CONSOLIDATED FINANCIAL STATEMENTS - Boston Scientific

MANAGEMENT’S DISCUSSION AND ANALYSIS of financial condition and results of operations
Product Liability Costs
We are substantially self-insured with respect to general and product
liability claims. In the normal course of business, product liability
claims are asserted against us. We accrue anticipated costs of litigation
and loss for product liability claims based on historical experience, or
to the extent specific losses are probable and estimable. We record
losses for claims in excess of the limits of purchased insurance in
earnings at the time and to the extent they are probable and
estimable. Our accrual for product liability claims was $13 million at
December 31, 2004 and $15 million at December 31, 2003. Product
liability claims against us will likely be asserted in the future related to
events not known to management at the present time. The absence of
significant third-party insurance coverage increases our exposure to
unanticipated claims or adverse decisions. However, based on product
liability losses experienced in the past, our election to become substantially
self-insured is not expected to have a material impact on our
future operations.
Management believes that our risk management practices, including
limited insurance coverage, are reasonably adequate to protect us
against anticipated general and product liability losses. However,
unanticipated catastrophic losses could have a material adverse
impact on our financial position, results of operations and liquidity.
New Accounting Standard
On December 16, 2004, the FASB issued Statement No.123(R),
Share-Based Payment, which is a revision of Statement No.123,
Accounting for Stock-Based Compensation. Statement No.123(R)
supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees and amends Statement No. 95, Statement of Cash
Flows. In general, Statement No.123(R) contains similar accounting
concepts as those described in Statement No.123. However,
Statement No.123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure
is no longer an alternative. We expect to adopt Statement No.123(R)
when it becomes effective as of July 1, 2005.
Statement No.123(R) permits public companies to adopt the new
requirements using one of two methods:
1. A “modified prospective” method in that compensation cost is
recognized beginning with the effective date (a) based on the
requirements of Statement No.123(R) for all share-based payments
granted after the effective date of Statement No.123(R) and
(b) based on the requirements of Statement No.123 for all
awards granted to employees before July 1, 2005 that remain
unvested as of July 1, 2005.
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2. A “modified retrospective” method that includes the requirements
of the modified prospective method described above, but also
permits entities to restate based on the amounts previously
recognized under Statement No.123 for purposes of pro forma
disclosures either (a) for all prior periods presented or (b) for prior
interim periods of the year of adoption.
We are currently evaluating which method we will use to adopt the
requirements of Statement No.123(R).
As permitted by Statement No.123, we currently account for share-based
payments to employees using Opinion No. 25’s intrinsic value method
and, as such, generally recognize no compensation cost for employee
stock options, except as disclosed in Note M of our consolidated financial
statements. Accordingly, the adoption of Statement No.123(R)’s fair
value method will impact our statements of operations. The impact
of adoption of Statement No.123(R) cannot be quantified at this time
because it will depend on the level of share-based payments granted
in the future and the method used to value such awards. However,
had we adopted Statement No.123(R) in prior periods, the impact of
that standard would have approximated the impact of Statement
No.123 as described in our disclosure of pro forma net income and
earnings per share in Note A to our consolidated financial statements.
Statement No.123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing
cash flow, rather than as an operating cash flow as required under
currently effective accounting literature. This requirement will reduce
our net operating cash flows and increase our net financing cash
flows in periods after our adoption of Statement No.123(R). While we
cannot estimate what those amounts will be in the future (because
they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows we recognized in prior
periods for such excess tax deductions was $185 million in 2004,
$154 million in 2003 and $28 million in 2002.
MARKET RISK DISCLOSURES
We develop, manufacture and sell medical devices globally and our
earnings and cash flow are exposed to market risk from changes in
currency exchange rates and interest rates. We address these risks
through a risk management program that includes the use of derivative
financial instruments. We operate the program pursuant to documented
corporate risk management policies. We do not enter into any derivative
transactions for speculative purposes. Gains and losses on derivative
financial instruments substantially offset losses and gains on underlying
hedged exposures. Furthermore, we manage our exposure to counterparty
nonperformance on derivative instruments by entering into
contracts with a diversified group of major financial institutions and
by monitoring outstanding positions.
BOSTON SCIENTIFIC AND SUBSIDIARIES