Boston Scientific 2000 Annual Report Details Focus on Innovation and Operational Excellence

BOSTON SCIENTIFIC ANNUAL REPORT
2000

To our employees
and shareholders:

Boston Scientific’s mission is to improve the

quality of patient care and the productivity

of health care delivery through the devel-

opment and advocacy of less invasive medical

devices and procedures. This is accomplished

through the continuing refinement of

existing products and procedures and the

investigation and development of new tech-

nologies which can reduce risk, trauma, cost,

procedure time and the need for aftercare.

mission va l u e s letter

La mission de Boston Scientific est La misión de Boston Scientific
l’amélioration de la qualité des soins Corporation es mejorar la calidad de
cliniques et de la productivité de la atención al paciente y la produc-
l’administration de ces soins grâce tividad del servicio de atención
à la mise au point, la promotion médica mediante el desarrollo y la
et la défense de méthodes et de recomendación de dispositivos y
dispositifs médicaux moins invasifs. procedimientos médicos menos
Ce but est atteint au moyen d’un invasivos. Todo eso se logra mediante
perfectionnement continuel des el constante perfeccionamiento
produits et méthodes existants ainsi de productos y procedimientos
que par la recherche et la mise au existentes y la investigación y el
point de nouvelles technologies desarrollo de nuevas tecnologías
visant à réduire les risques, le que puedan reducir el riesgo, el
traumatisme, les coûts, la durée trauma, el costo, el tiempo del
des interventions et la nécessité procedimiento y la necesidad de
de suivi. atención o cuidado posteriores.

Bei Boston Scientific sind wir
stets bemüht, die Qualität der
Patientenbehandlung und die
Boston Scientific beschouwt het
Leistungsfähigkeit der Gesundheit-
als haar missie, de kwaliteit en
sversorgung durch die Entwicklung
productiviteit van de zorgverlening
und Förderung von weniger inva-
aan patiënten te verbeteren door de
siven medizinischen Geräten und
ontwikkeling en gebruiksbevordering
Verfahren zu steigern – durch
van minder invasieve medische hulp-
ständige Verbesserung bestehender
middelen en procedures. Aan het
Produkte und Verfahren sowie
realiseren van deze doelstelling
Erforschung und Entwicklung
wordt gewerkt door een voortgaande
neuer Technologien, die
verfijning van bestaande producten
Risiken, Verletzungen, Kosten,
en procedures en door het verrichten
Behandlungszeiten sowie
van onderzoek naar en de ontwik-
den Nachversorgungsbedarf
keling van nieuwe technologieën
reduzieren können.
die kunnen bijdragen tot een
vermindering van risico’s, trauma,
behandelingskosten, behandelings-
duur en de noodzaak van nazorg.


The growth and success of our
organization is dependent upon
the shared values of our people.
We must learn, understand and
live by a unified set of values that
will guide us in a continually
changing medical environment:

Innovation
• to provide our people
with a strong under-
standing of our mission
and shared values

Commitment
• to think like our

Quality
customers and work
hard on their behalf • to rely on one another,
to treat each other
• to pay relentless well and to put the

Excellence
attention to business development and
fundamentals motivation of our
people at the top

Success
• to bring a commitment of our priority lists
to quality and a
sense of urgency to • to encourage innova-
everything we do tion, experimentation
and risk-taking • to provide share-
holders with an
• to recognize bureau- attractive return
cracy as an archenemy through sustained
and not allow it to high-quality growth
inhibit our good sense
and creative spirit • to recognize and
reward excellence
by sharing Boston
Scientific’s success
with our employees


The year 2000 was a challenging one
for Boston Scientific. We continued
to make progress integrating and
consolidating the businesses we have
acquired over the past several years.

A wide range of organizational and managerial
improvements were introduced as well,
including the addition of a number of senior
leaders who brought with them decades of
collective experience. And our financial
performance was sound. Yet there were also
frustrations, principally with our coronary
pete nicholas,
stent pipeline. It continues to be clear that the
chairman of the
financial markets will not reward our overall
board
performance until we resolve the problems
with our coronary stent program. We will
address this issue — and our relationship with
jim tobin, president
our stent vendor Medinol — later in the letter.
and chief executive
ofﬁcer
In last year’s annual report, we told you we
would remain focused on two critical themes
in 2000: Innovation and Operational Excel-
lence. Throughout the year, we focused
intensely on these priorities, and the results
have been encouraging.


Early in the year, the management structure was In order to create an organization that can
realigned to permit maximum emphasis on these efficiently convert innovative ideas into highly safe
objectives. Corporate research and development, and effective new products, we have strengthened
and regulatory and clinical affairs, were concentrated the processes, tools and core competencies in
under Kshitij Mohan, Ph.D., Senior Vice President research and development, and regulatory and
and Chief Technology Officer, and operations and clinical affairs.
quality were centralized under Jim Taylor, Senior
We have created a number of Centers of Technical
Vice President of Corporate Operations. Both have
Excellence and hired strong leaders to direct them.
brought substantial change and improvement to
their respective areas.
• Robert Graziadei, M.D., was recruited to head a
newly formed Center of Clinical Sciences that
Innovation
includes Mary Russell, M.D., who recently joined
Boston Scientific is committed to driving growth
us as head of Cardiovascular Clinical Affairs.
through harnessing technological innovation both
Worldwide clinical affairs is managed through
in the near and long term. Our approach includes a
the Center.
mixture of tactical and strategic initiatives designed to
provide sustainable growth through focusing on and
• Eric Ankerud joined the company as the head of
delivering the products currently in our pipeline as
worldwide Regulatory Affairs.
well as strengthening our product development
processes and tools. In addition, we are committed to • Michael Helmus, Ph.D., was recruited to direct
building a strong foundation of key scientific compe- a newly created Center for Material Sciences.
tencies that underpin our products and technologies.
Other newly established Centers include the Center
Progress included FDA clearances on 37 products, CE for Process Technologies and the Center for Imaging
marks on eight, and approval by the Japanese Ministry and Electronics.
of Health and Welfare on 39. We also conducted
nearly 50 clinical trials, filed 479 patent applications We believe that consolidating and strengthening
and received 345 patents. Our commitment to tech- our focus and technical excellence in these areas will
nological innovation was evidenced in our plans to enhance product development as well as provide for
significantly increase our research and development successful integration of products and technologies
spending in 2001. Progress continued during the first that we will continue to acquire through various
two months of 2001, with six FDA approvals, four strategic alliances.
CE marks and five approvals in Japan.
Innovation for Boston Scientific has always meant
Another promising program is our drug-coated combining internally developed products with those
stent platform. In October we began clinical trials we have obtained externally, through our licensing
in Germany on a Paclitaxel-coated stent after exten- and acquisition activities. Most successful innovation
sive animal trials. Drug-coated stents show great programs represent a balance between organic and
promise for lowering rates of restenosis. In addition acquired technology.
to Paclitaxel as our first choice for a drug-coated
We have recently created alliances with a number of
stent, we are building a portfolio of drugs and
companies as part of that strategy, including the
carrier materials to develop the most advantageous
following completed and pending acquisitions:
drug/carrier/stent combinations for different indi-
cations. We have also reinforced our portfolio of
• Interventional Technologies, Inc., a manufacturer
projects in the gastroenterology, endovascular
of microsurgical devices for use in interventional
and urology areas.
cardiology. Its flagship product is the Cutting
Balloon® catheter, a unique balloon angioplasty
device that makes precise incisions in arterial

plaque during balloon inflation. This technology The plan began showing preliminary results only
could serve as a platform for developing new ther- months after its implementation:
apies for treating coronary artery disease. The
• Supply chain initiatives have resulted in
acquisition also adds sophisticated metallurgy
improved inventory management, which
technology to Boston Scientific’s portfolio.
has reduced inventory levels and write-offs.
• Embolic Protection, Inc., the developer of the In addition, our supplier management efforts
Filterwire™ embolic protection device, which have reduced materials and services costs.
captures embolic material dislodged during
• Manufacturing process control improvements
cardiovascular interventions. This acquisition
are steadily raising production yields and manu-
will allow Boston Scientific to accelerate its entry
facturing efficiencies, improving quality and
into the embolic protection market, one of the
reducing costs.
most promising new growth segments in inter-
ventional medicine.
• Scheduled transfers of production, aimed at
optimizing our network of plants and better
• Quanam Medical Corporation, a manufacturer
allocating our resources through the creation
of medical devices that specializes in drug-delivery
of a more effective network of manufacturing
stent systems. Quanam’s technology will help
and R&D facilities, are on target for completion
Boston Scientific broaden its drug-delivery port-
by the end of 2001.
folio with an additional implant-based technology
and a family of proprietary biomaterials.
Looking forward to 2001 and beyond, we are
expanding our vision of improvement to include
• Catheter Innovations, Inc., a manufacturer
even shorter lead times and higher manufacturing
of vascular access products. The acquisition of
flexibility. Servicing our customers — from time
this technology presents opportunities for appli-
of order through receipt of product — will be the
cations across other Boston Scientific product
focus of improvements designed to make production
lines and therapies.
processes more robust and flexible, with reduced
We would like to welcome the new members of the cycle times at all stages. Our customers will see the
Boston Scientific team who are joining us as a result ultimate advantages of a more responsive organiza-
of these acquisitions. tion that fully meets highest quality product supply
needs and new product launch effectiveness.
Our acquisition strategy will remain a fundamental
part of our innovation program as we continue to Thanks to our employees, implementation of
investigate opportunities that will keep our new the global operations plan is proceeding smoothly,
product pipeline full and diversified. and we are on schedule to achieve our projected
improvements, technology transfers and resulting
Operational Excellence savings. The plan is forward-looking and makes clear
Joint progress on Innovation and Operational that innovation is our future and that we’re creating
Excellence was embodied in the global operations the opportunity to make the added investments
plan we announced in July. The plan increases needed to support that innovation. It represents a
productivity by creating greater operational efficien- thoughtful and thorough analysis and projection of
cies and generating savings, allowing the company to the strategic needs of the company.
increase its ability to invest in research and develop-
ment. The plan is estimated to achieve net, pre-tax While implementation is going well, job dislocation
operating savings of $250 million on an annualized was an unavoidable aspect of the plan, and we want
basis beginning in 2003 by improving supply chain to again acknowledge and thank all our affected
effectiveness, strengthening manufacturing process employees for their dedication and continuing
control and optimizing our network of plants. contributions during this transition period.


develop and position its existing, emerging and
Strengthening Our Team
future technologies.
The global operations plan is part of a series of
measures undertaken during the year to intensify our
• Dennis Ocwieja was named Vice President of
focus on Innovation and Operational Excellence.
Quality and is responsible for establishing a
In addition to the responsibilities consolidated under
common quality system throughout the company.
Kshitij Mohan and Jim Taylor, a number of other
appointments and promotions were made to • Paul Donovan was named Vice President of
strengthen the team. Corporate Communications, responsible for
employee communications, corporate identity
• Steve Moreci was appointed to the newly created
and media relations.
position of Senior Vice President and Group
President for Endosurgery. Under this new group All these new people and positions speak to the
structure, Steve will oversee three divisions: Medi- company’s ongoing commitment to its entrepre-
tech, Microvasive Endoscopy and Microvasive neurial spirit and risk-taking culture. Like most
Urology. successful organizations, we are constantly looking
to change, adapt and improve in ways that value
• Paul LaViolette, Senior Vice President and
unconventional thinking, bold action and original
Group President for Cardiovascular, assumed
solutions. From the beginning, we have known that
management responsibility for three divisions:
agility, flexibility and creativity have been — and
EP Technologies, Scimed and Target. He continues
will remain — the hallmarks of our success.
to lead our international business and oversee
Corporate Marketing and Corporate Sales. We also strengthened our team by investing in our
people. We made significant improvements in our
• Fred Colen was named Senior Vice President
employee training and development programs.
for Cardiovascular Technology, responsible
We also improved our vacation policy for all U.S.
for worldwide cardiovascular research and
employees, and we continued to enhance the com-
development.
pany contribution to the 401(k) retirement program.
Finally, through the introduction of the Performance
• Mark Stautberg was named Senior Vice President
Achievement and Development Review (PADR) system,
for Sales at Scimed, responsible for the new
we strengthened our commitment to a compensation
cardiovascular sales organization, which serves
program that recognizes individual accomplishment.
interventional cardiologists, radiologists and
vascular surgeons who treat coronary disease and
Noteworthy
peripheral vascular disease.
A number of other events and activities are
worth noting.
• Four division presidents were named: Jim
Feenstra, Target; Dave McClellan, Medi-tech;
• Overall, we remained highly profitable, and we
John Pedersen, Microvasive Urology; and Mike
continued to pay down debt rapidly. By reducing
Phalen, Microvasive Endoscopy.
debt we strengthened our ability to fund new
acquisitions and strategic alliances.
• Michael Glynn was named General Manager for
Asia Pacific. He leads a strong team that was
• Our facilities in Ireland performed well in both
distinguished by several promotions including
output and productivity, with plans for more pro-
Mike Daly, General Manager for Australia; Lim
duct transfers and employment increases this year.
Poh Lin, Group Marketing Manager for Korea;
and Sang Yi, Vice President for North Asia • Boston Scientific Japan again showed itself to
Business. be a leader both within the company and in the
industry at large. In an environment of increasing
• Art Rosenthal, Ph.D., was appointed Chief
competition and reimbursement reduction, BSJ
Scientific Officer and is working with physicians
and the scientific community to help the company

grew faster than its markets and increased market Looking ahead
leadership in all critical franchises in the world’s Throughout this past year — as throughout others —
second largest health care market. we have been guided by our core values. While our
execution has not always been flawless, it has always
• The Boston Scientific team performed superbly been — and will always be — informed by our best
during the year. Particularly impressive was the instincts. As we look ahead, we want to rededicate
ability of the sales and marketing teams around ourselves to living up to those values. They define
the world to maintain and strengthen leadership us as a company and as individuals. They motivate
positions in most of our markets in the face of our mission, our work and our actions.
stiff competition.
In the coming year we will maintain our focus on
• We reached an agreement with Guidant Innovation and Operational Excellence. We will carry
Corporation to settle all outstanding litigation, the momentum of the improvements and achieve-
which consisted of a number of lawsuits in the ments of the past year into 2001. The changes we
U.S. and Europe in which each had accused the have put in place have begun to show results and
other of patent infringement. will show even more in the future.
• While a jury ruled in our favor on five of six Above all, we will continue to provide our customers
claims in a patent infringement dispute with the most innovative and effective products and tech-
Johnson & Johnson, J&J was awarded a $324 nologies that help them deliver the highest quality
million verdict based on one finding of infringe- care to their patients. For all of you who have joined
ment. We disagree with this finding, and we us in this endeavor, we thank you for your support
believe the verdict is excessive, but it is not the and welcome your partnership as we continue
final word. Several additional legal stages remain our journey.
to be played out, and we believe in the end the
lone finding of infringement will not stand. Respectfully,
• We remained active in the public policy arena,
adding our voice to the national and inter-
national dialogue on issues affecting our
industry, particularly those involving the develop-
ment of technology and the delivery of health
care. We will continue to contribute to the debate
Jim Tobin Pete Nicholas
on these issues, advocating sound policies and President and Chief Chairman of the Board
appropriate reforms on regulation, reimburse- Executive Officer
ment, international trade, harmonization
of global regulatory standards, funding for
scientific research and other important issues.
• As has been reported elsewhere, our relationship
with Medinol remains unresolved at this writing.
We have been engaged in negotiations to acquire
them, but the process has taken longer than we had
anticipated. While we hope to reach an agreement,
we are proceeding aggressively with our own stent
development program. The rapid pace of innova-
tion in the coronary stent market demands that we
resolve our relationship with Medinol one way or
another, and we are committed to doing so.

leadership i n n o va t i o n healing

We are focused

14,000 employees • 15 technology centers •
direct marketing and sales operations in 40 countries •
specialties: cardiology, electrophysiology, endoscopy, endourology,
specialties: electrophysiology, endoscopy, endourology,
interventional cardiology, interventional neuroradiology,
interventional neuroradiology, surgical oncology
interventional radiology, oncology, vascular surgery

...on advancing less invasive medicine
to its fullest potential. No company has
been bolder in pushing the boundaries of
discovery and exploring better therapies
for patients. No company can match our
global reach, or our breadth and depth
of products across such a wide range of
medical specialties. No one has more
talented and capable people inspired by
shared values and an unwavering mission.
A Leading Role in the Less Invasive Medical Device Market

others
Boston Scientific has
boston scientific
23%
27 % remained the undisputed
leader in less invasive medicine
since it pioneered this field.
tyco/mallinckrodt Leadership of such duration
3%
comes from a sustained
cook, inc. willingness to take risks,
3%
literally creating new markets.
Our research philosophy
c.r. bard
focuses not only on developing
7%
products that strengthen our
guidant
medtronic 12% presence in the markets we
9%
serve but on finding solutions
16%
that meet diverse and complex
johnson & johnson
patient needs.

Source: IMS Health projections for the four quarters ending September 30, 2000.


We are determined

37 new products cleared by the fda •
345 u.s. patents issued • 479 u.s. patent applications ﬁled

...to continue to create new tech-
nologies and products that save and
improve lives. This is both our heritage
and our future. By combining the best
people and practices with the insights
of the world’s leading physicians, we
will take innovation to an even higher
level. Our collaboration with our
physician partners will help develop
even more new therapies, provide even
better care and make it possible for
even more people to lead active and
fulfilling lives.
Leading through technology
Boston Scientific’s leadership is tied closely to its many technology innovations, resulting
in new products and ongoing product improvements, as the following examples illustrate:

The Atlantis™ SR IVUS (intravas- Our new NIRoyal™ Elite Monorail™ The GDC® SynerG™ Detachment
cular ultrasound) imaging catheter Stent System represents our most System is used in treating brain
brings new capabilities to the diagnosis advanced stent placement system. It aneurysms. The latest improvements
of coronary artery disease. It is the combines several of our most current in the Guglielmi Detachable Coil
only commercially available 40MHz and innovative technologies in one focus on making it possible to detach
IVUS catheter compatible with product, providing excellent stent a coil more accurately, efficiently
smaller, increasingly popular 6 visualization, vessel support and and consistently.
French guiding catheters, and its ease of delivery.
high frequency makes images
easier to read.


We are committed

less invasive surgery impacts quality of life:
faster recovery time • fewer complications •
less trauma • quicker return to normal activities

...to improving the quality of life for
patients, their families and loved ones.
We are passionate about our work
because we know we make a difference
in countless lives. We come from many
cultures. We live in many countries.
We speak many languages. Yet we are
united by one belief: that together we
can change health care for the better,
not just for a few patients, but for
thousands around the world. In the
end, it all comes down to people.
“It’s clear from all aspects — administrative, engineering, “Boston Scientific’s products are without peer. They are
sales and marketing — that Boston Scientific’s primary focus innovative and ergonomically well designed with a lot of
is on patients. It’s clear in everything they do. One of the best physician input, and they’re a clear leader in the marriage
things about working with Boston Scientific is that they bring of coatings and devices. It’s a company of great integrity.”
the development engineers to the table early on to work with
Dr. Joseph Macaluso
the docs who will use their products. No other company does Managing Director
it like Boston Scientific.” The Urologic Institute of New Orleans

Dr. Douglas Coldwell
Interventional Radiologist
Good Samaritan Hospital, Phoenix

boston scientific

Approximately

9,000p 75,000
U.S. patients had Medi-tech
artnering urologists
venous access products
implanted
Approximately
130,000
new cases per year of colon cancer are diagnosed in the U.S.

8,000 Over

75,000
partnering interventional
radiologists
aneurysms treated worldwide with the GDC® coil

Approximately

100,000procedures performed in the U.S. using EPT products

750,000pati ents treated worldwide using Scimed balloon catheters

Over

250,000pat ients worldwide
Approximately
have advanced coronary artery disease

8,000p artnering vascular surgeons

Approximately

9,000p artnering gastroenterologists

1,700,000
angioplasty procedures performed
worldwide using Scimed products

Over

1,000,000
cases per year of primary liver cancers diagnosed worldwide

1,100,000
new and recurrent cases of coronary attack occur each year in the U.S.

Over

805,000
procedures for stone management performed worldwide using Microvasive products

Over

90,000
Approximately

1,000 venous access procedures for infusion therapies
and hemodialysis performed worldwide using
partnering interventional
Medi-tech Vaxcel™ products
neuroradiologists
and neurosurgeons

for the year 2000

boston scientific and subsidiaries

Consolidated
Financial Statements

Financial Table of Contents
management’s discussion and analysis of
financial condition and results of operations . . . .f-2

consolidated statements of operations . . . . . . . . .f-13

consolidated balance sheets . . . . . . . . . . . . . . . . . .f-14

consolidated statements of stockholders’ equity . .f-16

consolidated statements of cash flows . . . . . . . . .f-17

notes to consolidated financial statements . . . . . .f-18

report of independent auditors . . . . . . . . . . . . . . .f-42

five-year selected financial data . . . . . . . . . . . . . .f-43

quarterly results of operations . . . . . . . . . . . . . . .f-44

market for the company’s common stock
and related matters . . . . . . . . . . . . . . . . . . . . . . . . .f-45

boston scientific and subsidiaries f-1

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Gross profit as a percentage of net sales increased from
Results of Operations
65.3% in 1999 to 68.8% in 2000. The improvement
Years Ended December 31, 2000 and 1999 in gross margin in 2000 is due primarily to the
Net sales for the year ended December 31, 2000 were recording of a pre-tax provision of $62 million for
$2,664 million as compared to $2,842 million in excess NIR® stent inventories and purchase commit-
1999, a decline of 6 percent. Net sales were adversely ments during the third quarter of 1999. The improve-
affected by approximately $30 million arising from ment is also due to benefits that the Company realized
foreign currency fluctuations compared to the prior through its increased ability to better manage inventory
year. Net income for 2000 was $373 million, or and lower product costs, partially offset by a shift in
$0.91 per share (diluted), as compared to net income the Company’s product sales mix.
for 1999 of $371 million, or $0.90 per share.
The Company’s new stent systems launched in the
United States (U.S.) revenues decreased approximately U.S. in the first quarter of 2001 will negatively impact
9% to $1,577 million during 2000, while interna- gross margins because the systems include more
tional revenues decreased approximately 1% to $1,087 expensive gold-coated stents with higher costing delivery
million. The decrease in worldwide sales was princi- systems. Further, the Company’s ability to effectively
pally attributable to a decline in the Company’s sales manage its mix and levels of inventory, including con-
of coronary stents and balloons, primarily in the U.S. signment inventory, as the Company transitions to
Worldwide coronary stent revenues and worldwide new products will be critical in minimizing excess
coronary balloon revenues were approximately $427 inventories.
million and $357 million, respectively, during 2000,
Medinol Ltd. (Medinol), an Israeli company, is the
compared to $604 million and $429 million, respec-
supplier of the NIR® coronary stent. Any unforeseen
tively, during 1999.
delays, stoppages or interruptions in the supply
The worldwide coronary stent market is dynamic and and/or mix of NIR® stent inventory could adversely
highly competitive, with significant market share affect the operating results and/or revenues of the
volatility. In addition, technology and competitive Company. Generally, the Company has less control
offerings in the market are constantly changing. over inventory manufactured by third parties as
The Company’s reduction in coronary stent revenues compared to inventory manufactured internally.
during 2000 reflects this volatility. The decline in Furthermore, the purchase price of NIR® coronary
balloon revenues during 2000 results from new prod- stents, the amount of NIR® coronary stent sales as a
uct offerings by the Company’s competitors as well as percentage of worldwide sales and the mix of coronary
a trend towards fewer balloons being used in stent stent platforms could significantly impact gross mar-
procedures. In early 2001, the Company received gins. As average selling prices for the NIR® stents fluc-
approval from the U.S. Food and Drug Administra- tuate, the Company’s cost to purchase the stents will
tion to market four NIR ® coronary stent systems as change, because cost is based on a constant percentage
well as its Maverick® balloon dilatation catheter in the of average selling prices. Therefore, if higher-costing
U.S. The Company believes the launch of these new NIR® stents are being sold as average selling prices are
products will enable the Company to remain compet- declining, gross margins could be negatively impacted.
itive in these markets. However, stent revenues for At December 31, 2000, the Company had approxi-
2001 will be impacted by continued volatility in the mately $149 million of net NIR® coronary stent inven-
worldwide coronary stent market, product develop- tory and was committed to purchase approximately
ment and the timing of submission for and receipt of $32 million of NIR® stents from Medinol. Worldwide
regulatory approvals to market next generation coro- NIR® coronary stent sales as a percentage of worldwide
nary and peripheral stent platforms in the U.S. and sales were approximately 15% in 2000 compared to
international markets. All of these factors could also approximately 20% in 1999. The Company’s relation-
negatively impact the Company’s ability to transition ship with Medinol has been contentious, and the
to new products and to continue to offer competitive Company’s ability to manage its relationship with
stent products. Stent revenues for 2001 may be nega- Medinol could impact the future operating results of
tively impacted by a reduction in average selling prices the Company.
due to competitive pressures.

f-2 boston scientific and subsidiaries

of Financial Condition and Results of Operations (continued)

During the third quarter of 2000, the Company the Company expects to make during 2001 with the
approved and committed to a global operations plan remainder being primarily severance costs for employees
which encompasses a series of strategic initiatives to terminated during 2001 but paid out in 2001 and
increase productivity and enhance innovation. The 2002. The Company anticipates that these cash out-
plan includes manufacturing process and supply chain lays will be funded from cash flows from operating
programs and a plant optimization initiative. The activities and from the Company’s borrowing capacity.
manufacturing process and supply chain programs The cash outlays include severance and outplacement
are designed to lower inventory levels and the cost of costs, transition costs and capital expenditures related
manufacturing and to minimize inventory write- to the plan. The success of the initiative may be
downs. Gross margin benefits will not be fully realized dependent on the Company’s ability to retain existing
until manufacturing processes are improved and his- employees and attract new employees during the tran-
torical inventories are sold. sition period.
The intent of the plant optimization initiative is to The Company estimates that the global operations
better allocate the Company’s resources by creating a plan will achieve pre-tax operating savings, relative to
more effective network of manufacturing and research the base year of 1999, of approximately $100 million
and development facilities. It will consolidate manu- in 2001, $220 million in 2002 and $250 million in
facturing operations along product lines and shift sig- annualized savings thereafter. Incremental pre-tax
nificant amounts of production to Company facilities savings expected to be realized in 2001 relative to
in Miami and Ireland and to contract manufacturing. 2000 are estimated to be approximately $30 million.
The Company’s plan includes the discontinuation These savings will be realized primarily as reduced cost
of manufacturing activities at two facilities in the U.S. of sales and are expected to help mitigate gross margin
and the closure of a third facility. The Company pressures resulting from the launch of higher costing
expects that the plan will be substantially completed stents and stent delivery systems. Additionally, the
over the next twelve months. During 2000, the Com- Company intends to use a portion of these savings,
pany recorded a pre-tax special charge of approximately when generated, to increase its investment in research
$58 million associated with the plant optimization and development.
initiative. The charge relates to severance and outplace-
Selling, general and administrative expenses as a
ment costs for the approximately 1,950 manufacturing,
percentage of sales increased from 30% of sales in
manufacturing support and management employees
1999 to 33% in 2000 and increased approximately
who are expected to be affected by the plan over the
$25 million from 1999 to $867 million. The increase
next twelve months. Less than $1 million had been
in expenses as a percentage of sales in 2000 is prima-
charged against the related accrual for the approximately
rily attributable to the reduction in sales combined
10 employees terminated pursuant to the plan as of
with an increase in costs incurred to strengthen and
December 31, 2000. In addition, during 2000, the
retain the Company’s field sales force and to expand
Company recorded pre-tax costs of $11 million as cost
its direct sales presence in international regions. The
of sales related to transition costs associated with the
Company’s ability to retain its established sales force
plant optimization plan and accelerated depreciation
may impact the operating results of the Company.
on fixed assets whose useful lives have been reduced as
a result of the initiative. During 2001, the Company
Amortization expense remained at approximately
estimates that it will record pre-tax expenses of
3% of net sales while decreasing 1% from $92 million
approximately $70 million as cost of sales related
in 1999 to $91 million in 2000.
to the plant optimization initiative, primarily for
transition costs, accelerated depreciation and Royalties decreased approximately 20% from $46 mil-
abnormal production variances related to under- lion in 1999 to $37 million in 2000. The reduction
utilized plant capacity. in royalties is primarily due to non-recurring expenses
of approximately $7 million recorded during 1999.
The Company expects that it will make total cash
The Company continues to enter into strategic tech-
outlays, net of proceeds from building and fixed
nological alliances, some of which include royalty
asset sales, of approximately $115 million for the plant
commitments.
optimization initiative, $85 million of which



Research and development expenses remained at in the U.S. has also resulted in more complex billing
approximately 7% of net sales while increasing 1% and collection procedures. The Company’s ability to
from $197 million in 1999 to $199 million in 2000. react effectively to the changing environment may
The investment in research and development dollars impact its bad debt and sales allowances in the future.
reflects spending on new product development pro- Further, the U.S. marketplace is increasingly charac-
grams as well as regulatory compliance and clinical terized by consolidation among health care providers
research. The Company continues to be committed and purchasers of medical devices that prefer to limit
to refining existing products and procedures and to the number of suppliers from which they purchase
developing new technologies that can reduce risk, medical products. There can be no assurance that
trauma, cost, procedure time and the need for after- these entities will continue to purchase products from
care. In 2001, the Company expects to increase its the Company.
investment in research and development over 2000
International markets are also being affected by eco-
levels to fund the development of new products and
nomic pressure to contain reimbursement levels and
clinical trials, including the Company’s drug-coated
health care costs. The Company’s ability to benefit
stent program, the carotid program and an internally
from its international expansion may be limited by
developed stent platform. Additionally, the Company
risks and uncertainties related to economic conditions
plans to expand its research and development teams to
in these regions, regulatory and reimbursement
enhance the Company’s product development, clinical
approvals, competitive offerings, infrastructure devel-
affairs and regulatory compliance capabilities in 2001
opment, rights to intellectual property and the ability
and beyond.
of the Company to implement its overall business
Interest expense decreased from $118 million in 1999 strategy. Any significant changes in the competitive,
to $70 million in 2000. The overall decrease in inter- political, regulatory or economic environment where
est expense is primarily attributable to a lower average the Company conducts international operations may
debt balance. Other income (expense), net, changed have a material impact on revenues and profits, espe-
from expense of approximately $9 million in 1999 cially in Japan given its high profitability relative
to income of approximately $17 million in 2000. to its contribution to revenues. Deterioration in the
The change is primarily due to an increase in net gains Japanese and/or emerging markets economies may
recognized on sales of available-for-sale securities impact the Company’s ability to grow its business and
and to an increase in gains on derivative financial to collect its accounts receivable. Additionally, the
instruments. trend in countries around the world toward more
stringent regulatory requirements for product clear-
The Company’s effective tax rate, including the impact ance and more vigorous enforcement activities has
of restructuring-related charges and credits, decreased generally caused or may cause medical device manu-
from 34% in 1999 to 29% in 2000. Excluding the facturers to experience more uncertainty, greater risk
impact of restructuring-related charges and credits, and higher expenses. These factors may impact the rate
the Company’s effective tax rate decreased from 34% at which Boston Scientific can grow. In addition, the
in 1999 to 30% in 2000. The decrease is primarily impact of selling higher costing stents, the cost of
attributable to a shift in the mix of the Company’s maintaining the Company’s sales force and increasing
U.S. and international businesses. Management cur- its investment in research and development is expected
rently estimates that the 2001 effective tax rate will to result in lower operating margins for 2001.
remain at approximately 30%. However, the effective However, management believes that it is positioning
tax rate could be negatively impacted by acquisitions of the Company to take advantage of opportunities that
businesses contemplated by the Company in 2001. exist in the markets it serves.
Uncertainty remains with regard to future changes
within the health care industry. The trend toward
managed care and economically motivated and more
sophisticated buyers in the U.S. may result in continued
pressure on selling prices of certain products and
resulting compression on gross margins. In addition
to impacting selling prices, the trend to managed care



Years Ended December 31, 1999 and 1998 Selling, general and administrative expenses as a per-
Net sales increased 27% in 1999 to $2,842 million as centage of sales decreased from 34% of sales in 1998 to
compared to $2,234 million in 1998. The 1999 30% of sales in 1999 and increased approximately $87
results include the operations of Schneider Worldwide million from 1998 to $842 million. The decrease as a
(Schneider), which was acquired in the third quarter percentage of sales is primarily attributable to the
of 1998. On a pro forma basis, assuming Schneider increase in sales due to the launch of coronary stents
revenues had been included in all of 1998, net sales in the U.S. and Japan, the realization of synergies as
in 1999 increased approximately 14%. Net income the Company integrated Schneider into its organiza-
for 1999 was $371 million or $0.90 per share (diluted) tion, and improved returns in Asia Pacific and Latin
as compared to a reported net loss for 1998 of America as the Company continued to leverage its
$264 million, or $0.68 per share, including direct sales infrastructure. The increase in expense
merger-related charges and credits of $667 million dollars is primarily attributable to higher selling
($527 million, net of tax). expenses as a result of the launch of coronary stents in
the U.S., increased costs to expand the Company’s
U.S. revenues increased approximately 25% to $1,741 direct sales presence in Asia Pacific and Latin America,
million during 1999, while international revenues and increased legal expenses.
increased approximately 31% to $1,101 million.
Without the impact of foreign currency exchange rates Amortization expense increased from $53 million
on translation of international revenues, worldwide in 1998 to $92 million in 1999 and increased as a
sales for 1999 increased approximately 25%. The percentage of sales from 2% to 3%. The increase is
increase in sales was primarily attributable to the primarily a result of the amortization of intangibles
inclusion of Schneider sales for the entire year and related to the purchase of Schneider.
the Company’s sales of coronary stents in the U.S.
Royalty expense increased approximately 48% from
and Japan. U.S. coronary stent revenues and world-
$31 million in 1998 to $46 million in 1999. The
wide coronary stent revenues, primarily sales of the
increase in royalties is primarily due to royalty obliga-
NIR® stent, were approximately $409 million and
tions assumed in connection with the Schneider
$604 million, respectively, during 1999, compared
acquisition and payments made to Medinol on sales
to $211 million and $324 million, respectively, during
of internally developed stent platforms.
1998. Worldwide NIR® coronary stent sales as a
percentage of worldwide sales were approximately 20%
Research and development expenses decreased as
in 1999 compared to approximately 13% in 1998.
a percentage of sales from 9% in 1998 to 7% in 1999.
Research and development expenses were $200 mil-
Gross profit as a percentage of net sales decreased
lion in 1998 and $197 million in 1999. The decrease
from 67.1% in 1998 to 65.3% in 1999. The decrease
as a percentage of sales is primarily attributable to the
in gross margin is primarily due to a provision recorded
launch of coronary stents in the U.S. and Japan and
in the third quarter of 1999 of $62 million for excess
the realization of synergies in connection with the
NIR® stent inventories and purchase commitments.
Schneider acquisition.
The excess position was driven primarily by a shortfall
in planned third-quarter NIR® stent revenues, a
During 1999, the Company identified and reversed
reduction in NIR® stent sales forecasted for 1999 and
restructuring and merger-related charges of $10 million
2000, and strategic decisions regarding versions of
no longer deemed necessary. These amounts related
the NIR® stent system to be launched. In the third
primarily to the restructuring charges accrued in the
quarter of 1998, the Company provided $31 million
fourth quarter of 1998 and reflect the reclassification
for costs associated with the Company’s decision to
of assets from held-for-disposal to held-for-use
recall voluntarily the NIR ON® RangerTM with SoxTM
resulting from management’s decision to resume a
coronary stent system in the U.S. Excluding these
development program previously planned to be elimi-
charges, gross margins were 67.5% and 68.1% for
nated. In addition, estimated severance costs for 1998
1999 and 1998, respectively. Gross margins during
initiatives were reduced as a result of attrition. During
1999 were positively impacted compared to 1998 by a
1998, the Company recorded merger-related charges
reduction in other inventory charges. However, the
and credits of $667 million ($527 million, net of tax)
reduction was offset by a decrease in average selling
primarily related to purchased research and develop-
prices and increased manufacturing costs.
ment acquired in the $2.1 billion cash purchase of



Schneider. On September 10, 1998, the Company native future uses. Accordingly, the value attributable
consummated its acquisition of Schneider, formerly to these projects was immediately expensed at acquisi-
a member of the Medical Technology Group of Pfizer tion. If the projects are not successful or completed in
Inc. The acquisition was accounted for using the a timely manner, the Company may not realize the
purchase method of accounting. The consolidated financial benefits expected for these projects.
financial statements include Schneider’s operating
The income approach was used to establish the fair
results from the date of acquisition.
values of the purchased research and development.
The aggregate purchase price of the Schneider acqui- This approach established the fair value of an asset
sition has been allocated to the assets acquired and by estimating the after-tax cash flows attributable
liabilities assumed based on their estimated fair values to the in-process project over its useful life and then
at the date of acquisition. The estimated excess of pur- discounting these after-tax cash flows back to a present
chase price over the fair value of the net tangible assets value. Revenue estimates were based on estimates of
acquired was allocated to specific intangible asset cate- relevant market sizes, expected market growth rates,
gories with the remainder assigned to excess of cost expected trends in technology and expected product
over net assets acquired. At December 31, 2000, the introductions by competitors. In arriving at the value
net intangibles recorded in connection with the of the in-process research and development projects,
Schneider acquisition, including the excess of cost the Company considered, among other factors, the
over net assets acquired, represented 39% and 70% of in-process project’s stage of completion, the complexity
the Company’s total assets and stockholders’ equity, of the work completed as of the acquisition date, the
respectively. Core technology, developed technology, costs already incurred, the projected costs to com-
assembled workforce, trademarks and patents are plete, the contribution of core technologies and other
being amortized on a straight-line basis over periods acquired assets, the expected introduction date, and
ranging from 9 to 25 years. The Company is amortiz- the estimated useful life of the technology. The dis-
ing the value assigned to customer lists (relationships) count rate used to arrive at a present value as of the
over 25 years because it has been the Company’s date of acquisition was based on the time value of
experience that physician and hospital relationships money and medical technology investment risk
are built for the long term and fundamental to the factors. For the Schneider purchased research and
Company’s business of bringing innovative products development programs, a risk-adjusted discount rate
to market. The Company realizes that maintaining of 28% was utilized to discount the projected cash
these and similar relationships will require ongoing flows. The Company believes that the estimated
efforts. However, both Schneider and the Company purchased research and development amounts so
have over a 20-year history of working closely with determined represent the fair value at the date of
interventionalists and their institutions for both vas- acquisition and do not exceed the amount a third party
cular and nonvascular applications, and management would pay for the projects.
believes these relationships will continue to benefit the
The most significant Schneider purchased research
Company. In addition, after considering the long-
and development projects that were in-process at
term prospects for the less invasive medical device
the date of acquisition were brachytherapy, devices
industry and the fundamental role of catheter-based
for aneurysmal disease and coronary stents, which
interventional medicine, as well as Schneider’s com-
represented approximately 26%, 20% and 16% of the
petitive position within the industry, management
in-process value, respectively. Set forth below are
concluded that it is appropriate to amortize the excess
descriptions of these in-process projects, including
of the Schneider purchase price over the fair value of
their status at the end of 2000.
the assets acquired over 40 years. Finally, the
Company recorded a $671 million ($524 million, net
The brachytherapy system is an intravascular radiation
of tax) charge to account for purchased research and
system designed to reduce clinical restenosis after
development. The valuation of purchased research and
a balloon angioplasty and/or a stent procedure. The
development, for which management is primarily
system consists of a computer-controlled afterloader,
responsible, represents the estimated fair value at the
beta radiation source, centering catheter, source
date of acquisition related to in-process projects. As of
delivery wire and dummy wire. As of the date of acqui-
the date of acquisition, the in-process projects had not
sition, the project was expected to be completed and
yet reached technological feasibility and had no alter-
the products commercially available in the U.S. within



two to three years, with an estimated cost to complete approximately $62 million, most of which represented
of approximately $5 million to $10 million. severance and related costs. Approximately $36 mil-
lion of the total was capitalized as part of the purchase
The aneurysmal disease projects are endoluminal price of Schneider. The remaining $26 million was
grafts for the treatment of late stage vascular aneurysms charged to operations during 1998. In addition, as
and occlusions. The most significant of the projects part of the Schneider acquisition, the Company capi-
in this category at the date of acquisition was the endo- talized estimated costs of approximately $16 million
luminal graft for the treatment of abdominal aortic to cancel Schneider’s contractual obligations, primarily
aneurysms. As of the date of acquisition, the projects with its distributors.
were expected to be completed and the products
commercially available in the U.S. within two to three The Company substantially completed its rationaliza-
years, with an estimated cost to complete of approxi- tion plan in 1999, including the closure of five
mately $10 million to $15 million. Schneider facilities as well as the transition of manu-
facturing for selected Boston Scientific product lines
Coronary stent systems underway at the date of acqui- to different sites. Approximately 1,800 positions were
sition were stent systems for native coronary artery eliminated (resulting in the termination of approxi-
disease, saphenous vein graft disease, and versions with mately 1,500 employees) in connection with the
novel delivery systems. The Company believes that the rationalization plan, and the anticipated cost savings
stent systems will be especially helpful in the treatment have been achieved. As noted previously, in the third
of saphenous vein graft disease. As of the date of quarter of 1999, the Company identified and reversed
acquisition, the projects were expected to be completed restructuring and merger-related charges of $10 mil-
and the products commercially available for sale in the lion no longer deemed necessary. During 1999, the
U.S. within one year with an estimated cost to com- costs related to the transition of manufacturing
plete of approximately $1 million to $3 million. operations were not significant and were recognized
in operations as incurred.
In the second quarter of 2000, the brachytherapy
project was discontinued due to system performance The 1998 rationalization plan also resulted in the
issues. However, the Company recently outsourced decision to expand, not close, the Target Thera-
this project to a third party in which it holds a minority peutics, Inc. (Target) facilities originally provided for
interest. As part of a subsequent project consolidation in a 1997 merger-related charge and to relocate other
program, the Schneider abdominal aortic aneurysm product lines to those Target facilities. In the fourth
project has been integrated with another internal quarter of 1998, the Company reversed $21 million of
project. As a result, the Company will pursue the previously recorded merger-related charges, of which
development of next-generation products for aortic $4 million related to facility costs and which also
aneurysmal disease with an integrated platform while included reductions for revisions of estimates relating
minimizing duplicative research and development. to contractual commitment payments, associated legal
The cost of the development is still estimated to be in costs and other asset write-downs originally provided
the range of approximately $10 million to $15 million. for as a 1997 merger-related charge.
The coronary stent projects have been completed.
In the second quarter of 1998, the Company realigned
During 1998, the Company established a rationaliza- its operating units and decided to operate Target inde-
tion plan in conjunction with the consummation of pendently instead of as a part of its vascular division
the Schneider acquisition, taking into consideration as was planned at the date of the Target acquisition.
duplicate capacity as well as opportunities for further Management believed that an independent Target
leveraging of cost and technology platforms. The would allow the business unit to develop its technolo-
Company’s actions, approved and committed to in gies and markets more effectively than it would as part
the fourth quarter of 1998, included the planned of the vascular division. As a result of this decision,
displacement of approximately 2,000 positions, over the Company reversed $20 million of 1997 Target
half of which were manufacturing positions and would merger-related charges primarily related to revised
result in annualized cost savings of approximately estimates for costs of workforce reductions and costs
$50 million to $75 million. During the fourth quarter of canceling contractual commitments. In addition,
of 1998, the Company estimated the costs associated the Company recorded purchased research and
with these activities, excluding transition costs, to be development of approximately $11 million in connection



with another acquisition consummated during 1998, at December 31, 2000, and 1999, respectively, at
and, in the fourth quarter of 1998, the Company weighted-average interest rates of 8.00% and 6.70%,
recorded $30 million of year-end adjustments related respectively. In addition, the Company had approxi-
primarily to write-downs of assets no longer deemed mately $187 million and $421 million in revolving
to be strategic. The assets related primarily to inventory, credit facility borrowings outstanding at December 31,
long-lived and intangible assets that the Company did 2000 and 1999, respectively, at weighted-average
not believe would be sold or realized, respectively, interest rates of 4.54% and 6.66%, respectively.
because of revisions to and terminations of strategic At December 31, 2000, the revolving credit facilities
alliances. The provisions were recorded as costs of totaled $1.65 billion, consisting of a $1.0 billion credit
sales ($12 million), selling, general and administrative facility that terminates in June 2002, a $600 million
expenses ($12 million), amortization expenses 364-day credit facility that terminates in September
($2 million), royalties ($2 million), research and 2001 and a $50 million uncommitted credit facility.
development expenses ($1 million) and other expenses The revolving credit facilities also support the Com-
($1 million). pany’s commercial paper borrowings. Use of the
borrowings is unrestricted and the borrowings are
Interest expense increased from $68 million in 1998 unsecured. The revolving credit facilities require the
to $118 million in 1999. The overall increase in Company to maintain a specific ratio of consolidated
interest expense was primarily attributable to a higher funded debt (as defined) to consolidated net worth
average outstanding debt balance borrowed in con- (as defined) plus consolidated funded debt of less than
junction with the Schneider acquisition. or equal to 60%. As of December 31, 2000, the ratio
was approximately 26%.
The Company’s effective tax rate, including the impact
of merger-related charges and credits, was approxi- The Company has the ability to refinance a portion
mately 4% in 1998 and 34% in 1999. The Company’s of its short-term debt on a long-term basis through
pro-forma effective tax rate, excluding the impact of its revolving credit facilities. The Company does
merger-related charges and credits, increased from not expect that its short-term borrowings as of December
approximately 33% in 1998 to 34% in 1999. The 31, 2000, will remain outstanding beyond the next
increase is primarily attributable to a shift in the mix twelve months and, accordingly, the Company has not
of the Company’s U.S. and international business. reclassified any of the short-term borrowings as long-
term at December 31, 2000, compared to $108 million
of such reclassifications at December 31, 1999.
Liquidity and Capital Resources In March 1998, the Company issued $500 million of
seven-year senior notes. The senior notes bear a
Cash and short-term investments totaled $60 million
coupon of 6.625% payable semi-annually, and are not
at December 31, 2000, compared to $78 million
redeemable prior to maturity or subject to any sinking
at December 31, 1999. The Company had $173 mil-
fund requirements.
lion of working capital at December 31, 2000 as com-
pared to current assets equaling current liabilities at
The Company had 6.0 billion Japanese yen (translated
December 31, 1999. The increase in working capital is
to approximately $53 million and $58 million
primarily due to the repayment of approximately $340
at December 31, 2000 and 1999, respectively) of
million of short-term debt obligations using the
borrowings outstanding with a syndicate of Japanese
Company’s cash flows from operations, partially offset
banks. The interest rate on the borrowings is 2.37%
by changes in other working capital accounts. Cash
and the borrowings are payable in 2002. In addition,
proceeds during 2000 were generated primarily from
the Company had approximately 1.1 billion Japanese
operating activities. Cash proceeds during the period
yen (translated to approximately $9 million) and 1.2
were partially offset by the repayment of approximately
billion Japanese yen (translated to approximately $12
$447 million of outstanding short-term and long-
million) of borrowings outstanding from a Japanese
term debt obligations and purchases of the Company’s
bank used to finance a facility construction project
common stock of approximately $222 million.
at December 31, 2000, and 1999, respectively. The
interest rate on the borrowings is 2.1% and principal
The Company had approximately $56 million and
payments are due semi-annually through 2012.
$277 million of commercial paper outstanding



The Company has uncommitted Japanese credit facil- On February 15, 2001, the Company announced the
ities with several Japanese banks, which provided for signing of a definitive agreement to acquire
borrowings and promissory notes discounting of up to Interventional Technologies, Inc (IVT). IVT develops,
15.0 billion Japanese yen (translated to approximately manufactures and markets minimally invasive devices
$131 million) and 11.5 billion Japanese yen (translated for use in interventional cardiology, including the
Cutting BalloonTM catheter and the Infiltrator® trans-
to approximately $112 million) at December 31, 2000
and 1999, respectively. There was $12 million in bor- luminal drug delivery catheter. Boston Scientific will
rowings outstanding under the Japanese credit facili- pay approximately $345 million in cash plus additional
ties at an interest rate of 1.5% at December 31, 2000 cash amounts contingent upon achieving performance
compared to no borrowings at December 31, 1999. At and other milestones. The transaction is subject to
December 31, 2000, approximately $108 million of regulatory approval and is expected to be consummat-
notes receivable were discounted at average interest ed in the second quarter of 2001.
rates of approximately 1.5% compared to $112 million
On February 27, 2001, the Company acquired privately
of discounted notes receivable at average interest rates
held Embolic Protection, Inc., a developer of embolic
of approximately 1.4% at December 31, 1999.
protection medical devices. Boston Scientific will pay
The Company has recognized net deferred tax assets approximately $75 million in cash and assumed restrict-
aggregating $226 million at December 31, 2000, and ed stock and options plus additional amounts contin-
$238 million at December 31, 1999. The assets relate gent upon achieving certain performance milestones.
principally to the establishment of inventory and Contingent payments would be made in cash or stock
product-related reserves and purchased research and of Boston Scientific at the Company’s election.
development. In light of the Company’s historical
On February 28, 2001, the Company announced the
financial performance, the Company believes that
signing of a definitive agreement to acquire Quanum
these assets will be substantially recovered.
Medical Corporation (Quanum), a manufacturer of
The Company is authorized to purchase on the open medical devices that specializes in drug delivery systems.
market and in private transactions up to approximately Boston Scientific will pay an immaterial amount in
60 million shares of the Company’s common stock. stock as initial consideration plus additional payments
Stock repurchased under the Company’s systematic contingent upon achieving performance and other
plan will be used to satisfy its obligations pursuant to milestones. Contingent payments would be made in
its equity incentive plans. Under the authorization, stock of Boston Scientific.
the Company may also repurchase shares outside of the
On March 5, 2001, the Company announced the
Company’s systematic plan. These additional shares
acquisition of Catheter Innovations, Inc., a manufac-
would principally be used to satisfy the Company’s
turer of vascular access products. Boston Scientific will
obligations pursuant to its equity incentive plans, but
pay an immaterial amount as initial consideration plus
may also be used for general corporate purposes,
additional payments contingent upon achieving per-
including acquisitions. During 2000, the Company
formance and other milestones. Contingent payments
repurchased approximately 12 million shares at an
would be made in cash or stock of Boston Scientific at
aggregate cost of $222 million. As of December 31,
the Company’s election.
2000, a total of approximately 38 million shares of
the Company’s common stock have been repurchased.
These acquisition transactions involve contingent
payments. The Company expects to make contingent
In December 2000, a jury found that the Company’s
payments in 2001 of approximately $100 million to
NIR® coronary stent infringed one claim of a patent
$200 million for performance and other milestones
owned by Johnson & Johnson. A final decision has not
achieved in connection with these transactions. All
yet been entered pending post trial motions. The
of these transactions will be accounted for using the
Company could be found liable and owe damages
purchase method of accounting.
of approximately $324 million for past sales, plus
interest, and additional damages for sales occurring
Management believes it is developing a sound plan to
after the jury verdict. The Company expects to appeal
integrate these businesses. The failure to successfully
any adverse determination and post the necessary
integrate these businesses effectively could impair the
bond pending appeal.
Company’s ability to realize the strategic and financial



objectives of these transactions. As the health care The Company enters into foreign exchange forward
environment continues to undergo rapid change, contracts to hedge its net recognized foreign currency
management expects that it will continue to focus on transaction exposures for periods consistent with
strategic initiatives and/or make additional invest- commitments, generally one to six months. In addi-
ments in existing relationships. In connection with tion, on January 1, 2000, the Company initiated a
these and other acquisitions consummated during the program to hedge a portion of its forecasted inter-
last five years, the Company has acquired numerous company and third-party transactions with foreign
in-process research and development projects. As the exchange forward and option contracts upon adoption
Company continues to build its research base, it is of the Financial Accounting Standards Board
reasonable to assume that it will acquire additional Statement No. 133, “Accounting for Derivative
research and development platforms. Instruments and Hedging Activities.” Hedging activity
is intended to offset the impact of currency fluctua-
Additionally, the Company expects to incur capital tions on forecasted earnings and cash flow. However,
expenditures of approximately $100 million during the Company may be impacted by changes in foreign
2001. The Company expects that its cash and cash currency exchange rates related to the unhedged
equivalents, marketable securities, cash flows from portion. The success of the hedging program depends,
operating activities and borrowing capacity will be in part, on forecasts of transaction activity in various
sufficient to meet its projected operating cash needs, currencies (currently the Japanese yen and the euro).
including capital expenditures, restructuring The Company may experience unanticipated foreign
initiatives, and the above-mentioned acquisitions of currency exchange gains or losses to the extent that
businesses. there are timing differences between forecasted and
actual activity during periods of currency volatility.
Further, the Company continues to engage in negoti-
The Company had foreign exchange forward and
ations to acquire Medinol. If the Company is success-
option contracts outstanding in the total notional
ful in its attempt to acquire Medinol, the Company
amount of $452 million and $128 million as of
will need additional financing capacity to consummate
December 31, 2000, and 1999, respectively. The
the transaction. Although the Company believes it will
Company has recorded approximately $37 million of
be able to obtain additional financing, there are no
assets and $1 million of liabilities to recognize the fair
assurances that additional financing can be or will
value of its contracts outstanding on December 31,
be obtained.
2000, as compared to an immaterial amount at
December 31, 1999. Foreign exchange contracts that
hedge net recognized foreign currency transaction
exposures should not subject the Company’s earnings
Market Risk Disclosures
and cash flow to material risk due to exchange rate
In the normal course of business, the Company is movements because gains and losses on these contracts
exposed to market risk from changes in interest rates should offset losses and gains on the transactions being
and foreign currency exchange rates. The Company hedged. Hedges of anticipated transactions may sub-
addresses these risks through a risk management ject the income statement to volatility.
program that includes the use of derivative financial
instruments. The program is operated pursuant to A sensitivity analysis of changes in the fair value of for-
documented corporate risk management policies. The eign exchange contracts outstanding at December 31,
Company does not enter into any derivative trans- 2000 indicates that, if the U.S. dollar uniformly
actions for speculative purposes. weakened by 10% against all currencies, the fair value
of these contracts would decrease by $37 million as
The Company’s floating and fixed-rate investments compared to a $9 million decrease based on foreign
and debt obligations are subject to interest rate risk. exchange contracts outstanding at December 31, 1999.
As of December 31, 2000, a 100-basis-point increase While these hedging instruments are subject to fluctu-
in interest rates, assuming the amount invested and ations in value, such fluctuations are generally offset
borrowed remained constant, would not result in by changes in the value of the underlying exposures
a material increase in the Company’s then current being hedged. As the Company has expanded its inter-
net interest. national operations, its sales and expenses denominated


Boston Scientific 2000 Annual Report Details Focus on Innovation and Operational Excellence

Boston Scientific 2000 Annual Report Details Focus on Innovation and Operational Excellence

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Boston Scientific 2000 Annual Report Details Focus on Innovation and Operational Excellence