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Company"), DOES HEREBY CERTIFY: 1. That the first sentence of Article FOURTH of the Second Restated Certificate of Incorporation of the Company is hereby amended in its entirety to read as follows: "FOURTH. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 650,000,000, of which (a) 600,000,000 shall be Common Stock, $.01 par value, the holders of which shall have one vote for each share so held; and (b) 50,000,000 shares shall be Preferred Stock, $.01 par value." 2. That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS THEREOF, Boston Scientific Corporation has caused this Certificate to be signed by Paul W. Sandman, its Senior Vice President, Secretary and General Counsel this 4th day of November, 1998. BOSTON SCIENTIFIC CORPORATION By /s/ Paul W. Sandman ------------------------------------ Paul W. Sandman Senior Vice President, Secretary and General Counsel EX-10.21 3 FORM OF AMENDMENT 1 EXHIBIT 10.21 AMENDMENT AMENDMENT, dated as of February 23, 1999 (this "AMENDMENT"), to the Second Amended and Restated Credit Agreement, dated as of September 4, 1998 (the "CREDIT AGREEMENT"), among (i) BOSTON SCIENTIFIC CORPORATION, a Delaware corporation (the "BORROWER"), (ii) the several banks and other financial institutions from time to time parties thereto (the "LENDERS"), (iii) ABN AMRO BANK N.V., a Dutch banking corporation, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, and BARCLAYS BANK PLC, a banking corporation organized under the laws of England, as Syndication Agents (each in such capacity, a "SYNDICATION AGENT", and collectively, the "SYNDICATION AGENTS"), (iv) CHASE SECURITIES INC., as Arranger (in such capacity, the "ARRANGER") and as Book Manager (in such capacity, the "BOOK MANAGER") and (v) THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent for the Lenders hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make certain extensions of credit to the Borrower; and WHEREAS, the Borrower and Lenders have agreed that certain provisions of the Credit Agreement will be amended in the manner provided for in this Amendment; NOW, THEREFORE, the parties hereto hereby agree as follows: I. DEFINED TERMS. Terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. II. AMENDMENTS TO CREDIT AGREEMENT. 1. Subsection 1.1 of the Credit Agreement is hereby amended by deleting the definitions of "APPLICABLE MARGIN", "EXCESS UTILIZATION DAY", "FACILITY FEE RATE", "RATING CATEGORY," "RATING I, RATING II, RATING III, RATING IV AND RATING V", and "UTILIZATION FEE RATE", and replacing such definitions with those listed in Annex A attached hereto. 2. Subsection 8.1 of the Credit Agreement is hereby amended by deleting therefrom clause (ii) (y)(1) and substituting in lieu thereof the following clause: "(y)(1) December 31, 1999 and" 2 3. Subsection 12.6 of the Credit Agreement is hereby amended by adding thereto a new clause (h), attached hereto as Annex B. III. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective on the date (the "AMENDMENT EFFECTIVE DATE") on which the Borrower, the Administrative Agent and the Majority Lenders shall have executed and delivered to the Administrative Agent this Amendment. IV. GENERAL. 1. REPRESENTATION AND WARRANTIES. To induce the Administrative Agent and the Lenders parties hereto to enter into this Amendment, the Borrower hereby represents and warrants to the Administrative Agent and all of the Lenders as of the Amendment Effective Date that: (a) CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. (1) The Borrower has the corporate power and authority, and the legal right, to make, deliver this Amendment and to perform the Loan Documents, as amended by this Amendment, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment and the performance of the Loan Documents, as so amended. (2) No consent or authorization of, approval by, notice to, filing with or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the execution and delivery of this Amendment or with the performance, validity or enforceability of the Loan Documents, as amended by this Amendment. (3) This Amendment has been duly executed and delivered on behalf of the Borrower. (4) This Amendment and each Loan Document, as amended by this Amendment, constitutes a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (b) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Borrower in the Loan Documents (other than in Section 5.2 and 5.6 of the Credit Agreement) are true and correct in all material respects on and as of the Amendment Effective Date, after giving effect to the effectiveness of this Amendment, as if made on and as of the Amendment Effective Date, except as otherwise disclosed in the most recent filings by the Borrower with the Securities and Exchange Commission. 2. PAYMENT OF EXPENSES. The Borrower agrees to pay or reimburse the Administrative Agent for all of its out-of-pocket costs and reasonable expenses incurred in connection with this Amendment, any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent. 3 3. NO OTHER AMENDMENTS; CONFIRMATION. Except as expressly amended, modified and supplemented hereby, the provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect. 4. GOVERNING LAW; COUNTERPARTS. (a) This Amendment and the rights and obligations of the parties hereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. (b) This Amendment may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Amendment signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. BOSTON SCIENTIFIC CORPORATION By: ---------------------------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender By: ---------------------------------------------------- Name: Title: ABN AMRO BANK N.V. By: ---------------------------------------------------- Name: Title: By: ---------------------------------------------------- Name: Title: 5 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ---------------------------------------------------- Name: Title: BARCLAYS BANK PLC By: ---------------------------------------------------- Name: Title: ALLIED IRISH BANKS, P.L.C. By: ---------------------------------------------------- Name: Title: BANCA COMMERCIALE ITALIANA, NEW YORK BRANCH By: ---------------------------------------------------- Name: Title: By: ---------------------------------------------------- Name: Title: 6 BANCA MONTE DEI PASCHI DI SIENA S.P.A. By: ---------------------------------------------------- Name: Title: BANK BOSTON, N.A. By: ---------------------------------------------------- Name: Title: BANK OF IRELAND By: ---------------------------------------------------- Name: Title: BANK OF NEW YORK By: ---------------------------------------------------- Name: Title: THE BANK OF NOVA SCOTIA By: ---------------------------------------------------- Name: Title: BANK OF TOKYO-MITSUBISHI TRUST CO. By: ---------------------------------------------------- Name: Title: 7 BANKERS TRUST By: ---------------------------------------------------- Name: Title: BANQUE NATIONALE DE PARIS By: ---------------------------------------------------- Name: Title: By: ---------------------------------------------------- Name: Title: COMMERZBANK A.G. By: ---------------------------------------------------- Name: Title: By: ---------------------------------------------------- Name: Title: CORESTATES BANK, N.A. By: ---------------------------------------------------- Name: Title: THE DAI-ICHI KANGYO BANK, LIMITED By: ---------------------------------------------------- Name: Title: 8 THE FIRST NATIONAL BANK OF CHICAGO By: ---------------------------------------------------- Name: Title: FLEET NATIONAL BANK By: ---------------------------------------------------- Name: Title: THE FUJI BANK, LIMITED By: ---------------------------------------------------- Name: Title: MELLON BANK, N.A. By: ---------------------------------------------------- Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ---------------------------------------------------- Name: Title: NATIONSBANK, N.A. By: ---------------------------------------------------- Name: Title: 9 THE SANWA BANK, LIMITED By: ---------------------------------------------------- Name: Title: SVENSKA HANDELSBANKEN By: ---------------------------------------------------- Name: Title: By: ---------------------------------------------------- Name: Title: TORONTO DOMINION (TEXAS), INC. By: ---------------------------------------------------- Name: Title: UBS AG, NEW YORK BRANCH By: ---------------------------------------------------- Name: Title: By: ---------------------------------------------------- Name: Title: 10 U.S. BANK, N.A. By: ---------------------------------------------------- Name: Title: 11 ANNEX A to Amendment to the Second Amended and Restated Credit Agreement "APPLICABLE MARGIN": with respect to each day for each Type of Loan, the rate per annum (bps) based on the Ratings in effect on such day, as set forth under the relevant column heading below: EURODOLLAR LOANS RATING /MULTICURRENCY LOANS ABR LOANS Rating I 22.0 0 Rating II 25.0 0 Rating III 27.5 0 Rating IV 50.0 0 Rating V 57.5 0 Rating VI 75.0 0 "EXCESS UTILIZATION DAY": any day on which (i) the sum of the Aggregate Total Outstandings of all Lenders, PLUS the Aggregate Total Outstandings of all Lenders under (and as defined in) the 364-Day Agreement, exceeds, (ii) (a) with respect to Ratings Category III and above, 50% of the aggregate amount of the Revolving Credit Commitments hereunder and the Revolving Credit Commitments under (and as defined in) the 364-Day Agreement (or, in each case, with respect to any day after termination of such Revolving Credit Commitments, 50% of the aggregate amount of such Revolving Credit Commitments in effect on the date immediately prior to the date on which such Revolving Credit Commitments terminated) and (b) with respect to Ratings Category IV and below, 25% of the aggregate amount of the Revolving Credit Commitments hereunder and the Revolving Credit Commitments under (and as defined in) the 364-Day Agreement (or, in each case, with respect to any day after termination of such Revolving Credit Commitments, 25% of the aggregate amount of such Revolving Credit Commitments in effect on the date immediately prior to the date on which such Revolving Credit Commitments terminated). "FACILITY FEE RATE": for each day during each calculation period, the rate per annum (bps) based on the Ratings in effect on such day, as set forth below: FACILITY RATING FEE RATE ------ --------- Rating I 8.0 Rating II 10.0 Rating III 12.5 Rating IV 12.5 Rating V 17.5 Rating VI 25.0 12 "RATING CATEGORY": each of Rating I, Rating II, Rating III, Rating IV, Rating V and Rating VI. "RATING I, RATING II, RATING III, RATING IV, RATING V AND RATING IV": the respective Ratings set forth below: RATING CATEGORY S&P MOODY'S Rating I greater than or greater than or equal to A- equal to A3 Rating II lower than A- lower than A3 and greater than and greater than or or equal to BBB+ equal to Baa1 Rating III lower than BBB+ lower than Baa1 and greater than and greater than or or equal to BBB equal to Baa2 (A2/P2, or higher) Rating IV lower than BBB+ lower than Baa1 and greater than and greater than or or equal to BBB equal to Baa2 (A3/P2 or A2/P3, or lower) Rating V lower than BBB lower than Baa2 and greater than and greater than or or equal to BBB- equal to Baa3 Rating VI lower than or equal lower than or equal to BB+ to Ba1 ; PROVIDED, that (i) if on any day the Ratings of the Rating Agencies do not fall in the same Rating Category, and the lower of such Ratings (i.e., the Rating Category designated by a numerically higher Roman numeral) is one Rating Category lower than the higher of such Ratings, then the Rating Category of the higher of such Ratings shall be applicable for such day, (ii) if on any day the Ratings of the Rating Agencies do not fall in the same Rating Category, and the lower of such Ratings is more than one Rating Category lower than the higher of such Ratings, then the Rating Category next higher from that of the lower of such Ratings shall be applicable for such day, (iii) if on any day the Rating of only one of the Rating Agencies is available, then the Rating Category of such Rating shall be applicable for such day and (iv) if on any day a Rating is available from neither of the Rating Agencies, then Rating VI shall be applicable for such day. Any change in the applicable Rating Category resulting from a change in the Rating of a Rating Agency shall become effective on the date such change is publicly announced by such Rating Agency. 13 "UTILIZATION FEE RATE": 10 bps per annum, for Rating Category III and above; 12.5 bps for Rating Category IV and below. 14 ANNEX B to Amendment to the Second Amended and Restated Credit Agreement (h) Notwithstanding anything to the contrary contained herein, any Lender (a "GRANTING LENDER") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender, identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to Section 2.1 or 2.10, PROVIDED that (i) nothing herein shall constitute a commitment to make any Loan by any SPC and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall satisfy the obligation of the Granting Lenders to make Loans to the same extent, and as if, such Loan were made by the Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any payment under this Agreement for which a Lender would otherwise be liable, for so long as, and to the extent, the related Granting Lender makes such payment. In furtherance of the foregoing, each party hereto hereby agrees that, prior to the date that is one year and one day after the payment in full of all outstanding senior indebtedness of any SPC, it will not institute against or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 12.6 any SPC may (i) with notice to, but without the prior written consent of, the Borrower or the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to its Granting Lender or to any financial institutions providing liquidity and/or credit facilities to or for the account of such SPC to fund the Loans made by such SPC or to support the securities (if any) issued by such SPC to fund such Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of a surety, guarantee or credit or liquidity enhancement to such SPC. In no event shall the Borrower be obligated to pay to an SPC that has made a Loan any greater amount than the Borrower would have been obligated to pay under this Agreement if the Granting Lender had made such Loan. Each Granting Lender shall indemnify and hold harmless the Borrower and its directors, officers, employees and agents from and against any and all losses, liabilities, claims, damages and expenses arising from or attributable to the making of a Loan by an SPC of such Granting Lender. EX-10.23 4 FORM OF AMENDMENT 1 EXHIBIT 10.23 AMENDMENT AMENDMENT, dated as of February 23, 1999 (this "AMENDMENT"), to the Credit Agreement, dated as of September 4, 1998 (the "CREDIT AGREEMENT"), among (i) BOSTON SCIENTIFIC CORPORATION, a Delaware corporation (the "BORROWER"), (ii) the several banks and other financial institutions from time to time parties thereto (the "LENDERS"), (iii) ABN AMRO BANK N.V., a Dutch banking corporation, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, and BARCLAYS BANK PLC, a banking corporation organized under the laws of England, as Syndication Agents (each in such capacity, a "SYNDICATION AGENT", and collectively, the "SYNDICATION AGENTS"), (iv) CHASE SECURITIES INC., as Arranger (in such capacity, the "ARRANGER") and as Book Manager (in such capacity, the "BOOK MANAGER") and (v) THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent for the Lenders hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make certain extensions of credit to the Borrower; and WHEREAS, the Borrower and Lenders have agreed that certain provisions of the Credit Agreement will be amended in the manner provided for in this Amendment; NOW, THEREFORE, the parties hereto hereby agree as follows: I. DEFINED TERMS. Terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. II. AMENDMENTS TO CREDIT AGREEMENT. 1. Subsection 1.1 of the Credit Agreement is hereby amended by deleting the definitions of "APPLICABLE MARGIN", "EXCESS UTILIZATION DAY", "FACILITY FEE RATE", "RATING CATEGORY," "RATING I, RATING II, RATING III, RATING IV AND RATING V", and "UTILIZATION FEE RATE", and replacing such definitions with those listed in Annex A attached hereto. 2. Subsection 7.1 of the Credit Agreement is hereby amended by deleting therefrom clause (ii) (y)(1) and substituting in lieu thereof the following clause: "(y)(1) December 31, 1999 and" 2 3. Subsection 10.6 of the Credit Agreement is hereby amended by adding thereto a new clause (h), attached hereto as Annex B. III. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective on the date (the "AMENDMENT EFFECTIVE DATE") on which the Borrower, the Administrative Agent and the Majority Lenders shall have executed and delivered to the Administrative Agent this Amendment. IV. GENERAL. 1. REPRESENTATION AND WARRANTIES. To induce the Administrative Agent and the Lenders parties hereto to enter into this Amendment, the Borrower hereby represents and warrants to the Administrative Agent and all of the Lenders as of the Amendment Effective Date that: (a) CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. (1) The Borrower has the corporate power and authority, and the legal right, to make, deliver this Amendment and to perform the Loan Documents, as amended by this Amendment, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment and the performance of the Loan Documents, as so amended. (2) No consent or authorization of, approval by, notice to, filing with or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the execution and delivery of this Amendment or with the performance, validity or enforceability of the Loan Documents, as amended by this Amendment. (3) This Amendment has been duly executed and delivered on behalf of the Borrower. (4) This Amendment and each Loan Document, as amended by this Amendment, constitutes a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (b) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Borrower in the Loan Documents (other than in Section 4.2 and 4.6 of the Credit Agreement) are true and correct in all material respects on and as of the Amendment Effective Date, after giving effect to the effectiveness of this Amendment, as if made on and as of the Amendment Effective Date, except as otherwise disclosed in the most recent filings of the Borrower with the Securities and Exchange Commission. 2. PAYMENT OF EXPENSES. The Borrower agrees to pay or reimburse the Administrative Agent for all of its out-of-pocket costs and reasonable expenses incurred in connection with this Amendment, any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent. 3 3. NO OTHER AMENDMENTS; CONFIRMATION. Except as expressly amended, modified and supplemented hereby, the provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect. 4. GOVERNING LAW; COUNTERPARTS. (a) This Amendment and the rights and obligations of the parties hereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. (b) This Amendment may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Amendment signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. BOSTON SCIENTIFIC CORPORATION By: --------------------------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender By: --------------------------------------------------- Name: Title: ABN AMRO BANK N.V. By: --------------------------------------------------- Name: Title: By: --------------------------------------------------- Name: Title: 5 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: --------------------------------------------------- Name: Title: BARCLAYS BANK PLC By: --------------------------------------------------- Name: Title: ALLIED IRISH BANKS, P.L.C. By: --------------------------------------------------- Name: Title: BANCA COMMERCIALE ITALIANA, NEW YORK BRANCH By: --------------------------------------------------- Name: Title: By: --------------------------------------------------- Name: Title: 6 BANCA MONTE DEI PASCHI DI SIENA S.P.A. By: --------------------------------------------------- Name: Title: BANK OF IRELAND By: --------------------------------------------------- Name: Title: BANK OF NEW YORK By: --------------------------------------------------- Name: Title: THE BANK OF NOVA SCOTIA By: --------------------------------------------------- Name: Title: BANK OF TOKYO-MITSUBISHI TRUST CO. By: --------------------------------------------------- Name: Title: 7 BANKERS TRUST By: --------------------------------------------------- Name: Title: BANQUE NATIONALE DE PARIS By: --------------------------------------------------- Name: Title: By: --------------------------------------------------- Name: Title: COMMERZBANK A.G. By: --------------------------------------------------- Name: Title: By: --------------------------------------------------- Name: Title: THE DAI-ICHI KANGYO BANK, LIMITED By: --------------------------------------------------- Name: Title: 8 THE FIRST NATIONAL BANK OF CHICAGO By: --------------------------------------------------- Name: Title: FLEET NATIONAL BANK By: --------------------------------------------------- Name: Title: THE FUJI BANK, LIMITED By: --------------------------------------------------- Name: Title: MELLON BANK, N.A. By: --------------------------------------------------- Name: Title: NATIONSBANK, N.A. By: --------------------------------------------------- Name: Title: 9 SVENSKA HANDELSBANKEN By: --------------------------------------------------- Name: Title: By: --------------------------------------------------- Name: Title: TORONTO DOMINION (TEXAS), INC. By: --------------------------------------------------- Name: Title: UBS AG, NEW YORK BRANCH By: --------------------------------------------------- Name: Title: By: --------------------------------------------------- Name: Title: U.S. BANK, N.A. By: --------------------------------------------------- Name: Title: 10 ANNEX A to Amendment to the Credit Agreement "APPLICABLE MARGIN": with respect to each day for each Type of Loan, the rate per annum (bps) based on the Ratings in effect on such day, as set forth under the relevant column heading below: RATING EURODOLLAR LOANS ABR LOANS Rating I 24.0 0 Rating II 27.0 0 Rating III 30.0 0 Rating IV 52.5 0 Rating V 62.5 0 Rating VI 82.5 0 "EXCESS UTILIZATION DAY": any day on which (i) the sum of the Aggregate Total Outstandings of all Lenders, PLUS the Aggregate Total Outstandings of all Lenders under (and as defined in) the Medium-Term Facility, exceeds (ii) (a) with respect to Rating Category III and above, 50% of the aggregate amount of the Revolving Credit Commitments hereunder and the Revolving Credit Commitments under (and as defined in) the Medium-Term Facility (or, in each case, with respect to any day after termination of such Revolving Credit Commitments, 50% of the aggregate amount of such Revolving Credit Commitments in effect on the date immediately prior to the date on which such Revolving Credit Commitments terminated) and (b) with respect to Rating Category IV and below, 25% of the aggregate amount of the Revolving Credit Commitments hereunder and the Revolving Credit Commitments under (and as defined in) the Medium-Term Facility (or, in each case, with respect to any day after termination of such Revolving Credit Commitments, 25% of the aggregate amount of such Revolving Credit Commitments in effect on the date immediately prior to the date on which such Revolving Credit Commitments terminated). "FACILITY FEE RATE": for each day during each calculation period, the rate per annum (bps) based on the Ratings in effect on such day, as set forth below: 11 FACILITY RATING FEE RATE Rating I 6.0 Rating II 8.0 Rating III 10.0 Rating IV 10.0 Rating V 12.5 Rating VI 17.5 "RATING CATEGORY": each of Rating I, Rating II, Rating III, Rating IV, Rating V and Rating VI. "RATING I, RATING II, RATING III, RATING IV, RATING V AND RATING IV": the respective Ratings set forth below: RATING CATEGORY S&P MOODY'S Rating I greater than or greater than or equal to A- equal to A3 Rating II lower than A- lower than A3 and greater than and greater than or or equal to BBB+ equal to Baa1 Rating III lower than BBB+ lower than Baa1 and greater than and greater than or or equal to BBB equal to Baa2 (A2/P2, or higher) Rating IV lower than BBB+ lower than Baa1 and greater than and greater than or or equal to BBB equal to Baa2 (A3/P2 or A2/P3, or lower) Rating V lower than BBB lower than Baa2 and greater than and greater than or or equal to BBB- equal to Baa3 Rating VI lower than or equal lower than or equal to BB+ to Ba1 ; PROVIDED, that (i) if on any day the Ratings of the Rating Agencies do not fall in the same Rating Category, and the lower of such Ratings (i.e., the Rating Category designated by a numerically higher Roman numeral) is one Rating Category lower than the higher of such Ratings, then the Rating Category of the higher of such Ratings shall be applicable for such day, (ii) if on any day the Ratings of the Rating Agencies do not 12 fall in the same Rating Category, and the lower of such Ratings is more than one Rating Category lower than the higher of such Ratings, then the Rating Category next higher from that of the lower of such Ratings shall be applicable for such day, (iii) if on any day the Rating of only one of the Rating Agencies is available, then the Rating Category of such Rating shall be applicable for such day and (iv) if on any day a Rating is available from neither of the Rating Agencies, then Rating VI shall be applicable for such day. Any change in the applicable Rating Category resulting from a change in the Rating of a Rating Agency shall become effective on the date such change is publicly announced by such Rating Agency. "UTILIZATION FEE RATE": 10 bps per annum, for Rating Category III and above; 12.5 bps for Rating Category IV and below. 13 ANNEX B to Amendment to the Credit Agreement (h) Notwithstanding anything to the contrary contained herein, any Lender (a "GRANTING LENDER") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender, identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to Section 2.1, PROVIDED that (i) nothing herein shall constitute a commitment to make any Loan by any SPC and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall satisfy the obligation of the Granting Lenders to make Loans to the same extent, and as if, such Loan were made by the Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any payment under this Agreement for which a Lender would otherwise be liable, for so long as, and to the extent, the related Granting Lender makes such payment. In furtherance of the foregoing, each party hereto hereby agrees that, prior to the date that is one year and one day after the payment in full of all outstanding senior indebtedness of any SPC, it will not institute against or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 10.6 any SPC may (i) with notice to, but without the prior written consent of, the Borrower or the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to its Granting Lender or to any financial institutions providing liquidity and/or credit facilities to or for the account of such SPC to fund the Loans made by such SPC or to support the securities (if any) issued by such SPC to fund such Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of a surety, guarantee or credit or liquidity enhancement to such SPC. In no event shall the Borrower be obligated to pay to an SPC that has made a Loan any greater amount than the Borrower would have been obligated to pay under this Agreement if the Granting Lender had made such Loan. Each Granting Lender shall indemnify and hold harmless the Borrower and its directors, officers, employees and agents from and against any and all losses, liabilities, claims, damages and expenses arising from or attributable to the making of a Loan by an SPC of such Granting Lender. EX-10.25 5 FORM OF AMENDMENT NO. 1 1 EXHIBIT 10.25 AMENDMENT NO. 1 Amendment No. 1 ("AMENDMENT"), dated as of October 22, 1998, to that certain Credit Agreement, dated as of September 9, 1998, (the "CREDIT AGREEMENT"), among BOSTON SCIENTIFIC CORPORATION, a Delaware corporation (the "COMPANY" or the "BORROWER"), the lenders party thereto (the "LENDERS"), and MERRILL LYNCH CAPITAL CORPORATION, a New York banking corporation, as Administrative Agent, Lead Arranger and Syndication Agent. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to those terms in the Credit Agreement. W I T N E S S E T H: WHEREAS, the Company has requested the Lenders to amend certain covenants in the Credit Agreement; and WHEREAS, pursuant to Section 10.1 of the Credit Agreement, the Lenders hereby agree to amend certain provisions of the Credit Agreement as set forth herein; NOW, THEREFORE, the parties hereto hereby agree as follows: SECTION ONE AMENDMENTS 1. DEFINITIONS. The definition of "Eurodollar Rate" in Section 1.1 of the Credit Agreement is hereby amended by deleting "EURODOLLAR BASE RATE 1.00- Eurocurrency Reserve Requirements" and substituting in lieu thereof the following: " EURODOLLAR BASE RATE ------------------------------------------------- 1.00 - Eurocurrency Reserve Requirements" 2. EVENTS OF DEFAULT 2 - 2- Section 8.1 of the Credit Agreement is hereby amended as follows: (a) in the fourth line on page 44 of paragraph (d) thereof, "(i)" is hereby deleted and "(iii)" is hereby substituted in lieu thereof; (b) in the twelfth line on page 44 of paragraph (d) thereof, "(ii)" is hereby deleted and "(iv)" is hereby substituted in lieu thereof; (c) in the fourteenth line on page 44 of paragraph (d) thereof, "clause (i)" is hereby deleted and "clause (iii)" is hereby substituted in lieu thereof; (d) in the sixteenth line on page 44 of paragraph (d) thereof, "(iii)" is hereby deleted and "(v)" is hereby substituted in lieu thereof; (e) in the twenty-first line on page 44 of paragraph (d) thereof, "(iv)" is hereby deleted and "(vi)" is hereby substituted in lieu thereof; (f) in the twenty-third line on page 44 of paragraph (d) thereof, "clause (i), (ii), or (iii) above; or (v)" is hereby deleted and "clause (iii), (iv), or (v) above; or (vii)" is hereby substituted in lieu thereof; and (g) in first two lines of the last paragraph of Section 8.1 on page 45 thereof, "clause (i) or (ii) of paragraph (e)" is hereby deleted and "clause (iii) or (iv) of paragraph (d)" is hereby substituted in lieu thereof. 3 - 3 - SECTION TWO CONDITIONS TO EFFECTIVENESS This Amendment shall become effective on the date on which the Administrative Agent shall have received duly executed counterparts hereof from the Borrower and the Majority Lenders. SECTION THREE REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants (which representations and warranties shall survive the execution and delivery hereof) to the Lenders that: (i) The Borrower has the corporate power, authority and legal right to execute, deliver and perform its obligations under this Amendment and have taken all actions necessary to authorize the execution, delivery and performance of its obligations under this Amendment; and (ii) This Amendment has been duly executed and delivered on behalf of the Borrower by a duly authorized officer of the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally. SECTION FOUR MISCELLANEOUS 4.1. Except as herein expressly amended, all provisions of the Credit Agreement and all other agreements, documents, instruments and certificates executed in connection therewith are ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. 4 - 4 - 4.2. This Amendment may be executed by the parties hereto in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same agreement. 4.3. Headings are for convenience only and shall not affect the construction of this Amendment. 4.4. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. 5 - 5 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed as of the date first above written. BOSTON SCIENTIFIC CORPORATION By: -------------------------------------------- Name: Title: MERRILL LYNCH CAPITAL CORPORATION, By: -------------------------------------------- Name: Title: EX-10.26 6 FORM OF AMENDMENT NO. 2 1 EXHIBIT 10.26 AMENDMENT NO. 2 --------------- Amendment No. 2 ("AMENDMENT"), dated as of February 23, 1999, to that certain Credit Agreement, dated as of September 9, 1998, as amended by Amendment No. 1 dated as of October 22, 1998 (the "CREDIT AGREEMENT"), among BOSTON SCIENTIFIC CORPORATION, a Delaware corporation (the "COMPANY" or the "BORROWER"), the lenders party thereto (the "LENDERS"), and MERRILL LYNCH CAPITAL CORPORATION, a New York banking corporation, as Lead Arranger, The Bank of Nova Scotia, as Administrative Agent, Wachovia Bank, N.A., as Syndication Agent, and The Industrial Bank of Japan, as Documentation Agent, with the title for each of the aforementioned Lenders as set forth in an Acknowledgment dated October 19, 1998 between the Company and Merrill Lynch Capital Corporation. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to those terms in the Credit Agreement. W I T N E S S E T H: WHEREAS, the Company has requested the Lenders to amend certain definitions and covenants in the Credit Agreement; and WHEREAS, pursuant to Section 10.1 of the Credit Agreement, the Lenders hereby agree to amend certain definitions and covenants of the Credit Agreement as set forth herein; NOW, THEREFORE, the parties hereto hereby agree as follows: SECTION ONE AMENDMENTS 1. DEFINITIONS Section 1.1 of the Credit Agreement is hereby amended by: (i) deleting the table with the headings "Rating", "Eurodollar Loans" and "ABR Loans" under the definition of Ap- 2 - 2- plicable Margin and substituting the following table in lieu thereof: "RATING EURODOLLAR LOANS ABR LOANS ------ ---------------- --------- Rating I .240% 0% Rating II .270% 0% Rating III .300% 0% Rating IV .525% 0% Rating V .625% 0% Rating VI .825% 0%"; (ii) deleting everything following subclause (ii) on the second line of the definition of Excess Utilization Day and substituting in lieu thereof the following: "(a) with respect to Rating III and above, 50% of the aggregate amount of the Revolving Credit Commitments hereunder (or with respect to any day after termination of such Revolving Credit Commitments, 50% of the aggregate amount of such Revolving Credit Commitments in effect on the date immediately prior to the date on which such Revolving Credit Commitments terminated)and (b) with respect to Rating IV and below, 25% of the aggregate amount of the Revolving Credit Commitments hereunder (or with respect to any day after termination of such Revolving Credit Commitments, 25% of the aggregate amount of such Revolving Credit Commitments in effect on the date immediately prior to the date on which such Revolving Credit Commitments terminated)."; (iii) deleting the table with the headings "Rating" and "Facility Fee Rate" and substituting the following table in lieu thereof: "RATING FACILITY FEE RATE ------ ----------------- Rating I .060% Rating II .080% Rating III .100% Rating IV .100% Rating V .125% Rating VI .175%"; (iv) deleting "and Rating V" under the definition of Rating Category and substituting the following language thereof: ", Rating V and Rating VI"; (v) deleting Rating III, Rating IV and Rating V in the table under the definition Rating I, Rating II, Rating III, 3 - 3 - Rating IV and Rating V and substituting the following Rating III, Rating IV, Rating V and Rating VI in lieu thereof: "Rating III lower than BBB+ and lower than Baal and greater than or greater than or equal to equal to BBB Baa2 (A2/P2, or higher) Rating IV lower than BBB+ and lower than Baal and greater than or greater than or equal to equal to BBB Baa2 (A3/P2, or A2/P3, or lower) Rating V lower than BBB and lower than Baa2 and greater than or greater than or equal to equal to BBB- Baa3 Rating VI lower than or equal lower than or equal to Ba1"; to BB+ (vi) deleting "and Rating V" from the name of the defined term Rating I, Rating II, Rating III, Rating IV, and Rating V and substituting ", Rating V and Rating VI "in lieu thereof; (vii) deleting the reference to "Rating V" in subclause (iv) under the definition of Rating I, Rating II, Rating III, Rating IV and Rating V and substituting "Rating VI" in lieu thereof; (viii) adding the following language to the end of the sentence for the definition of Utilization Fee Rate: ", for Rating III and above; and .125% for Rating IV and below." 2. NEGATIVE COVENANTS. Section 7.1 of the Credit Agreement is hereby amended by deleting from subclause (ii)(y)(1) of Section 7.1 "the date which is six months after the Closing Date" and substituting in lieu thereof the following clause: "December 31, 1999". 4 - 4 - SECTION TWO CONDITIONS TO EFFECTIVENESS This Amendment shall become effective on the date on which the Administrative Agent shall have received duly executed counterparts hereof from the Borrower and the Majority Lenders. SECTION THREE REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants (which representations and warranties shall survive the execution and delivery hereof) to the Lenders that: (i) The Borrower has the corporate power, authority and legal right to execute, deliver and perform its obligations under this Amendment and have taken all actions necessary to authorize the execution, delivery and performance of its obligations under this Amendment; and (ii) This Amendment has been duly executed and delivered on behalf of the Borrower by a duly authorized officer of the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally. SECTION FOUR MISCELLANEOUS 4.1. Except as herein expressly amended, all provisions of the Credit Agreement and all other agreements, documents, instruments and certificates executed in connection therewith are ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. 4.2. This Amendment may be executed by the parties hereto in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same agreement. 5 - 5 - 4.3. Headings are for convenience only and shall not affect the construction of this Amendment. 4.4. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. 6 - 6 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed as of the date first above written. BOSTON SCIENTIFIC CORPORATION By: --------------------------------------- Name: Title: MERRILL LYNCH CAPITAL CORPORATION, as Lead Arranger and a Lender By: --------------------------------------- Name: Title: THE BANK OF NOVA SCOTIA, as Administrative Agent and a Lender By: --------------------------------------- Name: Title: WACHOVIA BANK, N.A., as Syndication Agent and a Lender By: --------------------------------------- Name: Title: 7 - 7 - THE INDUSTRIAL BANK OF JAPAN, as Documentation Agent and a Lender By: --------------------------------------- Name: Title: COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH, as a Lender By: --------------------------------------- Name: Title: By: --------------------------------------- Name: Title: BANCO CENTRAL HISPANOAMERICANO, S.A., as a Lender By: --------------------------------------- Name: Title: LANDESBANK SCHLESWIG-HOLSTEIN GIROZENTRALE, as a Lender By: --------------------------------------- Name: Title: EX-10.32 7 AGREEMENT AND GENERAL RELEASE OF ALL CLAIMS 1 EXHIBIT 10.32 AGREEMENT AND GENERAL RELEASE OF ALL CLAIMS This Agreement and General Release of All Claims ("Agreement") dated as of December 30. 1998 is entered into by and between James M. Corbett ("You") and Boston Scientific Corporation ("BSC"). This Agreement supersedes and cancels for periods following the Termination Date (as hereinafter defined) any and all prior employment agreements (including the employment agreement concerning any change in control and dated October 19, 1992) or arrangements You may have entered into with BSC or its affiliates. In consideration of the mutual covenants, agreements, and representations contained herein, the adequacy of which is hereby acknowledged, the parties hereto expressly and intentionally bind themselves as follows: 1. TERMINATION OF EMPLOYMENT You hereby acknowledge and agree that effective on or about October 21, 1998 ("Transition Date") You relinquished day-to-day job responsibilities as President, BSC International on behalf of BSC. You further acknowledge and agree that your position as an employee of BSC will end on December 31, 1998 ("Termination Date"). For the period between your Transition Date and Termination Date, You agree to provide such assistance to BSC in connection with your job duties as from time to time may be requested. 2. PAYMENTS BY BSC (a) For the period between your Transition Date and Termination Date, BSC will pay to You on each regular payroll cycle the bi-weekly portion of your current BSC base annual salary of the sum of Three Hundred Thirty-eight Thousand Dollars and no cents ($338,000.00), less applicable payroll withholding for taxes and other applicable deductions. (b) In addition, BSC will pay to You in a single payment on or about January 15, 1999 the sum of Three Hundred Thirty-Eight Thousand Dollars and no cents ($338,000.00). The parties acknowledge that this payment is in consideration of the releases granted and representations made by You in Sections 5 and 6 hereof and of the other obligations undertaken by You in this Agreement. You expressly acknowledge that upon the occurrence of the Termination Date, You will not be eligible for any payments or benefits in addition to those described in this Agreement under any existing BSC Severance Pay Plan and/or Layoff Notification Plan, change in control agreement, or any other such plan, policy or agreement. 1 2 (c) BSC will pay You for all accrued but unused vacation time through the Termination Date in accordance with applicable state law. 3. TERMINATION OF EMPLOYMENT BENEFITS (a) You agree and acknowledge that your participation in BSC's 401(k) Plan, Stock Option Plan(s), and Global Employee Stock Option Plan, if any, Accidental Death and Dismemberment (AD&D), Business Travel Accident, and Short-Term and Long-Term Disability Plans will terminate as of your Termination Date, as will your accrual of vacation time under the applicable BSC vacation policy. You further agree and acknowledge that you will participate through the Termination Date in all other benefits and benefit plans in which you are enrolled to the same extent as do active employees and that your participation in and entitlement to any and all other benefits and benefits plans in which You are currently enrolled, but which are not otherwise specifically addressed in this Agreement, terminates on the Termination Date or according to the same terms and conditions as are available to terminating BSC employees generally, whichever is applicable. (b) Your participation in BSC's Medical/Dental/Vision Plans (as well as the participation of any of your dependents who were covered by such Plans one month prior to the Transition Date) shall continue after the Termination Date on the same terms and conditions as such coverage is made available from time to time to terminating BSC employees generally. You will be responsible for making timely payments for the full costs (plus a 2% administrative fee) of continued participation in BSC's Medical/Dental/Vision Plans for an additional period of up to eighteen (or possibly more) months as provided by the Consolidated Omnibus Budget and Reconciliation Act of 1985 ("COBRA"), should You elect it. To enable BSC to comply with its obligation to provide notification of your eligibility to continue Medical/Dental/Vision Plan coverage, You agree to inform BSC of any change in address or marital status. You also acknowledge that you understand that the terms of BSC's Medical/Dental/Vision Plans offered to BSC employees generally may change from time to time, and that your coverage and associated contribution costs will be subject to any such change. (c) Any unvested portions of previously awarded stock option grants will continue to vest through the Termination Date and will become exercisable under the terms and conditions contained in the applicable plan documents. (d) BSC will reimburse You in accordance with usual BSC policy for all unreimbursed business travel and other out-of-pocket expenses incurred by You through the Termination Date in the performance of your duties as an employee of BSC. Such expenses must be submitted no later than the Termination Date. 2 3 4. FUTURE EMPLOYMENT You agree that You will not apply for employment or seek re-employment at any time in the future with BSC or any of its subsidiaries, affiliates, successors or assigns. 5. RELEASE BY YOU Except as otherwise provided in this Section 5, You hereby release and forever discharge BSC and its subsidiaries, affiliates, successors, and assigns and the Directors, officers, shareholders, employees, representatives and agents of each of the foregoing (collectively "Releasees") of and from the following up to and as of the date of execution of this Agreement: (a) Any and all claims, demands, and liabilities whatsoever of every name and nature (other than those arising directly out of this Agreement), including (without limitation) those with respect to Your employment or the terms and conditions or termination of his employment, benefits or compensation which You have against Releasees, or ever had; (b) As included in the above, without limitation, all claims known or which reasonably could have been known for tortious injury, breach of contract, and wrongful discharge (including without limitation, any claim for constructive discharge), all claims for infliction of emotional distress, all claims for slander, libel, or defamation of character, all claims for retaliation, and all claims for attorneys' fees, as related to Your employment by BSC, or the terms and conditions or termination of his employment, benefits, or compensation; and (c) You specifically releases and forever discharges Releasees from any and all claims based upon any allegation of employment discrimination, including (without limitation) discrimination on the basis of race, color, sex, age (including any claim pursuant to the Federal Age Discrimination in Employment Act), religion, disability or national origin. BSC agrees that in the event that the Releasees initiate litigation, arbitration, mediation or otherwise assert legal or equitable claims against You, then notwithstanding the releases provided for in this Section 5 and the representations made in Section 6 hereof, You may assert as counterclaims, crossclaims or set-offs against Releasees any and all claims You may have against Releasees, including any claims that otherwise were released by this Section 5 and further including any such claims that as of the Termination Date would not have been barred by applicable statutes of limitation, provided Your right to make such assertions shall not be triggered in the event BSC seeks repayment of indemnification payments in accordance with Delaware General Corporation Law or enforcement of Your obligations under this Agreement. You acknowledge that You have been given the opportunity, if You so desires, to consider this Agreement for twenty-one (21) days before executing it. In the event that You execute the Agreement within less than twenty-one (21) days of the date of its delivery to You, You acknowledge that such decision was entirely voluntary and that You had the 3 4 opportunity to consider this Agreement for the entire twenty-one (21) day period. You agree that any modifications, material or otherwise, made to this Agreement do not restart or affect in any manner the original twenty-one (21) day consideration period. BSC acknowledges that for a period of seven (7) days from the date of the execution of this Agreement, You shall retain the right to revoke this Agreement by written notice to BSC, c/o Robert G. MacLean, Senior Vice President, Human Resources, Boston Scientific Corporation, One Boston Scientific Please, Natick, MA 01760, and that this Agreement shall not become effective or enforceable until the expiration of such revocation period. Therefore, no payments called for by BSC under Section 2(b), above, shall be made until the expiration of such revocation period. 6. NO DAMAGES SOUGHT; FUTURE ACTIONS (a) You represent and state that You have not and will not seek any damages in connection with any complaints or charges filed against Releasees with any local, state or federal agency or court, and You agrees that if any complaint or charge is filed on Your behalf, You shall take all reasonable steps necessary to refuse any compensation in connection with any such claimed damages. (b) In addition, to the extent permitted by applicable law, You represent and warrant that You have not previously recommended or suggested, and You will not recommend or suggest, to any federal, state or local governmental agency or any potential claimants against or employees of the Releasees, that they initiate any claim or lawsuit against the Releasees, and, again to the extent permitted by applicable law, You will not voluntarily aid, assist or cooperate with any claimants against or employees of the Releasees in bringing such claims or lawsuits; provided, however, that nothing in this Section 6 will be construed to prevent You from giving truthful testimony in response to direct questions asked pursuant to a lawful subpoena or other legal process during any legal proceeding involving the Releasees. 7. NO LIABILITY ADMITTED You acknowledges that neither BSC's execution of this Agreement nor BSC's performance of any of its terms shall constitute an admission by BSC of any wrongdoing on Releasees' parts with respect to You in connection with any matter, including (without limitation) the matters set forth in Section 5, above. 8. NONDISCLOSURE OF CONFIDENTIAL INFORMATION (a) You shall keep entirely secret and confidential, and shall not disclose to any person or entity, in any fashion or for any purpose whatsoever, any information that is (i) not available to the general public, and/or (ii) not generally known outside BSC, regarding Releasees to which You have had access or about which You heard during the course of Your employment by BSC, including (without limitation) any information relating to BSC's business or operations; BSC plans, strategies, prospects or objectives; BSC products, technology, processes or 4 5 specifications; BSC research and development operations or plans; BSC customers and customer lists; BSC manufacturing, distribution, sales, service, support and marketing practices and operations; BSC financial conditions and results of BSC operations; BSC operational strengths and weaknesses; and BSC personnel and compensation policies, procedures and transactions. (b) You agree to return to BSC, on or before the Termination Date, documents or media of whatever nature, including summaries containing any of the data referred to in the immediately preceding paragraph whatsoever, including all documents, data, material, details and copies thereof in any form. You agree to return to BSC, on or before the Termination Date, all BSC property, including (without limitation) all computer equipment, property passes, keys, credit cards, business cards, identification badges, and all sample and demonstration products. 9. NO DETRIMENTAL COMMUNICATIONS You agree that You will not disclose or cause to be disclosed any negative, adverse or derogatory comments or information about Releasees, about any product or service provided by Releasees, or about Releasees' prospects for the future. Furthermore, You hereby represent to BSC that You have made no such communication to any public official, to any person associated with the media, or to any other person or entity. You acknowledge that BSC relies upon this representation in agreeing to enter into this Agreement. BSC agrees that its executive officers and directors will exercise reasonable business judgment and good faith not to disclose or cause to be disclosed any negative, adverse or derogatory comments or information about You or Your employee relationship with BSC or its affiliates. BSC further agrees to respond to inquiries by your potential future employers and/or business partners only after consultation or as may be agreed with You. BSC acknowledges that You have relied upon this representation in agreeing to enter into this Agreement. Nothing in this Section 9 will be construed to prevent You or BSC from giving truthful testimony in response to direct questions asked pursuant to a lawful subpoena or other legal process during any legal proceeding involving You or BSC. 10. FUTURE ASSISTANCE BSC may seek Your assistance, cooperation or testimony in connection with any investigation, litigation, patent application or prosecution, or intellectual property or other proceeding arising out of matters within Your knowledge and related to Your position as an employee of BSC, and in any such instance, You shall provide such assistance, cooperation or testimony and BSC shall pay Your reasonable costs and expenses in connection therewith. 5 6 11. HIRING OF BSC EMPLOYEES During the period from the Termination Date through twenty-four (24) months from the Termination Date, You shall not attempt to hire away any employee of BSC or any of its affiliates (collectively the "Company"), assist in the hiring away of any of the Company's employees by another person, or encourage any Company employee to terminate his or her employment with the Company, whether directly or indirectly, unless the President of BSC or his designee shall have given prior written approval. 12. POST-SEPARATION RESTRICTION In consideration of BSC's obligations hereunder, You agree that, during the period beginning as of the Termination Date and ending twenty-four months thereafter, he shall not, directly or indirectly, without the written consent of an Executive Officer of BSC, engage in any activity or provide any service for a company, business unit, entity or person who develops, manufactures, markets or sells less invasive medical devices that are competitive with products offered by BSC or known to You to be proposed to be offered by BSC indicated for use in the fields of cardiology, radiology, urology, gastroenterology, neurology or vascular surgery (the "Fields"). To the extent and from the date You demonstrate that BSC has failed to materially perform its obligations under Section 9 hereof, Your obligations under this Section 12 shall lapse. 13. CONFIDENTIALITY You agree to keep confidential the existence of this Agreement, as well as all of its terms and conditions, and not to disclose to any person or entity the existence, terms or conditions of this Agreement except to his attorney, financial advisors and members of his immediate family provided they agree to keep confidential the existence, terms and conditions of this Agreement. In the event that You believe you are compelled by law to divulge the existence, terms or conditions of this Agreement, he will notify BSC (by notifying BSC's Legal Department) of the basis for the belief sufficiently in advance of actually divulging the information to enable BSC to seek appropriate protective orders. You hereby confirm that as of the date of signing this Agreement, You have not disclosed the existence, terms or conditions of this Agreement, except as permitted by this Section 13. In the event of a breach of this Agreement, You shall repay to BSC all of the amounts paid under Section 2(b), above, and will be liable, moreover, for any damages which a court may determine and will be subject to injunctive relief damages, and any other relief which a court may award. 14. GOVERNING LAW; SEVERABILITY This Agreement is entered into and shall be construed under the laws of the Commonwealth of Massachusetts, without regard to its conflict of law rules, and suits to enforce rights and obligations hereunder shall be brought exclusively in a court of competent jurisdiction 6 7 in the Commonwealth of Massachusetts. In the event any provision of this Agreement is determined to be illegal or unenforceable by a duly authorized court of competent jurisdiction, then the remainder of this Agreement shall not be affected thereby, it being the intention of the parties that each provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. However, if any portion of the General Release language in Section 5, above, is ruled to be unenforceable for any reason, You shall return the consideration paid under Section 2(b), above, to BSC upon demand by BSC, which demand shall be made if You were to file any claim against BSC in violation of this Agreement, especially Section 6. 15. INDEMNIFICATION In the event You were, are or become a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a claim by reasons of (or arising in part out of) an Indemnifiable Event (as defined below), BSC shall indemnify You to the fullest extent permitted by law and upon receipt of an appropriate undertaking in accordance with Delaware General Corporation Law against any and all reasonable expenses, judgments, fines, penalties and amounts paid in settlement approved in advance by BSC (including all interest, assessments and other charges paid or payable in connection with or in respect of such expenses, judgments, fines, penalties or amounts paid in settlement) of such claim. For purposes of this Agreement, "Indemnifiable Event" means any event or occurrence that takes place either prior to or after the execution of this Agreement related to the fact that You are or were is or was an officer, director, employee, agent or fiduciary of BSC, or is or was serving at the request of BSC as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. It shall be a defense to any action brought by You against BSC to enforce this indemnification obligation that You has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for BSC to indemnify You for the amount claimed. 16. WAIVERS; AMENDMENTS The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation and shall not be deemed a waiver of any subsequent breach. No modification or waiver of any provision of this Agreement shall be effective unless in writing and signed by both parties. 17. NO OTHER INDUCEMENTS This Agreement sets forth the entire understanding of the parties in connection with the subject matter hereof. Any and all prior negotiations are merged in this Agreement. Neither of the parties has made any settlement, representation or warranty in connection herewith 7 8 (except those expressly set forth in this Agreement) which has been relied upon by the other party, or which acted as an inducement for the other party to enter into this Agreement. 18. PERSONS BOUND BY THE AGREEMENT This Agreement shall be binding upon and inure to the benefit of You and BSC and their respective successors. 19. ASSIGNMENT OF INTERESTS You warrant that You have not assigned or transferred or purported to assign or transfer any claim against Releasees. In addition, You shall for a period of one (1) year after the Termination Date, promptly report and disclose to BSC all ideas, inventions and concepts developed or conceived in the Fields ("Inventions"), which You agree shall be presumed to have been developed or conceived during the term of Your employment with BSC or its affiliates. Inventions shall be the property of BSC and are hereby assigned to BSC without any additional payments to You by BSC. It is understood that BSC shall have the right but not the obligation to initiate, prosecute, maintain and defend, at its expense, any and all patents fileable with respect to Inventions. You shall provide reasonable assistance to BSC with respect to any such patents and patent applications, and shall execute all appropriate documents and assignments with respect to any such patents and patent applications. 20. FEES In the event that any action or proceeding is initiated to enforce or interpret the provisions of this Agreement, or to recover for a violation of the Agreement, each party in any such action or proceeding shall be bear its own costs and expenses (including attorneys' fees). 21. REPRESENTATION You represent that, prior to executing this Agreement, You had the opportunity to review the provisions of this Agreement with counsel of Your choice. 8 9 The parties have read the foregoing Agreement and know its contents, and know that its terms are contractual and legally binding. The parties further agree that they enter this Agreement voluntarily and that they have not been pressured or coerced in any way into signing this Agreement. IN WITNESS WHEREOF, the parties hereby agree. By: /s/ James M. Corbett ------------------------------ James M. Corbett BOSTON SCIENTIFIC CORPORATION By: /s/ Robert G. MacLean ------------------------------ Robert G. MacLean Senior Vice President Human Resources 9 EX-10.33 8 AGREEMENT AND GENERAL RELEASE OF ALL CLAIMS 1 EXHIBIT 10.33 AGREEMENT AND GENERAL RELEASE OF ALL CLAIMS This Agreement and General Release of All Claims ("Agreement") is entered into by and between Charles M. Mabrey ("You" or "Employee") and Boston Scientific Corporation ("BSC") as of the latest date of execution by the parties to this Agreement. This Agreement supersedes and cancels any prior employment agreements or arrangements You may have entered into with BSC except for the Employment Agreement ("Employment Agreement") signed by You on May 19, 1987, and attached hereto as Attachment 1. Employee's obligations under the Employment Agreement shall be in addition or complementary to, and shall not be superseded, by this Agreement. In consideration of the mutual covenants, agreements, and representations contained herein, the adequacy of which is hereby acknowledged, the parties hereto expressly and intentionally bind themselves as follows: 1. TRANSITION AND ULTIMATE TERMINATION OF EMPLOYMENT You hereby acknowledge and agree that effective January 1, 1999 ("Transition Date") your position as a full-time Senior Vice President, Operations, of BSC will transition to that of a part-time employee working one hundred (100) hours per quarter. You further acknowledge and agree that your position as Senior Vice President, Operations, of BSC and as an employee of BSC will end entirely on December 31, 2000, subject to possible earlier termination as set forth in Paragraph 5(d), below ("Termination Date"). For the period between the Transition Date and Termination Date, You will continue to perform the job responsibilities referenced in Paragraph 5(a), below. 2. PAYMENTS BY BSC (a) For the first twelve-(12) month period (the "First Twelve-(12) Month Period") immediately following the Transition Date, BSC will pay to You on each regular payroll cycle the bi-weekly portion of your current BSC base annual salary of the sum of Two Hundred Seventy Thousand Four Dollars and Eighty cents ($270,004.80) (i.e., $10,384.80 per bi-weekly payroll cycle), less applicable payroll withholding for taxes and other applicable deductions. These payments will be made as compensation for the job responsibilities to be undertaken by You as referenced in Paragraph 5(a), below. 1 2 (b) For the second twelve-(12) month period (the "Second Twelve-(12) Month Period") following the Transition Date, BSC will pay to You on each regular payroll cycle the bi-weekly portion of the sum of Five Thousand Dollars and no cents ($5,000.00) per quarter (i.e., $769.23 per bi-weekly payroll cycle), less applicable payroll withholding for taxes and other applicable deductions. These payments will be made in recognition of and as compensation for the reduced job responsibilities to be undertaken by You during the Second Twelve-(12) Month Period, such reduced responsibility to consist primarily of your provision of transition assistance to your successor(s) on an as-needed basis. You expressly acknowledge that upon the occurrence of the Termination Date, You will not be eligible for any payments or benefits in addition to those described in this Agreement under any existing BSC Severance Pay Plan and/or Layoff Notification Plan. (c) To help defray the incremental costs you may incur in securing health insurance coverage for You and your spouse (over and above your normal contribution) once your participation in the BSC medical and dental programs ceases, BSC will pay you within a reasonable period of time after June 30, 2000 a one-time bonus in the gross amount of Seventy Thousand Dollars and no cents ($70,000.00), which includes a "grossed up" amount to account for tax obligations you will incur as a result of this payment. (d) BSC will pay You for all accrued but unused vacation time through the Termination Date in accordance with applicable Massachusetts law. 3. STATUS OF EMPLOYMENT BENEFITS (a) The Split Dollar Life Insurance Policy currently in place on your behalf will remain in place, and all of the terms and conditions of that Policy will continue to apply. (b) As of January 1, 1999, you will have the opportunity to convert the group dependent life insurance coverage you have elected to a non-group life insurance plan upon meeting applicable eligibility requirements. (c) You agree and acknowledge that your participation in BSC's Global Employee Stock Option Plan, if any, Accidental Death and Dismemberment (AD&D), Business Travel Accident, and Short-Term and Long-Term Disability Plans will terminate as of your Transition Date; that your accrual of vacation time under the applicable BSC vacation policy will continue through the Termination Date and will be based on your scheduled number of work hours; that you will not be eligible to receive holiday pay; and that your participation in BSC's 401(k) Plan will continue, based on your scheduled number of work hours, through the Termination Date. You further agree and acknowledge that you will participate through the Termination Date in all other benefits and benefit plans in which you are currently enrolled in accordance with the eligibility accorded part-time employees who work the number of hours for 2 3 which you have been scheduled and that your participation in and entitlement to any and all other benefits and benefit plans in which You are currently enrolled, but which are not otherwise specifically addressed in this Agreement, terminates according to the same terms and conditions as are available to BSC employees generally. (d) For the period January 1, 1999 through June 30, 2000, your participation in BSC's Medical/Dental Plans shall continue, on the same terms and conditions as are made available to BSC employees generally, as provided by the Consolidated Omnibus Budget and Reconciliation Act of 1985 ("COBRA"). You may cancel such coverage at any time prior to June 30, 2000, should you desire to do so. BSC will pay the employer's portion of the insurance premium for any such medical/dental coverage elected through June 30, 2000. You acknowledge that the terms of the BSC Medical/Dental Plans offered to BSC employees generally may change from time to time, and that your coverage will be subject to any such change. (e) Any unvested portions of previously awarded stock option grants will continue to vest through the Termination Date and will become exercisable under the terms and conditions contained in the applicable plan documents. (f) BSC will arrange to transfer to you as a gift, effective January 1, 1999, ownership of the leased vehicle currently in your possession through BSC's leasing program. Any tax obligations associated with the value of this transfer will be your personal responsibility. 4. EXPENSE REIMBURSEMENT BSC will reimburse you in accordance with usual BSC policy for all unreimbursed business travel and other out-of-pocket expenses incurred by you through the Termination Date in the performance of your duties as an employee of BSC. Such expenses must be submitted no later than the Termination date. 5. PART-TIME EMPLOYMENT FOR THE PERIOD JANUARY 1, 1999 THROUGH DECEMBER 30, 2000. (a) As described in Paragraph 1, above, Employee shall be employed by BSC as a part-time employee through the Termination Date. Attached to this Agreement as Attachment 2 is a description of the responsibilities to be performed by Employee through the Termination Date. (b) At all times through the Termination Date, Employee shall observe all policies and guidelines established by BSC with respect to its employees, including but not limited to the Company's Code of Conduct and Employee Information Guide. 3 4 (c) Prior to the Termination Date, Employee shall not work for or otherwise provide services for any other business, entity or person on a full-time basis or in any other way which would interfere with his ability to fully perform his part-time employment responsibilities in accordance with this Section 5. (d) Notwithstanding anything to the contrary in this Agreement, at any time prior to the Termination Date, BSC may change Employee's Termination Date to a date earlier than December 31, 2000 immediately upon notice to Employee if it determines that any of the following has occurred: (i) Employee has not signed and returned this Agreement prior to the end of the 21-day period referenced in Section 6(b), or has revoked or rescinded this Agreement pursuant to Section 7 of this Agreement; (ii) Employee has not cooperated in good faith to fulfill his obligations and agreements under Sections 5(a), (b) and (c), above, through and including the Termination Date; or (iii) Employee has materially breached any of his other obligations or agreements under this Agreement or the Employment Agreement. (e) If Employee's employment with BSC ends prior to December 31, 2000 as set forth in Section 5(d), above, in addition to any other remedies available to BSC: (i) BSC may cease making any payments under Sections 2(a), (b) and (c), above, provided, however, that such cessation of payments or other consideration shall neither nullify nor otherwise affect the enforceability of, or any of Employee's obligations under, this Agreement; and (ii) any reference in this Agreement to "Termination Date" shall refer to such earlier Termination Date. 6. RELEASE BY EMPLOYEE (a) Employee hereby releases and forever discharges BSC and its subsidiaries, affiliates, successors, and assigns and the Directors, officers, shareholders, employees, representatives and agents of each of the foregoing (collectively "Releasees") of and from the following as of the date of execution of this Agreement: (i) Any and all claims, demands, and liabilities whatsoever of every name and nature (other than those arising directly out of this Agreement), including (without limitation) those with respect to Employee's employment or the terms and conditions or termination of his employment, benefits or compensation which Employee has against Releasees, or ever had; (ii) As included in the above, without limitation, all claims known or which reasonably could have been known for tortious injury, breach of contract, and wrongful discharge (including without limitation, any claim for constructive discharge), all claims for infliction of emotional distress, all claims for slander, libel, or defamation of character, all claims for retaliation and all claims for attorneys' fees, as related to Employee's 4 5 employment by Releasees, or the terms and conditions or termination of his employment, benefits, or compensation; and (iii) Employee specifically releases and forever discharges Releasees from any and all claims based upon any allegation of employment discrimination, including (without limitation) discrimination on the basis of race, color, sex, age (including without limitation any claim pursuant to the Federal Age Discrimination in Employment Act), religion, disability or national origin. (b) Employee acknowledges that he has been given the opportunity, if he so desires, to consider this Agreement for 21 days before executing it. If Employee executes this Agreement within less than 21 days of the date of its delivery to him, he acknowledges that such decision was entirely voluntary and that he had the opportunity to consider this Agreement for the entire 21-day period. Employee agrees that any modifications, material or otherwise, made to this Agreement do not restart or affect in any manner the original twenty-one (21) day consideration period. 7. RESCISSION BSC acknowledges that for a period of seven (7) days from the date of the execution of this Agreement, Employee shall retain the right to revoke this Agreement by written notice to Boston Scientific Corporation, c/o Robert G. MacLean, Senior Vice President, Human Resources, One Boston Scientific Place, Natick, MA 01760, and that this Agreement shall not become effective or enforceable until the expiration of such revocation period. Therefore, no BSC obligations will be met and payments called for by BSC shall not be made under Sections 2(a), (b) and (c), above, until the expiration of such revocation period. 8. NO DAMAGES SOUGHT; FUTURE ACTIONS (a) Employee represents and states that he has not and will not seek any damages in connection with any complaints or charges filed against Releasees with any local, state or federal agency or court, and Employee agrees that if any complaint or charge is filed on his behalf, he shall take all reasonable steps necessary to refuse any compensation in connection with such claimed damages. (b) In addition, to the extent permitted by applicable law, Employee represents and warrants that he has not previously recommended or suggested, and he will not recommend or suggest, to any federal, state or local governmental agency or any potential claimants against or employees of the Releasees, that they initiate any claim or lawsuit against the Releasees, and, again to the extent permitted by applicable law, Employee will not voluntarily aid, assist or cooperate with any claimants against or employees of the Releasees in bringing such claims or lawsuits; provided, however, that nothing in this Paragraph 8 will be 5 6 construed to prevent Employee from giving truthful testimony in response to direct questions asked pursuant to a lawful subpoena or other legal process during any future legal proceeding involving the Releasees. 9. NO LIABILITY ADMITTED Employee acknowledges that neither BSC's execution of this Agreement nor BSC's performance of any of its terms shall constitute an admission by BSC of any wrongdoing on Releasees' parts with respect to Employee in connection with any matter, including (without limitation) the matters set forth in Paragraph 6, above. 10. NONDISCLOSURE OF CONFIDENTIAL INFORMATION (a) Employee shall keep entirely secret and confidential, and shall not disclose to any person or entity, in any fashion or for any purpose whatsoever, any information that is: (i) not available to the general public; and/or (ii) not generally known outside BSC, regarding Releasees to which he has had access during the course of his employment by BSC, including (without limitation) any information relating to BSC's business or operations; its plans, strategies, prospects or objectives; its products, technology, processes or specifications; its research and development operations or plans; its customers and customer lists; its manufacturing, distribution, procurement, sales, service, support and marketing practices and operations; its financial conditions and results of its operations; its operational strengths and weaknesses; and its personnel and compensation policies, procedures and transactions. (b) Employee agrees to return to BSC, on or before the Termination Date, documents or media of whatever nature, including summaries containing any of the notes or data referred to in the immediately preceding paragraph whatsoever, including all documents, data, material, details and copies thereof in any form. Employee agrees to return to BSC, on or before the Termination Date, all BSC property, including (without limitation) all computer equipment, property passes, keys, credit cards, business cards, identification badges, and all sample and demonstration products. 11. NO DETRIMENTAL COMMUNICATIONS Employee agrees that he will not disclose or cause to be disclosed any negative, adverse or derogatory comments or information about Releasees, about any product or service provided by Releasees, or about Releasees' prospects for the future. Furthermore, Employee hereby represents to BSC that he has made no such communication to any public official, to any person associated with the media, or to any other person or entity. Employee acknowledges that BSC relies upon this representation in agreeing to enter into this Agreement. 6 7 12. FUTURE ASSISTANCE BSC may seek the assistance, cooperation or testimony of Employee in connection with any investigation, litigation, patent application or prosecution, or intellectual property or other proceeding arising out of matters within the knowledge of Employee and related to his position as an employee of BSC, and in any such instance, Employee shall provide such assistance, cooperation or testimony and BSC shall pay Employee's reasonable costs and expenses in connection therewith. 13. HIRING OF BSC EMPLOYEES During the period beginning as of the date Employee signs this Agreement and for twenty-four (24) months thereafter, Employee shall not, directly or indirectly, attempt to hire away any individual who was an employee of BSC or any of the Releasees within the twelve (12)-month period immediately preceding the Transition Date, assist in the hiring away of any such employee by himself or any other person or entity, or encourage any such employee to terminate his or her employment with BSC, whether directly or indirectly, unless the President of BSC or his designee shall have given prior written approval. 14. POST-SEPARATION RESTRICTION During the period beginning as of the date Employee signs this Agreement, and for twenty-four (24) months thereafter, Employee agrees that he shall not, directly or indirectly, without the written consent of an Executive Officer of BSC, engage in any activity in the area of medical device manufacturing which is competitive with BSC as it relates to any of the work Employee performed or with which Employee was familiar as an employee of BSC. 15. CONFIDENTIALITY Employee agrees to keep confidential the existence of this Agreement, as well as all of its terms and conditions, and not to disclose to any person or entity the existence, terms or conditions of this Agreement except to his attorney, financial advisors and members of his immediate family provided they agree to keep confidential the existence, terms and conditions of this Agreement. In the event the Employee believes he is compelled by law to divulge the existence, terms or conditions of this Agreement, he will notify BSC (by notifying BSC's Legal Department) of the basis for the belief before actually divulging the information. Employee hereby confirms that as of the date of signing this Agreement, he has not disclosed the existence, terms or conditions of this Agreement, except as permitted by this Paragraph 15. In the event of a breach of this Agreement or the Employment Agreement, Employee shall repay to BSC all of the amounts paid under Sections 2(a), (b) and (c), above, and will be liable, moreover, for any damages which a court may determine and will be subject to injunctive relief, damages and any other relief which a court may award. 7 8 16. GOVERNING LAW, SEVERABILITY This Agreement is entered into and shall be construed under the laws of the Commonwealth of Massachusetts without regard to its conflicts of law rules. In the event any provision of this Agreement is determined to be illegal or unenforceable by a duly authorized court of competent jurisdiction, then the remainder of this Agreement shall not be affected thereby, it being the intention of the parties that each provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. However, if any portion of the general release language in Paragraph 6, above, were ruled to be unenforceable for any reason, Employee shall return the consideration provided under Sections 2(a), (b) and (c), above, to BSC upon demand by BSC, which demand shall be made if Employee were to file any claim against BSC in violation of this Agreement, especially Paragraph 8. 17. WAIVERS, AMENDMENTS The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation and shall not be deemed a waiver of any subsequent breach. No modification, alteration, or change or waiver of any provision of this Agreement shall be effective unless in writing and signed by both parties wherein specific reference is made to this Agreement. 18. NO OTHER INDUCEMENTS This Agreement sets forth the entire understanding of the parties in connection with the subject matter hereof. Any and all prior negotiations are merged in this Agreement. Neither of the parties has made any settlement, representation or warranty in connection herewith (except those expressly set forth in this Agreement) which has been relied upon by the other party, or which acted as an inducement for the other party to enter into this Agreement. 19. PERSONS BOUND BY THE AGREEMENT This Agreement shall be binding upon and inure to the benefit of Employee and BSC and their respective successors. 20. ASSIGNMENT OF INTERESTS Employee warrants that he has not assigned or transferred or purported to assign or transfer any claim against Releasees. 8 9 21. PREVAILING PARTY ENTITLED TO FEES In the event that any action or proceeding is initiated to enforce or interpret the provisions of this Agreement, or to recover for a violation of the Agreement, the prevailing party in any such action or proceeding shall be entitled to its costs (including reasonable attorneys' fees). 22. REPRESENTATION Employee represents that, prior to executing this Agreement, he had the opportunity to review the provisions of this Agreement with counsel of his choice. The parties have read the foregoing Agreement and know its contents, and know that its terms are contractual and legally binding. The parties further agree that they enter this Agreement voluntarily and that they have not been pressured or coerced in any way into signing this Agreement. IN WITNESS WHEREOF, the parties hereby agree. by: /s/ Charles M. Mabrey December 29, 1998 --------------------------------------- ------------------------- Charles M. Mabrey Date BOSTON SCIENTIFIC CORPORATION By: /s/ Robert G. MacLean January 4, 1999 --------------------------------------- ------------------------- Robert G. MacLean Date Senior Vice President Human Resources Attachments: 1. Employment Agreement Dated May 19, 1987 2. Part-Time Responsibilities Specification 9 10 ATTACHMENT 1 MEDI-TECH EMPLOYMENT AGREEMENT -------------------- In consideration of my employment by MEDI-TECH, Incorporated ("the Company"), I agree to communicate to the Company all inventions, discoveries or improvements (whether or not patentable) which I may make during the term of my employment. If requested to do so by the Company, I agree to do whatever is necessary to take out patents in any country and to assign all patents and applications relating to them to the Company, before or after leaving its employment. It is understood that the cost of making such assignments and procuring patents shall be paid by the Company. I further agree that rights to all royalties resulting from such patents will be the property of the Company. If requested, but not otherwise, I agree to take out copyrights on work resulting from specific Company assignments and to assign such copyrights to the Company. I further agree that rights to all royalties resulting from such copyrights will be the property of the Company. It is understood, however, that copyrights resulting from professional activities of a general nature not resulting from a specific Company assignment are my own property. I recognize that I will have knowledge of business confidences of the Company, including written material such as memoranda, sales records, product development information, customer information, financial information, and laboratory reports. I agree to hold confidential both during and after my employment all such matters, over and above the ordinary skill of my profession, the disclosure of which might prejudicially affect the Company or its clients. Upon termination of employment I will not take written or printed material with me whether in the form of printed reports, case memoranda, laboratory notebooks or any file material whatsoever without the written permission of the Company. I further agree that for a period of two years after the termination of my employment with the Company, I will not, without the written consent of the Company, work for or assist any business organization which competes with the Company with respect to its products being sold or in development. 10 11 As a condition of employment, I certify: that to the best of knowledge, I have no commitments to any present or former employer, or to any other parties, which could create a conflict of interest on behalf of the Company its clients, and that I am free to disclose and make use of non-confidential information except as noted below (if none, please state so.) - -------------------------------------------------------------------------------- None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- that I have no commitments, or restrictions, in my service as a result of past or present consulting agreements, directorships, ownerships or other position or connection with any other organization, and will not enter into such commitments without prior discussions with the Company, except as noted below (if none, please state so.) - -------------------------------------------------------------------------------- None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- that I am not committed to publish any work of mine by any other organization, or have my name used in connection with any publication or promotional material which may appear subsequent to my employment, except as noted below (if none, please state so.) - -------------------------------------------------------------------------------- None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Please bring this form to the Human Relations Department to execute signature and witness. Name (printed) Charles M. Mabrey -------------------------------------------- Signature /s/ Charles M. Mabrey -------------------------------------------- Date 5/18/87 -------------------------------------------- Witness to signature -------------------------------------------- (Human Relations Department) 11 12 ATTACHMENT 2 Part-Time Responsibilities to be Performed by Charles M. Mabrey for the Period January 1, 1999 through December 31, 2000 ("Termination Date") Through the Termination Date, Employee shall perform such responsibilities as may be reasonably requested by BSC, including without limitation: 1. Identify and assist to the extent requested in the orientation of Employee's successor(s) at BSC (during both the First Twelve-(12) Month Period and Second Twelve-(12) Month Period). 2. Assure a smooth transition of Employee's current job responsibilities, including: (i) the transition of such job responsibilities to his successor(s) or another one or more persons designated by his manager(s); and (ii) the professional handling of matters for which he is currently responsible until such matters are assigned to another one or more persons designated by BSC (during both the First Twelve-(12) Month Period and Second Twelve-(12) Month Period). 3. Evaluate and provide input with respect to the supply chain initiative (McKinsey Project) currently being implemented at BSC (particularly during the First Twelve-(12) Month Period). 4. Provide advice and assistance to facilitate the implementation and ongoing progress of the strategic manufacturing capacity plan (particularly during the First Twelve-(12) Month Period). 5. Provide advice and assistance to facilitate operational rationalization and consolidation (particularly during the First Twelve-(12) Month Period). 12 EX-10.34 9 LETTER AGREEMENT DATED MARCH 17, 1999 1 EXHIBIT 10.34 March 17, 1999 Mr. James R. Tobin Dear Jim: On behalf of Boston Scientific Corporation, I am very pleased to offer you the position of President and Chief Executive Officer reporting directly to Pete Nicholas, Chairman of the Board. If you accept our offer, your employment will be effective March 17, 1999. COMPENSATION: Boston Scientific's compensation programs provide our employees on a pay for performance basis, with significant compensation opportunities through both annual and long term incentive programs. The objective of these programs is to recognize and reward employees on the basis of both individual and company performance. During employment, your compensation and benefits will be as follows: * Base Salary: Your annual base salary from your start date through the end of 1999 will be at the rate of $700,000 per year, payable in accordance with the regular payroll practices of Boston Scientific. Your base salary will be reviewed annually thereafter, with your next review scheduled for December, 1999. * Boston Scientific Performance Bonus Award Program: You will be eligible to participate in this program subject to terms generally applicable to Program participants. As in previous years, the actual 1999 award will be based on a combination of Corporate accomplishment and personal achievement and will be targeted at 100% of your base salary if our goals and objectives are met. You must be employed on the date the award is payable in order to be eligible for payment under this Program. * Long-Term Incentive Program: You will be nominated for a grant of a non-qualified stock option of 1,000,000 shares, which will provide you an opportunity for equity interest in Boston Scientific. Such options will be granted under the approved 1995 Long Term Incentive Plan for active employees in effect on the date of this letter and will be subject to all terms of that Program. Your options will vest over a five (5) year period at a rate of 20% per year on the anniversary of the initial grant date. In addition, if you are terminated from the Company without cause, all remaining unvested options from this grant will fully vest on your termination date and shall be exercisable for two (2) years following the termination date. The grant of the option is subject to the approval of the Compensation Committee of the Board of Directors of Boston Scientific. 2 BOARD MEMBERSHIP: The Chairman of the Board will recommend your appointment to serve as a Director of Boston Scientific effective your first day of employment. BENEFITS: During your employment, you will be eligible to participate in all benefit plans made available by Boston Scientific to it's U.S. employees, subject to plan terms, plan changes and amendments from time to time, and generally applicable Boston Scientific policies. In addition you will be eligible to participate in the Executive Life Insurance Program and in the annual Medical Examination/Automobile Reimbursement Program. VACATION: You will be eligible for the maximum vacation allowable under the U.S. plan which is 4 weeks a year. In addition you will be granted all legal holidays that U.S. employees are granted on an annual basis. BUSINESS EXPENSES: Boston Scientific will pay or reimburse you all reasonable and customary business expenses incurred or paid by you in the performance of your duties for Boston Scientific, subject to any maximum annual limit and other restrictions on such expenses set by policy and to such reasonable substantiation and documentation as may be specified by Boston Scientific from time to time. CAPACITY AND DUTIES: As President and Chief Executive Officer of Boston Scientific Corporation initially you will have the entire Executive Committee reporting to you with the exception of our General Counsel who will report to the Chairman of the Board. In your capacity as President and Chief Executive Officer you will be expected to devote your full business time and your best professional efforts to the performance of your duties and responsibilities for Boston Scientific and to abide by all policies and procedures of Boston Scientific as in effect from time to time. MISCELLANEOUS: All payments by Boston Scientific under this letter will be reduced by taxes and other amounts required to be withheld by Boston Scientific under applicable law. Compensation programs and benefits will be applied to you on the same terms as are applicable to other participants and are subject to modification, termination or replacement from time to time at the discretion of Boston Scientific. Please understand that this letter and your response are not meant to constitute a contract of employment for a specific term. This means that, if you accept this offer, you will retain the right to terminate your employment at any time and Boston Scientific will retain a similar right. I look forward to your acceptance of this offer. It will remain in effect through March 31, 1999. Please sign, date and return this letter and the enclosed Employee Agreement signifying your acceptance of our offer and return it to me at your earliest convenience. There is a second copy enclosed for your personal records. 3 This letter and the Employee Agreement together contain the entire agreement between you and Boston Scientific concerning your employment and all related matters. An amendment of this letter or the Employee Agreement will only be effective if in writing and signed by both you and an authorized representative of Boston Scientific. In accepting this offer, you give us your assurance that you have not relied on any agreements or representations, express or implied, with respect to your employment that are set forth expressly in this letter or the Employee Agreement. Jim, I am personally delighted that you are joining us and look forward to working with you as a fellow member of the Boston Scientific Executive Committee. Very truly yours, /s/ Robert MacLean Robert MacLean Senior Vice President Human Resources Accepted and agreed: Date: /s/ James R. Tobin 03/17/99 - -------------------------------------------- ---------------------- James R. Tobin EX-12.1 10 STATEMENT REGARDING COMPUTATION OF RATIOS 1 BOSTON SCIENTIFIC CORPORATION STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 (UNAUDITED) (In thousands)
Year Ended December 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------------------------------------------------- Fixed charges: Interest expense $ 67,573 $ 14,285 $ 11,518 $ 9,591 $ 8,378 Capitalized interest 4,460 4,976 Debt issuance costs 1,675 65 501 Interest portion of rental expense 16,361 14,354 8,534 5,802 5,370 ------------------------------------------------------------- Total fixed charges $ 90,069 $ 33,680 $ 20,553 $15,393 $ 13,748 ============================================================= Earnings: Income (loss) before income taxes and cumulative effect of change in accounting $(275,314) $215,131 $303,330 $62,678 $219,703 Fixed charges per above 90,069 33,680 20,553 15,393 13,748 LESS: capitalized interest 4,460 4,976 ------------------------------------------------------------- Total earnings, as adjusted $(189,705) $243,835 $323,883 $78,071 $233,451 ============================================================= Ratio of earnings to fixed charges 7.24 15.76 5.07 16.98 ============================================================= Coverage deficiency(1) $(279,774) ========= Supplemental pro forma coverage deficiency(2) $(345,507) =========
(1) Includes noncash special charges of $646 million recorded in connection with the acquisition of Schneider Worldwide and other merger-related initiatives. (2) Reflects the coverage deficiency as if the acquisition of Schneider Worldwide occurred at the beginning of 1998, with pro forma adjustments to give effect to amortization of intangibles, an increase in interest expense on acquisition financing and certain other adjustments. EX-13.1 11 THE COMPANY'S 1998 ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13.1 BOSTON SCIENTIFIC 1998 ANNUAL REPORT VISION EXECUTION [GRAPHIC] [GRAPHIC] INNOVATION PEOPLE [GRAPHIC] [GRAPHIC] BOSTON SCIENTIFIC 2 [BLANK PAGE] 3 EXECUTIVE OFFICERS AND DIRECTORS JOHN E. ABELE Director, Founder Chairman (+)*CHARLES J. ASCHAUER, JR. Director, Retired Executive Vice President and Director of Abbott Laboratories (+)RANDALL F. BELLOWS Director, Retired Executive Vice President of Cobe Laboratories, Inc. MICHAEL BERMAN Senior Vice President and President - Scimed LAWRENCE C. BEST Senior Vice President - Finance & Administration and Chief Financial Officer JOSEPH A. CIFFOLILLO Director, Private Investor (+)*JOEL L. FLEISHMAN Director, President of The Atlantic Philanthropic Service Company, Inc. and Professor of Law and Public Policy, Duke University *LAWRENCE L. HORSCH Director, Chairman of Eagle Management and Financial Corp. PAUL A. LAVIOLETTE Senior Vice President and President, Boston Scientific International PHILIP P. LE GOFF Senior Vice President and Group President - - Vascular and Nonvascular Businesses C. MICHAEL MABREY Senior Vice President - Operations ROBERT G. MACLEAN Senior Vice President - Human Resources N.J. NICHOLAS, JR. Director, Private Investor PETER M. NICHOLAS Director, Founder, President, Chief Executive Officer and Chairman of the Board ARTHUR L. ROSENTHAL Senior Vice President and Chief Development Officer PAUL W. SANDMAN Senior Vice President, Secretary and General Counsel DALE A. SPENCER Director, Former Executive Vice President of Boston Scientific Corporation CORPORATE HEADQUARTERS Boston Scientific Corporation One Boston Scientific Place Natick, MA 01760-1537 508-650-8000 508-647-2200 (Investor Relations Facsimile) www.bsci.com SHAREHOLDER INFORMATION STOCK LISTING Boston Scientific Corporation common stock is traded on the NYSE under the symbol "BSX". TRANSFER AGENT Inquiries concerning the transfer or exchange of shares, lost stock certificates, duplicate mailings or changes of address should be directed to the Company's Transfer Agent at: BANKBOSTON, N.A. c/o Equiserve, L.P. Post Office Box 8040 Boston, MA 02266-8040 781-575-3100 www.EquiServe.com INDEPENDENT AUDITORS Ernst & Young LLP Boston, Massachusetts ANNUAL MEETING The annual meeting for shareholders will take place on Tuesday, May 4, 1999, beginning at 10:00 a.m. at BankBoston, Corporate Headquarters, 100 Federal Street, Boston. INVESTOR INFORMATION REQUESTS Investors, shareholders and security analysts seeking information about the Company should refer to the Company's website at www.bsci.com or call Investor Relations at (508) 650-8555. A COPY OF FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION MAY BE OBTAINED UPON WRITTEN REQUEST TO THE COMPANY. ADDRESS REQUESTS TO: Investor Relations Boston Scientific Corporation One Boston Scientific Place Natick, MA 01760-1537 (508) 650-8555 (508) 647-2200 (Facsimile) REGIONAL HEADQUARTERS BOSTON SCIENTIFIC ARGENTINA S.A. Buenos Aires, Argentina BOSTON SCIENTIFIC INTERNATIONAL B.V. Paris, France BOSTON SCIENTIFIC ASIA PACIFIC PTE. LTD. Singapore BOSTON SCIENTIFIC JAPAN K.K. Tokyo, Japan TECHNOLOGY CENTERS Bulach, Switzerland Natick, MA, USA Cork, Ireland Plymouth, MN, USA Fremont, CA, USA Redmond, WA, USA Galway, Ireland San Jose, CA, USA Glens Falls, NY, USA Spencer, IN, USA Maple Grove, MN, USA Watertown, MA, USA Miami, FL, USA Wayne, NJ, USA Miyazaki, Japan *Member of the Audit Committee (+)Member of the Compensation Committee 4 CHAIRMAN'S LETTER 1998 was a year of growth on many fronts. We are stronger in several key areas. We are clear about our future path, and we have the confidence and capability to follow it successfully. The year just completed was also a year of reckoning. While we took significant steps forward in building the Strategic Mass we need to achieve our vision, we also stumbled a few times. The recall of the NIR ON(TM) Ranger(TM) with SOX(TM) stent system focuses attention on the need for relentless quality assurance. We are cooperating fully with the Department of Justice investigation begun in the wake of that recall, and believe the government will agree that the Company acted appropriately. The discovery of business irregularities in our Japanese operation makes us realize that, as we grow, we must develop better safeguards to prevent such occurrences. And we must do a better job of communicating and instilling our corporate values, including personal integrity and accountability, throughout the global organization. Lastly, our failure to meet earnings expectations highlights the overall problem that confronts us and about which we have talked much: execution. We need to improve processes, competencies, and leverage in order to come together as a single, unified company and strengthen our overall business performance. These are issues that often accompany rapid growth. We do not view them lightly; we are learning from our experiences and incorporating those lessons into our plans for the future. However, as we reflect upon our experiences in 1998, we should not allow a few unfortunate events to overshadow the substantial successes and great progress that occurred during the year-marked by the favorable trends that emerged in the fourth quarter and are continuing into this year. ACQUISITIONS AND NEW PRODUCTS DRIVE GROWTH Among our most significant achievements are two acquisitions made last year which support our strategy of strengthening leadership in chosen fields through increased sales volume, market presence and technological superiority. Certainly, the most significant event was the acquisition of Schneider Worldwide, a leader in catheter-based and stent technologies used in less invasive treatment of cardiovascular, peripheral vascular and nonvascular disease. Early in the year, the timing of the decision by Pfizer Inc. to divest its worldwide medical device operations created an unexpected opportunity to accelerate our Strategic Mass strategy. Combining our businesses was a natural fit for two pioneering companies in the field of less invasive medicine, both with strong traditions of innovation, complementary research efforts and a genuine commitment to customer service. Further, Schneider brought a rich pipeline of new development projects as well as an attractive patent portfolio which at last permits Boston Scientific to make available to physicians, in the United States, the Schneider-pioneered Monorail(TM) catheter systems which we had developed into a leading franchise outside the United States over the past 10-plus years. Access to this technology not only enables Boston Scientific to introduce powerful new PTCA balloon catheter and catheter-based stent delivery systems into the United States, but also enables us to standardize product offerings in this market segment worldwide. Our second strategic acquisition, CardioGene Therapeutics, Inc., a development stage company exploring the role and use of gene therapy to treat cardiovascular and other diseases, represented an investment in the future by bringing Boston Scientific the technologies and know-how we believe will enable us to remain on the therapeutic frontier of a disease state where we already have developed a well-established presence. These companies bring technological expertise and strength, and deepen our commitment in high-growth areas of interventional medicine. And, as important, Schneider brings skilled and dedicated employees, many of whom have assumed key leadership positions throughout the corporation. The recognized scientific and commercial leadership positions Schneider possesses demonstrates the commitment of its employees to excellence and less invasive medicine. We welcome them to the Boston Scientific family. We also grew internally, with continuing special emphasis on the emerging markets in Asia Pacific, Latin America, Canada and Middle East/Africa. We are well aware of the opportunities that lie in many of these countries where less 5 invasive medicine is still in its infancy, and we are continuing, through market development programs, to build our presence and leadership in these important markets outside of the United States, Western Europe and Japan. Our goal is to understand the unique needs of all of our different markets and to develop long-term, direct relationships and partnerships with physicians around the globe. Media attention on the recall of our NIR ON(TM) Ranger(TM) with SOX(TM) stent system has tended to eclipse the fact that the U.S. launches of the NIR ON(TM) Ranger(TM) without SOX(TM) stent system and our Radius(TM) self-expanding stent have been received with great enthusiasm. We hope to be able to relaunch the SOX(TM) system in the United States once the balloon leakage problem has been rectified and FDA approval has been received. Our efforts in the highly competitive U.S. coronary stent market were also fortified by the introduction of the Magic WALLSTENT(R) stent system toward the end of the year. Used successfully in Europe since its 1997 introduction, the Magic WALLSTENT stent system comes to us through the Schneider acquisition and gives us a second self-expanding coronary stent platform, further broadening our offerings for the treatment of both peripheral vascular and nonvascular disease. As a result of a conscious strategy, Boston Scientific now offers five distinct stent technology platforms which are selectively applied to the management of multiple disease-specific states throughout the human anatomy. RESHAPING OUR COMPANY FOR FUTURE SUCCESS To say that we have grown dramatically in the past few years is an understatement. Boston Scientific has become a much larger and interdependent organization with greater geographic reach and broader, deeper product lines continuously strengthened by an impressive and growing technology portfolio. The process of assimilating this growth and developing and integrating new processes and systems is a critical--and daunting--task. Although that process was well underway when the opportunity to acquire Schneider Worldwide presented itself, that acquisition enabled us to refine and further improve the rationalization strategy for our worldwide organization and operations. Our goal has always been to eliminate duplication and incompatibility, and encourage cooperation and the achievement of cross-divisional synergies. This is happening. We have identified and implemented improved ways of working-and working together-that will enable our vastly larger and more complex company to sustain superior growth and return to our high standards of overall business excellence and profitability. Several 1998 efforts mark the beginning of this endeavor. We are rightsizing, streamlining and integrating our European organization and facilities and now believe we have a viable leadership blueprint for the future. We are consolidating the worldwide Schneider Team into our global business model and are already acting as one company. We have restructured and consolidated several of our core business units to form a new U.S. Vascular division comprising Medi-tech, Meadox, and the vascular group within Schneider. This enables us to combine and leverage technologies more effectively, achieve more comprehensive market coverage and operate from a disease management state, rather than a medical specialty perspective. This vascular business unit model was already in practice outside the United States and adopting this strategy in our domestic markets gives us the added benefit of planning and executing our business on a global basis. All these efforts when combined focus on rationalizing our size and structure to improve performance and efficiency worldwide. They are, however, only part of the picture. Other essential work focuses on revamping our systems and processes to provide the flexibility, coordination and leverage a multi-billion dollar company needs for success. For example, in 1998 we began to reap the benefits of our new global information system. While the efficiency [PHOTOGRAPH] 6 improvements and cost savings we anticipate will not be fully felt in 1999, this powerful enterprise-wide system, a work-in-progress since 1997, has enabled us to achieve transparency of timely data worldwide on a need-to-know basis to support our objectives of business excellence. Another outgrowth of our recognition of the need for improvement has been the formation in mid-1998 of four global task forces focused on mission-critical areas of the company: supply chain optimization, innovation, quality and organizational development. Each is charged with evaluating the current organization and processes, identifying best practices, then formulating and implementing revised structures and systems appropriate for a world class operation. Each is also charged with promoting a greater sense of who we now are, what we stand for and what we can accomplish together. By more efficiently sharing our competencies, experience and commitments, we can leverage our many separate strengths for the benefit of the divisions and the corporation as a whole. The specific focus, scope and examples of the task force assignments are discussed in the editorial section that follows this letter. Needless to say, I consider these task forces among the most crucial undertakings of 1998. Their work, continuing into and beyond 1999, is essential to our future success. It will improve planning and execution, dramatically reduce working capital requirements and improve gross margins for which performance metrics have now become a daily way of life. SUCCEEDING IN A CHANGING INDUSTRY Although we still have work to do, we should take pride in our accomplishments. Boston Scientific has an unparalleled portfolio of less invasive technologies and products for treatment of specific disease states. Our business units are today the clear market leaders worldwide in the markets within which they compete. Despite the setbacks we experienced, sales and earnings momentum is excellent, and the trends I spoke of earlier are a clear signal of what can be achieved in 1999. We have made some changes in the responsibilities of our management team to ensure that the positive momentum continues to build. Philip Le Goff has taken on the expanded responsibility of directing both our vascular and nonvascular operations. Paul LaViolette's assignments within the company highlight the growth we have undergone. He joined us in 1994 as President of Boston Scientific International, moved on to other responsibilities and now returns to that position, taking charge of an organization that is today larger and more complex than Boston Scientific itself when Paul joined the company. Paul succeeds Jim Corbett who has resigned to pursue interests elsewhere. Jim was the architect and force behind the creation of our current International organization for which we give him our thanks. Finally, Mike Mabrey, Senior Vice President, Operations, has elected to retire after twelve years of service. During this period, we acquired and merged with 10 major companies where Mike was specifically responsible for developing and overseeing the manufacturing operations integration strategy and execution. The Team thanks Mike for his solid record of achievement and exemplary behavior over the years as a senior Boston Scientific executive. We wish both Mike and Jim well as they look forward to futures beyond Boston Scientific. Most significantly, on March 18, 1999, I announced the appointment of James R. Tobin as President and Chief Executive Officer of Boston Scientific. This is a landmark event in the history of our Company. Eighteen months ago, we began a process to put in place an effective succession plan to ensure continued leadership of our great Company. In May of 1998, we launched a formal search for a strong, seasoned leader. I am pleased that we discovered Jim Tobin and that he agreed to join us and will immediately assume leadership of our organization. I am confident that he is the right person to lead our Team. Jim is an accomplished executive who has an outstanding record of success in leading complex global organizations and brings to this position a proven reputation of operational excellence and global execution. I will remain fully engaged as Chairman of the Board and look forward to continuing to work with Jim and the Team. 7 We greatly value and need the talents and hard work of all our employees as we seek continued success in a global healthcare industry marked by continuing dramatic transformation and realignment. Fundamental issues involving health policy, consolidation, cost, quality and organization of health providers continue to drive significant change in how healthcare is delivered and paid for throughout the world. None of these issues will be completely resolved in the near future. In fact, emerging issues, including the organization of payers along with providers, increased consumer involvement in healthcare decision making, and medical disease management, will also grow in importance. All of these issues will challenge the conventional wisdom of how we compete successfully in our segment of the healthcare business. For example, succeeding in today's economic climate requires us to assess the reimbursement situation early in the new product development process and, based on this assessment, bring the right clinical and economic information to healthcare purchasers. As a result, we have strengthened our core competencies in this area enabling us to better optimize the market adoption of our new technologies. Investment in this new competency is symbolic of our commitment to listen to our customers and our willingness to be open to change. Another example of this commitment is our creation of an advisory council comprised of opinion leaders representing major segments of the healthcare industry. The primary goal of this group is to provide a platform for constructive dialogue among healthcare leaders who have a vested interest in clarifying complex issues and identifying potential solutions to healthcare dilemmas. These are but two examples of the many ways in which we are responding to a rapidly changing landscape to ensure we remain a relevant force in the healthcare arena. THE POWER OF ONE This letter reports some of our achievements, calls for a strong commitment to improvement and emphasizes the need to rebalance our vision with renewed ability to execute to plan. We must be attentive to our own values and mindful of the financial health of our company. This will require that we continue making tough decisions in the year ahead, and we will do it. Our long-term strategic vision is sound, and we have a strong, committed management team. We bring a robust tradition of innovation, clearly defined values and a true "can do" spirit to the tasks at hand. Our biggest asset, however, remains the cadre of immensely talented, dedicated and hardworking men and women who are Boston Scientific's employees. Challenges are not new to them, as their history of pioneering accomplishments affirms. The extra effort of a single employee to execute better may seem inconsequential; multiplied by 12,000, the power of one becomes the power of Boston Scientific and the promise of our future. It has been that way from the beginning. Respectfully, /s/ Pete M. Nicholas -------------------- Pete M. Nicholas [PHOTOGRAPH] 8 BAL-ANCE (BAL'ENS) 1. PAYING EQUAL ATTENTION TO CRITICAL SUCCESS FACTORS REQUIRED TO MAINTAIN A BEST-IN-CLASS LEADERSHIP POSITION. As Boston Scientific has grown, it has changed. Our much larger global enterprise demands different processes from those that served us well in the past. Employees who have joined the company in the last year or two may not have fully internalized the values that guide our organization. This is normal. Growth is organic. It means change. It means constantly redefining who we are, what we stand for, what we want to accomplish and how we will do so. It means constantly striving to balance the factors on which our success depends. Our strength lies in our vision.and in our ability to execute it. It lies in the spirit of innovation which permeates our culture and in having people who can translate that vision and spirit into reality. The four words on the front cover - Vision, Execution, Innovation, People - tell a story. This annual report is about the process of defining what those words mean to us today and about the process of balancing them for continued success in a changing and challenging world. Boston Scientific 9 VI-SION (VIZH'EN) [GRAPHIC] 1. A clear mental image of how we will achieve our mission. 2. A definition of success specific to Boston Scientific Corporation. 3. A tangible picture of success capable of inspiring employees to contribute to its realization. Boston Scientific's "ship-in-the-balloon" symbol is the medical analogy of the "ship-in-the-bottle." It represents the challenging task of diagnosing and treating damaged organs or vessels through tiny openings from a remote location...the essence of minimally invasive procedures. [BACKGROUND GRAPHIC] *The Wallgraft stent is not approved for sale in the U.S. 10 (UNWAVERING) MISSION AND VISION Since our founding in 1979, our mission has been to improve the quality of patient care and productivity of healthcare delivery. It is a goal that is as relevant today as it was 20 years ago. Our vision-to become the biggest, the best and the fastest medical device company in the world-derives its meaning from our mission. Stripped of their strategic context, these are merely business buzzwords; within the context of our mission, however, they define what we must be in order to fully achieve that mission: a supplier of the best technology and products that enable our physician customers to deliver the most effective diagnosis and treatment, with the greatest clinical and economic outcomes, to the patients they treat. Our vision continues to drive our success. (VALUES) A VISION WITH INTEGRITY The vitality of our vision depends on the values it embodies. Values provide integrity and enable us--as individuals and as a corporation--to achieve amazing things. It is fair to say that we have influenced how healthcare is delivered with our pioneering efforts in less invasive medicine. And the values that made this possible--willingness to take risks, a strong commitment to thinking like our customers and working hard on their behalf, for instance--continue to guide our efforts. They are also the same values that have helped to make the companies we have acquired successful. As we continue to focus on integrating our acquisitions into a unified organization, our shared value system forms a foundation on which we will build an even stronger company. Our values are timeless. The first solo circumnavigation of the globe in 1898 by Joshua Slocum was possible because of his ability to persevere, to strike out on his own, and to trust others to help him achieve his goal. A century later, the same values enabled us to chart a groundbreaking course in less invasive medicine. The image of Slocum's sloop, Spray, in a balloon catheter, reminds us of these shared values and symbolizes the seeming impossibility of both putting a ship in a bottle and performing surgery through minute openings with sophisticated instruments. It is a fitting symbol for our company. (RESPONSIVE) REDEFINING HOW VISION BECOMES REALITY As constant as our vision is, it must also be responsive to changing times. We are no longer a lone pioneer on the frontier of less invasive medicine, but a leader in a highly competitive and rapidly evolving healthcare landscape. We have responded proactively with the concept of Strategic Mass--developing breadth and depth through external event strategies and internal development to reinforce our leadership position in our chosen fields. Now we must assimilate the people, cultures, processes and strengths of our acquisitions, and, at the same time, continue to drive and manage the internal growth spurred by the success of our unparalleled product portfolio. Will Boston Scientific remain unchanged? No. We will all change...together. [GRAPHIC] While we must focus on performing basic business functions superbly, we must not lose sight of maintaining close relationships with our physician customers and responding to their needs. The reality of our vision is validated by the smile of a child whose physician asked us for help in a time of need. Kimberly Stuntzner (left) received a compassionate use of our Wallgraft(R) stent. The Wallgraft stent was used to hold open her pulmonary artery while doctors repaired a large pseudo aneurysm that threatened her life. 11 EX-E-CU-TION (EK'SI-KYOO'SHEN) 1. Demonstrating relentless attention to business fundamentals. 2. The means by which our vision becomes reality. [GRAPHIC] Beek Customer Fulfillment Center [BACKGROUND GRAPHIC] The work of Dr. James Spies and employee Dr. Sujha Subramanian, in evaluating the clinical and economic outcomes of the UAE prodecure, represents our commitment to introduce products that benefit physician and patient, and satisfy global demands for economic value among healthcare purchasers. 12 (BALANCE) VISION AND EXECUTION Vision demands execution. As strong and inspiring as the Boston Scientific vision is, it depends on Boston Scientific employees to make it happen. This is not a lofty, esoteric event; it is performing daily tasks consistently well--developing and delivering products where and when our customers need them, continuing to seek and achieve manufacturing efficiencies and superior quality. It demands relentless attention to detail. (FUNDAMENTALS) FOCUS THROUGH TASK FORCES We continue to change and improve. After four years and $6 billion in acquisitions, we are intently focused on integrating our operations and bringing both costs and the physical organization into better alignment. We are developing the world class systems and processes befitting a worldwide enterprise. Our awareness of what we need to do has resulted in establishing four task forces, each charged with improving our execution in a mission-critical area: supply chain, quality, innovation and organizational development. Their work has begun, and the benefits, such as those offered by improvements in supply chain management achievable with the installation of our new global information system, are beginning to be felt. (SPECIFICS) TACKLING THE ISSUES Some issues are strictly internal-improving processes or realizing our goal of being able to deliver any product anywhere we operate within one day. To gain this efficiency, we have integrated our customer fulfillment centers into four primary locations around the world capable of handling the increased product and transactional volume driven by our growth. Our ability to integrate the entire Schneider European distribution network in 68 days into our facility in Beek, the Netherlands, depended on our global information system. It exemplifies the kind of speed, power and flexibility for which we are striving throughout the organization. Other opportunities, such as reimbursement and outcomes planning, relate to our external environment. It is no longer enough for new products to be better; they must also be more cost-effective. We have taken a proactive approach to this by internally establishing a strong team focused exclusively on building the economic case for new products and gathering the data to support outcomes and improved treatment claims. Boston Scientific employee Dr. Sujha Subramanian and Dr. James Spies of Georgetown University Medical Center are studying the potential advantages of a minimally invasive procedure, uterine artery embolization (UAE), for treating uterine fibroid tumors. UAE may offer a faster, less traumatic and easier to perform procedure than traditional surgical treatment. But for women who hope to have children, its biggest benefit is that it is a therapy that preserves fertility. The efforts of Drs. Spies and Subramanian today are intended to facilitate market acceptance of the procedure and allow Boston Scientific to apply an existing technology that offers both physician and patient a less invasive alternative to surgery. [GRAPHIC] Order volume growth through consolidated distribution centers [GRAPHIC] 13 IN-NO-VA-TION (IN'E'VA'SHEN) 1. The process of developing new technologies and products that will result in better patient outcomes and more accessible and cost-effective healthcare delivery. 2. The reengineering of systems to bring new products to market. [GRAPHIC] The highly-radiopaque, gold-plated *NIROYAL(TM) is part of our strong portfolio of cardiovascular stents. Boston Scientific/Target plays a prominent role in the development of the neurointerventional market. Microcatheter-based therapies allow physicians to access remote sites deep within the brain and deliver coils that enable physicians to prevent and treat diseases such as aneurysms and stroke. [BACKGROUND GRAPHIC] *NIROYAL is not approved for sale in the U.S. 14 (STRENGTH) EXECUTION AND INNOVATION Boston Scientific was born and continues to grow on the strength of its ability to innovate. Today, we continue to demonstrate our leadership in this arena with our steady introduction of improvements to existing products, our introduction of new devices and our investment in technologies for the future. Much of this work is the direct outgrowth of our close relationships with physicians whose specific needs often provide the impetus for new products. But it is not enough. By extending our emphasis on execution to the actual process of innovation, we can improve speed to market, focus on the highest potential products and positively influence the lives of more people. (FOCUS) MANAGING PROJECTS, SETTING PRIORITIES Melding execution and innovation is the mandate of the Innovation Task Force. Like the other task forces, its membership crosses disciplines and brings together people from all divisions to develop a common approach to product development that will be understood by everyone and will help us to leverage skills, resources and knowledge across the corporation. Its goal is to improve how we manage both individual research projects and our entire research portfolio. One aspect of this effort is already being implemented. Boston Scientific/Vascular has recognized the challenge and has developed a new design control and quality training program to drive innovation and excellence in the concept, development and launch phases of product development execution. These types of efforts, and others, are expanding throughout the company. (LEADERSHIP) EXPLORING NEW FRONTIERS Worldwide, we have approximately 2,500 patent applications pending and our current research efforts will undoubtedly bring this number even higher. In the highly competitive coronary stent market, we enjoy a commanding presence. In 1998, in partnership with Medinol Ltd., we launched the NIR(R) stent in the United States and Japan. The NIR(R) stent has rapidly ascended to a leadership position. Also in 1998, we were the first to offer in the United States a self-expanding coronary stent, the Radius(TM) stent, and followed up with a second, the Magic WALLSTENT(R) stent system. Our innovative work in interventional neuroradiology is less well known, but no less important. Devices such as the Tracker(R) Excel(TM) and Renegade(TM) microcatheters make it possible to track tortuous neurovasculature and treat diseases in the brain. And we are breaking new ground in other areas. Boston Scientific/Microvasive Urology is exploring and investing in fields such as brachytherapy, which eliminates multiple beam radiation treatment by implanting radioactive pellets or "seeds" to treat prostate cancer today and perhaps other, localized cancers tomorrow. In the field of electrophysiology, Boston Scientific/EP Technologies is investigating a new Loop catheter that uses radiofrequency energy to treat atrial fibrillation. Atrial fibrillation, an irregular heartbeat, affects approximately 5 million people worldwide and is a leading cause of stroke. Our acquisition of CardioGene Therapeutics, Inc. puts us on the frontier of using gene therapy to stimulate the growth of new blood vessels and tissue. These technologies, and others in our robust pipeline, provide great momentum for the Boston Scientific vision and for less invasive medicine in the years to come. [GRAPHIC] 15 PEO-PLE (PE'PEL) 1. A group united by common interest, who must work together to develop common processes, beliefs and commitment to a shared goal. 2. Those who enable us to fulfill our mission. 3. An engine to growth if properly nurtured. [GRAPHIC] The Boston Scientific/Microvasive Endoscopy CRE(TR) balloon team. Pam Jerdee (left), Manager, College Recruiting and Deanna Capobianco, Development Engineer, Boston Scientific/Microvasive [BACKGROUND GRAPHIC] 16 (INTEGRATION) DIVERSITY AND UNITY Our employees bring a wealth of diverse skills and knowledge that will be essential to our future success. Regardless of where within the corporation they work, Boston Scientific employees are people of commitment, and we appreciate the divisional loyalties they hold. At the same time, we are focused on becoming one company with common values and a common vision. Only in this way can we fulfill our promise as a corporation and our commitment to providing growth opportunities for our employees. [GRAPHIC] (TASK FORCE) DEVELOPING THE ORGANIZATION The appointment of the Organizational Development Task Force testifies to the urgency and importance of having an enterprise-wide system for ensuring the availability of people at all levels with the right skills and experience to manage our business and fuel our future growth. There is no more important task in the corporation than getting people to their greatest potential. We took a significant interdivisional first step in formulating a set of leadership competencies that define the skills and abilities we need to develop in all employees at all levels of the organization moving forward. Communicating this framework, essentially the new foundation of our people systems, and implementing developmental solutions to support it, are major endeavors for the immediate future, along with the formulation of functional competencies that will help define our employee development requirements. (TEAMWORK) THE POWER OF ONE One need not look far to find people throughout our organization who embody the traits we value. Some are experienced professionals like Pam Jerdee. After working in sales and training for Medi-tech, Microvasive Urology, Microvasive Endoscopy and Corporate Sales, who better than Pam to now head our college recruiting program and share our values with prospective employees? Others are new employees, like engineer Deanna Capobianco, who volunteered to help Pam with recruitment because she is energized by the Boston Scientific mission and eager to share her enthusiasm with others. Teamwork is an attribute we value and want to foster further in both cross-divisional and cross-functional ways. For example, it takes many people to develop, manufacture and distribute our controlled radial expansion (CRE(TM)) balloon dilators. This Microvasive Endoscopy product dramatically improves physicians' ability to control placement, inflation and dilatation of the balloon and minimize patient trauma while treating strictures throughout the gastrointestinal tract. Members of the CRE dilator team cross all functions, from research and development engineers to product managers, sales representatives, and those responsible for the actual manufacture of the device. The combination of their individual efforts generates a powerful force able to achieve great things. We also need more people capable of working across the organization, like Bob Skribiski, Principal Engineer in our Corporate Technology department. Bob was charged with the task of establishing a cross-divisional team that examines and encourages communication with various technology and engineering staffs. Bob enlisted technical personnel from the divisions and the result has been a team that shares a common approach to engineering ideas, tooling and material resources so all can do their jobs more efficiently and effectively. In addition, new materials and processes are quickly communicated across divisional and product lines, keeping the team poised for superior performance. We can manufacture products, and we can develop programs to improve the skills and value of our employees, but there is one thing we cannot manufacture: enthusiasm and dedication. These come from within, and it is through the renewed commitment and effort on the part of every Boston Scientific employee that we will achieve our mission. [GRAPHIC] 17 BOS-TON SCI-EN-TIF-IC 1. A company committed to improving the quality of patient care and the productivity of healthcare delivery through the development and advocacy of less invasive medical devices and procedures. 2. A company whose perseverance on behalf of products and techniques helped pioneer the field of less invasive medicine. 3. More than 12,000 employees worldwide. 4. The sum of the global divisions comprising the corporation: EP Technologies, Microvasive Endoscopy, Microvasive Urology, Scimed, Target Therapeutics, Vascular (Medi-tech, Meadox, Schneider). 5. A company whose vision is to be the biggest, the fastest, the best medical device company in the world. 6. A values-based company. 7. A company intently focused on operational excellence. 18 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 1998 CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FINANCIAL TABLE OF CONTENTS - --------------------------------------------------------------------------------
Financial Highlights F-1 Management's Discussion and Analysis of F-2 Financial Condition and Results of Operations Consolidated Statements of Operations F-11 Consolidated Balance Sheets F-12 Consolidated Statements of Stockholders' Equity F-14 Consolidated Statements of Cash Flows F-15 Notes to Consolidated Financial Statements F-16 Report of Independent Auditors F-33 Five-Year Selected Financial Data F-34 Quarterly Results of Operations F-35 Market for the Company's Common Stock F-36 and Related Matters
19 FINANCIAL HIGHLIGHTS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Net sales $2,233,576 $1,830,778 $1,551,238 Gross profit 1,498,735 1,285,237 1,123,400 Operating income (loss) (207,435) 225,455 313,171 Net income (loss) (264,369) 110,400 167,094 Net income (loss) per common share - basic $ (0.68) $ 0.28 $ 0.43 Net income (loss) per common share - assuming dilution (0.68) 0.28 0.42
The above amounts include special charges of $667 million ($527 million, net of tax), $206 million ($156 million, net of tax) and $142 million ($128 million, net of tax) recorded in 1998, 1997 and 1996, respectively. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-1 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------- RESULTS OF OPERATIONS On September 10, 1998, the Company consummated its acquisition of Schneider Worldwide (Schneider), formerly a member of the Medical Technology Group of Pfizer Inc., for $2.1 billion in cash. The acquisition was accounted for using the purchase method of accounting. The consolidated financial statements include Schneider's operating results from the date of acquisition. YEARS ENDED DECEMBER 31, 1998 AND 1997 Net sales increased 22% in 1998 to $2,234 million from $1,831 million in 1997. Without the impact of foreign currency exchange rates on translation of international revenues, net sales for 1998 increased 25%. International sales during 1998 were negatively impacted compared to 1997 by approximately $47 million of unfavorable exchange rate movements caused primarily by the strengthening of the United States (U.S.) dollar versus the Japanese yen. Net income for the year ended December 31, 1998, excluding merger-related and special charges, was $262 million or $0.66 per share (diluted) compared to $266 million or $0.67 per share in 1997. The Company for 1998 reported a net loss of $264 million or $0.68 per share (diluted), including merger-related and special charges of $527 million, net of tax, as compared to 1997 net income of $110 million, or $0.28 per share, including merger-related and special charges of $156 million, net of tax. U.S. revenues increased approximately 30% from 1997 to $1,394 million in 1998, while international revenues increased approximately 11% from 1997 to $840 million in 1998. U.S. sales as a percentage of worldwide sales increased from 59% in 1997 to 62% in 1998. Worldwide vascular and nonvascular sales increased 25% and 13%, respectively, from 1997 to 1998. The increases in U.S. sales as a percentage of worldwide sales and in vascular sales were primarily attributable to the Company's 1998 third quarter introduction of U.S. coronary stents. U.S. coronary stent revenues, primarily sales of the NIR(R) stent, were approximately $211 million during the second half of 1998. Worldwide NIR(R) coronary stent sales as a percentage of worldwide sales were approximately 13% in 1998 and could exceed 20% during 1999. The NIR(R) coronary stent is supplied by Medinol Ltd. (Medinol) and unforeseen delays, stoppages or interruptions in the supply and/or mix of the NIR(R) stent could adversely affect the operating results of the Company. On November 3, 1998, the Company announced it had detected the occurrence of business irregularities in the operations of its Japanese subsidiary. The irregularities detected involved shipments of products that were improperly recorded as sales to the subsidiary's dealer network in Japan. The Company has recently completed its investigation of the irregularities and believes that the irregularities were limited to the operations of the Japan subsidiary. The Company's financial statements reflect management's estimate of the timing and impact of the Japan business irregularities. Gross profit as a percentage of net sales was approximately 67.1% and 70.2% during 1998 and 1997, respectively. As a result of multiple acquisitions, the Company's supply chain has been weakened and there has been continued pressure on gross margins, including write-downs for excess and obsolete inventory and high manufacturing costs. During 1998, the Company initiated a full time global program to focus on supply chain optimization. The program is designed to lower inventory levels and the cost of manufacturing, improve absorption and minimize inventory write-downs. By addressing the entire supply chain, including application of lean manufacturing techniques, the Company seeks to return gross margins to more acceptable levels and to improve working capital. The program should be completed by the end of 1999. The decrease in gross margins during 1998 compared to 1997 was also attributable to a decline in average selling prices due to continuing pressure on healthcare costs and increased competition, and the significant increase in sales of the NIR(R) coronary stent which have lower gross margins than the corporate average. As average selling prices for the NIR(R) stents fluctuate, the Company's cost to purchase the stents will change because cost is based on a constant percentage of average selling prices. In the third quarter of 1998, the Company provided $31 million ($21 million, net of tax) for costs associated with the Company's decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent system in the U.S. Success of the global supply chain initiative is critical to realizing improved gross margins. In addition, gross margins could be significantly impacted by the purchase price of NIR(R) coronary stents and the amount of NIR(R) coronary stent sales as a percentage of worldwide sales. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-2 21 Selling, general and administrative expenses as a percentage of net sales decreased from 36% in 1997 to 34% in 1998, while increasing approximately $92 million from $663 million in 1997 to $755 million in 1998. The decrease as a percent of sales is primarily attributable to the increase in net sales related to the launch of coronary stents in the U.S. In addition, during the past three years, the Company has expanded its direct sales presence in Europe and Emerging Markets so as to be in a position to take advantage of market opportunities in those regions. The costs of expansion have negatively impacted the Company's operating margins. During the second half of 1998, the Company's rate of investment slowed and the Company has begun to realize improved returns in certain geographic regions. The Company believes that, during 1999, it will continue to leverage its direct sales infrastructure. Approximately $17 million of the 1998 increase in expense dollars is attributable to results of Schneider operations from the date of acquisition through December 31, 1998. In addition, the increase in expense dollars reflects costs to operate the Company's new global information system and increased costs of domestic distribution. Amortization expense increased 63% from $32 million in 1997 to $53 million in 1998 and increased as a percentage of sales from 1.8% to 2.4% of net sales. The increase is primarily a result of the amortization of intangibles related to the purchase of Schneider from the date of acquisition through December 31, 1998. Royalty expenses remained at approximately 1% of net sales while increasing 41% from $22 million in 1997 to $31 million in 1998. The Company continues to enter into strategic technological alliances, some of which include royalty commitments. Research and development expenses remained at 9% of net sales while increasing 20% from $167 million in 1997 to $200 million in 1998. Approximately $7 million of the increase in 1998 is attributable to research and development of Schneider from the date of acquisition through December 31, 1998. The increase in research and development reflects increased spending on new product development programs and regulatory and clinical research, and reflects the Company's continued commitment to refine existing products and procedures and to develop new technologies that provide simpler, less traumatic, less costly and more efficient diagnosis and treatment. The trend in countries around the world toward more stringent regulatory requirements for product clearance and more vigorous enforcement activities has generally caused or may cause medical device manufacturers to experience more uncertainty, greater risk and higher expenses. The aggregate purchase price of the Schneider acquisition has been allocated on a preliminary basis to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The estimated excess of purchase price over the fair value of the net tangible assets acquired was allocated to specific intangible asset categories with the remainder assigned to excess of cost over net assets acquired. Core technology, developed technology, assembled workforce, customer lists, trademarks and patents are being amortized on a straight-line basis over periods ranging from 9 to 25 years, and the estimated excess of cost over net assets acquired is being amortized on a straight-line basis over 40 years. In addition, the Company recorded a $671 million charge ($524 million, net of tax) to account for purchased research and development acquired. The valuation of purchased research and development represents the estimated fair value related to incomplete projects. At the date of the acquisition, the development of these projects had not reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the date of acquisition. The income approach was used to establish the fair values of the intangible assets. This approach establishes the fair value of an asset by estimating the after-tax cash flows attributable to the asset over its useful life and then discounting these after-tax cash flows back to a present value. The discounting process uses a rate of return commensurate with the time value of money and investment risk factors. Accordingly, for the purpose of establishing the fair value of each asset in the Schneider analysis, revenues for each future period were estimated, along with costs, expenses, taxes and other charges. Revenue estimates were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. With respect to the value of purchased research and development, the Company considered, among other factors, the research and development project's stage of completion, the complexity of the work completed to date, the costs already incurred, the projected costs to complete, the contribution of core technologies and other acquired assets, the projected introduction date and the estimated useful life. The respective after-tax cash flows were then discounted back to present value using a risk-adjusted discount rate. The discount rates used in the Schneider analysis ranged from 16%-28% dependent upon the risk profile of the asset. The Company believes that the assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project revenues, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, among others, actual results may vary from the projected results. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-3 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - --------------------- The in-process technology acquired in the Schneider acquisition consisted of 20 significant research and development projects, ranging in stage of completion from 46% to 95%. One project reached completion in late 1998, while the others are expected to reach completion in 1999, 2000 and 2001. New in-process technologies include brachytherapy for the prevention of restenosis, devices for the treatment of carotid disease, devices for the treatment of coronary artery disease, devices for peripheral vascular disease, devices for aneurysmal disease and devices for nonvascular disease. Remaining efforts to complete the projects include product validation, the successful completion of clinical trials and governmental regulatory approvals. Through the acquisition date, approximately $63 million had been spent by Schneider on the in-process research and development projects. The Company intends to incur in excess of $50 million, related primarily to salaries, materials, clinical trials and regulatory costs, to develop the in-process technology into commercially viable projects over the next three years. The Company expects to begin to realize significant revenue and cash flows from the in-process technology beginning in 1999. Management expects to continue supporting these research and development efforts and believes the Company has a reasonable chance of completing the in-process technology. However, the development of the in-process technology is subject to risks and uncertainties. These include the inherent difficulties in completing the projects on a timely basis, potential changes in future target markets, technology and governmental regulation, third party intellectual property, and product introductions or other actions by competitors. If the projects are not successfully developed, the Company may not realize the value assigned to the in-process technology. In addition, the value of the other acquired intangible assets may also become impaired. The Company is in the process of implementing a rationalization plan established after acquiring Schneider. The rationalization plan takes into consideration duplicate capacity and opportunities for further leveraging of cost and technology platforms. The Company's actions approved and committed to in the fourth quarter of 1998 will result in the displacement in 1999 of approximately 2,000 current positions, over half of which are manufacturing positions. The Company has decided to close five Schneider facilities, as well as transition the manufacturing of selected Boston Scientific product lines to different sites. The Company expects that approximately 1,000 positions will be added in 1999 as a result of the transition plan. The Company estimates that the costs associated with these activities will be approximately $62 million, most of which represent severance and related costs. Approximately $36 million of the total has been capitalized as part of the purchase price of Schneider. The remaining $26 million ($17 million, net of tax) has been charged to operations. These actions are anticipated to result in annualized cost savings of approximately $50 to $75 million. The rationalization plan also resulted in the decision to expand, not close, a facility originally provided for in a 1997 merger-related charge; thus, in the fourth quarter, the Company reversed $21 million ($14 million, net of tax) of previously recorded merger-related charges. The reversal also includes revised estimates of contractual commitment payments, associated legal costs and other asset write-downs originally provided for in a 1997 merger-related charge. The Company will continue to challenge its plant network strategy during 1999. In the second quarter of 1998, the Company reorganized certain U.S. sales organizations differently than was originally contemplated at the time of the Target Therapeutics, Inc. (Target) acquisition. As a result, the Company reversed $20 million ($13 million, net of tax) of 1997 merger-related charges. In addition, the Company recorded purchased research and development of approximately $11 million in connection with another acquisition consummated during 1998 and $30 million ($20 million, net of tax) of year-end adjustments related primarily to write-downs of assets no longer deemed to be strategic. As discussed previously, results for the year ended December 31, 1998 include a provision of $31 million for costs associated with the Company's decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent system in the U.S. The Company is aware that the U.S. Department of Justice is conducting an investigation of matters that include this recall. The Company is cooperating fully in the investigation. During 1997, the Company recorded merger-related charges of $146 million ($106 million, net of tax) primarily related to the Company's acquisition of Target, purchased research and development of $29 million, net of tax, in conjunction with accounting for its additional investment in Medinol and other strategic investments, and a charge of $31 million ($21 million, net of tax) to reflect the impact of implementing a new accounting standard. 1997 results also include provisions related to inventory write-downs of $19 million ($13 million, net of tax) and litigation-related reserves of $34 million ($23 million, net of tax). Interest expense increased from $14 million in 1997 to $68 million in 1998. The overall increase in interest expense is primarily attributable to a higher outstanding debt balance, including the issuance of $2.1 billion in commercial paper on September 10, 1998 to finance the acquisition of Schneider and the issuance of $500 million in fixed rate debt securities during the first quarter of 1998. Other income (expense), net, changed from income of less than $1 million in 1997 to expense of $5 million in 1998. The change is primarily attributable to net gains on sales of equity investments in 1997 that were more significant than in 1998. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-4 23 The Company's effective tax rate, including the impact of special charges, was approximately 39% in 1997 and 4% in 1998. Excluding these special charges, the pro forma effective tax rate increased from approximately 32% during 1997 to 33% during 1998. The increase is primarily attributable to a shift in the mix of U.S. and international business. The effective rate for 1999 is expected to increase slightly due to the continued shift in the geographic mix of the Company's business. The Company has substantially completed the integration of all mergers and acquisitions consummated in 1996 and 1997. The Company expects to complete the integration of Schneider by the end of 1999. Management believes it has developed a sound plan for continuing and concluding the integration process, and that it will achieve that plan. However, in view of the number of major transactions undertaken by the Company, the dramatic change in the size of the Company and the complexity of its organization resulting from these transactions, management also believes that the successful implementation of its plan presents a significant degree of difficulty. The failure to integrate these businesses effectively could adversely affect the Company's operating results in the near term, and could impair the Company's ability to realize the strategic and financial objectives of these transactions. Uncertainty remains with regard to future changes within the healthcare industry. The trend towards managed care and economically motivated buyers in the U.S. may result in continued pressure on selling prices of certain products and resulting compression on gross margins. The U.S. marketplace is increasingly characterized by consolidation among healthcare providers and purchasers of medical devices that prefer to limit the number of suppliers from which they purchase medical products. There can be no assurance that these entities will continue to purchase products from the Company. In addition, international markets are also being affected by economic pressure to contain reimbursement levels and healthcare costs. The Company's ability to benefit from its international expansion may be limited by risks and uncertainties related to economic conditions in these regions, competitive offerings, infrastructure development, rights to intellectual property, and the ability of the Company to implement its overall business strategy. Any significant changes in the political, regulatory or economic environment where the Company conducts operations may have a material impact on revenues and profits. Although these factors may impact the rate at which Boston Scientific can grow, the Company believes that it is well positioned to take advantage of opportunities for growth that exist in the markets it serves. YEARS ENDED DECEMBER 31, 1997 AND 1996 Net sales increased 18% in 1997 to $1,831 million from $1,551 million in 1996. International sales for the year were adversely impacted by changes in foreign currency exchange rates. Without the impact of changes in exchange rates, net sales for the year increased approximately 23%. Net income for the year ended December 31, 1997, excluding merger-related and special charges, decreased approximately 10% to $266 million from $295 million during the year ended December 31, 1996. In 1997, the Company recorded merger-related charges of $146 million ($106 million, net of tax) and purchased research and development of $29 million, net of tax, and the Company recorded a charge of $31 million ($21 million, net of tax) to reflect the impact of implementing an accounting standard issued in 1997 related to business process reengineering. 1997 results also include provisions related to inventory write-downs of $19 million ($13 million, net of tax) and litigation-related reserves of $34 million ($23 million, net of tax). During 1996, the Company recorded merger-related charges of $32 million ($29 million, net of tax) and purchased research and development of $110 million ($99 million, net of tax). Reported net income for 1997 was $110 million, or $0.28 per share (diluted), as compared to $167 million, or $0.42 per share, for the prior year. U.S. revenues increased approximately 16% from 1996 to $1,076 million in 1997, while international revenues, increased approximately 20% from 1996 to $755 million in 1997. International sales as a percentage of worldwide sales increased from 40% in 1996 to 41% in 1997. International sales during 1997 were negatively impacted compared to 1996 by approximately $77 million of unfavorable exchange rate movements caused primarily by the strengthening of the U.S. dollar versus major European currencies and the Japanese yen. Worldwide vascular and nonvascular sales increased 16% and 26%, respectively, from 1996 to 1997. Gross profit as a percentage of net sales was approximately 70.2% and 72.4% during 1997 and 1996, respectively. The decline in gross margins during 1997 is primarily attributable to write-downs for excess and obsolete inventory and a decline in average selling prices as a result of continuing pressure on healthcare costs and increased competition. In addition, gross margins were negatively impacted by the unfavorable foreign exchange rate movements discussed above. The negative impact of the above conditions was partially offset by the Company's U.S. cost containment programs and the positive gross margin impact of selected new product offerings. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-5 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - --------------------- Selling, general and administrative expenses increased 35% from $492 million in 1996 to $663 million in 1997, and increased as a percentage of sales from 32% to 36% of net sales. The increase includes $34 million in litigation-related reserves recorded in 1997. In addition, the Company continued to expand its domestic and international sales and distribution organizations. Amortization expense increased 37% from $24 million in 1996 to $32 million in 1997, and increased as a percentage of sales from 1.5% to 1.8% of net sales. The increase in dollars is primarily a result of several strategic alliances initiated by the Company during 1997. Royalty expenses remained at approximately 1% of net sales while increasing 30% from $17 million in 1996 to $22 million in 1997. The increase in overall royalty expense dollars is due to increased sales and royalties due under several strategic alliances that the Company initiated in 1997 and prior years. Research and development expenses remained at approximately 9% of net sales while increasing 24% from $135 million in 1996 to $167 million in 1997. The increase in research and development dollars reflects increased spending in regulatory, clinical research and various other product development programs, and reflects the Company's continued commitment to refine existing products and procedures and to develop new technologies that provide simpler, less traumatic, less costly and more efficient diagnosis and treatment. Interest and dividend income was $4 million as compared to $6 million in 1996. The decrease is primarily attributable to a decrease in the Company's average cash and marketable securities balance resulting from the use of cash to fund the Company's working capital, finance several of the Company's recent acquisitions and alliances and to repurchase the Company's common stock. Interest expense increased from $12 million in 1996 to $14 million in 1997. The overall increase in interest expense is primarily attributable to a higher outstanding balance related to the Company's commercial paper borrowings. Other income (expense), net, changed from expense of $5 million in 1996 to less than $1 million of income in 1997. The change is primarily attributable to net gains on sales of equity investments of approximately $11 million compared to net gains of $1 million in 1996. The Company's effective tax rate, including the impact of special charges, was approximately 45% in 1996 and 39% in 1997. Excluding these special charges, the pro forma effective tax rate improved from approximately 34% during 1996 to 32% during 1997. The reduction in the Company's effective tax rate, excluding the impact of special charges, is primarily due to increased business in lower tax geographies and certain tax planning initiatives. LIQUIDITY AND CAPITAL RESOURCES Cash and short-term investments totaled $75 million at December 31, 1998 compared to $80 million at December 31, 1997. Cash flows provided by operating activities increased from $80 million in 1997 to $258 million during 1998. Cash used in investing and provided by financing activities during the same period increased from $251 million to $2,225 million and $162 million to $1,977 million, respectively. The increases are primarily the result of financing the Schneider acquisition with commercial paper and capital expenditures incurred to expand the Company's manufacturing facilities. In addition, cash was provided by the exercise of stock options. As a result, working capital decreased from $227 million at December 31, 1997 to current liabilities exceeding current assets by $353 million at December 31, 1998. Accounts receivable increased $172 million from December 31, 1997 to December 31, 1998. The increase is primarily attributable to recording approximately $65 million of Schneider accounts receivable as of the date of the acquisition, an increase in U.S. sales in the second half of 1998 compared to the second half of 1997, and an increase in international sales to countries where healthcare systems have longer payment terms. In addition to impacting selling prices, the trend to managed care in the U.S. has also resulted in more complex billing and collection procedures. The Company's ability to effectively react to the changing environment may impact its bad debt and sales return provisions in the future. In addition, the deterioration in the Japan economy may impact the Company's ability to collect its outstanding Japan receivables. Inventory increased $70 million from December 31, 1997 to December 31, 1998. The increase since December 31, 1997 is primarily attributable to recording $40 million of Schneider inventory as of the date of acquisition, continued stocking of the NIR(R) stent in the U.S. and Japan and an increase in U.S. finished goods. The Company is committed to purchase approximately $150 million of NIR(R) stents through 1999. Excluding the impact of Schneider inventory acquired, inventory has decreased since the second quarter of 1998. The Company expects inventory levels to continue to decline in 1999 as the Company's new global supply chain management system becomes fully operational. Successful implementation of the Company's supply chain initiative is necessary to reduce the Company's inventory to an acceptable level and to reduce manufacturing costs. In connection with the Schneider acquisition, the Company established $1.7 billion in additional revolving credit facilities. The Company's revolving credit facilities (Facilities) now total $2.2 billion and consist of a $1.0 billion facility that terminates in June 2002 and $1.2 billion in 364-day facilities that terminate in September 1999. The Company may extend the 364-day revolving credit facilities for an additional 364 days BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-6 25 under certain conditions. Use of the borrowings is unrestricted and the borrowings are unsecured. Commercial paper is supported by the Facilities and outstanding commercial paper reduces available borrowings under the Facilities. The Facilities require the Company to maintain a specific ratio of consolidated funded debt (as defined) to consolidated net worth (as defined) plus consolidated funded debt. The ratio requirement is 70% through December 31, 1999 and 60% thereafter. As of December 31, 1998, the ratio was approximately 64%. The Company currently intends to comply with the reduction in the ratio through an equity issuance, as discussed below. As noted, the Company financed the Schneider acquisition by issuing approximately $2.1 billion in commercial paper. At December 31, 1998, the Company had approximately $1.8 billion of commercial paper outstanding at a weighted average interest rate of 6.23%. The Company expects a minimum of $800 million will remain outstanding through the next twelve months and, accordingly, has classified this portion of borrowings as long-term at December 31, 1998. During the first quarter of 1999, the Company refinanced substantially all of its commercial paper with short-term borrowings under its Facilities due to the limited market for its commercial paper. The variable interest rates on the borrowings is approximately 5.75%. The Company intends to continue to borrow under its Facilities until it is able to issue commercial paper at reasonable rates. In 1999, the Company intends to refinance a portion of the outstanding credit facilities balance by raising more permanent financing through an issuance of convertible securities and additional equity securities. In September 1998, the Company filed a Public Registration Statement with the U.S. Securities and Exchange Commission. At December 31, 1998, the Company had no outstanding securities issued under this registration statement. In March 1998, the Company issued $500 million of 6.625% debt securities (Debt Securities) due March 2005 under a Public Debt Registration Statement filed with the U.S. Securities and Exchange Commission. The Debt Securities are not redeemable prior to maturity and are not subject to any sinking fund requirements. A significant portion of the net proceeds from the sale of the Debt Securities (approximately $496 million) was used for repayment of indebtedness under the Company's commercial paper program. During March 1998, the Company borrowed 1.2 billion yen (the equivalent of approximately $11 million) under a financing arrangement with a Japanese bank at a fixed interest rate of 2.1%. The term of the borrowing extends through 2012. At December 31, 1998, the Company had an additional 6 billion Japanese yen borrowings (approximately $53 million) outstanding with a syndicate of Japanese banks. The interest rate on the borrowings is 2.47%. The borrowings are payable in 2002. The Company had uncommitted Japanese credit facilities with several Japanese banks to provide for borrowings and promissory notes discounting of up to 7.5 billion Japanese yen (approximately $66 million). At December 31, 1998, there were no borrowings under these facilities and approximately $61 million of receivables were discounted at average interest rates of approximately 1.5%. Since early 1995, the Company has entered into several transactions involving acquisitions and alliances, certain of which have involved equity investments. As the healthcare environment continues to undergo rapid change, management expects that it will continue to focus on strategic initiatives and/or make additional investments in existing relationships, although management does not expect that such investments will be significant during 1999. As of December 31, 1998, the Company's cash obligations required to complete the balance of the Company's initiatives to integrate businesses related to its mergers and acquisitions and its fourth quarter rationalization plan are estimated to be approximately $70 million. In addition, the Company has outstanding $140 million of acquisition-related cash obligations. Substantially all of these cash outlays will occur during 1999. Further, the Company expects to incur capital expenditures of approximately $130 million during 1999. The Company expects that its cash and cash equivalents, marketable securities, cash flows from operating activities, proceeds from the issuance of debt and equity securities discussed previously and borrowing capacity will be sufficient to meet its projected operating cash needs, including integration costs through the end of 1999. As noted, the Company has $1.2 billion of 364-day credit facilities that expire in September 1999. An extension of these facilities will be needed if the Company does not obtain additional financing through an equity offering or other means. The Company intends to issue equity and other securities, but there are no assurances that additional financing can be or will be obtained. YEAR 2000 READINESS The inability of business processes to continue to function correctly after the beginning of the Year 2000 could have serious adverse effects on companies and entities throughout the world. The Company has undertaken a global effort to identify and mitigate Year 2000 issues in its information systems, products, facilities and suppliers. The Company established a multidisciplinary Year 2000 Task Force in 1998, comprised of management from each of the Company's principal functional areas, including Finance, Information Technology, Regulatory Affairs, Customer Service, Manufacturing, Distribution, Purchasing, Facilities, Legal and Communications. A core team and a program management office has also been established for coordinating and BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-7 26 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - --------------------- tracking all Year 2000 issues. This office is comprised of Company management and staff and representatives of an experienced Year 2000 consulting firm. These efforts report directly to members of the Company's Executive Committee. An independent consulting firm has been working with the Company for over two years to implement a global information system that is designed to be Year 2000 compliant. In addition to the Company's information systems project, other internal systems are being addressed largely through the replacement and testing of much of the Company's older systems. The efforts are both company-wide and site specific, spanning the range from the Information Technology department systems to manufacturing operations (including production facilities, support equipment, and process control) and infrastructure technologies. The vast majority of the Company's products do not perform date-sensitive operations and are therefore unaffected by Year 2000 issues. Steps have been taken to correct non-compliance which affects the functional performance of the few remaining products. Through December 31, 1998, the Company has expended in excess of $100 million to implement and operate a Year 2000 compliant global information system, and other costs relating to Year 2000 compliance. The Company does not anticipate that additional compliance costs will have a material impact on its business operations or its financial condition. The Company relies on third party providers for services such as telecommunications, Internet service, utilities, certain product components and other key services. Interruption of those services due to Year 2000 issues could affect the Company's operations. The Company has initiated an evaluation of the status of third party service providers' compliance efforts and of alternative and contingency requirements. While approaches to reducing risks of interruption of business operations vary by business unit, options include identification of alternative service providers available to provide such services if a service provider fails to become Year 2000 compliant within an acceptable time frame. Based on the Company's evaluation to date, management believes that in most cases redundant capacity exists at the supplier or that alternative sources of supply are available or could be developed within a reasonable amount of time should compliance become an issue for individual suppliers. The Company believes that its Year 2000 program will identify and correct all material non-compliant systems and operations before the end of 1999. Third party service providers are being assessed and the Company expects to have contingency plans that will avoid failures having a material effect on the Company's business operations or financial condition in place before the end of 1999. There can be no assurance that the Company's Year 2000 program will identify and correct all non-compliant systems of the Company and its third party service providers or that any such failure will not have a material effect on the Company's business operations or financial condition. MARKET RISK DISCLOSURES In the normal course of business, the Company is exposed to market risk from changes in interest rates and foreign currency exchange rates. The Company addresses these risks through a risk management program that includes the use of derivative financial instruments. The use of derivative financial instruments are initiated within the guidelines of documented corporate risk management policies. The Company does not enter into any derivative transactions for speculative purposes. The Company's floating and fixed rate debt obligations are subject to interest rate risk. A 100 basis point increase in interest rates related to the Company's floating rate borrowings, assuming the amount borrowed remains constant, would result in an annual increase in the Company's then current interest expense of approximately $18 million. The Company intends to refinance a portion of its floating rate borrowings through a combination of issuance of convertible securities and additional equity securities, which are subject to market risk. A 100 basis point increase in interest rates related to the Company's fixed long-term debt would not result in a material change in its fair value. The Company enters into foreign exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with commitments, generally one to six months. The Company does not engage in speculation. The Company's foreign exchange contracts should not subject the Company to material risk due to exchange rate movements because gains and losses on these contracts should offset losses and gains on the assets and liabilities being hedged. The Company had spot and forward foreign exchange contracts outstanding in the notional amounts of $230 million and $177 million as of December 31, 1998 and 1997, respectively. Although the Company engages in hedging transactions that may offset the effect of fluctuations in foreign currency exchange rates on foreign currency denominated assets and liabilities, financial exposure may nonetheless result, primarily from the timing of transactions and the movement of exchange rates. The short-term nature of these contracts has resulted in these instruments having insignificant fair values at December 31, 1998. A sensitivity analysis of changes in the fair value of foreign currency exchange contracts outstanding at December 31, 1998 indicates that, if the U.S. dollar uniformly weakened by 10% against all currencies, the fair value of these contracts BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-8 27 would decrease by $11 million. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by changes in the value of the underlying exposures being hedged. In addition, unhedged foreign currency balance sheet exposures as of December 31, 1998 are not expected to result in a significant loss of earnings or cash flows. As the Company has expanded its international operations, its sales and expenses denominated in foreign currencies have expanded and that trend is expected to continue. Therefore, most international sales and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations and these fluctuations may have an impact on margins. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency selling prices. EURO CONVERSION On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the euro. The participating countries agreed to adopt the euro as their common legal currency on that date. Fixed conversion rates between these participating countries' existing currencies (the legacy currencies) and the euro were established as of that date. The legacy currencies are scheduled to remain legal tender as denominations of the euro until at least January 1, 2002 (but not later than July 1, 2002). During this transition period, parties may settle transactions using either the euro or a participating country's legacy currency. The Company is addressing the potential impact resulting from the euro conversion, including adaptation of information technology systems, competitive implications related to pricing and foreign currency considerations. Management currently believes that the introduction of the euro will not have a material impact related to the adaptation of information technology systems or foreign currency exposures. The increased price transparency resulting from the use of a single currency in the eleven participating countries may affect the ability of the Company to price its products differently in the various European markets. A possible result of this is price harmonization at lower average prices for products sold in some markets. However, uncertainty exists as to the effects the euro will have on the marketplace. LITIGATION The Company is involved in various lawsuits, including patent infringement and product liability suits, from time to time in the normal course of business. In management's opinion, the Company is not currently involved in any legal proceeding other than those specifically identified in the notes to consolidated financial statements which, individually or in the aggregate, could have a material effect on the financial condition, operations and cash flows of the Company. The Company believes that it has meritorious defenses against claims that it has infringed patents of others. However, there can be no assurance that the Company will prevail in any particular case. An adverse outcome in one or more cases in which the Company's products are accused of patent infringement could have a material adverse effect on the Company. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. The Company has insurance coverage which management believes is adequate to protect against such product liability losses as could otherwise materially affect the Company's financial position. CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains forward-looking statements. The Company desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all forward-looking statements. Forward-looking statements contained in this report include, but are not limited to, statements with respect to, and the Company's performance may be affected by: (a) the Company's ability to obtain benefits from the Schneider acquisition; (b) the process, outlays and plan for the integration of businesses acquired by the Company, and the successful and timely implementation of the rationalization plan; (c) the impact and timing of successful implementation of the Company's supply chain initiatives; (d) the potential impacts of continued consolidation among healthcare providers, trends towards managed care and economically motivated buyers, healthcare cost containment, more stringent regulatory requirements and more vigorous enforcement activities; (e) the Company's belief that it is well positioned to take advantage of opportunities for growth that exist in the markets it serves; (f) the Company's continued commitment to refine existing products and procedures and to develop new technologies that provide simpler, less traumatic, less costly and more efficient diagnosis and treatment; (g) risks associated with international operations; (h) the potential effect of foreign currency fluctuations on revenues, expenses and resulting margins and the trend toward increasing sales and expenses denominated in foreign currencies; (i) the Company's belief that its effective tax rate for 1999 will only increase slightly from 1998; (j) the ability of the Company to manage accounts receivable, manufacturing costs and inventory levels and mix and to react effectively to the changing managed care environment and worldwide economic conditions; (k) the ability of the Company to meet its projected cash needs through the end of 1999; (l) the ability BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-9 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - --------------------- of the global information systems to improve supply chain management; (m) costs and risks associated with implementing Year 2000 compliance and business process reengineering; (n) timely and uninterrupted supply of the NIR(R) coronary stent and increase in purchase price; (o) the ability to realize improved long-term returns on the Company's investments with a direct selling presence in Emerging Markets; (p) the ability of the Company to obtain more permanent financing to re-finance a portion of its commercial paper and amounts borrowed under the Facilities, to comply with its debt ratio through an equity issuance and to place its commercial paper at reasonable rates; (q) the Company's expectation that a minimum of $800 million of short-term debt supported by the Facilities will remain outstanding through the next twelve months; (r) the Company's ability to fund development of purchased technology and to realize value assigned to in-process research and development and other intangible assets; (s) the impact of stockholder class action, patent, product liability and other litigation, the outcome of the U.S. Department of Justice investigation, and the adequacy of the Company's product liability insurance; (t) the potential impact resulting from the euro conversion, including adaptation of information technology systems, competitive implications related to pricing and foreign currency considerations; (u) the effects of finalization of accounting for the purchase of Schneider; and (v) the timing, size and nature of strategic initiatives available to the Company. Several important factors, in addition to the specific factors discussed in connection with such forward-looking statements individually, could affect the future results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements contained herein. Such additional factors include, among other things, future economic, competitive and regulatory conditions, demographic trends, third-party intellectual property, financial market conditions and future business decisions of Boston Scientific and its competitors, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Boston Scientific. Therefore, the Company wishes to caution each reader of this report to consider carefully these factors as well as the specific factors discussed with each forward-looking statement in this report and as disclosed in the Company's filings with the Securities and Exchange Commission as such factors, in some cases, have affected, and in the future (together with other factors) could affect, the ability of the Company to implement its business strategy and may cause actual results to differ materially from those contemplated by the statements expressed herein. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-10 29 CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Net sales $2,233,576 $1,830,778 $1,551,238 Cost of products sold 734,841 545,541 427,838 ------------------------------------------------- Gross profit 1,498,735 1,285,237 1,123,400 Selling, general and administrative expenses 754,970 662,647 492,332 Amortization expense 52,662 32,398 23,576 Royalties 31,315 22,177 17,061 Research and development expenses 200,285 167,194 134,919 Purchased research and development 681,952 29,475 110,000 Restructuring and merger-related charges (credits) (15,014) 145,891 32,341 ------------------------------------------------- 1,706,170 1,059,782 810,229 ------------------------------------------------- Operating income (loss) (207,435) 225,455 313,171 Other income (expense): Interest and dividend income 4,835 3,706 6,297 Interest expense (67,573) (14,285) (11,518) Other, net (5,141) 255 (4,620) ------------------------------------------------- Income (loss) before income taxes and cumulative effect of change in accounting (275,314) 215,131 303,330 Income taxes (10,945) 83,651 136,236 ------------------------------------------------- Income (loss) before cumulative effect of change in accounting (264,369) 131,480 167,094 Cumulative effect of change in accounting (net of tax) (21,080) ------------------------------------------------- Net income (loss) $ (264,369) $ 110,400 $ 167,094 ================================================= Earnings (loss) per common share - basic: Income (loss) before cumulative effect of change in accounting $ (0.68) $ 0.34 $ 0.43 Cumulative effect of change in accounting (0.06) ------------------------------------------------- Net income (loss) per common share - basic $ (0.68) $ 0.28 $ 0.43 ================================================= Earnings (loss) per common share - assuming dilution: Income (loss) before cumulative effect of change in accounting $ (0.68) $ 0.33 $ 0.42 Cumulative effect of change in accounting (0.05) ------------------------------------------------- Net income (loss) per common share - assuming dilution $ (0.68) $ 0.28 $ 0.42 =================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-11 30 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) - -------------------------------
DECEMBER 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 70,330 $ 57,993 Short-term investments 5,073 22,316 Trade accounts receivable, net 537,786 365,463 Inventories 461,981 391,580 Deferred income taxes 129,922 146,956 Prepaid expenses and other current assets 61,535 36,176 ----------------------------- Total current assets 1,266,627 1,020,484 Property, plant and equipment, net 679,882 498,967 Other assets: Excess of cost over net assets acquired, net 876,843 100,382 Technology - core and developed, net 606,475 70,694 Patents, trademarks and other intangibles, net 330,217 142,270 Deferred income taxes 69,346 Investments 34,058 66,239 Other assets 29,263 25,234 ----------------------------- $3,892,711 $1,924,270 =============================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-12 31 CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) - -------------------------------
DECEMBER 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Commercial paper $1,016,163 $423,250 Bank obligations 11,324 23,958 Accounts payable 108,597 98,878 Accrued expenses 245,022 161,236 Acquisition-related obligations 139,623 Accrual for restructuring and merger-related charges 71,231 68,358 Income taxes payable 18,821 11,436 Other current liabilities 8,877 6,292 ----------------------------- Total current liabilities 1,619,658 793,408 Long-term debt 1,363,822 46,325 Deferred income taxes 58,034 Other long-term liabilities 88,094 69,205 Commitments and contingencies Stockholders' equity: Preferred stock, $ .01 par value - authorized 50,000,000 shares, none issued and outstanding Common stock, $ .01 par value - authorized 600,000,000 shares, 394,185,781 shares issued at December 31, 1998; authorized 300,000,000 shares, 195,611,491 shares issued at December 31, 1997 3,942 1,956 Additional paid-in capital 506,750 432,556 Contingent stock repurchase obligation 18,295 Treasury stock, at cost - 1,800,627 shares at December 31, 1997 (96,260) Retained earnings 381,246 677,608 Accumulated other comprehensive income (expense): Foreign currency translation adjustment (72,289) (94,279) Unrealized gain on available-for-sale securities, net 1,488 17,422 ----------------------------- Total stockholders' equity 821,137 957,298 ----------------------------- $3,892,711 $1,924,270 =============================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-13 32 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) - --------------------
Common Stock Contingent Accumulated --------------- Additional Stock Other Shares Par Paid-In Repurchase Treasury Retained Comprehensive Comprehensive Issued Value Capital Obligation Stock Earnings Income(Expense) Income(Loss) --------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 195,035 $1,950 $431,052 $(26,296) $406,957 $ (5,746) Comprehensive income: Net income 167,094 $ 167,094 Other comprehensive income (expense), net of tax: Net change in equity investments 10,053 10,053 Foreign currency translation adjustment (23,385) (23,385) Issuance of common stock 576 6 (5,500) 66,385 Purchase of common stock for treasury (66,355) Sale of stock repurchase obligation (24,855) $24,855 2,523 Tax benefit relating to stock option and employee stock purchase plans 36,377 --------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 195,611 1,956 437,074 24,855 (23,743) 574,051 (19,078) $ 153,762 Comprehensive income: ========== Net income 110,400 $ 110,400 Other comprehensive expense, net of tax: Net change in equity investments (1,464) (1,464) Foreign currency translation adjustment (56,315) (56,315) Issuance of common stock (47,713) 114,134 (11,758) Purchase of common stock for treasury (188,159) Sale of stock repurchase obligation (18,295) 18,295 1,508 Expiration of stock repurchase obligation 24,855 (24,855) Tax benefit relating to stock option and employee stock purchase plans 36,635 4,915 --------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 195,611 1,956 432,556 18,295 (96,260) 677,608 (76,857) $ 52,621 Comprehensive loss: ========== Net loss (264,369) $(264,369) Other comprehensive income (expense), net of tax: Net change in equity investments (15,934) (15,934) Foreign currency translation adjustment 21,990 21,990 Issuance of common stock 2,047 20 47,444 96,260 (55,492) Stock split effected in the form of a stock dividend 196,528 1,966 (1,966) Expiration of stock repurchase obligation 18,295 (18,295) Tax benefit relating to stock option and employee stock purchase plans 8,455 25,465 --------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 394,186 $3,942 $506,750 $381,246 $(70,801) $(258,313) =======================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-14 33 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) - -------------------
Year ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $ (264,369) $110,400 $167,094 Adjustments to reconcile net income (loss) to cash provided by operating activities: Gain on sale of equity investments (4,933) (10,526) (827) Depreciation and amortization 128,605 86,692 66,317 Deferred income taxes (151,424) (52,214) (11,749) Noncash special charges (credits) (35,464) 37,104 14,378 Purchased research and development 681,952 29,475 110,000 Exchange (gain) loss (2,411) 4,212 2,115 Increase (decrease) in cash flows from operating assets and liabilities: Trade accounts receivable (94,823) (59,462) (105,370) Inventories (25,664) (179,951) (90,980) Prepaid expenses and other current assets 7,004 9,751 (19,399) Accounts payable and accrued expenses 35,792 101,378 31,342 Accrual for restructuring and merger-related charges (22,107) 28,489 (60,420) Other liabilities 11,412 (17,075) 32,175 Other, net (5,105) (7,779) 7,303 ---------------------------------- Cash provided by operating activities 258,465 80,494 141,979 INVESTING ACTIVITIES: Purchases of property, plant, and equipment, net (174,039) (220,097) (145,332) Net maturities of held-to-maturity short-term investments 28,555 28,152 Purchases of available-for-sale securities (7,834) (74,947) Sales of available-for-sale securities 11,562 5,351 70,260 Acquisitions of businesses, net of cash acquired (2,059,979) (18,076) (264,493) Payments for acquisitions of and/or investments in certain technologies, net (2,314) (39,066) (8,564) Other, net 205 (6,379) ---------------------------------- Cash used in investing activities (2,224,770) (250,962) (401,303) FINANCING ACTIVITIES: Net increase in commercial paper 1,392,913 210,750 212,500 Proceeds from notes payable and long-term debt, net of debt issuance costs 522,850 52,005 Payments on notes payable, capital leases and long-term borrowings (33,231) (10,929) (27,816) Proceeds from issuances of shares of common stock, net of tax benefits 99,795 96,213 77,642 Acquisitions of treasury stock, net of proceeds from put options (186,651) (63,832) Other, net (4,959) 484 762 ---------------------------------- Cash provided by financing activities 1,977,368 161,872 199,256 Effect of foreign exchange rates on cash 1,274 (5,586) (2,588) ---------------------------------- Net increase (decrease) in cash and cash equivalents 12,337 (14,182) (62,656) Cash and cash equivalents at beginning of period 57,993 72,175 134,831 ---------------------------------- Cash and cash equivalents at end of period $ 70,330 $ 57,993 $ 72,175 ==================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-15 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE A) NOTE A - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Boston Scientific Corporation (Boston Scientific or the Company) and its subsidiaries, substantially all of which are wholly-owned, and include the results of EP Technologies, Inc. (EPT) and Target Therapeutics, Inc. (Target) acquired in 1996 and 1997, respectively, accounted for as poolings-of-interests for all periods presented. The statements also include the results of Symbiosis Corporation (Symbiosis), beginning in March 1996, the results of Endotech, Ltd. and MinTec, Inc., and certain related companies (Endotech/MinTec), beginning in May 1996 and the results of Schneider Worldwide (Schneider), beginning in September 1998. Investments in affiliates, representing 20% to 50% of the ownership of such companies, are accounted for under the equity method, including the Company's investment in Medinol Ltd. (Medinol). Income recorded in connection with these investments was not significant during the periods presented. Investments in affiliates, representing less than 20% of the ownership of such companies, are accounted for under the cost method. ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TRANSLATION OF FOREIGN CURRENCY: All assets and liabilities of foreign subsidiaries are translated at the rate of exchange at year end while sales and expenses are translated at the average rates in effect during the year. The net effect of these translation adjustments is shown in the accompanying financial statements as a component of stockholders' equity. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. SHORT-TERM INVESTMENTS: Short-term investments are recorded at fair value, which approximates cost. CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of temporary cash and cash equivalents, marketable securities, forward foreign exchange contracts and accounts receivable. The Company invests its excess cash primarily in high quality securities and limits the amount of credit exposure to any one financial institution. The Company's investment policy limits exposure to concentration of credit risk and changes in market conditions. The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. The Company transacts forward foreign exchange contracts with major financial institutions to limit its credit exposure. The Company provides credit, in the normal course of business, primarily to hospitals, private and governmental institutions and healthcare agencies and doctors' offices. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or market. PROPERTY, PLANT AND EQUIPMENT: Property, plant, equipment and leaseholds are stated at historical cost. Expenditures for maintenance and repairs are charged to expense; betterments are capitalized. The Company provides for depreciation and amortization by the straight-line method at rates which are intended to depreciate and amortize the cost of these assets over their estimated useful lives. Buildings and improvements are depreciated over a 15 to 40-year life; equipment, furniture and fixtures are depreciated over a 2 to 12-year life. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. The Company capitalizes interest incurred on funds used to construct property, plant and equipment. Interest capitalized was $4 million during 1998 and $5 million during 1997. The Company receives grant money equal to a percentage of expenditures on eligible capital equipment which is recorded as deferred income and recognized ratably over the life of the underlying assets. The grant money would be repayable, in whole or in part, should the Company fail to meet certain employment goals. INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line method over the following lives: Patents and trademarks (3 - 20 years); Licenses (2 - 20 years); Core and developed technology (3 - 25 years); Excess of cost over net assets acquired (15 - 40 years); Other intangibles (various). The Company examines the carrying value of its excess of cost over net assets acquired and other intangible assets to determine whether there are any impairment losses. If indicators of impairment were present in intangible assets used in operations, and future cash flows were not expected to be sufficient to recover the assets' carrying amount, an impairment loss would be charged to expense in the period identified. No event has been identified that would indicate an impairment of the value of material intangible assets recorded in the accompanying consolidated financial statements. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-16 35 INCOME TAXES: The Company utilizes the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Taxes are not provided on unremitted earnings of subsidiaries outside the United States (U.S.) where such earnings are permanently reinvested. At December 31, 1998, unremitted earnings of non-U.S. subsidiaries were $416 million. It is not practical to estimate the amount of taxes payable on these foreign earnings. Research and development tax credits are recorded as a reduction in income tax expense in the year realized. FORWARD FOREIGN EXCHANGE CONTRACTS: The Company enters into forward foreign exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with commitments. The Company does not engage in speculation. The Company's foreign exchange contracts do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the assets and liabilities being hedged. During 1998, net foreign currency transaction and translation gains (losses) that are reflected as other income (expense) on the Consolidated Statements of Operations totaled approximately $2 million of net foreign exchange gains compared to net foreign exchange losses of $4 million and $2 million in 1997 and 1996, respectively. Although the Company engages in hedging transactions that may offset the effect of fluctuations in foreign currency exchange rates on foreign currency denominated assets and liabilities, financial exposure may nonetheless result, primarily from the timing of transactions and the movement of exchange rates. Further, any significant changes in the political, regulatory or economic environment where the Company conducts international operations may have a material impact on revenues and profits. REVENUE RECOGNITION: The Company recognizes revenue from the sale of its products when the products are shipped to its customers. The Company allows its customers to return certain products for credit. The Company also allows customers to return defective or damaged products for credit or replacement. Accruals are made and evaluated for adequacy for all returns. RESEARCH AND DEVELOPMENT: Research and development costs are expensed as incurred. STOCK COMPENSATION ARRANGEMENTS:The Company accounts for its stock compensation arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and intends to continue to do so. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". ACCOUNTING CHANGE: In 1997, the Company implemented Emerging Issues Task Force (EITF) No. 97-13 "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation", the effect of which ($31 million or $21 million, net of tax) is reflected as a cumulative effect of change in accounting in 1997. NEW ACCOUNTING STANDARDS: In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company has not yet adopted the American Institute of Certified Public Accountants' Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", which will require adoption in 1999, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which will require adoption in 2000. The Company is in the process of determining the effect of adoption of these statements on its consolidated financial statements and related disclosures but does not believe the impact will be significant. NET INCOME PER COMMON SHARE: Net income (loss) per common share is based upon the weighted average number of common shares, common share equivalents and the dilutive effect of European put options, if applicable, outstanding each year. The Company paid a two-for-one stock split on November 30, 1998. All historical per share amounts have been restated to reflect the stock split. RECLASSIFICATIONS: Certain prior years' amounts have been reclassified to conform to the current years' presentation. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-17 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE B TO NOTE D) NOTE B - OTHER BALANCE SHEET INFORMATION Components of other selected captions in the Consolidated Balance Sheets at December 31 consisted of:
(IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------------------- TRADE ACCOUNTS RECEIVABLE Accounts receivable $586,937 $395,942 Less allowances 49,151 30,479 --------------------------- $537,786 $365,463 =========================== INVENTORIES Finished goods $248,925 $209,506 Work-in-process 82,861 45,683 Raw materials 130,195 136,391 --------------------------- $461,981 $391,580 =========================== PROPERTY, PLANT AND EQUIPMENT Land $ 48,233 $ 45,213 Buildings and improvements 418,669 306,958 Equipment, furniture and fixtures 478,437 354,344 --------------------------- 945,339 706,515 Less accumulated depreciation and amortization 265,457 207,548 --------------------------- $679,882 $498,967 =========================== EXCESS OF COST OVER NET ASSETS ACQUIRED Excess of cost over net assets acquired $897,805 $115,638 Less accumulated amortization 20,962 15,256 --------------------------- $876,843 $100,382 =========================== TECHNOLOGY - CORE AND DEVELOPED Core technology $420,960 Developed technology 219,985 $ 89,004 --------------------------- 640,945 89,004 Less accumulated amortization 34,470 18,310 --------------------------- $606,475 $ 70,694 =========================== PATENTS, TRADEMARKS AND OTHER INTANGIBLES Patents and trademarks $273,364 $129,610 Licenses 66,404 58,040 Other intangibles 76,069 13,768 --------------------------- 415,837 201,418 Less accumulated amortization 85,620 59,148 --------------------------- $330,217 $142,270 =========================== ACCRUED EXPENSES Payroll and related liabilities $ 83,763 $ 40,547 Other 161,259 120,689 --------------------------- $245,022 $161,236 ===========================
Inventories as of December 31, 1998 include approximately $123 million of NIR(R) coronary stents which are supplied by Medinol. Delays, stoppages, or interruptions in the supply and/or mix of the NIR(R) stent could adversely affect the operating results of the Company. During 1998, worldwide NIR(R) coronary stent sales were approximately 13% of worldwide sales. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-18 37 NOTE C - CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents, and investments, stated at fair market value, consisted of the following: FAIR GROSS GROSS MARKET UNREALIZED UNREALIZED AMORTIZED (IN THOUSANDS) VALUE GAINS LOSSES COST - -------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1998 AVAILABLE-FOR-SALE: Cash and money market accounts $ 70,330 $70,330 Equity securities (with a readily determinable fair value) 20,567 $ 9,159 $6,684 18,092 Debt securities 5,073 5,073 ------------------------------------------------- $ 95,970 $ 9,159 $6,684 $93,495 ================================================= DECEMBER 31, 1997 AVAILABLE-FOR-SALE: Cash and money market accounts $ 57,993 $57,993 Equity securities (with a readily determinable fair value) 47,828 $31,079 $2,090 18,839 Debt securities 16,607 16,607 ------------------------------------------------- $122,428 $31,079 $2,090 $93,439 =================================================
The Company has no trading securities. Unrealized gains and temporary losses for available-for-sale securities are excluded from earnings and are reported, net of tax, as a separate component of stockholders' equity until realized. The cost of available-for-sale securities is based on the specific identification method. At December 31, 1998 and 1997, the Company had investments totaling $13 million and $24 million, respectively, in which the fair market value was not readily determinable. NOTE D - BORROWINGS AND CREDIT ARRANGEMENTS The Company's borrowings at December 31 consisted of:
(IN THOUSANDS) 1998 1997 - --------------------------------------------------------------------------- Commercial paper $1,016,163 $423,250 Bank obligations 11,324 23,958 Long-term debt - fixed rate 563,822 46,325 Long-term debt - floating rate 800,000
At December 31, 1998, the Company had approximately $1.8 billion of commercial paper outstanding at a weighted average interest rate of 6.23% compared to $423 million at a weighted average interest rate of 6.46% at December 31, 1997. The Company's commercial paper borrowings are supported by revolving credit facilities with certain domestic and foreign financial institutions. At December 31, 1998, the revolving credit facilities totaled $2.2 billion. The credit facilities consist of a $1.0 billion credit facility which terminates in June 2002 and $1.2 billion in 364-day facilities which terminate in September 1999 and can be extended for an additional 364 days under certain conditions. The Company has the ability to refinance a portion of its short-term debt on a long-term basis through its credit facilities and expects a minimum of $800 million will remain outstanding through the next twelve months and, accordingly, the Company has classified this portion of borrowings as long-term at December 31, 1998. Under the revolving credit facilities, the Company has the option to borrow amounts at various interest rates. Use of the borrowings is unrestricted and the borrowings are unsecured. The revolving credit facilities require the Company to maintain a specific ratio of consolidated funded debt (as defined) to consolidated net worth (as defined) plus consolidated funded debt. In the first quarter of 1999, the Company refinanced substantially all of the outstanding commercial paper borrowings with proceeds of borrowings under the revolving credit facilities. The Company had other outstanding bank obligations of $11 million and $24 million at December 31, 1998 and 1997, respectively, at weighted average interest rates of 6.45% and 2.55%, respectively. In March 1998, the Company issued $500 million of seven-year senior notes. The senior notes bear a coupon of 6.625% payable semiannually, and are not redeemable prior to maturity or subject to any sinking fund requirements. During March 1998, the Company borrowed 1.2 billion Japanese yen (approximately $11 million) at a fixed interest rate of 2.1% from a Japanese bank to finance a facility construction project. The term of the borrowing extends through 2012. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-19 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE D CONTINUED TO NOTE G) - ---------------------------- At December 31, 1998, the Company had an additional 6 billion Japanese yen borrowings (approximately $53 million) outstanding with a syndicate of Japanese banks. The interest rate on the borrowings is 2.47% and the borrowings are payable in 2002. The Company has uncommitted Japanese credit facilities with several Japanese banks to provide for borrowings and promissory notes discounting of up to 7.5 billion Japanese yen (approximately $66 million). At December 31, 1998, there were no borrowings outstanding under the Japanese credit facilities compared to 2.7 billion Japanese yen (approximately $21 million) at December 31, 1997. During 1998, approximately $266 million of receivables were discounted through promissory notes compared to $194 million during 1997. At December 31, 1998, approximately $61 million of receivables were discounted at average interest rates of approximately 1.5%. In September 1998, the Company filed a $1.2 billion shelf registration with the U.S. Securities and Exchange Commission under which the Company may from time to time issue various equity and debt securities. At December 31, 1998, the Company had no outstanding securities issued under this shelf registration. Interest paid, including interest paid under capital leases and mortgage loans, amounted to $65 million in 1998, $19 million in 1997, and $13 million in 1996. NOTE E - LEASES Rent expense amounted to $40 million in 1998, $37 million in 1997 and $22 million in 1996. Future minimum rental commitments as of December 31, 1998 under noncancelable capital and operating lease agreements are as follows:
(IN THOUSANDS) - --------------------------------------------------------------------------- CAPITAL OPERATING YEAR ENDING DECEMBER 31, LEASES LEASES - --------------------------------------------------------------------------- 1999 $ 3,425 $ 32,427 2000 2,274 29,247 2001 2,282 15,508 2002 2,299 11,460 2003 2,323 7,437 Thereafter 8,872 50,002 ------------------------ Total minimum lease payments 21,475 $146,081 ======================== Amount representing interest 8,799 ------- Present value of minimum lease payments $12,676 =======
NOTE F - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheets for cash and cash equivalents are valued at cost which approximates their fair value. INVESTMENTS: The fair values for marketable debt and equity securities are based on quoted market prices when readily determinable. COMMERCIAL PAPER AND BANK OBLIGATIONS: The carrying amounts of the Company's borrowings under its commercial paper program and its financing agreements approximate their fair value. LONG-TERM DEBT: The fair value of the Company's fixed rate long-term debt is estimated based on quoted market prices. The carrying amounts of the Company's floating rate long-term debt approximate their fair value. FORWARD FOREIGN EXCHANGE CONTRACTS: The fair values of forward foreign exchange contracts are estimated based on the amount that the Company would receive or pay to terminate the agreements at the reporting date. The Company had spot and forward foreign exchange contracts outstanding in the notional amounts of $230 million and $177 million as of December 31, 1998 and 1997, respectively. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-20 39
The carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows: 1998 1997 CARRYING FAIR CARRYING FAIR (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------- Assets: Cash, cash equivalents and investments $ 95,970 $ 95,970 $122,428 $122,428 Forward foreign exchange contracts, net 3,038 2,476 Liabilities: Commercial paper 1,016,163 1,016,163 423,250 423,250 Bank obligations -short-term 11,324 11,324 23,958 23,958 Long-term debt - fixed rate 563,822 549,522 46,325 47,255 Long-term debt - floating rate 800,000 800,000 Forward foreign exchange contracts, net 7,436 7,501
NOTE G - INCOME TAXES Income (loss) before income taxes and cumulative effect of change in accounting consisted of: YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Domestic $(346,518) $178,381 $253,239 Foreign 71,204 36,750 50,091 ----------------------------------------- $(275,314) $215,131 $303,330 =========================================
The related provision (benefit) for income taxes consisted of: YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Current: Federal $106,177 $97,237 $116,191 State 20,903 14,567 9,108 Foreign 13,399 16,614 22,686 ---------------------------------------- 140,479 128,418 147,985 ======================================== Deferred: Federal (112,024) (30,123) 4,175 State (27,127) (5,648) 522 Foreign (12,273) (8,996) (16,446) ---------------------------------------- (151,424) (44,767) (11,749) ======================================== $(10,945) $83,651 $136,236 ========================================
The reconciliation of taxes on income at the federal statutory rate to the actual provision (benefit) for income taxes is: YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Tax at statutory rate $(96,360) $75,296 $106,166 State income taxes, net of federal benefit 8,368 7,760 8,778 Effect of foreign taxes (24,849) (9,981) 3,641 Non-deductible merger-related expenses and purchased research and development 93,247 14,957 19,902 Other, net 8,649 (4,381) (2,251) ---------------------------------------- $(10,945) $83,651 $136,236 ========================================
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-21 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE G CONTINUED TO NOTE I) - ----------------------------
SIGNIFICANT COMPONENTS OF THE COMPANY'S DEFERRED TAX ASSETS AND LIABILITIES AT DECEMBER 31 CONSISTED OF: (IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Deferred tax assets: Inventory costs, intercompany profit and related reserves $ 84,942 $ 98,636 Tax benefit of net operating loss and tax credits 29,013 28,808 Reserves and accruals 29,148 31,937 Merger-related charges, including purchased research and development 201,006 44,302 Other, net 5,875 23,669 ------------------------ 349,984 227,352 Less valuation allowance on deferred tax assets 24,698 23,250 ------------------------ $325,286 $204,102 ======================== Deferred tax liabilities: Property, plant and equipment $ (7,222) $ (8,509) Intangible assets (51,415) (33,593) Unremitted earnings of subsidiaries (55,980) (52,104) Other (10,414) (9,407) ------------------------ (125,031) (103,613) ======================== Deferred SFAS No. 115 adjustment (987) (11,567) ------------------------ $199,268 $ 88,922 ========================
At December 31, 1998, the Company had U.S. tax net operating loss carryforwards and research and development tax credits of approximately $14 million that will expire periodically beginning in the year 2006. In addition, the Company had foreign tax net operating loss carryforwards of approximately $15 million that will expire periodically beginning in the year 2000. The Company established a valuation allowance of $25 million for these carryforwards primarily attributable to the carryforwards acquired as part of the Company's 1995, 1996 and 1997 mergers and acquisitions. Income taxes paid amounted to $109 million in 1998, $89 million in 1997 and $85 million in 1996. The income tax provision (benefit) of the unrealized gain or loss component of other comprehensive income (expense) was approximately $(11) million, $1 million and $7 million for 1998, 1997 and 1996, respectively. NOTE H - STOCKHOLDERS' EQUITY PREFERRED STOCK: The Company is authorized to issue 50 million shares of preferred stock in one or more series and to fix the powers, designations, preferences and relative, participating, option or other rights thereof, including dividend rights, conversion rights, voting rights, redemption terms, liquidation preferences and the number of shares constituting any series, without any further vote or action by the Company's stockholders. At December 31, 1998, the Company had no shares of preferred stock outstanding. COMMON STOCK: The Company is authorized to issue 600 million shares of common stock, $.01 par value per share. Holders of common stock are entitled to one vote per share. Holders of common stock are entitled to receive dividends when and if declared by the Board of Directors and to share ratably in the assets of the Company legally available for distribution to its stockholders in the event of liquidation. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The holders of common stock do not have cumulative voting rights. The holders of a majority of the shares of common stock can elect all of the Directors and can control the management and affairs of the Company. The Company is authorized to purchase on the open market up to approximately 40 million shares of the Company's common stock. Purchases will be made at prevailing prices as market conditions and cash availability warrant. Stock repurchased under the Company's systematic plan will be used to satisfy its obligations pursuant to employee benefit and incentive plans. The Company did not repurchase any shares of its common stock during 1998. Prior to 1998, a total of 20 million shares of the Company's common stock was repurchased under the program. On August 27, 1998, the Company announced that its Board of Directors approved a two-for-one stock split, to be effected in the form of a 100 percent stock dividend. On November 4, 1998, the Company announced that its stockholders had approved an amendment to the Company's certificate of BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-22 41 incorporation increasing the Company's authorized common stock from 300,000,000 shares to 600,000,000 shares and authorized preferred stock from 25,000,000 to 50,000,000 shares. The amendment allowed the two-for-one stock split announced on August 27, 1998 to go forward. The stock split was paid on November 30, 1998 to stockholders of record as of November 13, 1998. All historical share and per share amounts have been restated to reflect the stock split except for share amounts presented in the Consolidated Balance Sheets and the Consolidated Statements of Stockholders' Equity which reflect the actual share amounts outstanding for each period presented. NOTE I - STOCK OWNERSHIP PLANS EMPLOYEE AND DIRECTOR STOCK INCENTIVE PLANS Boston Scientific's 1992 and 1995 Long-Term Incentive Plans provide for the issuance of up to 40 million shares of common stock. The terms of these two plans are similar. The plans cover officers, employees and consultants of and to the Company and provide for the grant of various incentives, including qualified and non-qualified options, stock grants, share appreciation rights and performance awards. Options granted to purchase shares of common stock are either immediately exercisable or exercisable in installments as determined by an appointed committee consisting of two or more non-employee directors (the Committee), and, in the case of any qualified options, expire within ten years from date of grant. In the case of qualified options, if an employee owns more than 10% of the voting power of all classes of stock, the option granted will be at 110% of the fair market value of the Company's common stock on the date of grant and will expire over a period not to exceed five years. The Committee may also make stock grants in which shares of common stock may be issued to officers, employees and consultants at a purchase price less than fair market value. The terms and conditions of such issuances, including whether achievement of individual or Company performance targets is required for the retention of such awards, are determined by the Committee. The Committee may also issue shares of common stock and/or authorize cash awards under the incentive plans in recognition of the achievement of long-term performance objectives established by the Committee. Stock grants for 5,000 shares, 15,000 shares and 2,000 shares were issued to employees during 1998, 1997 and 1996, respectively. Boston Scientific's 1992 Non-Employee Directors' Stock Option Plan provides for the issuance of up to 200,000 shares of common stock and authorizes the automatic grant to outside directors of options to acquire 4,000 shares of common stock generally on the date of each annual meeting of the Stockholders of the Company. Options under this plan are exercisable ratably over a three-year period and expire ten years from the date of grant. Shares reserved for future issuance under all of the Company's plans totaled approximately 42 million at December 31, 1998. If the Company had elected to recognize compensation expense for the granting of options under stock option plans based on the fair values at the grant dates consistent with the methodology prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation", net income (loss) and earnings (loss) per share would have been reported as the following pro forma amounts:
(IN THOUSANDS, YEAR ENDED DECEMBER 31, EXCEPT PER SHARE DATA) 1998 1997 1996 - --------------------------------------------------------------------- Net income (loss) As reported $(264,369) $110,400 $167,094 Pro forma (302,455) 82,974 151,820 - --------------------------------------------------------------------- Earnings (loss) per common share - assuming dilution As reported $ (0.68) $ 0.28 $ 0.42 Pro forma (0.77) 0.21 0.38 - ---------------------------------------------------------------------
The weighted average grant-date fair value per share of options granted during 1998, 1997 and 1996, calculated using the Black-Scholes options pricing model, is $13.13, $9.08 and $7.21, respectively. The fair value of the stock options used to calculate the pro forma net income (loss) and earnings (loss) per share amounts above is estimated using the Black-Scholes options pricing model with the following weighted average assumptions:
1998 1997 1996 - --------------------------------------------------------------------- Dividend yield 0% 0% 0% Expected volatility 37.80% 35.90% 37.70% Risk-free interest rate 5.64 6.42% 6.12% Actual forfeitures 1,127,000 1,340,000 682,000 Expected life 3.7 4.0 3.7
The effects of expensing the estimated fair value of stock options on 1997 and 1996 pro forma amounts are not necessarily representative of the effects on reporting the results of operations, as the periods presented include only three and two years, respectively, of option grants under the Company's plans. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-23 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE I CONTINUED TO NOTE K)
Information related to stock options at December 31 under stock ownership plans is as follows: 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE (OPTION AMOUNTS IN THOUSANDS) OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE - ------------------------------------------------------------------------------------------------------ Outstanding at January 1 33,206 $15.76 29,078 $11.42 29,398 $8.28 Granted 6,621 35.91 10,716 24.70 6,654 20.52 Exercised (5,557) 10.19 (5,106) 8.98 (5,948) 6.23 Canceled (2,222) 22.02 (1,482) 18.58 (1,026) 10.36 ------------------------------------------------------------------- Outstanding at December 31 32,048 20.45 33,206 15.76 29,078 11.42 =================================================================== Exercisable at December 31 13,053 $11.58 12,230 $ 9.08 10,784 $7.93 ===================================================================
Below is additional information related to stock options outstanding and exercisable at December 31, 1998: STOCK OPTIONS STOCK OPTIONS (OPTION AMOUNTS IN THOUSANDS) OUTSTANDING EXERCISABLE - ------------------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE - ------------------------------------------------------------------------------------------- $0.00- 8.00 7,082 4.49 $ 5.71 6,898 $ 5.67 8.01-16.00 5,179 6.18 13.63 2,907 13.47 16.01-24.00 4,890 7.60 20.64 1,999 20.46 24.01-32.00 8,976 8.42 25.10 1,186 25.14 32.01-40.00 5,921 9.32 36.85 63 34.16 --------------------------------------------------------- 32,048 7.23 $20.45 13,053 $11.58 =========================================================
STOCK PURCHASE PLAN Boston Scientific's Global Employee Stock Ownership Plan (Stock Purchase Plan) provides for the granting of options to purchase up to 3 million shares of the Company's common stock to all eligible employees. Under the Stock Purchase Plan, each eligible employee is granted, at the beginning of each period designated by the Committee as an offering period, an option to purchase shares of the Company's common stock equal to not more than 10% of the employee's eligible compensation. Such options may be exercised generally only to the extent of accumulated payroll deductions at the end of the offering period, at a purchase price equal to 85% of the fair market value of the Company's common stock at the beginning or end of each offering period, whichever is less. During 1998, approximately 380,000 shares were issued at $23.35 per share. During 1997, approximately 240,000 shares were issued at prices ranging from $23.45 to $24.33 per share, and, during 1996, approximately 240,000 shares were issued at prices ranging from $18.06 to $19.71 per share. At December 31, 1998, there were approximately 1.6 million shares available for future issuance. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-24 43 NOTE J - EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) - ----------------------------------------------------------------------------------------- BASIC: Net income (loss) $(264,369) $110,400 $167,094 ==================================== Weighted average shares outstanding 390,836 389,146 387,018 ==================================== Net income (loss) per common share $ (0.68) $ 0.28 $ 0.43 ==================================== ASSUMING DILUTION: Net income (loss) $(264,369) $110,400 $167,094 ==================================== Weighted average shares outstanding 390,836 389,146 387,018 Net effect of dilutive put options 28 Net effect of dilutive stock options 10,602 11,688 ------------------------------------ Total 390,836 399,776 398,706 ==================================== Net income (loss) per common share $ (0.68) $ 0.28 $ 0.42 ====================================
During 1998, approximately 9 million stock options were not included in the computation of earnings per share, assuming dilution, because they would have been antidilutive. In addition, during 1998 and 1997, approximately 7 million and 10 million stock options, respectively, were not included in the computation of earnings per share, assuming dilution, because exercise prices were greater than the average market price of the common shares. NOTE K - COMMITMENTS AND CONTINGENCIES On May 31, 1994, SCIMED Life Systems, Inc. (SCIMED), a wholly owned subsidiary of the Company, filed a suit for patent infringement against Advanced Cardiovascular Systems, Inc. (ACS), alleging willful infringement of two of SCIMED's U.S. patents by ACS's RX ELIPSE(TM) PTCA catheter. The suit was filed in the U.S. District Court for the Northern District of California seeking monetary and injunctive relief. In January 1998, the Company added the ACS RX MULTILINK(TM) stent delivery system to its complaint. ACS has answered, denying the allegations of the complaint. Trial is expected to begin in 1999. On December 29, 1998, the Company and SCIMED filed a cross-border suit against ACS, Guidant Corporation (Guidant) and various foreign subsidiaries in The Netherlands alleging ACS's MULTILINK(TM), RX ELIPSE, RX MULTILINK HP(TM) and RX DUET(TM) catheters and stent delivery systems infringe one of the Company's European patents. In this action, the Company requested relief covering The Netherlands, the United Kingdom, France, Germany and Italy. A hearing on cross-border jurisdiction will be held on March 12, 1999. A hearing on the merits is set for November 5, 1999. On January 13, 1999, SCIMED filed a suit for patent infringement against ACS, Guidant and Guidant Sales Corporation alleging willful infringement of two of SCIMED's U.S. patents by ACS's RX MULTILINK HP and RX DUET stent delivery systems and one of SCIMED's U.S. patents by ACS's RX MULTILINK stent delivery system. The suit was filed in the U.S. District Court for the Northern District of California seeking monetary and injunctive relief. ACS has answered, denying the allegations of the complaint. On October 10, 1995, ACS filed a suit for patent infringement against SCIMED, alleging willful infringement by SCIMED'S EXPRESS PLUS(TM) and EXPRESS PLUS II(TM) PTCA catheters of four U.S. patents licensed to ACS. Suit was filed in the U.S. District Court for the Northern District of California and seeks monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaint. Trial is expected to begin in 1999. On March 12, 1996, ACS filed two suits for patent infringement against SCIMED, alleging in one case the willful infringement of a U.S. patent by SCIMED's EXPRESS PLUS, EXPRESS PLUS II and LEAP(R) EXPRESS PLUS PTCA catheters, and in the other case the willful infringement of a U.S. patent by SCIMED's BANDIT(TM) PTCA catheter. The suits were filed in the U.S. District Court for the Northern District of California and seek monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaints. Both trials are expected to begin in 1999. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-25 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE K CONTINUED) - --------------------- On September 16, 1997, ACS filed a suit for patent infringement against the Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter infringes two U.S. patents licensed to ACS and one U.S. patent owned by ACS. Suit was filed in the U.S. District Court for the Northern District of California seeking monetary damages, injunctive relief and that the patents be adjudged valid, enforceable and infringed. The Company and SCIMED have answered, denying the allegations in the complaint. A trial date has not yet been set. On August 12, 1998, ACS and an affiliate of ACS filed suit for patent infringement against the Company and SCIMED alleging that the Company's NIR(R) stent infringes five patents owned by ACS. The suit was filed in the U.S. District Court for the Southern District of Indiana seeking injunctive and monetary relief. The Company and SCIMED have answered, denying the allegations of the complaint. A trial date has been set for February 22, 2000. On March 25, 1996, Cordis Corporation (Cordis), a subsidiary of Johnson & Johnson Company (Johnson & Johnson), filed a suit for patent infringement against SCIMED, alleging the infringement of five U.S. patents by SCIMED's LEAP balloon material, used in certain SCIMED catheter products, including SCIMED's BANDIT and EXPRESS PLUS catheters. The suit was filed in the U.S. District Court for the District of Minnesota and seeks monetary and injunctive relief. SCIMED has answered, denying the allegations of the complaint. Trial is expected to begin in 1999. On March 17, 1997, the Company, through its subsidiaries, filed suit against Cordis in France seeking a declaration of noninfringement for the Company's LEAP balloon in relation to a European patent owned by Cordis. A hearing on the pleadings is scheduled for May 11, 1999. On July 18, 1997, Cordis filed a cross border suit in The Netherlands against various subsidiaries of the Company, alleging that the LEAP balloon infringes one of Cordis' European patents. In this action, Cordis requested expedited relief, including an injunction, covering The Netherlands, Germany, France, the United Kingdom and Italy. The court posed certain questions to the European Patent Office (EPO). The Company appealed the court's decision to present questions to the EPO. A hearing on the appeal was held June 16, 1998. In November 1998, the Court of Appeals held that there was a "ready chance" that the Cordis patent would be found invalid and dismissed the action. On March 27, 1997, SCIMED filed suit for patent infringement against Cordis, alleging willful infringement of several SCIMED U.S. patents by Cordis' TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM), SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in the U.S. District Court for the District of Minnesota, Fourth District, seeking monetary and injunctive relief. The parties have agreed to add Cordis' CHARGER(TM) and HELIX(TM) catheters to the suit. Cordis has answered, denying the allegations of the complaint. Trial is expected to begin in 1999. On March 13, 1997, the Company (through its subsidiaries) filed suits against Johnson & Johnson (through its subsidiaries) in The Netherlands, the United Kingdom and Belgium, and on March 17, 1997 filed suit in France, seeking a declaration of noninfringement for the NIR(R) stent relative to two European patents licensed to Ethicon, Inc. (Ethicon), a Johnson & Johnson subsidiary, as well as a declaration of invalidity with respect to those patents. After a trial on the merits in the United Kingdom during March 1998, the Court ruled on June 26, 1998 that neither of the patents is infringed by the NIR(R) stent, and that both patents are invalid. Ethicon has appealed. On October 28, 1998, the Company's motion for a declaration of noninfringement in France was dismissed for failure to satisfy statutory requirements; the French invalidity suits were not affected. The Company has appealed the dismissal, and a hearing is scheduled for March 22, 1999. On March 20, 21 and 22, 1997, the Company (through its subsidiaries) filed additional suits against Johnson & Johnson (through its subsidiaries) in Sweden, Italy and Spain, respectively, seeking a declaration of noninfringement for the NIR(R) stent relative to one of the European patents licensed to Ethicon in Sweden, Italy and Spain and a declaration of invalidity in Italy and Spain. Ethicon and other Johnson & Johnson subsidiaries filed a cross-border suit in The Netherlands on March 17, 1997, alleging that the NIR(R) stent infringes one of the European patents licensed to Ethicon. In this action, the Johnson & Johnson entities requested relief, including provisional relief (a preliminary injunction), covering Austria, Belgium, France, Greece, Italy, The Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. On April 2, 1997, the Johnson & Johnson entities filed a similar cross-border proceeding in The Netherlands with respect to a second European patent licensed to Ethicon. Johnson & Johnson subsequently withdrew its request for cross-border relief in the United Kingdom. In October, 1997, Johnson & Johnson's request for provisional cross-border relief on both patents was denied by the Dutch court, on the ground that it is "very likely" that the NIR(R) stent will be found not to infringe the patents. Johnson & Johnson appealed this decision with respect to one of the patents; the appeal has been denied on the ground that there is a "ready chance" that the patent will be declared null and void. In January 1999, Johnson & Johnson amended the claims of one of the patents, changed the action from a cross-border case to a Dutch national action, and indicated its intent not to pursue its action on the second patent. A hearing has been set for March 26, 1999. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-26 45 On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf, Germany, alleging that the Company's NIR(R) stent infringes one of Ethicon's patents. On June 23, 1998, the case was stayed following a decision in an unrelated nullity action in which the Ethicon patent was found to be invalid. On June 16, 1997, the Company and SCIMED filed a suit against Johnson & Johnson, Ethicon and Johnson & Johnson International Systems Co. in the U.S. District Court for the District of Massachusetts seeking a declaratory judgment of noninfringement for the NIR(R) stent relative to two patents licensed to Johnson & Johnson and that the two patents are invalid and unenforceable. The Company subsequently amended its complaint to add a third patent. Johnson & Johnson answered, denying the allegations of the complaint, and counterclaiming for patent infringement. In October 1997, Johnson & Johnson's motion to dismiss the suit was denied. This action has been consolidated with the Delaware action described below. On August 22, 1997, Johnson & Johnson filed a suit for patent infringement against the Company alleging that the sale of the NIR(R) stent infringes certain Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court of Canada seeking a declaration of infringement, monetary damages and injunctive relief. The Company has answered, denying the allegations of the complaint. On October 22, 1997, Cordis filed a suit for patent infringement against the Company and SCIMED alleging that the importation and use of the NIR(R) stent infringes two patents owned by Cordis. The suit was filed in the U.S. District Court for the District of Delaware seeking monetary damages, injunctive relief and that the patents be adjudged valid, enforceable and infringed. The Company and SCIMED have answered the complaint, denying Cordis' allegations. The Massachusetts case described above has been consolidated with this action. A trial date has been set for March 6, 2000. On April 13, 1998, Cordis filed a suit for patent infringement against the Company and SCIMED alleging that the Company's NIR(R) stent infringes a third patent owned by Cordis. The suit was filed in the U.S. District Court for the District of Delaware seeking injunctive and monetary relief. The Company and SCIMED have answered, denying the allegations of the complaint. A trial date has been set for March 6, 2000. On August 13, 1998, Arterial Vascular Engineering, Inc. (AVE) filed a suit for patent infringement against the Company and SCIMED alleging that the Company's NIR(R) stent infringes two patents owned by AVE. The suit was filed in the U.S. District Court for the District of Delaware seeking injunctive and monetary relief. The Company and SCIMED have answered, denying the allegations of the complaint. A trial date has not yet been set. On December 15, 1998, the Company and SCIMED filed a cross-border suit against AVE in The Netherlands alleging that AVE's AVE GFX(TM), AVE GFX 2(TM), AVE LTX(TM) and USCI CALYPSO(TM) rapid exchange catheters and stent delivery systems infringe one of the Company's European patents. In this action, the Company requested relief covering The Netherlands, the United Kingdom, France, Germany and Italy. A hearing is set for October 22, 1999. On December 18, 1998, AVE filed a suit for patent infringement against the Company and SCIMED alleging that the Company's MAXXUM(TM) and VIVA!(TM) catheters infringe a patent owned by AVE. The suit was filed in the U.S. District Court for the District of Delaware seeking injunctive and monetary relief. The Company and SCIMED have answered, denying the allegations of the complaint. On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District Court for the District of Delaware alleging that certain Company products, including the Company's MaxForce TTS(TM) catheter, infringe a patent assigned to Bard. Following a trial and jury verdict, on February 3, 1999 the court entered a judgment that the Company infringed the Bard patent and awarded damages to Bard in the amount of $10.8 million. The Company was also enjoined from selling the product found to be infringing. The Company is appealing the judgment to the Court of Appeals for the Federal Circuit. The Company no longer markets the accused device. On May 12, 1998, Bard filed a cross-border suit in The Netherlands against various subsidiaries of the Company, alleging that the Company's VIVA!(TM) and MAXXUM(TM) rapid exchange catheters infringe one of Bard's European patents. In this action, Bard requested relief covering The Netherlands, Germany, France, Spain and the United Kingdom. On February 16, 1999, the suit was withdrawn for procedural reasons. The Company is aware that AVE, successor-in-interest to Bard's cardiovascular business, could file a similar suit against the Company, alleging infringement of the patent by one or more of the Company's products. On March 7, 1996, Cook Inc. (Cook) filed suit in the Regional Court, Munich Division for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally Invasive Technologies alleging that the Cragg EndoPro(TM) System I and Stentor(TM) endovascular device infringe a certain Cook patent. Since the purchase of the assets of the Endotech/MinTec companies by the Company, the Company has assumed control of the litigation. The defendant answered, denying the allegations. A court-appointed technical expert has provided the court with technical advice. A final hearing is scheduled to be held on May 12, 1999. On June 30, 1998, Cook filed suit in the Regional Court, Dusseldorf Division for Patent Disputes, in Dusseldorf, BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-27 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE K CONTINUED TO NOTE M) - ---------------------------- Germany against the Company alleging that the Company's PASSAGER(TM) peripheral vascular stent graft and VANGUARD(TM) endovascular aortic graft products infringe the same Cook patent. A hearing date has been set for July 22, 1999. On January 13, 1999, Medical Innovations Corporation (Innovations) filed a lawsuit in the U.S. District Court for the District of Utah alleging that certain Company products, including the Company's Ultratome(TM) XL sphinctertome product, infringe two patents assigned to Innovations. The suit also includes a claim of unfair trade practices. Innovations is seeking injunctive relief and monetary damages for both claims. The Company is preparing an answer, denying the allegations of the complaint. On February 1, 1999, Hewlett-Packard Company filed a suit in the U.S. District Court for the District of Massachusetts against the Company alleging violation of the Sherman Antitrust Act and Massachusetts General Laws Chapter 93A and breach of contract. The Company is preparing an answer, denying the allegations of the complaint. Beginning November 4, 1998, a number of shareholders of the Company, on behalf of themselves and all others similarly situated, filed purported stockholders' class action suits in the U.S. District Court for the District of Massachusetts alleging that the Company and certain of its officers violated certain sections of the Securities Exchange Act of 1934. The complaints principally allege that as a result of certain accounting irregularities involving the improper recognition of revenue by the Company's subsidiary in Japan, the Company's previously issued financial statements were materially false and misleading. In all, 16 purported class action suits have been filed. Plaintiffs have moved for the appointment of lead plaintiffs and lead counsel. The Company and its officers have not yet filed an answer, but intend to vigorously defend all actions. The Company is aware that the U.S. Department of Justice is conducting an investigation of matters that include the Company's NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent delivery system which was voluntarily recalled by the Company in October 1998 following reports of balloon leaks. The Company is cooperating fully in the investigation. The Company is involved in various other lawsuits from time to time. In management's opinion, the Company is not currently involved in any legal proceedings other than those specifically identified above which, individually or in the aggregate, could have a material effect on the financial condition, operations or cash flows of the Company. The Company believes that it has meritorious defenses against claims that it has infringed patents of others. However, there can be no assurance that the Company will prevail in any particular case. An adverse outcome in one or more cases in which the Company's products are accused of patent infringement could have a material adverse effect on the Company. At December 31, 1998 and 1997, the Company has accrued approximately $38 million and $42 million, respectively, of litigation-related reserves to cover certain costs of defense, settlement and damages. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. The Company has insurance coverage which management believes is adequate to protect against product liability losses as could otherwise materially affect the Company's financial position. NOTE L - BUSINESS COMBINATIONS On September 10, 1998, the Company consummated its acquisition of Schneider Worldwide, formerly a member of the Medical Technology Group of Pfizer Inc., for $2.2 billion, net of assets acquired and liabilities assumed. The acquisition was accounted for using the purchase method of accounting. The consolidated financial statements include Schneider's operating results from the date of acquisition. The aggregate purchase price has been allocated on a preliminary basis to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition. The estimated excess of purchase price over the fair value of net tangible assets acquired was allocated to specific intangible asset categories as follows:
(IN THOUSANDS) - -------------------------------------------------------------- Excess of cost over net assets acquired $ 781,232 Purchased research and development 671,000 Core technology 420,960 Developed technology 126,940 Assembled workforce, customer lists, trademarks and patents 194,780 ---------- $2,194,912 ==========
Core technology, developed technology, assembled workforce, customer lists, trademarks and patents are being amortized on a straight-line basis over periods ranging from 9 to 25 years and the excess of cost over net assets acquired is being amortized on a straight-line basis over 40 years. The Company recorded a $671 million ($524 million, net of tax) charge to account for purchased research and development acquired. The valuation of purchased research and development represents the estimated fair value related to incomplete projects. At the date of the acquisition, the development of these projects had not reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the date of acquisition. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-28 47 The income approach was used to establish the fair values of the intangible assets. This approach establishes the fair value of an asset by estimating the after-tax cash flows attributable to the asset over its useful life and then discounting these after-tax cash flows back to a present value. The discounting process uses a rate of return commensurate with the time value of money and investment risk factors. Accordingly, for the purpose of establishing the fair value of each asset in the Schneider analysis, revenues for each future period were estimated, along with costs, expenses, taxes and other charges. Revenue estimates were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. With respect to the value of purchased research and development, the Company considered, among other factors, the research and development project's stage of completion, the complexity of the work completed to date, the costs already incurred, the projected costs to complete, the contribution of core technologies and other acquired assets, the projected introduction date and the estimated useful life. The respective after-tax cash flows were then discounted back to present value using a risk-adjusted discount rate. The discount rates used in the Schneider analysis ranged from 16%-28% dependent upon the risk profile of the asset. The Company believes that the assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project revenues, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, among others, actual results may vary from the projected results. The following unaudited pro forma information presents a summary of consolidated results of operations of the Company and Schneider as if the acquisition had occurred at the beginning of each year presented, with pro forma adjustments to give effect to amortization of intangibles, purchased research and development, an increase in interest expense on acquisition financing and certain other adjustments together with related tax effects:
(IN THOUSANDS, YEAR ENDED DECEMBER 31, EXCEPT PER SHARE DATA) 1998 1997 - -------------------------------------------------------------------- Net sales $2,482,809 $2,161,626 Net loss (302,683) (471,186) Net loss per share - assuming dilution (0.77) (1.21)
In 1997, the Company completed its merger with Target in a tax-free, stock-for-stock transaction accounted for as a pooling-of-interests. In conjunction with this merger, Target's stockholders received 1.07 shares of the Company's common stock in exchange for each share of Target common stock. Approximately 33 million shares of the Company's common stock were issued in connection with the Target merger. In 1996, the Company completed its merger with EPT in a stock-for-stock transaction. The transaction, which is accounted for as a pooling-of-interests, was effected through the exchange of 0.297 shares of the Company's common stock for each EPT share held. Approximately 6.8 million shares of the Company's common stock were issued in conjunction with the EPT merger. In 1996, the Company acquired Symbiosis, formerly a wholly-owned subsidiary of American Home Products Corporation, for approximately $153 million in a cash transaction. The acquisition was accounted for using the purchase method of accounting. In 1996, the Company purchased the assets of Endotech/MinTec for approximately $72 million in a cash transaction accounted for using the purchase method of accounting. NOTE M - RESTRUCTURING AND MERGER-RELATED CHARGES The Company is in the process of implementing a rationalization plan established after acquiring Schneider. The rationalization plan takes into consideration duplicate capacity and opportunities for further leveraging of cost and technology platforms. The Company's actions approved and committed to in the fourth quarter of 1998 will result in the displacement in 1999 of approximately 2,000 current positions, over half of which are manufacturing positions. The Company has decided to close five Schneider facilities, as well as transition the manufacturing of selected Boston Scientific product lines to different sites. The Company estimates that the costs associated with these activities will be approximately $62 million, most of which represent severance and related costs. Approximately $36 million of the total has been capitalized as part of the purchase price of Schneider. The remaining $26 million ($17 million, net of tax) has been charged to operations. The rationalization plan also resulted in the decision to expand, not close, a facility originally provided for in a 1997 merger-related charge; thus, in the fourth quarter, the Company reversed $21 million ($14 million, net of tax) of previously recorded merger-related charges. The reversal also includes estimated reductions in contractual commitment payments, associated legal costs and other asset write-downs originally provided for as a 1997 merger charge. In the second quarter of 1998, the Company reorganized certain U.S. sales organizations differently than was originally contemplated at the time of the Target acquisition. As a result, the Company reversed $20 million ($13 million, net of tax) of 1997 merger-related charges. At December 31, 1998, the Company had an accrual for restructuring and merger-related charges of $89 million, which is comprised of $50 million of accrued severance and related costs associated with integrating Schneider and streamlining manufacturing operations, $16 million related to the cost of cancelling contractual commitments recorded in connection BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-29 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE M CONTINUED TO NOTE N) - ---------------------------- with the Schneider acquisition and $23 million of accruals remaining for 1997 and prior mergers (primarily costs associated with rationalized facilities). During 1997, the Company recorded merger-related charges of $146 million ($106 million, net of tax) primarily related to the Company's acquisition of Target. At December 31, 1995, the Company's accrual for restructuring and merger-related charges was $136 million. During 1996, the Company recorded merger-related charges of $32 million ($29 million, net of tax) related primarily to the Company's acquisition of EPT. Charges utilized in 1996 were approximately $102 million. The restructuring and merger-related charges were determined based on formal plans approved by the Company's management using the best information available to it at the time. The amounts the Company may ultimately incur may change as the balance of the Company's initiative to integrate the businesses related to these mergers and acquisitions is executed. The activity impacting the accrual for restructuring and merger-related charges during 1998 and 1997, net of reclassifications made by management based on available information, is summarized in the table below:
PURCHASE BALANCE AT CHARGES TO CHARGES PRICE CHARGES TO CHARGES BALANCE AT DECEMBER 31, OPERATIONS IN UTILIZED IN ADJUSTMENTS OPERATIONS IN UTILIZED IN CHANGE IN DECEMBER 31 (IN THOUSANDS) 1996 1997 1997 IN 1998 1998 1998 ESTIMATES 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Facilities $18,897 $ 8,193 $ (7,101) $ (4,901) $ (4,243) $10,845 Workforce reductions 25,897 24,655 (25,310) $35,611 $14,102 (14,428) (15,921) 44,606 Contractual commitments 8,156 52,673 (31,495) 16,580 855 (20,965) (7,704) 18,100 Asset write-downs 6,248 27,602 (18,048) 9,027 (6,709) (7,563) 10,557 Direct transaction and other costs 6,359 32,768 (27,836) 2,016 (2,712) (5,583) 5,012 ------------------------------------------------------------------------------------------------------- Total $65,557 $145,891 $(109,790) $52,191 $26,000 $(49,715) $(41,014) $89,120 =======================================================================================================
The December 31, 1998 accrual for restructuring and merger-related charges is classified within the balance sheet as follows:
(IN THOUSANDS) - --------------------------------------------------- Accrual for restructuring and merger-related charges $71,231 Property, plant and equipment, net 13,848 Other long-term liabilities 4,041 ------- $89,120 =======
As of December 31, 1998, the Company's cash obligations required to complete the balance of the Company's initiatives to integrate businesses related to its mergers and acquisitions and announced rationalization strategy are estimated to be approximately $70 million. Further, the Company has outstanding $140 million of acquisition-related cash obligations. Substantially all of these cash outlays will occur during 1999. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-30 49 NOTE N - SEGMENT REPORTING Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices for less invasive procedures. The Company has four reportable operating segments based on geographic regions: the United States, Europe, Japan and Emerging Markets. Each of the Company's reportable segments generates revenues from the sale of minimally invasive medical devices. The reportable segments represent an aggregate of operating divisions. Sales and operating results of reportable segments are based on internally derived standard foreign exchange rates and do not include inter-segment profits. Because of the interdependence of the reportable segments, the operating profit as presented may not be representative of the geographic distribution that would occur if the segments were not interdependent. Total assets and purchases of property, plant and equipment are based on foreign exchange rates used in the Company's consolidated financial statements.
UNITED EMERGING (IN THOUSANDS) STATES EUROPE JAPAN MARKETS TOTAL - --------------------------------------------------------------------------------------------------------------------------- 1998: Net sales $1,394,222 $381,130 $332,465 $118,751 $2,226,568 Depreciation and amortization 63,676 17,389 2,457 826 84,348 Operating income excluding special charges 462,830 54,220 178,180 9,453 704,683 Total assets 1,394,769 551,682 203,841 75,540 2,225,832 Purchases of property, plant and equipment, net 96,632 50,132 18,857 8,418 174,039 -------------------------------------------------------------------- 1997: Net sales $1,076,292 $325,960 $298,639 $ 88,042 $1,788,933 Depreciation and amortization 56,884 8,960 2,083 280 68,207 Operating income excluding special charges 373,226 62,346 154,975 16,835 607,382 Total assets 1,088,463 429,157 135,835 53,257 1,706,712 Purchases of property, plant and equipment, net 138,587 65,918 13,684 1,908 220,097 -------------------------------------------------------------------- 1996: Net sales $ 924,205 $294,139 $196,450 $ 65,668 $1,480,462 Depreciation and amortization 43,515 6,854 1,305 214 51,888 Operating income excluding special charges 296,444 99,876 122,482 32,989 551,791 --------------------------------------------------------------------
The Company's results for Europe and Emerging Markets reflect investments in people and infrastructure made to transition from distributors to direct sales in most markets. The direct sales model should benefit operating margins in future years (refer to Management's Discussion and Analysis of Financial Condition and Results of Operations). BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-31 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (NOTE N CONTINUED) - --------------------- A reconciliation of the totals reported for the reportable segments to the applicable line items in the consolidated financial statements is as follows:
(IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Net sales: Total net sales for reportable segments $2,226,568 $1,788,933 $1,480,462 Foreign exchange 7,008 41,845 70,776 --------------------------------------- $2,233,576 $1,830,778 $1,551,238 ======================================= Depreciation and amortization: Total depreciation and amortization allocated to reportable segments $ 84,348 $ 68,207 $ 51,888 Corporate expenses and foreign exchange 44,257 18,485 14,429 --------------------------------------- $ 128,605 $ 86,692 $ 66,317 ======================================= Income (loss) before income taxes and cumulative effect of change in accounting: Total operating income excluding special charges for reportable segments $ 704,683 $ 607,382 $ 551,791 Corporate expenses and foreign exchange (245,180) (206,561) (96,279) Purchased research and development (681,952) (29,475) (110,000) Restructuring and merger-related (charges) credits 15,014 (145,891) (32,341) --------------------------------------- (207,435) 225,455 313,171 Other income (expense) (67,879) (10,324) (9,841) --------------------------------------- $ (275,314) $ 215,131 $ 303,330 ======================================= Total assets: Total assets for reportable segments $2,225,832 $1,706,712 Corporate assets 1,666,879 217,558 ------------------------- $3,892,711 $1,924,270 =========================
ENTERPRISE-WIDE INFORMATION (IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Net sales: Vascular $1,777,204 $1,426,129 $1,228,414 Nonvascular 425,287 376,992 299,698 Other 31,085 27,657 23,126 --------------------------------------- $2,233,576 $1,830,778 $1,551,238 ======================================= Long-lived assets: United States $ 484,298 $ 377,749 Ireland 118,825 78,776 Other foreign countries 76,759 42,442 ------------------------- $ 679,882 $ 498,967 =========================
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-32 51 REPORT OF INDEPENDENT AUDITORS - -------------------- BOARD OF DIRECTORS BOSTON SCIENTIFIC CORPORATION We have audited the accompanying consolidated balance sheets of Boston Scientific Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boston Scientific Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As more fully described in Note A, in 1997, the Company changed its accounting policy to conform to the consensus reached by the FASB Emerging Issues Task Force on its Issue No. 97-13. /s/ Ernst & Young LLP Boston, Massachusetts February 16, 1999 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-33 52 FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- OPERATING DATA: Net sales $2,233,576 $1,830,778 $1,551,238 $1,190,821 $932,969 Gross profit 1,498,735 1,285,237 1,123,400 848,074 638,872 Selling, general and administrative expenses 754,970 662,647 492,332 385,338 309,702 Amortization expense 52,662 32,398 23,576 6,210 1,594 Royalties 31,315 22,177 17,061 26,233 25,682 Research and development expenses 200,285 167,194 134,919 105,788 86,320 Purchased research and development 681,952 29,475 110,000 67,946 Restructuring and merger-related charges (credits) (15,014) 145,891 32,341 204,448 Total operating expenses 1,706,170 1,059,782 810,229 795,963 423,298 Operating income (loss) (207,435) 225,455 313,171 52,111 215,574 Income (loss) before cumulative effect of change in accounting (264,369) 131,480 167,094 (18,419) 142,274 Cumulative effect of change in accounting (net of tax) (21,080) Net income (loss) $ (264,369) $ 110,400 $ 167,094 $ (18,419) $142,274 Income (loss) per common share before cumulative effect of change in accounting: Basic $ (0.68) $ 0.34 $ 0.43 $ (0.05) $ 0.38 Assuming dilution (0.68) 0.33 0.42 (0.05) 0.38 Net income (loss) per common share: Basic $ (0.68) $ 0.28 $ 0.43 $ (0.05) $ 0.38 Assuming dilution (0.68) 0.28 0.42 (0.05) 0.38 Weighted average shares outstanding - assuming dilution 390,836 399,776 398,706 381,574 379,126
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Working capital $(353,031) $ 227,076 $ 335,001 $ 344,609 $ 475,255 Total assets 3,892,711 1,924,270 1,585,045 1,159,445 1,114,433 Commercial paper 1,016,163 423,250 212,500 Bank obligations - short-term 11,324 23,958 28,056 57,520 88,948 Long-term debt, net of current portion 1,363,822 46,325 4,162 16,800 Stockholders' equity 821,137 957,298 995,115 807,917 794,190 Book value per common share $ 2.08 $ 2.47 $ 2.50 $ 2.12 $ 2.10
The Company paid a two-for-one stock split on November 30, 1998. All historical amounts above have been restated to reflect the stock split. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-34 53 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, - ----------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 Net sales $453,465 $488,032 $575,390 $716,689 Gross profit 315,160 338,572 370,290 474,713 Operating income (loss) 96,122 110,369 (559,199) 145,273 Net income (loss) 59,641 67,460 (461,928) 70,458 Net income (loss) per common share - assuming dilution $ 0.15 $ 0.17 $ (1.18) $ 0.18 -------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 Net sales $425,892 $463,312 $461,646 $479,928 Gross profit 305,986 332,901 327,052 319,298 Operating income (loss) 102,556 (28,365) 112,537 38,727 Income (loss) before cumulative effect of change in accounting 68,518 (33,189) 80,123 16,028 Net income (loss) 68,518 (33,189) 80,123 (5,052) Net income (loss) per common share - assuming dilution $ 0.17 $ (0.09) $ 0.20 $ (0.01)
During the fourth quarter of 1998, the Company recorded a charge of $26 million representing estimated severance and other related cost associated with integrating Schneider and streamlining manufacturing operations and reversed $21 million of merger-related amounts no longer required. Fourth quarter results also include adjustments of $30 million related primarily to write-downs of assets no longer deemed to be strategic. During the third quarter of 1998, the Company recorded a $671 million charge to account for purchased research and development acquired in the purchase of Schneider. Further, the third quarter results include a provision of $31 million for costs associated with the Company's decision to voluntarily recall the NIR ON(TM) Ranger(TM) with Sox(TM) coronary stent system in the U.S. During the second quarter of 1998, the Company reversed approximately $20 million of merger-related amounts no longer required and recorded purchased research and development of $11 million in connection with another acquisition consummated during the period. The Company recorded merger-related charges and purchased research and development totaling $158 million and $17 million during the second and fourth quarters of 1997, respectively. In addition, during the fourth quarter of 1997, the Company recorded provisions for inventory write-downs ($19 million), litigation-related reserves ($34 million) and implemented EITF No. 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation", the effect of which ($31 million) is reflected as a cumulative effect of change in accounting. On November 3, 1998, the Company announced it had detected the occurrence of business irregularities in the operations of its Japanese subsidiary. As a result, the Company has restated its quarterly results for the first three quarters of 1998 which allows for more accurate period to period comparisons. The restatement resulted in a decrease in revenues of $34 million for the six months ended June 30, 1998. Revenues, as previously reported, were $470 million and $506 million for the quarters ended March 31, 1998, and June 30, 1998, respectively. Net income (loss), previously reported, was $67 million, $79 million, and $(509) million for the quarters ended March 31, 1998, June 30, 1998, and September 30, 1998, respectively. The Company paid a two-for-one stock split on November 30, 1998. All historical amounts above have been restated to reflect the stock split. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-35 54 MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS (UNAUDITED) - ------------------------ The following table shows the market range for the Company's common stock based on reported sales prices on the New York Stock Exchange. All amounts below reflect the impact of the Company's two-for-one common stock split which was effected in the form of a 100% stock dividend paid in the fourth quarter of 1998.
High Low - --------------------------------------------------------- 1998 First Quarter $35.844 $21.125 Second Quarter 37.281 30.219 Third Quarter 40.844 25.125 Fourth Quarter 29.500 20.125 High Low - --------------------------------------------------------- 1997 First Quarter $35.750 $29.313 Second Quarter 31.469 20.500 Third Quarter 39.219 26.625 Fourth Quarter 29.875 20.500
The Company has not paid a cash dividend during the past five years. The Company currently intends to retain all of its earnings to finance the continued growth of its business. Boston Scientific may consider declaring and paying a dividend in the future; however, there can be no assurance that it will do so. At December 31, 1998, there were approximately 8,600 record holders of the Company's common stock. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES F-36 55 Boston Scientific Corporation One Boston Scientific Place Natick, MA 01760-1537 Tel 508.650.8000 www.bsci.com EX-21 12 LIST OF THE COMPANY'S SUBSIDIARIES 1 EXHIBIT 21 Page 1 BOSTON SCIENTIFIC CORPORATION ENTITIES AND PLACES OF INCORPORATION AMS MEDINVENT S.A. Incorporated State: Switzerland BSC FSC, INC. Incorporated State: Barbados BSC FINANCE CORP. Incorporated State: Indiana BSC FINANCE TRUST Incorporated State: Massachusetts BSC INTERNATIONAL CORPORATION Incorporated State: Delaware BSC INTERNATIONAL HOLDING LIMITED Incorporated State: Ireland BSC INTERNATIONAL MEDICAL TRADING (SHANGHAI) CO., Ltd. Incorporated State: People's Republic of China BSC SECURITIES CORPORATION Incorporated State: Massachusetts BOSTON SCIENTIFIC (MALAYSIA) Sdn. Bhd. Incorporated State: Malaysia BOSTON SCIENTIFIC (SOUTH AFRICA) (PROPRIETARY) LIMITED Incorporated State: South Africa BOSTON SCIENTIFIC (THAILAND) Ltd. Incorporated State: Thailand BOSTON SCIENTIFIC (ZURICH) GmbH Incorporated State: Switzerland 2 BOSTON SCIENTIFIC AG Incorporated State: Switzerland BOSTON SCIENTIFIC ARGENTINA S.A. Incorporated State: Argentina BOSTON SCIENTIFIC ASIA PACIFIC Pte. LTD. Incorporated State: Singapore BOSTON SCIENTIFIC B.V. Incorporated State: Netherlands BOSTON SCIENTIFIC BENELUX B.V. Incorporated State: Netherlands BOSTON SCIENTIFIC BENELUX SA Incorporated State: Belgium BOSTON SCIENTIFIC CESKA REPUBLIKA, s.r.o. Incorporated State: Czech Republic BOSTON SCIENTIFIC COLOMBIA LIMITADA Incorporated State: Colombia BOSTON SCIENTIFIC CORK LIMITED Incorporated State: Ireland BOSTON SCIENTIFIC CORPORATION NORTHWEST TECHNOLOGY CENTER, INC. Incorporated State: Washington BOSTON SCIENTIFIC DENMARK A/S Incorporated State: Denmark BOSTON SCIENTIFIC DISTRIBUTION COMPANY Incorporated State: Ireland BOSTON SCIENTIFIC DISTRIBUTION IRELAND LIMITED Incorporated State: Ireland 3 BOSTON SCIENTIFIC EASTERN EUROPE B.V. Incorporated State: Netherlands BOSTON SCIENTIFIC EUROPE S.P.R.L. Incorporated State: Belgium BOSTON SCIENTIFIC FSC CORPORATION Incorporated State: Barbados BOSTON SCIENTIFIC FAR EAST B.V. Incorporated State: Netherlands BOSTON SCIENTIFIC Ges.m.b.H. Incorporated State: Austria BOSTON SCIENTIFIC HONG KONG LIMITED Incorporated State: Hong Kong BOSTON SCIENTIFIC HUNGARY TRADING LIMITED LIABILITY COMPANY Incorporated State: Hungary BOSTON SCIENTIFIC IBERICA, S.A. Incorporated State: Spain BOSTON SCIENTIFIC INTERNATIONAL B.V. Incorporated State: Netherlands BOSTON SCIENTIFIC INTERNATIONAL CORPORATION Incorporated State: Virgin Islands BOSTON SCIENTIFIC INTERNATIONAL S.A. Incorporated State: France BOSTON SCIENTIFIC IRELAND LIMITED Incorporated State: Ireland BOSTON SCIENTIFIC JAPAN K.K. Incorporated State: Japan 4 BOSTON SCIENTIFIC KOREA CO. Ltd. incorporated State: Korea BOSTON SCIENTIFIC LATIN AMERICA B.V. Incorporated State: Netherlands BOSTON SCIENTIFIC LATIN AMERICA B.V. (CHILE) Ltda. Incorporated State: Chile BOSTON SCIENTIFIC LIMITED Incorporated State: England BOSTON SCIENTIFIC LIMITED Incorporated State: Ireland BOSTON SCIENTIFIC Ltd. Incorporated State: Canada (Province of Ontario) BOSTON SCIENTIFIC MEDIZINTECHNIK GmbH Incorporated State: Germany BOSTON SCIENTIFIC NEW ZEALAND LIMITED Incorporated State: New Zealand BOSTON SCIENTIFIC NORDIC AB Incorporated State: Sweden BOSTON SCIENTIFIC NORWAY AS Incorporated State: Norway BOSTON SCIENTIFIC PHILIPPINES, INC. Incorporated State: Philippines BOSTON SCIENTIFIC POLSKA SP. z o.o. Incorporated State: Poland BOSTON SCIENTIFIC PTY. LTD. Incorporated State: Australia 5 BOSTON SCIENTIFIC PUERTO RICO, INC. Incorporated State: Puerto Rico BOSTON SCIENTIFIC S.P.A. Incorporated State: Italy BOSTON SCIENTIFIC SWITZERLAND S.a.r.l. Incorporated State: Switzerland BOSTON SCIENTIFIC TIP GERECLERI LIMITED SIRKETI Incorporated State: Turkey BOSTON SCIENTIFIC URUGUAY S.A. Incorporated State: Uruguay BOSTON SCIENTIFIC DE MEXICO, S.A. de C.V. Incorporated State: Mexico BOSTON SCIENTIFIC DE VENEZUELA, S.A. Incorporated State: Venezuela BOSTON SCIENTIFIC DO BRASIL Ltda. incorporated State: Brazil BOSTON SCIENTIFIC, S.A. Incorporated State: France CARDIOGENE THERAPEUTICS, INC. Incorporated State: Delaware CORVITA CANADA, INC. Incorporated State: Canada (Province of Ontario) CORVITA CORPORATION Incorporated State: Florida CORVITA EUROPE, S.A. Incorporated State: Belgium 6 EP TECHNOLOGIES, INC. Incorporated State: Delaware HEART TECHNOLOGY FSC, INC. Incorporated State: Barbados HEART TECHNOLOGY MANUFACTURING, INC. Incorporated State: Washington INTERVENTIONAL THERAPEUTICS CORPORATION Incorporated State: California INTERVENTIONAL THERAPEUTICS INT'L Incorporated State: California LABORATOIRES CORVITA S.A.R.L. Incorporated State: France MM FOREIGN SALES CORPORATION Incorporated State: Virgin Islands MEADOX (U.K.) LIMITED Incorporated State: England MEADOX MEDICALS, INC. Incorporated State: New Jersey NAMIC INTERNATIONAL INC. Incorporated State: Virgin Islands NILO HOLDINGS SA Incorporated State: Switzerland SCHNEIDER/NAMIC Incorporated State: Delaware SCIMED FOUNDATION Incorporated State: Minnesota 7 SCIMED LIFE SYSTEMS LIMITED Incorporated State: England SCHNEIDER (EUROPE) GmbH Incorporated State: Switzerland SCHNEIDER (USA) INC Incorporated State: Minnesota SCHNEIDER BELGIUM N.V. Incorporated State: Belgium SCHNEIDER HOLLAND BV Incorporated State: Netherlands SCHNEIDER IRELAND BV Incorporated State: Netherlands SCHNEIDER PUERTO RICO Incorporated State: Delaware SCIMED, INC. Incorporated State: Minnesota SCIMED LIFE SYSTEMS, INC. Incorporated State: Minnesota SCIMED MEDIZENTECHNIK GMBH Incorporated State: Germany SHILEY LTD. Incorporated State: England SYMBIOSIS CORPORATION Incorporated State: Florida TARGET THERAPEUTICS INTERNATIONAL SALES CORPORATION Incorporated State: Barbados 8 TARGET THERAPEUTICS, INC. Incorporated State: Delaware EX-23.1 13 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Boston Scientific Corporation of our report dated February 16, 1999, included in the 1998 Annual Report to Shareholders of Boston Scientific Corporation. Our audits also included the financial statement schedule of Boston Scientific Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Forms S-8 Nos. 33-57242, 33-89772, 33-93790, 33-99766, 33-80265, 333-02256, 333-25033, and 333-25037) and in the Registration Statements (Forms S-3 Nos. 333-37255, 333-64887, and 333-64991) of our report dated February 16, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Boston Scientific Corporation. ERNST & YOUNG LLP Boston, Massachusetts March 25, 1999 EX-27.1 14 FINANCIAL DATA SCHEDULE
5 1,000 USD YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 70,330 5,073 586,937 49,151 461,981 1,266,627 945,339 265,457 3,892,711 1,619,658 1,363,822 0 0 3,942 817,195 3,892,711 2,233,576 2,233,576 734,841 734,841 1,706,170 0 67,573 (275,314) (10,945) (264,369) 0 0 0 (264,369) (0.68) (0.68)
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