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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997 Commission File No. 1-11083
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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
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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. ---
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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 $8.2 billion based on the closing price of the Common
Stock as reported in the Wall Street Journal on March 12, 1998.
The number of shares outstanding of the Company's Common Stock as of March 12,
1998 was 194,148,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1997 Annual Report to Shareholders 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,
1998 are incorporated by reference into Parts I, II and III.
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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, 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 $1.87 billion in 1997.
The Company's growth in the past three 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. During the period from 1995 to 1997, the Company acquired, or merged
with, the following significant business entities:
ACQUIRED COMPANY PRODUCT TYPE
---------------- ------------
SCIMED Life Systems, Inc. (cardiology catheters, wires and
balloons)
Cardiovascular Imaging Systems, Inc. (intraluminal ultrasound consoles and
catheters)
Vesica Medical, Inc. (incontinence devices)
Meadox Medicals, Inc. (vascular grafts)
Heart Technology, Inc. (rotational atherectomy devices)
EP Technologies, Inc. (diagnostic and therapeutic
electrophysiology devices)
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Symbiosis Corp. (formerly a (specialty urology/endoscopy forceps)
subsidiary of American Home Products
Corporation)
Endotech Ltd./MinTec Inc. (endovascular stent grafts)
Target Therapeutics, Inc. (neuro-endovascular catheters and
detachable coils)
During this same period, the Company also entered into several strategic
alliances. Principal among these are:
<TABLE>
<CAPTION>
ALLIANCE PARTNER PRODUCT TYPE NATURE OF ALLIANCE
- ---------------- ------------ ------------------
<S> <C> <C>
Medinol Ltd. coronary, vascular and nonvascular Exclusive worldwide
stents, including the NIR(TM) stent distribution rights to Medinol
(NIR is a trademark of Medinol Ltd., stent products
Israel)
Nitinol Medical Technologies, vascular and nonvascular stents Exclusive license and development
Inc. agreement
Urologix, Inc. microwave thermotherapy system Exclusive worldwide distribution rights,
to treat BPH excluding Japan and the United States
Aida Engineering, Ltd. Synergo(TM) device to treat Joint venture
bladder cancer
Angiotech Pharmaceuticals, use of paclitaxel on Co-exclusive license
Inc. intraluminal devices to inhibit
restenosis
</TABLE>
These acquisitions and alliances have helped to round-out and fill-in gaps in
the Company's product lines, allowing the Company to offer one of the broadest
product lines in the world for use in minimally invasive procedures. The Company
now maintains leading or strong market share positions in each of the principal
markets in which it competes: cardiology, electrophysiology, gastroenterology,
neuro-endovascular therapy, radiology, urology and vascular surgery. The
acquisitions have also helped the Company to reach a strategic mass which has
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.
The task of integrating these acquisitions and alliances has been significant.
The Company has substantially completed the integration of all mergers and
acquisitions consummated in 1995 and 1996. The Company expects to complete the
integration of Target by the end of 1998. 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 changes in the size of the Company and
the complexity of its organization resulting from these transactions, management
also believes that the successful
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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 applications 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.
Focused Marketing. The Company markets its products through seven principal
divisions: SCIMED (cardiology), Medi-tech (radiology), Target
(neuro-endovascular therapy) Microvasive Endoscopy (gastroenterology),
Microvasive Urology (urology), EPT (electrophysiology) and Meadox (vascular
surgery and endovascular therapy). 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 1997,
international sales accounted for approximately 43% of the Company's net sales,
up from approximately 40% in 1996 and 35% in 1995. Currently, the Company
operates two international manufacturing facilities in Ireland; direct marketing
and sales subsidiaries in more than 25 countries; and distribution arrangements
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in more than 60 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. As
the healthcare environment continues to shift towards consolidation and
managed-care, the Company expects that it will continue to make acquisitions and
enter into strategic alliances consistent with its corporate mission.
PRODUCTS
The Company's products are 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, while nonvascular products are employed in procedures
affecting other systems and organs. In 1997, approximately 79% of the Company's
net sales were derived from its vascular business and approximately 21% from its
nonvascular 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
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Company's products in this market are used in percutaneous transluminal coronary
angioplasty ("PTCA") and percutaneous transluminal coronary rotational
atherectomy ("PTCRA").
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.
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. Following the acquisitions of Meadox and
Endotech/Mintec, the Company expanded its product line to include vascular
grafts and endovascular stent grafts for the treatment of thoracic dissection,
abdominal aortic aneurysms and peripheral vascular occlusive diseases.
Stents. Through its alliance with Medinol, the Company currently markets the NIR
coronary stent internationally. A pre-market approval ("PMA") application for
this stent was filed with the FDA on January 28, 1998 and the Company hopes to
have approval to begin selling the NIR stent domestically mid-year. The Company
also hopes to introduce the Radius(TM) self-expanding nitinol coronary stent in
the U.S. later this year, pending receipt of FDA regulatory approval.
Intraluminal Ultrasound Imaging. The Company markets a family of intraluminal
catheter-directed ultrasound imaging systems for diagnostic use in blood
vessels, heart chambers, 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 (abnormal heart rhythms). The Company
markets RF generators and steerable ablation catheters, many of which
incorporate proprietary temperature monitoring and control technology, as well
as a line of diagnostic and therapeutic catheters and associated accessories.
Neuro-Endovascular Therapy. The Company markets a line of micro-guidewires and
infusion and guiding catheters to treat diseases of the neurovascular system.
Through its acquisition of Target, the Company also recently expanded its
product line in this market to include the Guglielmi Detachable Coil(TM) system
to treat and prevent the rupture of cerebral aneurysms that are otherwise either
considered to be inoperable or very high risk for surgery.
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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.
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. 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 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.
The Company also has the exclusive right to sell a microwave based thermotherapy
system to treat BPH in international markets excluding Japan.
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Urinary Incontinence and Bladder Disease. The Company markets a line of
minimally invasive devices 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. Recently,
the Company has expanded its incontinence product line to include sling
technology to treat a broader patient population. The Company has also developed
other devices to diagnose and treat bladder cancer and bladder obstruction.
INTERNATIONAL OPERATIONS
In 1997, international sales accounted for approximately 43% of the Company's
net sales, up from approximately 40% in 1996 and 35% in 1995. Net sales,
operating income and identifiable assets attributable to significant geographic
areas are presented in Note O to the Company's 1997 Consolidated Financial
Statements, included within the Company's 1997 Annual Report to Shareholders
which is filed with the Securities and Exchange Commission as an exhibit hereto.
As of December 31, 1997, the Company had direct marketing and sales operations
in more than 25 countries, including Argentina, Australia, Austria, Belgium,
Canada, Chile, Denmark, Finland, France, Germany, Hong Kong, India, Ireland,
Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, Norway, New Zealand, the
Philippines, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand
and the United Kingdom. In the future, the Company expects to further expand its
direct sales operations in Asia, Eastern Europe and Latin America, as well as
other markets where it can both generate strong net sales and capture a
significant market share. The Company will continue to use distributors in those
smaller markets where it is not economical or strategic to establish a direct
presence.
The Company has international manufacturing facilities in Galway and Cork,
Ireland. Presently, approximately 50% of the Company's products sold
internationally are manufactured at the Company's Irish manufacturing
facilities. The Company also maintains an international research and development
facility in Galway, Ireland, and is currently developing another such facility
in Miyazaki, Japan.
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. Thus, certain sales and expenses have been, and are
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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 seven principal divisions, each
focusing upon physicians who specialize in the diagnosis and treatment of
different medical conditions.
SCIMED: markets devices to cardiologists for the nonsurgical diagnosis
and treatment of coronary and peripheral vascular disease and
other cardiac disorders.
Medi-tech: markets therapeutic and diagnostic devices to physicians who
perform interventional image-guided procedures primarily in the
fields of radiology and vascular surgery.
Target: markets a line of micro-catheters and other medical devices
which aid neuroradiologists and neurosurgeons in the treatment
of neurovascular diseases.
Microvasive markets therapeutic and diagnostic devices which aid
Endoscopy: gastroenterologists and pulmonologists in performing flexible
endoscopy procedures involving the digestive tract and lungs.
Microvasive offers a line of therapeutic and diagnostic devices which aid
Urology: urologists in performing ureteroscopic and other minimally
invasive endoscopic procedures as well as devices to treat
urinary incontinence.
EPT: offers a line of electrophysiology catheters and systems for use
by interventional electrophysiologists in the diagnosis and
treatment of cardiac tachyarrhythmias.
Meadox: markets woven, knitted and collagen-sealed vascular and
endovasular 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.
A dedicated sales force of in excess of 1,600 individuals, including over 700 in
the United States, markets the Company's products worldwide. This dedicated
sales force accounted for approximately 98% of the Company's net sales during
1997. A network of over 80 dealers, sub-dealers and distributors who offer the
Company's products in more than 60 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.
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The Company's worldwide customer base includes interventional medical
specialists, including cardiologists, radiologists, neuroradiologists,
neurosurgeons, gastroenterologists, urologists, electrophysiologists,
pulmonologists, vascular surgeons and gynecologists. In 1997, 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
1997. 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 devices industry. There can be no assurance that 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 majority of the Company's customers typically place frequent, small volume
orders to replace their inventory on a regular basis as specific products are
used. Accordingly, the Company expects delivery to be made within a short period
of time, and the Company ships the vast majority of its products within 24 hours
of receiving an order. Because of this short cycle between order and shipment,
the Company does not have significant backlog. The Company's distribution
facilities in Quincy, Massachusetts; Maple Grove, Minnesota; Beek, The
Netherlands; Tokyo, Japan and Singapore currently serve substantially all of the
Company's distribution needs. By the end of 1998, the Company expects to
complete the consolidation of its domestic distribution activities into its
Quincy, Massachusetts site. See "Properties".
The Company distributes several products for third parties, including the NIR
stent and certain guidewires. None of these products represented more than 10%
of the Company's 1997 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 stent, are very important to the
Company strategically. Unforeseen delays, stoppages or interruptions in the
supply of the NIR stent or certain other distributed products could adversely
effect 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 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. In 1997, Japan experienced certain delays in approving
products and procedures for reimbursement and certain European countries
experienced erosion in reimbursement levels and selling prices. Competitive
pressures in Germany and reimbursement cuts in France forced a strong downward
movement in product pricing. The Company cannot predict what future economic,
reimbursement and pricing environments will exist in domestic and international
markets for its healthcare products. It is
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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 10
manufacturing and development facilities located in the United States and
Ireland. 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.
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), Medtronic,
Inc., Arterial Vascular Engineering, Inc. and Pfizer, Inc., as well as a wide
range of companies which sell a single or limited number of competitive
products.
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 cost. 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.
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
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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 1997, the Company expended $167 million on research and development,
representing approximately 9% of the Company's 1997 net sales. These
expenditures funded clinical research, 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's internal research and development facilities are located in Natick
and Watertown, Massachusetts; Spencer, Indiana; Maple Grove, Minnesota; Oakland,
New Jersey; Miami, Florida; Fremont and San Jose, California; Redmond,
Washington and Galway, Ireland. A new research and development facility is also
under construction in Miyazaki, Japan. In addition to internal development, the
Company works with hundreds of leading research institutions, universities and
clinicians around the world in evaluating, developing 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.
REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by numerous regulatory bodies, including the United States Food and
Drug Administration 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.
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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.
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 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 anticipation of 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. The Company's NIR stent
is among the many devices for which the Company is seeking FDA and other
regulatory approval. The Company is hopeful that approval to commercialize the
NIR in the United States and Japan will be received mid year. There can,
however, be no assurance that such approval will be obtained. Failure to obtain
such approval to market the NIR stent could adversely impact the Company's
ability to increase revenues, sell inventory on hand or committed to be
purchased and maintain or improve its market share of the interventional
cardiology business.
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
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<PAGE> 15
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.
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 2,000
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 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, or 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
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<PAGE> 16
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 and there can be no assurance that
product liability claims will not be asserted against the Company. Although the
Company maintains product liability insurance, 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. The Company is involved in various suits arising in the normal course
of business from product liability claims. The Company believes the outcome of
product liability suits and other non-patent litigation, individually and in the
aggregate, will not have a material adverse effect on the financial condition,
operations or cash flows of the Company.
EMPLOYEES
As of December 31, 1997, the Company had over 11,000 employees, including
approximately 7,000 in operations, 600 in administration, 1,100 in research and
development and 2,400 in selling, marketing, distribution and related
administrative support. Of these employees, approximately 3,100 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.
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
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: (a) the potential
impacts, both in the U.S. and abroad, of continued consolidation among
healthcare providers, trends towards managed care, healthcare cost containment,
increased competition and more stringent regulatory requirements; (b) the
Company's belief that it is well positioned to take advantage of opportunities
for growth that exist in the markets it serves; (c) 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; (d) risks associated with maintaining and
expanding international operations; (e) the process and plan for
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<PAGE> 17
the integration of businesses acquired by the Company and the successful
implementation of the plan; (f) 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; (g) the
Company's plans and ability to launch the NIR stent in the U.S. and Japan; (h)
the Company's plans and ability to enter into strategic acquisitions and
alliances; (i) the Company's plans to expand its international presence in Asia,
Eastern Europe and Latin America; (j) the Company's ability to create or acquire
scientifically advanced technology, apply technology cost-effectively across
product lines and markets, develop or acquire proprietary products, attract and
retain skilled development personnel and obtain patent protection for its
products; and (k) the Company's ability to obtain competitive advantage from its
intellectual property and to defend itself against claims alleging infringement
of other parties' intellectual property. 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, 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.
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. The Company's principal research facilities are located in
Natick and Watertown, Massachusetts; Spencer, Indiana; Maple Grove, Minnesota;
Oakland, New Jersey; Miami, Florida; Fremont and San Jose, California; Redmond,
Washington and Galway, Ireland, and its major distribution centers are located
in Quincy, Massachusetts; Beek, The Netherlands; Tokyo, Japan and Singapore. The
Company maintains ten major manufacturing facilities, eight in the United
States, and two in Ireland. Many of these manufacturing facilities produce and
manufacture products for more than one of the Company's divisions.
The Company owns or has long-term leases on all of its major facilities. The
facilities leased from third parties are subject to leases whose terms expire,
subject to renewal options, between 1998 and 2018 and whose current monthly base
rental payments range from approximately $1,000 to approximately $225,000. One
property in Mansfield, Massachusetts is leased from a realty trust for the
benefit of the Company's Chief Executive Officer and his wife pursuant to a
lease whose term expires, subject to renewal options, in 2001 and whose monthly
base rental payment is approximately $39,000. The mortgage debt on this
property, in the principal amount of approximately $240,000 as of December 31,
1997, is guaranteed by the Company. Some of these leases contain escalation
provisions and require that the Company pay for utilities, taxes,
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<PAGE> 18
insurance and maintenance expenses. In addition, some of these leases contain
provisions which give the Company an option to purchase the property under
certain conditions.
Although the Company's facilities are adequate to meet its current needs, the
Company is currently engaged in several facilities expansion and centralization
efforts to accommodate its recent growth. Internationally, the Company
completed in 1997 construction of 143,000 square feet of additional workspace
at its Galway, Ireland facility, and acquired a 20,000 square foot new
manufacturing facility in Cork, Ireland. In addition, the Company commenced
construction of an additional 150,000 square feet of workspace at its Cork
facility. The Company also commenced construction of an approximately 70,000
square foot new research and development facility in Miyazaki, Japan.
Domestically, the Company continued construction of a 248,000 square foot
multi-purpose building in Maple Grove, Minnesota to help consolidate and
centralize many of the Company's Minnesota operations. The Company is in the
process of consolidating some of its Oakland, New Jersey operations into a new
280,000 square foot site recently purchased by the Company. The Company also
expanded its Miami, Florida operations by leasing an additional 140,000 square
feet of workspace adjacent to its exiting facilities. Most recently, the
Company indicated its intent to exercise its option to purchase its 1.3 million
square foot centralized distribution facility in Quincy, Massachusetts.
ITEM 3. LEGAL PROCEEDINGS
Note L to the Company's 1997 Consolidated Financial Statements, appearing on
pages F-21 and F-24 thereto (contained in the Company's 1997 Annual Report to
Shareholders and included in Exhibit 13.1 hereto), is incorporated herein by
reference.
RECENT PATENT PROCEEDINGS
On March 6, 1998, the Company filed suit in the U.S. District Court for the
District of Massachusetts alleging that Circon Corporation's ("Circon") Spiked
and Fluted VaporTrode(TM) electrodes and Grooved VaporTome(TM) resection
electrode infringe two patents owned by the Company, and requesting a
declaratory judgement for invalidity and noninfringement of three Circon
patents. On March 19, 1998 the Company was served by Circon with a suit alleging
that the Company's PERCUFLEX(R), CONTOUR(R) and BEAMER(TM) ureteral stents
infringe two patents owned by Circon, including two patents that are the subject
of the Company's declaratory judgement action against Circon. The suit was filed
in the U.S. District Court for the Eastern District of Wisconsin seeking a
declaration of infringement and monetary damages. The Company is currently
evaluating Circon's complaint and is preparing an answer.
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 L to the Company's 1997
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.
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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 case in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors and executive officers of the Company as of December 31, 1997 are
as follows:
NAME AGE POSITION
- ---- --- --------
John E. Abele 61 Director, Founder Chairman
Charles J. Aschauer, Jr. 69 Director, Retired Executive Vice President
and Director of Abbott Laboratories
Randall F. Bellows 69 Director, Retired Executive Vice President
of Cobe Laboratories, Inc.
Michael Berman 40 Senior Vice President and Group
President--Cardiology Businesses, and
President--SCIMED Life Systems, Inc.
Lawrence C. Best 47 Senior Vice President--Finance &
Administration and Chief Financial Officer
Joseph A. Ciffolillo 59 Director, Retired Executive Vice President
and Chief Operating Officer of Boston
Scientific Corporation
James M. Corbett 39 Senior Vice President--International and
President--Boston Scientific International
Joel L. Fleishman 63 Director, President of The Atlantic
Philanthropic Service Company, Inc. and
Professor of Law and Public Policy,
Duke University
Lawrence L. Horsch 63 Director, Chairman of Eagle Management &
Financial Corp.
Paul A. LaViolette 40 Senior Vice President and Group
President--Nonvascular Businesses
Philip P. LeGoff 47 Senior Vice President and Group
President--Vascular Businesses
C. Michael Mabrey 56 Senior Vice President--Operations
Robert G. MacLean 54 Senior Vice President--Human Resources
N.J. Nicholas, Jr. 58 Director, Private Investor
Pete M. Nicholas 56 Director, Founder, Chief Executive Officer
and Chairman of the Board
Arthur L. Rosenthal 51 Senior Vice President and Chief
Development Officer
Paul W. Sandman 50 Senior Vice President, Secretary and
General Counsel
Dale A. Spencer 52 Director, Former Executive Vice President
of Boston Scientific Corporation
Mr. Aschauer, Mr. Fleishman, Mr. Horsch and Mr. N.J. Nicholas, Jr. serve on
the Audit Committee of the Company. Mr. Aschauer, Mr. Bellows and Mr.
Fleishman serve on the Compensation Committee of the Company.
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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. and Trustmark
Insurance Company. 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.
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.
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<PAGE> 22
Joseph A. Ciffolillo joined the Company in 1983 as President of Medi-tech. In
1988, he was also named President of Microvasive, 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.
James M. Corbett joined the Company as Vice President--International, President
of Boston Scientific International in February 1995, and in May 1997 became
Senior Vice President - International. Previously, he was the Vice President and
Business Manager of SCIMED International for SCIMED Life Systems, Inc. from
October 1992 to February 1995. Prior to joining SCIMED, Mr. Corbett served as
General Manager for Baxter Japan, based in Tokyo, responsible for Baxter's
Cardiovascular Business from December 1989 to October 1992, and held a series of
sales and marketing positions with the Baxter/American Hospital Supply
Organization since 1982. Mr. Corbett received his B.S. degree in Business from
the University of Kansas.
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 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., a
management consulting firm. 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.
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<PAGE> 23
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. 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.
Philip P. LeGoff joined the Company in November 1997 as Senior Vice President
and Group President -- Vascular 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.
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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 New York 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 Chief Executive
Officer and a Director of the Company since 1979 and was Co-Chairman of the
Board from 1979 to 1995. In February 1995, Mr. Nicholas was elected to the
position of Chairman of the Board. 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. 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. Prior to joining the Company, he was Senior
Vice President, General Counsel and Secretary of Wang Laboratories, Inc. (a
computer company that filed a petition for reorganization under Chapter 11 of
the Federal Bankruptcy Code in August 1992 and emerged from bankruptcy in
December 1993), from March 1992 through April 1993, 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.
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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 1997 Annual Report to
Shareholders (Exhibit 13.1 filed herewith) is incorporated herein by reference.
The closing price of the Company's Common Stock as reported by The Wall Street
Journal on March 12, 1998 was $65.375.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Five-Year Selected Financial Data"
included in the Company's 1997 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 1997 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 1997 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 1997 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 1997 Annual Report to Shareholders
(Exhibit 13.1 filed herewith) are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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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, 1998 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, 1998 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, 1998 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, 1998 are incorporated herein by
reference.
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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 -- 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
and 3.3.
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).
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).
27
<PAGE> 28
EXHIBIT
NO. TITLE
------- -----
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).
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).
28
<PAGE> 29
EXHIBIT
NO. TITLE
------- -----
*10.17 -- Boston Scientific Corporation 401(k) Savings Plan, Amended
and Restated, Effective January 1, 1997.
*10.18 -- Boston Scientific Corporation Global Employee Stock Ownership
Plan, as Amended and Restated.
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 Amended and Restated Credit Agreement, dated as of
June 10, 1997, among the Company, The Several Lenders and
certain other parties (Exhibit 10.1, Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, File No.
1-11083).
10.21 -- Form of Indemnification Agreement between the Company and
certain Directors and Officers (Exhibit 10.16, Registration
No. 33-46980).
10.22 -- 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).
10.23 -- 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).
*10.24 -- 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.
10.25 -- 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).
10.26 -- 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).
10.27 -- 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 K to the Company's Annual
Report to Shareholders for the year ended December 31, 1997).
*12.1 -- Statement regarding computation of ratios of earnings to fixed
charges.
*13.1 -- The Company's 1997 Annual Report to Shareholders for the
year ended December 31, 1997.
13.2 -- Report of Independent Auditors, Ernst & Young LLP (included in
the Company's Annual Report to Shareholders for the year ended
December 31, 1997, filed as Exhibit 13.1 hereto).
29
<PAGE> 30
EXHIBIT
NO. TITLE
------- -----
*21 -- List of the Company's subsidiaries as of March 12, 1998.
Each subsidiary does business under the corporate name
indicated.
*23.1 -- Consent of Independent Auditors, Ernst & Young LLP.
*27.1 -- Restated Financial Data Schedule, three months ended
March 31, 1996.
*27.2 -- Restated Financial Data Schedule, six months ended
June 30, 1996.
*27.3 -- Restated Financial Data Schedule, nine months ended
September 30, 1996.
*27.4 -- Restated Financial Data Schedule, fiscal year ended
December 31, 1996.
*27.5 -- Restated Financial Data Schedule, three months ended
March 31, 1997.
*27.6 -- Restated Financial Data Schedule, six months ended
June 30, 1997.
*27.7 -- Restated Financial Data Schedule, nine months ended
September 30, 1997.
*27.8 -- Financial Data Schedule, fiscal year ended
December 31, 1997.
(b) Reports on Form 8-K.
The following Report on Form 8-K was filed during the quarter ended December
31, 1997 and the quarter ended March 31, 1998:
Item Description Event Date
---- ----------- ----------
Item 5 Other Events $500 million March 10, 1998
Public Debt
Offering
30
<PAGE> 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, 1998
BOSTON SCIENTIFIC CORPORATION
By: 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, 1998 /s/ JOHN E. ABELE
---------------------------------
John E. Abele
Director, Founder
Dated: March 30, 1998 /s/ CHARLES J. ASCHAUER, JR.
---------------------------------
Charles J. Aschauer, Jr.
Director
Dated: March 30, 1998 /s/ RANDALL F. BELLOWS
---------------------------------
Randall F. Bellows
Director
Dated: March 30, 1998 /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, 1998 /s/ JOSEPH A. CIFFOLILLO
---------------------------------
Joseph A. Ciffolillo
Director
Dated: March 30, 1998 /s/ JOEL L. FLEISHMAN
---------------------------------
Joel L. Fleishman
Director
31
<PAGE> 32
Dated: March 30, 1998 /s/ LAWRENCE L. HORSCH
---------------------------------
Lawrence L. Horsch
Director
Dated: March 30, 1998 /s/ N.J. NICHOLAS, JR.
---------------------------------
N.J. Nicholas, Jr.
Director
Dated: March 30, 1998 /s/ PETER M. NICHOLAS
---------------------------------
Peter M. Nicholas
Director, Founder, Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Dated: March 30, 1998 /s/ DALE A. SPENCER
---------------------------------
Dale A. Spencer
Director
32
<PAGE> 33
FINANCIAL STATEMENT SCHEDULE
The following additional consolidated financial statement schedule should be
considered in conjunction with the Company's 1997 Consolidated Financial
Statements (contained in the Company's 1997 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
<PAGE> 34
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
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
YEAR ENDED DECEMBER 31, 1995
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible
amounts and sales returns.............. $ 4,425 2,849 957 (1) 361 (2) $7,870
</TABLE>
(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.
<PAGE> 1
Exhibit 10.17
BOSTON SCIENTIFIC CORPORATION
401(k) SAVINGS PLAN
(Amended and Restated, Effective January 1, 1997)
<PAGE> 2
TABLE OF CONTENTS
ARTICLE 1. INTRODUCTION ................................................... 1
1.1. Qualification and Purpose ...................................... 1
1.2. Rights under Plans ............................................. 1
1.3. Defined Terms .................................................. 1
ARTICLE 2. PARTICIPATION .................................................. 2
2.1. Date of Participation .......................................... 2
2.2. Duration of Participation ...................................... 3
ARTICLE 3. CONTRIBUTIONS .................................................. 4
3.1. Elective Contributions ......................................... 4
3.2. Form and Manner of Elections ................................... 4
3.3. Matching Contributions ......................................... 4
3.4. Discretionary Contributions .................................... 5
3.5. Qualified Nonelective Contributions ............................ 5
3.6. Rollover Contributions ......................................... 5
3.7. Employee Contributions ......................................... 5
3.8. Crediting of Contributions ..................................... 6
3.9. Time for Making Contributions .................................. 6
3.10. Certain Limits Apply ........................................... 6
3.11. Return of Contributions ........................................ 6
3.12. Establishment of Trust ......................................... 6
ARTICLE 4. PARTICIPANT ACCOUNTS ........................................... 7
4.1. Accounts ....................................................... 7
4.2. Adjustment of Accounts ......................................... 7
4.3. Investment of Accounts ......................................... 7
4.4. Appointment of Investment Manager or Named Fiduciary ........... 8
4.5. Section 404(c) Compliance ...................................... 8
4.6. Transfers From Other Plans ..................................... 8
ARTICLE 5. VESTING OF ACCOUNTS ............................................ 10
5.1. Immediate Vesting of Certain Accounts .......................... 10
5.2. Deferred Vesting of Discretionary Contribution Accounts ........ 10
5.3. Special Vesting Rules .......................................... 10
5.4. Changes in Vesting Schedule .................................... 10
5.5. Forfeitures .................................................... 11
5.6. Vesting of Accounts Transferred From Other Plans ............... 12
ARTICLE 6. WITHDRAWALS PRIOR TO SEPARATION FROM SERVICE ................... 13
6.1. Hardship Withdrawals ........................................... 13
- i -
<PAGE> 3
6.2. Withdrawals After Age 59 1/2 .................................. 14
6.3. Restrictions on Certain Distributions ......................... 14
6.4. Limitation of Withdrawable Amount ............................. 15
6.5. Required Distributions After Required Beginning Date .......... 15
6.6. Distributions Required by a Qualified Domestic Relations Order. 15
6.7. Certain Dispositions .......................................... 15
6.8. Withdrawals by Certain Former Participants in Other Plans ..... 15
ARTICLE 7 LOANS TO PARTICIPANTS ......................................... 17
7.1. In General .................................................... 17
7.2. Rules and Procedures .......................................... 17
7.3. Maximum Amount of Loan ........................................ 17
7.4. Minimum Amount of Loans; Limit on Number of Loans ............. 18
7.5. Note; Security; Interest ...................................... 18
7.6. Repayment ..................................................... 18
7.7. Repayment Upon Distribution ................................... 18
7.8. Default ....................................................... 18
7.9. Note as Trust Asset ........................................... 19
7.10. Nondiscrimination ............................................. 19
7.11. Designation of Accounts ....................................... 19
7.12. Spousal Consent to Loans to Certain Former Participants in
Other Plans ................................................... 19
ARTICLE 8. BENEFITS UPON DEATH OR SEPARATION FROM SERVICE ................ 20
8.1. Separation from Service for Reasons Other Than Death .......... 20
8.2. Time of Distributions ......................................... 20
8.3. Amount of Distribution ........................................ 21
8.4. Distributions After a Participant's Death ..................... 21
8.5. Designation of Beneficiary .................................... 22
8.6. Direct Rollovers of Eligible Distributions .................... 23
8.7. Special Rules for Former Participants in Merged Plans ......... 24
ARTICLE 9. ADMINISTRATION ................................................ 26
9.1. Committee ..................................................... 26
9.2. Powers of Committee ........................................... 26
9.3. Effect of Interpretation or Determination ..................... 26
9.4. Reliance on Tables, etc. ...................................... 27
9.5. Claims and Review Procedures .................................. 27
9.6. Indemnification of Committee and Assistants ................... 27
9.7. Annual Report ................................................. 27
ARTICLE 10. AMENDMENT AND TERMINATION ..................................... 28
10.1. Amendment ..................................................... 28
10.2. Termination ................................................... 28
10.3. Distributions upon Termination of the Plan .................... 28
- ii -
<PAGE> 4
10.4. Merger or Consolidation of Plan; Transfer of Plan Assets ...... 29
ARTICLE 11. LIMITS ON CONTRIBUTIONS ....................................... 30
11.1. Code Section 404 Limits ....................................... 30
11.2. Code Section 415 Limits ....................................... 30
11.3. Code Section 402(g) Limits .................................... 32
11.4. Code Section 401(k)(3) Limits ................................. 33
11.5. Code Section 401(m) Limits .................................... 37
ARTICLE 12. SPECIAL TOP-HEAVY PROVISIONS .................................. 42
12.1. Provisions to Apply ........................................... 42
12.2. Minimum Contribution .......................................... 42
12.3. Adjustment to Limitation on Benefits .......................... 43
12.4. Definitions ................................................... 43
ARTICLE 13. MISCELLANEOUS ................................................. 46
13.1. Exclusive Benefit Rule ........................................ 46
13.2. Limitation of Rights .......................................... 46
13.3. Nonalienability of Benefits ................................... 46
13.4. Adequacy of Delivery .......................................... 46
13.5. Reclassification of Employment Status ......................... 46
13.6. Veterans' Reemployment and Benefits Rights .................... 47
13.7. Governing Law ................................................. 47
ARTICLE 14. DEFINITIONS ................................................... 48
14.1. "Accounts" ................................................... 48
14.2. "Affiliated Employer" ......................................... 48
14.3. "Beneficiary" ................................................. 48
14.4. "Board of Directors" .......................................... 48
14.5. "Code" ........................................................ 48
14.6. "Committee" ................................................... 48
14.7. "Company Stock" ............................................... 48
14.8. "Compensation" ................................................ 49
14.9. "Disability" .................................................. 49
14.10. "Discretionary Contribution" .................................. 50
14.11. "Discretionary Contribution Account" .......................... 50
14.12. "Elective Contribution" ....................................... 50
14.13. "Elective Contribution Account" ............................... 50
14.14. "Eligible Employee" ........................................... 50
14.15. "Employee" .................................................... 50
14.16. "Employee Contribution" ....................................... 50
14.17. "Entry Date" .................................................. 51
14.18. "ERISA" ....................................................... 51
14.19. "Highly Compensated Employee" ................................. 51
- iii -
<PAGE> 5
14.20. "Hour of Service" .................................. 51
14.21. "Matching Contribution Account" .................... 53
14.22. "Normal Retirement Age" ............................ 53
14.23. "Participant" ...................................... 53
14.24. "Participating Employer" ........................... 53
14.25. "Plan" ............................................. 53
14.26. "Plan Sponsor" ..................................... 53
14.27. "Plan Year" ........................................ 53
14.28. "Predecessor Employer" ............................. 53
14.29. "Qualified Domestic Relations Order" ............... 53
14.30. "Qualified Nonelective Contribution" ............... 53
14.31. "QNEC Account" ..................................... 54
14.32. "Regulation" ....................................... 54
14.33. "Required Beginning Date" .......................... 54
14.34. "Rollover Contribution" ............................ 54
14.35. "Section" ......................................... 54
14.36. "Trust" ............................................ 54
14.37. "Trustee" .......................................... 54
14.38. "Valuation Date" ................................... 54
14.39. "Year of Service for Vesting" ...................... 54
- iv -
<PAGE> 6
ARTICLE 1. INTRODUCTION.
1.1. QUALIFICATION AND PURPOSE. This document amends and restates the
provisions of the Boston Scientific Corporation Long-Term Savings and Security
Plan, effective as of January 1, 1997 unless otherwise stated herein. Mergers of
certain other plans into the Plan shall have such effective dates as are
provided in Schedule B. The original effective date of the Plan was January 1,
1987. The Plan and its related Trust are intended to qualify as a profit-sharing
plan and trust under Code sections 401(a) and section 501(a), the cash or
deferred arrangement forming part of the Plan is intended to qualify under Code
section 401(k). The Plan is intended to constitute a plan described in section
404(c) of ERISA. The provisions of the Plan and Trust shall be construed and
applied accordingly. The purpose of the Plan is to provide benefits to
Participants in a manner consistent and in compliance with such Code sections
and Title I of ERISA.
1.2. RIGHTS UNDER PLANS. The rights of Participants in this Plan or any
other plan which has been merged into this Plan, who ceased to be employed by
the applicable employer prior to January 1, 1997 or, if later, the applicable
merger date provided in Schedule B and have not thereafter been reemployed by
the Plan Sponsor or an Affiliated Employer, and the rights of their
beneficiaries, shall be determined in accordance with the terms of the
applicable plan at the time they ceased to be employed.
1.3. DEFINED TERMS. All capitalized terms used in the following
provisions of the Plan have the meanings given them under Article 14.
<PAGE> 7
ARTICLE 2. PARTICIPATION.
2.1. DATE OF PARTICIPATION.
(a) Any individual who was a Participant on December 31, 1996
and is an Eligible Employee on January 1, 1997 will, subject to Section
2.2, continue to be a Participant.
(b) Any other individual will become a Participant on the
Entry Date coinciding with or next following the latest of
(1) January 1, 1997;
(2) the date on which he or she becomes an Eligible
Employee;
(3) the date on which he or she attains age 21; and
(4) the 30th day after the date he or she completes
an Hour of Service;
provided that (i) he or she is an Eligible Employee on such Entry Date
and (ii) he or she has in effect on such Entry Date a compensation
reduction authorization described in Section 3.2 which was submitted in
the manner prescribed by the Committee. Unless otherwise provided by
the Committee, an Employee who has satisfied the requirements of (1),
(2), (3) and (4) above, but who has failed to satisfy the requirements
of (i) or (ii) above, will become a Participant on the first Entry Date
coinciding with or next following the date on which the requirements of
both (i) and (ii) are satisfied.
(c) Unless otherwise provided in Schedule B, in the event the
Plan Sponsor acquires a business of another employer, through an
acquisition of either assets or stock, an Employee who was employed by
such other employer immediately prior to such acquisition shall have
his or her prior service with such other employer taken into account,
as if it were service with an Affiliated Employer, for purposes of
(b)(4) above and Section 14.14(b).
(d) An Employee who, immediately before becoming an Eligible
Employee, has a contribution agreement in effect with an Affiliated
Employer under a separate plan described in section 401(k) of the Code
shall become a Participant on the payroll date coinciding with or next
following the date he or she becomes an Eligible Employee, provided
that he or she has a compensation reduction authorization in effect on
such payroll date.
- 2 -
<PAGE> 8
2.2. DURATION OF PARTICIPATION. An individual who has become a
Participant under the Plan will remain a Participant for as long as an Account
is maintained under the Plan for his or her benefit, or until his or her death,
if earlier. Notwithstanding the preceding sentence and unless otherwise
expressly provided for under the Plan, no contributions shall be made with
respect to a Participant who is not an Eligible Employee. In the event a
Participant remains an Employee but ceases to be an Eligible Employee and
becomes ineligible for contributions, such Employee will again become eligible
for contributions immediately upon returning to the class of Eligible Employees.
In the event an Employee who is not an Eligible Employee becomes an Eligible
Employee, such Employee will become a Participant on the first Entry Date on or
after becoming an Eligible Employee, if he or she has satisfied the requirements
of Section 2.1. A Participant or former Participant who is reemployed as an
Eligible Employee shall again become eligible for contributions on the first
Entry Date on or after reemployment.
- 3 -
<PAGE> 9
ARTICLE 3. CONTRIBUTIONS.
3.1. ELECTIVE CONTRIBUTIONS. On behalf of each Participant for whom
there is in effect, for any pay period, a compensation reduction authorization
described in Section 3.2 and who is receiving Compensation from a Participating
Employer during such pay period, such Participating Employer will contribute to
the Trust, as an Elective Contribution, an amount equal to the amount by which
such Compensation was reduced pursuant to the compensation reduction
authorization. Elective Contributions for any pay period in a Plan Year may not
be less than 1 percent nor exceed 15 percent of the Participant's Compensation
for such pay period.
3.2. FORM AND MANNER OF ELECTIONS. A "compensation reduction
authorization" is an authorization from an Eligible Employee to a Participating
Employer which satisfies the requirements of this Section 3.2. Each compensation
reduction authorization shall be in a form prescribed or approved by the
Committee, and may be entered into as of any Entry Date upon such prior notice
as the Committee may prescribe. A compensation reduction authorization may be
changed by the Participant, with such prior notice as the Committee may
prescribe, as of the first day of any payroll period. A compensation reduction
authorization shall be effective with respect to Compensation payable on and
after the applicable Entry Date. A compensation reduction authorization may be
revoked by the Participant at any time, upon such prior notice as the Committee
may prescribe. A Participant who revokes a compensation reduction authorization
may enter into a new authorization only as of a subsequent Entry Date.
3.3. MATCHING CONTRIBUTIONS.
(a) On a bi-weekly basis, each Participating Employer will
make a Matching Contribution to the Trust for the benefit of each
Participant on whose behalf it made Elective Contributions for the
period. The amount of Matching Contributions made by a Participating
Employer for the period shall be equal to 50% of the Elective
Contributions made on behalf of the Participant for the period which do
not exceed 4% of the Participant's Compensation for such period.
(b) If (i) a Participant is an Eligible Employee on the last
day of the Plan Year, and (ii) the aggregate Matching Contributions
made by his or her Participating Employer under paragraph (a) above to
the Trust for the benefit of such Participant with respect to such Plan
Year are less than the lesser of (1) 50% of the Participant's Elective
Contributions for such Plan Year or (2) 2% of such Participant's
Compensation in such Plan Year, then the Participating Employer shall
make a further contribution to the Trust, for the benefit of such
Participant, to be credited to his or her Matching Contribution
Account, such that the aggregate Matching Contributions made by the
Participating Employer for the benefit of such Participant for the Plan
Year under this Section shall equal the
- 4 -
<PAGE> 10
lesser of the amounts set forth in clauses (1) and (2) above.
3.4. DISCRETIONARY CONTRIBUTIONS. For each Plan Year, the Participating
Employers shall contribute to the Plan such other amounts, if any, as the Board
of Directors, in its sole discretion, may determine. Any such Discretionary
Contribution for a Plan Year shall be made in cash or, if the Board of Directors
so directs, in Company Stock, and shall be allocated among and credited to the
Accounts of each Participant who:
(a) is an Eligible Employee on the last day of the Plan Year;
or
(b) has ceased to be an Eligible Employee during the Plan Year
by reason of death or separation from service after attaining age 62 or
on account of Disability,
in proportion to their relative amounts of Compensation for such Plan Year.
3.5. QUALIFIED NONELECTIVE CONTRIBUTIONS. To the extent necessary to
satisfy the Code Section 401(k)(3) limits with respect to Elective Contributions
or the Code Section 401(m) limits with respect to Matching Contributions, the
Plan Sponsor, in its discretion, may determine whether a Qualified Nonelective
Contribution shall be made to the Trust for a Plan Year and, if so, the amount
to be contributed by such Participating Employer. If the Plan Sponsor determines
that a Qualified Nonelective Contribution shall be made, each Participating
Employer shall contribute its designated portion. A Qualified Nonelective
Contribution for a Plan Year shall be allocated among and credited to the QNEC
Accounts of all Participants who are eligible to receive Elective Contributions
for the Plan Year, in proportion to their relative amounts of Compensation for
the Plan Year. Qualified Nonelective Contributions shall be fully vested and
subject to the same distribution rules as Elective Contributions as of the time
such Qualified Nonelective Contributions are made to the Plan.
3.6. ROLLOVER CONTRIBUTIONS. An Eligible Employee (whether or not a
Participant) may make a Rollover Contribution to the Plan upon demonstration to
the Committee that the contribution is eligible for transfer to the Plan
pursuant to the rollover provisions of the Code.
3.7. EMPLOYEE CONTRIBUTIONS.
(a) FOR PERIODS PRIOR TO JULY 1, 1997. Prior to July 1, 1997,
Employee Contributions are neither required nor permitted under the
Plan. However, if a Participant who was a participant in a plan that is
merged into this Plan, or from which accounts have been transferred to
this Plan, made after-tax contributions under such plan, such
contributions shall be maintained under the Plan in an after-tax
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contribution account for such Participant.
(b) FOR PERIODS ON OR AFTER JULY 1, 1997. Effective July 1,
1997, a Participant may elect to make Employee Contributions under the
Plan in the form and manner prescribed or approved by the Committee.
Employee Contributions for any pay period in a Plan Year may not be
less than 1 percent nor exceed 10 percent of the Participant's
Compensation for such pay period.
3.8. CREDITING OF CONTRIBUTIONS. Each type of contribution for a Plan
Year shall be allocated among and credited to the respective Accounts of
Participants eligible to share in the contributions as of the Valuation Date
next following the date the contributions are received by the Trustee.
3.9. TIME FOR MAKING CONTRIBUTIONS. Elective Contributions will be paid
in cash to the Trust as soon as such contributions can reasonably be segregated
from the general assets of the Participating Employer, but in any event no later
than the time set forth in Department of Labor Regulations section 2510.3-102.
3.10. CERTAIN LIMITS APPLY. All contributions to the Plan are subject
to the applicable limits set forth under Code sections 401(k), 402(g), 401(m),
404, and 415, as further described elsewhere in the Plan. In addition, certain
minimum allocations may be required under Code section 416, as also further
described elsewhere in the Plan.
3.11. RETURN OF CONTRIBUTIONS. If any contribution by a Participating
Employer to the Trust is (a) made by reason of a mistake of fact, or (b)
believed by the Participating Employer in good faith to be deductible under Code
section 404, but the deduction is disallowed, the Trustee shall, upon request by
the Participating Employer, return to the Participating Employer the excess of
the amount contributed over the amount, if any, that would have been contributed
had there not occurred a mistake of fact or a mistake in determining the
deduction. Such excess shall be reduced by the losses of the Trust attributable
thereto, if and to the extent such losses exceed the gains and income
attributable thereto. In no event shall the return of a contribution hereunder
cause any Participant's Accounts to be reduced to less than they would have been
had the mistaken or nondeductible amount not been contributed. No return of a
contribution hereunder shall be made more than one year after the mistaken
payment of the contribution, or disallowance of the deduction, as the case may
be.
3.12. ESTABLISHMENT OF TRUST. The Plan Sponsor will establish a Trust
to accept and hold contributions made under the Plan. The Trust shall be
governed by an agreement between the Plan Sponsor and the Trustee the terms of
which shall be consistent with the Plan provisions and intended qualification
under Code sections 401(a) and 501(a).
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ARTICLE 4. PARTICIPANT ACCOUNTS.
4.1. ACCOUNTS. The Committee will establish and maintain (or cause the
Trustee to establish and maintain) for each Participant, such Accounts as are
necessary to carry out the purposes of this Plan.
4.2. ADJUSTMENT OF ACCOUNTS. As of each Valuation Date, each Account
will be adjusted to reflect the fair market value of the assets allocated to the
Account. In so doing,
(a) each Account balance will be increased by the amount of
contributions, income and gain allocable to such Account since the
prior Valuation Date; and
(b) each Account balance will be decreased by the amount of
distributions from the Account and expenses and losses allocable to the
Account since the prior Valuation Date.
Income, expense, gain or loss which is generated by a particular investment
within the Trust shall be allocated among the Accounts invested in that
investment in proportion to the balances of such Accounts as of the immediately
preceding Valuation Date. Any expenses relating to a specific Account or
Accounts, including without limitation commissions or sales charges with respect
to an investment in which the Account participates, may be charged solely to the
particular Account or Accounts.
4.3. INVESTMENT OF ACCOUNTS.
(a) A Participant's Accounts shall be invested by the Trustee
as the Participant directs from among such investment options as the
Plan Sponsor may make available from time to time. The Committee shall
prescribe the manner in which such directions may be made or changed,
the dates as of which they shall be effective, and the allocation of
Accounts with respect to which no directions are submitted. Any other
assets of the Trust not specified above in this Section shall be
invested by the Trustee in the sole discretion of the Trustee and in
accordance with its fiduciary duties under ERISA; provided, that if an
investment manager or other named fiduciary has been appointed with
respect to all or a portion of such assets, the Trustee shall invest
such portion as the investment manager or other named fiduciary
directs.
(b) The Committee is specifically authorized to establish a
Company Stock investment option. To the extent such Company Stock has
voting rights, or in the event of any tender or exchange offer by any
person for such Company Stock, Participants invested in such Company
Stock fund may direct the Trustee
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as to the voting and tender of such Company Stock in accordance with
procedures established by the Committee. The Committee may also provide
for the temporary suspension of the right of Participants subject to
Section 16 of the Securities Exchange Act of 1934 to invest further
amounts in the Company Stock fund following any withdrawal from the
portion of such Participants' Accounts theretofore invested in such
Company Stock fund. The Committee may also establish from time to time
a maximum percentage of any Participant's Accounts which may be
invested in the Company Stock fund.
4.4. APPOINTMENT OF INVESTMENT MANAGER OR NAMED FIDUCIARY. The Plan
Sponsor may appoint in writing one or more investment managers or other "named
fiduciaries" (within the meaning of ERISA section 402(a)(2)) to manage the
investment of all or designated portions of the assets held in the Trust. The
appointment shall be effective upon acknowledgment in writing by the investment
manager or other named fiduciary that it is a fiduciary with respect to the
Plan. An investment manager must be (a) registered as an investment adviser
under the Investment Advisers Act of 1940, (b) a bank as defined in that Act, or
(c) an insurance company qualified under the laws of more than one state to
manage, acquire or dispose of any assets of the Plan.
4.5. SECTION 494(c) COMPLIANCE. The Plan is intended to be an "ERISA
section 404(c) plan" as described in section 404(c) of ERISA and title 29 of the
Code of Federal Regulations section 2550.404c-1, and shall be administered and
interpreted in a manner consistent with that intent. The investment direction
requirements of Department of Labor regulation section
2550.404c-1(b)(2)(i)(B)(1)(iv) and (b)(2)(i)(A) and the requirements relating to
the investment alternatives under the Plan are intended to be satisfied by
Section 4.3 above, in each case taking into account related communications to
Participants and beneficiaries under the summary plan description for the Plan
and other communications. For purposes of ERISA section 404(c), the "identified
plan fiduciary" obligated to comply with Participant and Beneficiary investment
instructions (except as provided in such section and regulations thereunder),
the identified plan fiduciary obligated to provide Participants and
Beneficiaries with the materials set forth in Department of Labor regulations
section 2550.404c-1(b)(2)(i)(B) and the identified plan fiduciary obligated to
comply with the confidentiality requirements and procedures under Department of
Labor regulations section 2550.404c-1(d)(2)(ii)(E)(4)(viii) relating to employer
securities shall be the Committee. The Committee may decline to implement
Participant and Beneficiary investment instructions which would result in a
prohibited transaction described in ERISA section 406 or section 4975 of the
Code or which would generate income that would be taxable to the Plan.
4.6. TRANSFERS FROM OTHER PLANS.
(a) Unless otherwise provided herein, in the event that
another plan is merged into the Plan, or accounts are otherwise
transferred to the Plan from
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<PAGE> 14
another plan, the assets transferred to the Plan shall be allocated as
follows:
(1) Assets attributable to an individual's elective
contributions and qualified nonelective contributions (if any)
shall be allocated to an Elective Contribution Account for his
or her benefit under the Plan;
(2) Assets attributable to matching employer
contributions (if any), shall be allocated to a Matching
Contribution Account for his or her benefit under the Plan;
(3) Assets attributable to other employer
contributions (if any), shall be allocated to a Discretionary
Contribution Account for his or her benefit under the Plan;
and
(4) Assets attributable to an individual's after-tax
contributions (if any) shall be allocated to an after-tax
contribution account for his or her benefit under the Plan.
The assets transferred may be separately accounted for in
sub-accounts under the Plan as determined to be necessary by the
Committee in order to administer the provisions of Articles 5, 6, 7 and
8. Unless otherwise provided in Schedule B or in an acquisition
agreement between a Participating Employer and the employer maintaining
such transferor plan, all assets transferred under this Section 4.6
shall be invested in accordance with investment directions by the
Participant under Section 4.3 above or, absent such directions, in a
fund designated by the Committee.
(b) Any individual for whom accounts have been transferred
under this Section 4.6 and who has not become a Participant under
Section 2.1, or pursuant to such other special eligibility rules
provided in Schedule B, shall be treated as a Participant for purposes
of Articles 4, 5, 8, 9, 10 and 13 and, so long as he or she is an
Employee, Articles 6 and 7. Such an individual shall become a
Participant for all purposes of the Plan to the extent such individual
satisfies the requirements of Section 2.1 or any other special
eligibility rules provided in Schedule B which apply to such
individual.
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<PAGE> 15
ARTICLE 5. VESTING OF ACCOUNTS.
5.1. IMMEDIATE VESTING OF CERTAIN ACCOUNTS. A Participant shall at all
times have a vested interest in 100% of his or her Elective Contribution
Account, QNEC Account, Matching Contribution Account, and his or her Rollover
Account, if any.
5.2. DEFERRED VESTING OF DISCRETIONARY CONTRIBUTION ACCOUNTS.
(a) A Participant who on December 31, 1992 had at least
three Years of Service for purposes of calculating vesting, shall have
a vested interest in 100% of his or her Discretionary Contribution
Account, if any.
(b) Effective January 1, 1996, a Participant not described
in (a) above, shall have a vested interest in a percentage of his or
her Discretionary Contribution Account, if any, determined in
accordance with the following schedule and based on his or her Years of
Service for Vesting:
Years of Service Applicable
for Vesting Nonforfeitable Percentage
less than 1 0%
1 but less than 2 20%
2 but less than 3 40%
3 but less than 4 60%
4 but less than 5 80%
5 or more 100%
5.3. SPECIAL VESTING RULES. Notwithstanding any provision of the Plan
to the contrary, a Participant will have a vested interest in 100% of the
Accounts maintained for his or her benefit upon the happening of any one of the
following events:
(a) the Participant's attainment of age 62 while an Employee;
(b) the Participant's separation from service on account of
Disability;
(c) the Participant's death while an Employee;
(d) the termination of the Plan or the complete discontinuance
of Contributions under the Plan; or
(e) the partial termination of the Plan with respect to the
Participant.
5.4. CHANGES IN VESTING SCHEDULE. If the Plan's vesting schedule is
amended,
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or the Plan is amended in any way that directly or indirectly affects
the computation of a Participant's vested percentage (or if the Plan changes to
or from a top-heavy vesting schedule), each Participant who has completed 3
years of Vesting Service may elect, within the period described below, to have
his or her vested percentage determined without regard to such amendment or
change. The period referred to in the preceding sentence will begin on the date
the amendment of the vesting schedule is adopted and will end 60 days after the
latest of the following dates:
(a) the date on which such amendment is adopted;
(b) the date on which such amendment becomes effective; and
(c) the date on which the Participant is issued written notice
of such amendment by the Committee.
5.5. FORFEITURES.
(a) In general. Effective as of January 1, 1996, any portion
of a Participant's Account in which he or she is not vested upon
separation from service for any reason will be forfeited as of the
earlier of
(1) the expiration of 5 consecutive Plan Years
during each of which the Participant does not complete 501
Hours of Service, or
(2) the distribution of the vested portion of the
Account if such distribution is made as a result of the
Participant's separation from service.
Any Participant who separates from the service of the Affiliated
Employers prior to earning a vested interest in any of his or her
Accounts shall be deemed to have received a complete distribution of
his or her vested interest on the day he or she separates from service.
(b) Certain Restorations. Notwithstanding the preceding
paragraph, if a Participant forfeits any portion of an Account as a
result of the complete distribution of the vested portion of the
Account but thereafter returns to the employ of an Affiliated Employer,
the amount forfeited will be recredited to the Participant's Account if
he or she repays to the Plan the entire amount distributed, without
interest, prior to the earlier of (i) the close of the fifth
consecutive Plan Year in each of which the Participant does not
complete at least 501 Hours of Service or (ii) the fifth anniversary of
the date on which the Participant is reemployed. In the case of a
Participant who had earlier separated from service prior to earning a
vested interest in any of his or her Accounts and was deemed to
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<PAGE> 17
have received a distribution of such vested interest, the amount
forfeited will be restored upon the Participant's reemployment prior to
the close of the fifth consecutive Plan Year in each of which the
Participant does not complete at least 501 Hours of Service. A
Participant's vested percentage in the amount recredited under this
paragraph will thereafter be determined under the terms of the Plan as
if no forfeiture had occurred. The money required to effect the
restoration of a Participant's Account shall come from other Accounts
forfeited during the Plan Year of restoration, and to the extent such
funds are inadequate, from a special contribution by the Participant's
Participating Employer.
(c) If a Participant forfeits any part of his or her
Accounts under paragraph (a) above, the amount of the forfeiture will
be applied, first, toward any restoration of any amount previously
forfeited as required under paragraph (a) above, and, then, toward the
Matching Contributions required to be made to the Plan under Section
3.3.
5.6. VESTING OF ACCOUNTS TRANSFERRED FROM OTHER PLANS. In the event
that another plan is merged into the Plan, or accounts are otherwise transferred
to the Plan from another plan, the portion of each Account under this Plan that
is attributable to a vested and nonforfeitable account, or portion of an
account, under the transferor plan shall remain vested and nonforfeitable under
this Plan. The remaining portion of each Account under this Plan that is
attributable to a transferor plan account shall vest in accordance with Section
5.2, unless otherwise provided in Schedule B.
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<PAGE> 18
ARTICLE 6. WITHDRAWALS PRIOR TO SEPARATION FROM SERVICE.
6.1. HARDSHIP WITHDRAWALS.
(a) Immediate and heavy financial need. A Participant may make
a withdrawal from his or her Elective Contribution Account in the event
of an immediate and heavy financial need arising from
(i) expenses for medical care described in Code
section 213(d) previously incurred by the Participant, his or
her spouse or any of his or her dependents (as defined in Code
section 152) or amounts necessary for these persons to obtain
such medical care;
(ii) costs directly related to the purchase of a
principal residence of the Participant (excluding mortgage
payments);
(iii) the payment of tuition, room and board expenses
and related educational fees for the next 12 months of
post-secondary education for the Participant, his or her
spouse, children or dependents (as defined in Code section
152);
(iv) payments necessary to prevent the eviction of
the Participant from his or her principal residence or
foreclosure on the mortgage on that principal residence; or
(v) any other need identified by the Commissioner of
Revenue as a "financial hardship" for purposes of section
401(k) plans through the publication of revenue rulings,
notices and other guidance of general applicability.
The Committee's determination of whether there is an immediate and
heavy financial need as defined above shall be made solely on the basis
of written evidence furnished by the Participant. Such evidence must
also indicate the amount of such need.
(b) Distribution of amount necessary to meet need. As soon as
practicable after the Committee's determination that an immediate and
heavy financial need exists with respect to the Participant, that the
Participant has obtained all other distributions (other than hardship
distributions) and all nontaxable loans currently available under the
Plan and all other plans maintained by the Affiliated Employers, and
that no other resources are reasonably available to the Participant to
satisfy the need, the Committee will direct the Trustee to pay to the
Participant the amount necessary to meet the need created by the
hardship
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<PAGE> 19
(but not in excess of the value of the Participant's Elective
Contribution Account, determined as of the Valuation Date next
following the Committee's determination). The amount necessary to meet
the need may include any amounts necessary to pay any federal, state,
or local income taxes or penalties reasonably anticipated to result
from the distribution. Distribution will be made solely from the
Participant's Elective Contribution Account, and shall not include any
portion of the Account that is attributable to income earned after
December 31, 1988.
(c) Effective Date. The provisions under this Section 6.1
shall be effective as of January 1, 1996.
6.2. WITHDRAWALS AFTER AGE 59-1/2. A Participant who is an Employee and
has attained age 59 1/2 may make a withdrawal from any one or more of his or her
Accounts for any reason, upon such prior notice as the Committee may prescribe.
Any such withdrawal shall be in the amount specified by the Participant, up to
the vested value of the particular Account determined as of the Valuation Date
next following the Committee's receipt of notice of the withdrawal. Payment to
the Participant shall be made as soon as practicable after such Valuation Date.
6.3. RESTRICTIONS ON CERTAIN DISTRIBUTIONS. In the case of a
Participant whose Accounts are valued in excess of $3,500 and who has not yet
attained the Normal Retirement Age, no distribution may be made to the
Participant under this Article unless
(a) between the 30th and 90th day prior to the date
distribution is to be made, the Committee notifies the Participant in
writing that he or she may defer distribution until the Normal
Retirement Age and provides the Participant with a written description
of the material features and (if applicable) the relative values of the
forms of distribution available under the Plan; and
(b) the Participant consents to the distribution in writing
after the information described above has been provided to him or her.
Notwithstanding the foregoing, such distribution may commence less than 30 days
after the required notification described above is given, provided that (i) the
Committee clearly informs the Participant that the Participant has a right to a
period of at least 30 days after receiving the notice to consider whether or not
to elect a distribution; and (ii) the Participant, after receiving the notice,
elects a distribution.
For purposes of this Section, a Participant's Accounts will be considered to be
valued in excess of $3,500 if the value of his or her Accounts exceeds such
amount at the time of the distribution in question or exceeded such amount at
the time of any prior distribution to (or withdrawal by) the Participant under
the Plan.
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<PAGE> 20
6.4. LIMITATION OF WITHDRAWABLE AMOUNT. In the event that there is
allocated to a Participant's Account a promissory note with respect to a loan
made from the Plan, the maximum amount of cash that may be withdrawn from the
Account prior to the Participant's separation from service shall be determined
without regard to the value of such note.
6.5. REQUIRED DISTRIBUTIONS AFTER REQUIRED BEGINNING DATE. In the case
of a Participant who remains an Employee on or after his or her Required
Beginning Date, such Participant's Accounts will be distributed, beginning on
his or her Required Beginning Date, in accordance with the applicable
requirements of Code section 401(a)(9) and the Regulations promulgated
thereunder.
6.6. DISTRIBUTIONS REQUIRED BY A QUALIFIED DOMESTIC RELATIONS ORDER. To
the extent required by a Qualified Domestic Relations Order, the Committee shall
make distributions from a Participant's Accounts to alternate payees named in
such order in a manner consistent with the distribution options otherwise
available under the Plan, regardless of whether the Participant is otherwise
entitled to a distribution at such time under the Plan.
6.7. CERTAIN DISPOSITIONS. In connection with the disposition by a
Participating Employer of at least 85 percent of the assets used by the
Participating Employer in a trade or business to an unrelated corporation, or
the disposition of a Participating Employer's interest in a subsidiary to an
unrelated entity, distribution of the entire vested Account balance of an
Employee who continues employment with the acquirer may be made to the Employee
in a single sum, but only if the acquirer does not maintain the Plan after the
disposition, and only if such distribution is otherwise made in accordance with
Code section 401(k)(10).
6.8. WITHDRAWALS BY CERTAIN FORMER PARTICIPANTS IN OTHER PLANS.
(a) In addition to the rights to take withdrawals prior to
separation from service as described in Sections 6.1 and 6.2, in the
case of a Participant for whom amounts have been transferred under
Section 4.6, the Participant shall be entitled to take withdrawals
hereunder in the circumstances in which withdrawals prior to separation
from service would have been permitted under the transferor plan, as
set forth in Schedule B.
(b) In the case of a married Participant for whom amounts
have been transferred under Section 4.6 from another plan and who has
at any time elected an annuity form of payment under Section 8.7, no
withdrawal may be made under Sections 6.1, 6.2 or 6.8(a) unless (i) his
or her spouse consents in writing to such withdrawal, such consent
acknowledges the effect of the withdrawal and is witnessed by a Plan
representative or a notary public, and such consent specifies
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<PAGE> 21
the form of the withdrawal (i.e., a lump sum cash payment), or (ii) it
is established to the satisfaction of the Committee that the foregoing
consent may not be obtained because the spouse cannot be located, or
because of such other circumstances as the Secretary of the Treasury
may prescribe.
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ARTICLE 7. LOANS TO PARTICIPANTS.
7.1. IN GENERAL. Upon the written request of a Participant on a form
acceptable to the Committee, and subject to the conditions of this Article, the
Committee shall direct the Trustee to make a loan from the Trust to the
Participant. Notwithstanding the foregoing, a Participant who is an
owner-employee or member of the family (as defined in Code section 267(e)(4) of
an owner-employee is not eligible to receive a loan under this Article 7. An
"owner-employee" shall mean an owner employee as defined in Code section
401(c)(3), and shall include an employee or officer of an electing small
business (Subchapter S) corporation which is an Affiliated Employer who owns (or
is considered as owning within the meaning of Code section 318(a)(1)), on any
day during the taxable year of such corporation, more than 5% of the outstanding
stock of such corporation. For purposes of this Article, "Participant" includes
any Participant who is an Employee of a Participating Employer, and any other
Participant (or Beneficiary of a deceased Participant) who is a "party in
interest" within the meaning of ERISA section 3(14).
7.2. RULES AND PROCEDURES. The Committee shall promulgate such rules
and procedures, not inconsistent with the express provisions of this Article, as
it deems necessary to carry out the purposes of this Article including, but not
limited to, rules for charging loan fees directly to a Participant's Accounts.
All such rules and procedures shall be deemed a part of the Plan for purposes of
the Department of Labor regulation section 2550.408b-1(d). Loans shall not be
made available to Participants who are Highly Compensated Employees in an amount
(determined under Department of Labor regulation section 2550.408b-1(b)) greater
than the amount made available to other Participants.
7.3. MAXIMUM AMOUNT OF LOAN. The following limitations shall apply in
determining the amount of any loan to a Participant hereunder:
(a) The amount of the loan, together with any other
outstanding indebtedness of the Participant under the Plan or any other
qualified retirement plans of the Affiliated Employers, shall not
exceed $50,000 reduced by the excess of (i) the highest outstanding
loan balance of the Participant from such plans during the one-year
period ending on the day prior to the date on which the loan is made,
over (ii) the Participant's outstanding loan balance from such plans
immediately prior to the loan.
(b) The amount of the loan shall not exceed 50% of the
Participant's vested interest in his or her Accounts, determined as of
the Valuation Date immediately preceding the date of the loan.
7.4. MINIMUM AMOUNT OF LOANS; LIMIT ON NUMBER OF LOANS. The amount of
any single loan under this Plan shall not be less than $1,000. No more than two
loans
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<PAGE> 23
may be outstanding to a Participant at any one time.
7.5. NOTE; SECURITY; INTEREST. Each loan shall be evidenced by a note
signed by the Participant and shall be secured by the Participant's vested
interest in his or her Accounts, including in such security the note evidencing
the loan. The loan shall bear interest at a reasonable annual percentage
interest rate to be determined by the Committee. In determining the interest
rate, the Committee shall take into consideration interest rates currently being
charged by persons in the business of lending money with respect to loans made
in similar circumstances. The Committee shall make such determination through
consultation with one or more lending institutions, as the Committee deems
appropriate.
7.6. REPAYMENT. Each loan made to a Participant who is receiving
regular payments of compensation from a Participating Employer shall be
repayable by payroll deduction. Loans made to other Participants (and, in all
events, where payroll deduction is no longer practicable) shall be repayable in
such manner as the Committee may from time to time determine. The documents
evidencing a loan shall provide that payments shall be made not less frequently
than quarterly and over a specified term as determined by the Committee (but not
to exceed five years; ten years if the loan is being applied toward the purchase
of a principal residence for the Participant); such documents shall also require
that the loan be amortized with level payments of principal and interest. A
Participant may prepay all, but not less than all, of his or her loan at any
time, without penalty, by paying the loan principal then outstanding together
with interest accrued and unpaid to the date of payment.
7.7. REPAYMENT UPON DISTRIBUTION. If, at the time benefits are to be
distributed (or to commence being distributed) to a Participant with respect to
a separation from service, there remains any unpaid balance of a loan hereunder,
such unpaid balance shall, to the extent consistent with Department of Labor
regulations, become immediately due and payable in full. Such unpaid balance,
together with any accrued but unpaid interest on the loan, shall be deducted
from the Participant's Accounts, subject to the default provisions below, before
any distribution of benefits is made. Except as may be required in order to
comply (in a manner consistent with continued qualification of the Plan under
Code section 401(a)) with Department of Labor regulations, no loan shall be made
or remain outstanding with respect to a Participant under this Article after the
time distributions to the Participant with respect to a separation from service
are to be paid or commence.
7.8. DEFAULT. In the event of a default in making any payment of
principal or interest when due under the note evidencing any loan under this
Article, if such default continues for more than 90 days of the due date
thereof, the unpaid principal balance of the note shall immediately become due
and payable in full. Such unpaid principal, together with any accrued but unpaid
interest, shall thereupon be deducted from the
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<PAGE> 24
Participant's Accounts, subject to the further provisions of this Section. The
amount so deducted shall be treated as distributed to the Participant and
applied by the Participant as a payment of the unpaid interest and principal (in
that order) under the note evidencing such loan. In no event shall the Committee
apply the Participant's Accounts to satisfy the Participant's repayment
obligation, whether or not he or she is in default, unless the amount so applied
otherwise could be distributed in accordance with the Plan.
7.9. NOTE AS TRUST ASSET. The note evidencing a loan to a Participant
under this Article shall be an asset of the Trust which is allocated to the
Account of such Participant, and shall for purposes of the Plan be deemed to
have a value at any given time equal to the unpaid principal balance of the note
plus the amount of any accrued but unpaid interest.
7.10. NONDISCRIMINATION. Loans shall be made available under this
Article to all Participants on a reasonably equivalent basis, except that the
Committee may make reasonable distinctions based on creditworthiness.
7.11. DESIGNATION OF ACCOUNTS. Unless the Committee designates
otherwise, loans shall be made from the Participant's Accounts in the following
order: (1) from his or her Rollover Account, if any, (2) from his or her
Matching Contribution Account, (3) from his or her Elective Contribution
Account, (4) from the vested portion of his or her Discretionary Contribution
Account, if any and (5) from his or her After-Tax Contribution Account, if any.
The crediting of loan repayments shall be made to the foregoing Accounts in the
same order and shall be allocated among the investment options in accordance
with the Participant's then-effective instructions regarding the investment of
contributions made on his or her behalf.
7.12. SPOUSAL CONSENT TO LOANS TO CERTAIN FORMER PARTICIPANTS IN OTHER
PLANS. In the case of a married Participant for whom amounts have been
transferred under Section 4.6 from a transferor plan and who has at any time
elected an annuity form of payment under Section 8.7 or under the transferor
plan, no loan shall be made unless (a) the Participant's spouse consents in
writing to such loan and to the use of the Participant's Accounts as security
for the loan, and such consent acknowledges the effect of the loan and the use
of the Accounts as security, is witnessed by a Plan representative or a notary
public, and is provided no more than 90 days before the date on which the loan
is to be secured by the Accounts, or (b) it is established to the satisfaction
of the Committee that the foregoing consent may not be obtained because there is
no spouse, because the spouse cannot be located, or because of such other
circumstances as the Secretary of the Treasury may prescribe.
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ARTICLE 8. BENEFITS UPON DEATH OR SEPARATION FROM SERVICE.
8.1. SEPARATION FROM SERVICE FOR REASONS OTHER THAN DEATH. Following a
Participant's separation from the service of an Affiliated Employer for any
reason other than death, the Participant will receive the vested portion of his
or her Accounts in cash in a single sum or, if the Participant elects and the
value of such portion exceeds $3,500, in monthly, quarterly, semi-annual, or
annual installments over a period certain not to exceed the Participant's life
expectancy or the joint life and last survivor expectancy of the Participant and
his or her Beneficiary. An election to receive monthly, quarterly, semi-annual,
or annual installment distributions in lieu of a single sum, and the period over
which such installments are to be made, shall be made by the Participant on a
form approved by the Committee. Notwithstanding the foregoing, in the case of
Participant for whom amounts have been transferred under Section 4.6, the
Participant shall be entitled to elect any other form of distribution of his
benefits hereunder that would have been permitted under the transferor plan, as
set forth in Schedule B.
8.2. TIME OF DISTRIBUTIONS. Distribution with respect to a
Participant's separation from service normally will be made as soon as
practicable after such separation. In the case of a Participant whose Accounts
are valued in excess of $3,500 and who has not yet attained the Normal
Retirement Age, however, distribution may not be made under this Section unless
(a) between the 30th and 90th day prior to the date
distribution is to be made, the Committee notifies the Participant in
writing that he or she may defer distribution until the Normal
Retirement Age; and
(b) the Participant consents to the distribution in writing
after the information described above has been provided to him or her,
and files such consent with the Committee.
Notwithstanding the foregoing, such distribution may commence less than 30 days
after the required notification described above is given, provided that (i) the
Committee clearly informs the Participant that the Participant has a right to a
period of at least 30 days after receiving the notice to consider whether or not
to elect a distribution; and (ii) the Participant, after receiving the notice,
elects a distribution.
A Participant's Accounts will be considered to be valued in excess of $3,500 if
the value of such Accounts exceeds such amount at the time of the distribution
in question or exceeded such amount at the time of any prior distribution to the
Participant under the Plan. Distribution under this Section in all events will
be made no later than the 60th day after the close of the Plan Year in which
occurs the later of the Participant's separation from service or the
Participant's attainment of the Normal Retirement Age.
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<PAGE> 26
8.3. AMOUNT OF DISTRIBUTION.
(a) Single Sums. In the case of a distribution to be made in a
single sum, the amount of the distribution shall be determined as of
the Valuation Date on which authorized distribution directions are
received by the Trustee.
(b) Installments. In the case of distributions to be made in
monthly, quarterly, semi-annual, or annual installments, the aggregate
installment amount for a particular calendar year (the "installment
year") shall be determined by dividing
(i) the value of the vested portion of the
Participant's Accounts as of the last Valuation Date preceding
the distribution date by
(ii) the lesser of (A) the number of remaining
installment years in the installment period elected by the
Participant as of the beginning of the installment year and
(B) the number of years in the applicable remaining life
expectancy for the installment year determined pursuant to
Regulation section 1.401(a)(9)-1, or (if the Participant's
Beneficiary is not his or her spouse) the applicable divisor
for the installment period determined under Regulation section
1.401(a)(9)-2. For purposes of determining the amount of any
installment distribution, life expectancies will not be
recalculated annually pursuant to Code section 401(a)(9)
unless the Participant elects otherwise. Any such election
shall be in writing on a form prescribed or approved by the
Committee and filed prior to the Participant's attainment of
age 70 1/2.
8.4. DISTRIBUTIONS AFTER A PARTICIPANT'S DEATH.
(a) Death Prior to Separation From Service. If a Participant
dies prior to his or separation from the service of the Company, the
Participant's Beneficiary will receive the Participant's Accounts in
either of the following forms, as elected by the Beneficiary on a form
approved by the Committee:
(i) in cash in a single sum as soon as practicable
following the Participant's death (but in no event later than
December 31 of the calendar year following the year of the
Participant's death); or
(ii) in monthly, quarterly, semi-annual, or annual
installments over a period certain not to exceed the life
expectancy of the Beneficiary, such installments to begin not
later than December 31 of the calendar year following the year
of the Participant's death and to be made in amounts
determined in the same manner as under Section 8.3(b) above.
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<PAGE> 27
(b) Death After Separation From Service. If a Participant
dies after separation from service but before the complete distribution
of his or her Accounts has been made, the Participant's Beneficiary
will receive the vested portion of the Participant's Accounts.
Distribution will be made in cash in a single sum as soon as
practicable following the Participant's death (but no later than
December 31 of the calendar year following the year of the
Participant's death) provided, however, that if distribution to the
Participant had begun following his or her separation from service in a
form elected by the Participant, distribution will continue to be made
to the Beneficiary at least as rapidly in such form unless the
Beneficiary elects to receive the distribution in cash in a single sum
as soon as practicable following the Participant's death. Any such
election must be made on a form approved by the Committee and must be
received by the Committee within such period following the
Participant's death as the Committee may prescribe.
Any distribution to a Beneficiary under this Section shall be determined as of
the Valuation Date immediately preceding the date distribution is to be made.
8.5. DESIGNATION OF BENEFICIARY. Subject to the provisions of this
Section, a Participant's Beneficiary shall be the person or persons and entity
or entities, if any, designated by the Participant from time to time on a form
approved by the Committee. In the absence of an effective beneficiary
designation, the full amount payable upon the death of the Participant shall be
paid to his or her surviving spouse or, if none, to his or her issue per stirpes
or, if no issue, to his or her heirs at law determined under the laws of
intestacy of the jurisdiction of his or her last domicile. If any of such issue
is a minor, the Trustee may deposit his or her share in a savings account to his
or her credit. If any Beneficiary survives the Participant but dies prior to
receipt of his or her interest in the Participant's Account, such Beneficiary's
remaining interest shall be paid to the Beneficiary's estate (unless the
Participant had effectively designated a successor or contingent Beneficiary for
the Beneficiary's remaining interest). A nonspouse beneficiary designation by a
Participant who is married at the time of his or her death shall not be
effective unless
(a) prior to the Participant's death, the Participant's
surviving spouse consented to and acknowledged the effect of the
Participant's designation of a specific non-spouse Beneficiary
(including any class of Beneficiaries or any contingent Beneficiaries)
on a written form approved by the Committee and witnessed by a notary
public or a duly authorized Plan representative; or
(b) it is established to the satisfaction of the Committee
that spousal consent may not be obtained because there is no spouse,
because the spouse has died (evidenced by a certificate of death),
because the spouse cannot be located (based on information supplied by
a government agency or independent
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<PAGE> 28
investigator), or because of such other circumstances as the Secretary
of the Treasury may prescribe; or
(c) the spouse had earlier executed a general consent form
permitting the Participant (i) to select from among certain specified
beneficiaries without any requirement of further consent by the spouse
(and the Participant designates a Beneficiary from the specified list),
or (ii) to change his or her Beneficiary without any requirement of
further consent by the spouse. Any such general consent shall be on a
form approved by the Committee, and must acknowledge that the spouse
has the right to limit consent to a specific beneficiary and that the
spouse voluntarily elects to relinquish such right.
In the event a spouse is legally incompetent to give consent, the spouse's legal
guardian, even if the guardian is the Participant, may give consent on behalf of
the spouse. Any consent and acknowledgment by (or on behalf of) a spouse, or the
establishment that the consent and acknowledgment cannot be obtained, shall be
effective only with respect to such spouse, but shall be irrevocable once made.
8.6. DIRECT ROLLOVERS OF ELIGIBLE DISTRIBUTIONS. Notwithstanding any
provision of the Plan to the contrary that may otherwise limit a distributee's
election under this Section, for Plan Years beginning after December 31, 1992, a
distributee may elect, at the time and in the manner prescribed by the
Committee, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the distributee in a direct
rollover. For purposes of this Section, the following terms have the following
meanings:
(a) an "eligible rollover distribution" is any distribution
of all or any portion of the balance to the credit of the distributee,
except that an eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives of the distributee
and the distributee's Beneficiary, or for a specified period of ten
years or more; any distribution to the extent such distribution is
required under Code section 401(a)(9); and the portion of any
distribution that is not includible in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to
employer securities).
(b) with respect to a distributee other than the
Participant's surviving spouse, an "eligible retirement plan" is an
individual retirement account described in Code section 408(a), an
individual retirement annuity described in Code section 408(b), an
annuity plan described in Code section 403(a), or a qualified trust
described in Code section 401(a). With respect to a distributee who is
a Participant's surviving spouse, an eligible retirement plan is an
individual
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<PAGE> 29
retirement account or an individual retirement annuity.
(c) a "distributee" includes an employee or former employee.
In addition, the employee's or former employee's surviving spouse and
the employee's or former employee's spouse or former spouse, who is an
alternate payee under a Qualified Domestic Relations Order, are
distributees with regard to the interest of the spouse or former
spouse.
(d) a "direct rollover" is a payment by the Plan to the
eligible retirement plan specified by the distributee.
8.7. SPECIAL RULES FOR FORMER PARTICIPANTS IN MERGED PLANS. If the
vested portion of the Account of a Participant for whom accounts have been
transferred under Section 4.6 from a transferor plan to which the requirements
of Code section 401(a)(11) were applicable at the time of the transfer, as
indicated on Schedule B, becomes payable under Section 8.1, and if the
Participant elects during the 90-day period preceding his or her annuity
starting date (or has elected at any time under the transferor plan) the payment
of benefits in the form of a life annuity, the Participant's vested portion of
his or her Accounts shall be applied to the purchase from an insurance company
of a single premium nontransferable annuity contract providing (a) if the
Participant is married on his or her annuity starting date, an annuity for the
life of the Participant, and upon the death of the Participant providing a
further annuity for the life of the spouse (to whom the Participant was married
on his or her annuity starting date) in an amount equal to 50 percent of the
amount of the annuity payable during the joint lives of the Participant and his
or her spouse, and (b) if the Participant is not married on his or her annuity
starting date, an annuity for the life of the Participant. Any Participant
subject to the provisions of this Section 8.7 may elect, during the 90-day
period preceding his or her annuity starting date, not to have his or her vested
Account balance applied to purchase the annuity described above and either (1)
to have his or her vested Account balance distributed in the form of a single
cash lump sum payment or (2) to have his or her vested Account balance applied
to the purchase from an insurance company of a single premium nontransferable
annuity contract providing any form of optional form of payment provided under
the transferor plan, as described on Schedule B applicable to such transferor
plan.
If the Participant is married on his or her annuity starting date, any
election pursuant to the preceding sentence shall be effective only if:
(i) his or her spouse consents in writing to such election
and, if applicable, to distribution of the Participant's vested Account
balance before age 65, such consent acknowledges the effect of the
election and is witnessed by a Plan representative or a notary public,
and such consent either (1) specifies the form of distribution to the
Participant and, if distribution is to be made in installments, any
nonspouse Beneficiary (including any class of Beneficiaries or any
contingent Beneficiaries), or (2) authorizes the Participant to change
the form
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<PAGE> 30
of distribution or the Beneficiary without further consent, or
(ii) it is established to the satisfaction of the Committee
that the foregoing consent may not be obtained because the spouse
cannot be located, or because of such other circumstances as the
Secretary of the Treasury may prescribe,
(iii) the Participant elects a joint and survivor annuity
naming his or her surviving spouse as beneficiary which provides a
survivor annuity greater than 50 percent of the annuity payable during
the joint lives of the Participant and his or her spouse.
Any consent by a spouse under (i) above, or a determination by the Committee
under (ii) above with respect to such spouse, shall be effective only with
respect to such spouse and shall be obtained within 90 days prior to the annuity
starting date. Any such consent shall be irrevocable. Any such consent that
authorizes the Participant to change the form of distribution of the Beneficiary
without further consent must acknowledge the spouse's right to limit consent to
specific form of distribution and Beneficiary and the spouse's voluntary
election to relinquish such right. For purposes of this Section 8.7, the term
"annuity starting date" means the first day of the first period for which an
annuity is payable under the annuity contract described above.
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<PAGE> 31
ARTICLE 9. ADMINISTRATION.
9.1. COMMITTEE. The Plan will be administered by a committee of
individuals selected by the Board of Directors to serve at its pleasure. The
Committee will be a "named fiduciary" for purposes of Section 402(a)(1) of ERISA
with authority to control and manage the operation and administration of the
Plan, and will be responsible for complying with all of the reporting and
disclosure requirements of Part 1 of Subtitle B of Title I of ERISA. The
Committee will not, however, have any authority over the investment of assets of
the Trust in its capacity as Committee.
9.2. POWERS OF COMMITTEE. The Committee will have full discretionary
power to administer the Plan in all of its details, subject, however, to the
requirements of ERISA. For this purpose the Committee's discretionary power will
include, but will not be limited to, the following authority:
(a) to make and enforce such rules and regulations as it deems
necessary or proper for the efficient administration of the Plan or
required to comply with applicable law;
(b) to interpret the Plan;
(c) to decide all questions concerning the Plan and the
eligibility of any person to participate in the Plan;
(d) to compute the amounts to be distributed under the Plan,
and to determine the person or persons to whom such amounts will be
distributed;
(e) to authorize the payment of distributions;
(f) to keep such records and submit such filings, elections,
applications, returns or other documents or forms as may be required
under the Code and applicable regulations, or under other federal,
state or local law and regulations;
(g) to allocate and delegate its ministerial duties and
responsibilities and to appoint such agents, counsel, accountants and
consultants as may be required or desired to assist in administering
the Plan; and
(h) by written instrument, to allocate and delegate its
fiduciary responsibilities in accordance with ERISA section 405.
9.3. EFFECT OF INTERPRETATION OR DETERMINATION. Any interpretation of
the Plan or other determination with respect to the Plan by the Committee shall
be final and conclusive on all persons in the absence of clear and convincing
evidence that the
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<PAGE> 32
Committee acted arbitrarily and capriciously.
9.4. RELIANCE ON TABLES, ETC. In administering the Plan, the Committee
will be entitled, to the extent permitted by law, to rely conclusively on all
tables, valuations, certificates, opinions and reports which are furnished by
any accountant, trustee, counsel or other expert who is employed or engaged by
the Committee or by the Plan Sponsor on the Committee's behalf.
9.5. CLAIMS AND REVIEW PROCEDURES. The Committee shall adopt procedures
for the filing and review of claims in accordance with ERISA section 503.
9.6. INDEMNIFICATION OF COMMITTEE AND ASSISTANTS. Each Participating
Employer agrees, jointly and severally, to indemnify and defend to the fullest
extent of the law any Employee or former Employee (a) who serves or has served
as Committee, (b) who has been appointed to assist the Committee in
administering the Plan, or (c) to whom the Committee has delegated any of its
duties or responsibilities against any liabilities, damages, costs and expenses
(including attorneys' fees and amounts paid in settlement of any claims approved
by the Plan Sponsor) occasioned by any act or omission to act in connection with
the Plan, if such act or omission to act is in good faith and without gross
negligence.
9.7. ANNUAL REPORT. The Committee shall submit annually to the Plan
Sponsor a report showing in reasonable summary form, the financial position of
the Trust and giving a brief account of the operations of the Plan for the past
year, and such further information as the Plan Sponsor may reasonably require.
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<PAGE> 33
ARTICLE 10. AMENDMENT AND TERMINATION.
10.1. AMENDMENT. The Plan Sponsor reserves the power at any time or
times to amend the provisions of the Plan and Trust to any extent and in any
manner that it may deem advisable. Upon delivery to the Trustee and each
Participating Employer of an amendment adopted by the Board of Directors, the
Plan shall be amended at the time and in the manner set forth therein, and all
Participants and all persons claiming an interest hereunder shall be bound
thereby. Notwithstanding the foregoing, no action by the Board of Directors
shall be required to amend the Plan to revise Schedule A, regarding the addition
or removal of Participating Employers, or Schedule B, regarding a merger of, or
transfer of accounts from, another plan into the Plan. Moreover, the Plan
Sponsor may amend or modify any plan provisions which relate to ERISA section
404(c) compliance, including changes which would eliminate the Plan's status as
an ERISA section 404(c) plan. However, the Plan Sponsor will not have the power:
(a) to amend the Plan or Trust in such manner as would cause
or permit any part of the assets of the Trust to be diverted to
purposes other than for the exclusive benefit of each Participant and
his or her Beneficiary (except as permitted by the Plan with respect to
Qualified Domestic Relations Orders or the return of contributions upon
nondeductibility, mistake of fact, or the failure to qualify
initially), unless such amendment is required or permitted by law,
governmental regulation or ruling; or
(b) to amend the Plan or Trust retroactively in such a
manner as would reduce the accrued benefit of any Participant, except
as otherwise permitted or required by law. For purposes of this
paragraph, an amendment which has the effect of decreasing a
Participant's Account balance or eliminating an optional form of
benefit, with respect to benefits attributable to service before the
amendment, shall be treated as reducing an accrued benefit.
10.2. TERMINATION. The Plan Sponsor has established the Plan and
authorized the establishment of the Trust with the bona fide intention and
expectation that contributions will be continued indefinitely, but may
discontinue contributions under the Plan or terminate the Plan at any time by
written notice delivered to the Trustee without liability whatsoever for any
such discontinuance or termination. In addition, the Participating Employers
will have no obligation or liability whatsoever to maintain the Plan for any
given length of time and may cease to be Participating Employers in a manner
acceptable to the Plan Sponsor.
10.3. DISTRIBUTIONS UPON TERMINATION OF THE PLAN. Upon termination of
the Plan by the Plan Sponsor, the Trustee will distribute to each Participant
(or other person entitled to distribution) the value of the Participant's
Accounts in a single sum as soon as practicable following such termination. The
amount of such distribution shall be
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<PAGE> 34
determined as of the Valuation Date immediately preceding the date distribution
is to be made.
10.4. MERGER OR CONSOLIDATION OF PLAN; TRANSFER OF PLAN ASSETS. In case
of any merger or consolidation of the Plan with, or transfer of assets and
liabilities of the Plan to, any other plan, provision must be made so that each
Participant would, if the Plan then terminated, receive a benefit immediately
after the merger, consolidation or transfer which is equal to or greater than
the benefit he or she would have been entitled to receive immediately before the
merger, consolidation or transfer if the Plan had then terminated.
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<PAGE> 35
ARTICLE 11. LIMITS ON CONTRIBUTIONS.
11.1. CODE SECTION 404 LIMITS. The sum of the contributions made by
each Participating Employer under the Plan for any Plan Year shall not exceed
the maximum amount deductible under the applicable provisions of the Code. All
contributions under the Plan made by a Participating Employer are expressly
conditioned on their deductibility under Code section 404 for the taxable year
when paid (or treated as paid under Code section 404(a)(6)).
11.2. CODE SECTION 415 LIMITS.
(a) Incorporation by reference. Code section 415 is hereby
incorporated by reference into the Plan.
(b) Annual addition. The Committee shall determine an "annual
addition" for each Participant for each limitation year, which shall
consist of the following amounts:
(i) Elective Contributions allocated to the
Participant's Accounts for the year;
(ii) Qualified Nonelective Contributions allocated to
the Participant's Accounts for the year;
(iii) amounts allocated to an individual medical
amount (as defined in Code section 415(l)(2)) which
is part of a pension or annuity plan maintained by an
Affiliated Employer; and
(iv) amounts derived from contributions paid or
accrued which are attributable to post-retirement
medical benefits allocated to the separate account of
a key employee (as defined in Code section
419A(d)(3)) under a welfare benefit fund (as defined
in Code section 419(e)) maintained by an Affiliated
Employer.
(c) General limitation on annual additions. The annual
addition of a Participant under (b) above for any limitation year, when
added to the annual additions to his or her accounts for such year
under all other defined contribution plans maintained by the Affiliated
Employers, shall not exceed the lesser of (i) $30,000 (increased from
time to time in accordance with Code section 415(d)), or (ii) 25% of
the Participant's Compensation for such limitation year.
(d) Combined limitations. In the case of a Participant who
also participates in a defined benefit plan maintained by an Affiliated
Employer, the
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<PAGE> 36
annual addition for a limitation year will, if necessary, be further
limited so that the sum of the Participant's defined contribution
fraction and his or her defined benefit plan fraction for such
limitation year does not exceed 1.0.
(i) A Participant's "defined contribution fraction"
shall be a fraction, the numerator of which is the sum of the
annual additions to the Participant's accounts under all the
defined contribution plans (whether or not terminated)
maintained by an Affiliated Employer for the current and all
prior limitation years (including the annual additions
attributable to the Participant's nondeductible employee
contributions to all defined benefit plans, whether or not
terminated, maintained by an Affiliated Employer, and the
annual additions attributable to all welfare benefit funds, as
defined in section 419(e) of the Code, and individual medical
accounts, as defined in section 415(l)(2) of the Code,
maintained by an Affiliated Employer), and the denominator of
which is the sum of the maximum aggregate amounts for the
current and all prior limitation years of service with the
Affiliated Employers (regardless of whether a defined
contribution plan was maintained by an Affiliated Employer).
The maximum aggregate amount in any limitation year is the
lesser of 125 percent of the dollar limitation determined
under Code sections 415(b) and (d) in effect under Code
section 415(c)(1)(A) or 35 percent of the Participant's
Compensation for such year.
(ii) A Participant's "defined benefit fraction" shall
be a fraction, the numerator of which is the sum of the
Participant's projected annual benefits under all the defined
benefit plans (whether or not terminated) maintained by an
Affiliated Employer, and the denominator of which is the
lesser of 125 percent of the dollar limitation determined for
the limitation year under Code sections 415(b) and (d) or 140
percent of the highest average compensation, including any
adjustments under Code section 415(b).
(e) Limitation Year. For purposes of determining the Code
section 415 limits under the Plan, the "limitation year" shall be the
Plan Year.
(f) Order of reductions. To the extent necessary to satisfy
the limitations of Code section 415 for any Participant, the annual
addition which would otherwise be made on behalf of the Participant
under the Plan shall be reduced before the Participant's benefit is
reduced under any and all defined benefit plans, and before the
Participant's annual addition is reduced under any other defined
contribution plan.
(g) Return of excess contributions. If, as a result of a
reasonable error
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<PAGE> 37
in estimating a Participant's Compensation for a Plan Year or
limitation year, a reasonable error in determining the amount of
elective deferrals (within the meaning of Code section 402(g)(3)) that
may be made with respect to any individual under the limits of Code
section 415, or under such other facts and circumstances as may be
permitted under regulation or by the Internal Revenue Service, the
annual addition under the Plan for a Participant would cause the Code
section 415 limitations for a limitation year to be exceeded, the
excess amounts shall be held in an unallocated suspense account and
allocated in subsequent years in accordance with the rules provided in
Internal Revenue Service Reg. Section 1.415-6(b)(6)(i).
11.3. CODE SECTION 402(g) LIMITS.
(a) In general. The maximum amount of Elective Contributions
made on behalf of any Participant for any calendar year, when added to
the amount of elective deferrals under all other plans, contracts and
arrangements of an Affiliated Employer with respect to the Participant
for the calendar year), shall in no event exceed the maximum applicable
limit in effect for the calendar year under Regulation section
1.402(g)-1(d). For purposes of the Plan, an individual's elective
deferrals for a taxable year are the sum of the following:
(i) Any elective contribution under a qualified
cash or deferred arrangement (as defined in Code section
401(k)) to the extent not includible in the individual's
gross income for the taxable year on account of Code section
402(a)(8) (before applying the limits of Code section 402(g)
or this section);
(ii) Any employer contribution to a simplified
employee pension (as defined in code section 408(k) to the
extent not includible in the individual's gross income for
the taxable year on account of Code section 402(h)(1)(B)
(before applying the limits of Code section 402(g)); and
(iii) Any employer contribution to a custodial
account or annuity contract under section 403(b) under a
salary reduction agreement (within the meaning of Code
section 3121(a)(5)(D)), to the extent not includible in the
individual's gross income for the taxable year on account of
Code section 403(b) before applying the limits of Code
section 402(g).
A Participant will be considered to have made "excess deferrals" for a
taxable year to the extent that the Participant's elective deferrals
for the taxable year exceed the applicable limit described above for
the year.
(b) Distribution of excess deferrals. In the event that an
amount is included in a Participant's gross income for a taxable year
as a result of an excess
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<PAGE> 38
deferral under Code section 402(g), and the Participant notifies the
Committee on or before the March 1 following the taxable year that all
or a specified part of an Elective Contribution made for his or her
benefit represents an excess deferral, the Committee shall make every
reasonable effort to cause such excess deferral, adjusted for allocable
income, to be distributed to the Participant no later than the April 15
following the calendar year in which such excess deferral was made. The
income allocable to excess deferrals is equal to the allocable gain or
loss for the taxable year of the individual, but not the allocable gain
or loss for the period between the end of the taxable year and the date
of distribution (the "gap period"). Income allocable to excess
deferrals for the taxable year shall be determined by multiplying the
gain or loss attributable to the Participant's Elective Contribution
Account for the taxable year by a fraction, the numerator of which is
the Participant's excess deferrals for the taxable year, and the
denominator of which is the sum of the Participant's Elective
Contribution Account balance as of the beginning of the taxable year
plus the Participant's Elective Contributions for the taxable year. No
distribution of an excess deferral shall be made during the taxable
year of a Participant in which the excess deferral was made unless the
correcting distribution is made after the date on which the Plan
received the excess deferral and both the Participant and the Plan
designate the distribution as a distribution of an excess deferral. The
amount of any excess deferrals that may be distributed to a Participant
for a taxable year shall be reduced by the amount of Elective
Contributions that were excess contributions and were previously
distributed to the Participant for the Plan Year beginning with or
within such taxable year.
(c) Treatment of excess deferrals. For other purposes of the
Code, including Code sections 401(a)(4), 401(k)(3), 404, 409, 411, 412,
and 416, excess deferrals must be treated as employer contributions
even if they are distributed in accordance with paragraph (b) above.
However, excess deferrals of a non-Highly Compensated Employee are not
to be taken into account for purposes of Code section 401(k)(3) (the
actual deferral percentage test) to the extent the excess deferrals are
prohibited under Code section 401(a)(30). Excess deferrals are also to
be treated as employer contributions for purposes of Code section 415
unless distributed under paragraph (b) above.
11.4. CODE SECTION 401(k)(3) LIMITS.
(a) In general. Elective Contributions made under the Plan
are subject to the limits of Code section 401(k)(3), as more fully
described below. The Plan provisions relating to the 401(k)(3) limits
are to be interpreted and applied in accordance with Code sections
401(k)(3) and 401(a)(4), which are hereby incorporated by reference,
and in such manner as to satisfy such other requirements relating to
Code section 401(k) as may be prescribed by the
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<PAGE> 39
Secretary of the Treasury from time to time.
(b) Actual deferral ratios. For each Plan Year, the
Committee will determine the "actual deferral ratio" for each
Participant who is eligible for Elective Contributions. The actual
deferral ratio shall be the ratio, calculated to the nearest
one-hundredth of one percent, of the Elective Contributions (plus any
Qualified Nonelective Contributions treated as Elective Contributions)
made on behalf of the Participant for the Plan Year to the
Participant's Compensation for the Plan Year. For purposes of
determining a Participant's actual deferral ratio,
(i) Elective Contributions will be taken into
account only if each of the following requirements are
satisfied:
(A) the Elective Contribution is allocated
to the Participant's Elective Contribution Account
as of a date within the Plan Year is not contingent
upon participation in the Plan or performance of
services on any date subsequent to that date, and
is actually paid to the Trust no later than the end
of the 12-month period immediately following the
Plan Year to which the contribution relates; and
(B) the Elective Contribution relates to
Compensation that either would have been received
by the Participant in the Plan Year but for the
Participant's election to defer under the Plan, or
is attributable to services performed in the Plan
Year and, but for the Participant's election to
defer, would have been received by the Participant
within 2 1/2 months after the close of the Plan
Year.
To the extent Elective Contributions which meet the
requirements of (A) and (B) above constitute excess
deferrals, they will be taken into account for each Highly
Compensated Employee, but will not be taken into account for
any non-Highly Compensated Employee;
(ii) in the case of a Participant who is a Highly
Compensated Employee for the Plan Year and is eligible to
have elective deferrals (and qualified nonelective
contributions, to the extent treated as elective deferrals)
allocated to his or her accounts under two or more cash or
deferred arrangements described in Code section 401(k)
maintained by an Affiliated Employer, the Participant's
actual deferral ratio shall be determined as if such
elective deferrals (as well as qualified nonelective or
qualified ) are made under a single arrangement, and if two
or more of the cash or deferred arrangements have different
Plan Years, all Plan Years ending with or within the same
calendar year shall be treated as a
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<PAGE> 40
single Plan Year;
(iii) the applicable period for determining
Compensation for each Participant for a Plan Year shall be
the 12-month period ending on the last day of such Plan
Year; provided, that to the extent permitted under
Regulations, the Committee may choose, on a uniform basis,
to treat as the applicable period only that portion of the
Plan Year during which the individual was eligible to make
Elective Contributions;
(iv) Qualified Nonelective Contributions made on
behalf of Participants who are eligible to receive Elective
Contributions shall be treated as Elective Contributions to
the extent permitted by Regulation section 1.401(k)-1(b)(5);
(v) in the event that the Plan satisfies the
requirements of Code sections 401(k), 410(a)(4), or 410(b)
only if aggregated with one or more other plans with the
same plan year, or if one or more other plans with the same
Plan Year satisfy such Code sections only if aggregated with
this Plan, then this section shall be applied by determining
the actual deferral ratios as if all such plans were a
single plan;
(vi) An employee who would be a Participant but for
the failure to make Elective Contributions shall be treated
as a Participant on whose behalf no Elective Contributions
are made; and
(vii) Elective Contributions which are made on
behalf of non-Highly Compensated Employees which could be
used to satisfy the Code section 401(k)(3) limits but are
not necessary to be taken into account in order to satisfy
such limits, may instead be taken into account for purposes
of the Code section 401(m) limits to the extent permitted by
Regulation sections 1.401(m)-1(b)(5).
(c) Actual deferral percentages. Each Plan Year, the actual
deferral ratios for all Highly Compensated Employees who are eligible
for Elective Contributions for a Plan Year shall be averaged to
determine the actual deferral percentage for the highly compensated
group for the Plan Year, and the actual deferral ratios for all
Employees who are not Highly Compensated Employees but are eligible for
Elective Contributions for the Plan Year shall be averaged to determine
the actual deferral percentage for the nonhighly compensated group for
the Plan Year.
(d) Actual deferral percentage tests. For a Plan Year, at
least one of the following tests must be satisfied:
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<PAGE> 41
(i) the highly compensated group's actual deferral
percentage for the Plan Year does not exceed 125% of the
prior year actual deferral percentage for the prior year
nonhighly compensated group; or
(ii) the excess of the actual deferral percentage
for the highly compensated group for the Plan Year over the
prior year actual deferral percentage for the prior year
nonhighly compensated group does not exceed two percentage
points, and the actual deferral percentage for the highly
compensated group for the Plan Year does not exceed twice
the prior year actual deferral percentage for the prior year
nonhighly compensated group.
For purposes of satisfying the above tests for a Plan Year, the "prior
year actual deferral percentage for the prior year nonhighly
compensated group" refers to the actual deferral percentage determined
for the immediately preceding Plan Year for the nonhighly compensated
group existing during such preceding Plan Year. Notwithstanding the
foregoing, in satisfying the above tests, the Committee may elect, in
accordance with Code section 401(k)(3) and applicable regulations, to
use the actual deferral percentage for the nonhighly compensated group
determined for the current Plan Year.
(e) Adjustments by Committee. If, prior to the time all
Elective Contributions for a Plan Year have been contributed to the
Trust, the Committee determines that Elective Contributions are being
made at a rate which will cause the Code section 401(k)(3) limits to be
exceeded for the Plan Year, the Committee may, in its sole discretion,
limit the amount of Elective Contributions to be made with respect to
one or more Highly Compensated Employees for the balance of the Plan
Year by suspending or reducing Elective Contribution elections to the
extent the Committee deems appropriate. Any Elective Contributions
which would otherwise be made to the Trust shall instead be paid to the
affected Participant in cash.
(f) Excess contributions. If the Code section 401(k)(3)
limits have not been met for a Plan Year after all contributions for
the Plan Year have been made, the Committee will determine the amount
of excess contributions with respect to Participants who are Highly
Compensated Employees in the manner prescribed by Code section
401(k)(8) and by applicable regulations.
(g) Distribution of excess contributions. A Participant's
excess contributions, adjusted for income, will be designated by the
Participating Employer as a distribution of excess contributions and
distributed to the Participant. The income allocable to excess
contributions is equal to the allocable
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<PAGE> 42
gain or loss for the Plan Year, but not the allocable gain or loss for
the period between the end of the Plan Year and the date of
distribution (the "gap period"). Income allocable to excess
contributions for the Plan Year shall be determined by multiplying the
gain or loss attributable to the Participant's Elective Contribution
Account and QNEC Account balances by a fraction, the numerator of which
is the excess contributions for the Participant for the Plan Year, and
the denominator of which is the sum of the Participant's Elective
Contribution Account and QNEC Account balances as of the beginning of
the Plan Year plus the Participant's Elective Contributions and
Qualified Nonelective Contributions for the Plan Year. Distribution of
excess contributions will be made after the close of the Plan Year to
which the contributions relate, but within 12 months after the close of
such Plan Year. Excess contributions shall be treated as annual
additions under the Plan, even if distributed under this paragraph.
(h) Special rules. For purposes of distributing excess
contributions, the amount distributed with respect to a Highly
Compensated Employee for a Plan Year shall be reduced by the amount of
excess deferrals previously distributed to the Highly Compensated
Employee for his or her taxable year ending with or within such Plan
Year.
(i) Recordkeeping requirement. The Committee, on behalf of
the Participating Employers, shall maintain such records as are
necessary to demonstrate compliance with the Code section 401(k)(3)
limits, including the extent to which Qualified Nonelective
Contributions are taken into account in determining the actual deferral
ratios.
(j) Excise tax where failure to correct. If the excess
contributions are not corrected within 2 1/2 months after the close of
the Plan Year to which they relate, the Participating Employers will be
liable for a 10 percent excise tax on the amount of excess
contributions attributable to them, to the extent provided by Code
section 4979. Qualified Nonelective Contributions properly taken into
account under this Section for the Plan Year may enable the Plan to
avoid having excess contributions, even if the contributions are made
after the close of the 2 1/2 month period.
11.5. CODE SECTION 401(m) LIMITS.
(a) In General. Matching Contributions made under the Plan
are subject to the limits of Code section 401(m), as more fully
described below. The Plan provisions relating to the 401(m) limits are
to be interpreted and applied in accordance with Code sections 401(m)
and 401(a)(4), which are hereby incorporated by reference, and in such
manner as to satisfy such other requirements relating to Code section
401(m) as may be prescribed by the
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<PAGE> 43
Secretary of the Treasury from time to time.
(b) Actual contribution ratios. For each Plan Year, the
Administrator will determine the "actual contribution ratio" for each
Participant who is eligible for Matching Contributions. The actual
contribution ratio shall be the ratio, calculated to the nearest
one-hundredth of one percent, of the sum of the Matching Contributions
and Qualified Nonelective Contributions which are not treated as
Elective Contributions made on behalf of the Participant for the Plan
Year, to the Participant's Compensation for the Plan Year. For purposes
of determining a Participant's actual contribution ratio,
(i) A Matching Contribution will be taken into
account only if the Contribution is allocated to a
Participant's Account as of a date within the Plan Year, is
actually paid to the Trust no later than 12 months after the
close of the Plan Year, and is made on behalf of a
Participant on account of the Participant's Elective
Contributions for the Plan Year;
(ii) in the case of a Participant who is a Highly
Compensated Employee for the Plan Year and is eligible to
have Matching Contributions or employee contributions
(including amount treated as Matching Contributions)
allocated to his or her accounts under two or more plans
maintained by an Affiliated Employer which may be aggregated
for purposes of Code sections 410(b) and 401(a)(4), the
Participant's actual contribution ratio shall be determined
as if such contributions are made under a single plan, and
if two or more of the plans have different Plan Years, all
Plan Years ending with or within the same calendar year
shall be treated as a single Plan Year;
(iii) the applicable period for determining
Compensation for each Participant for a Plan Year shall be
the 12-month period ending on the last day of such Plan
Year; provided that to the extent permitted under
Regulations, the Administrator may choose, on a uniform
basis, to treat as the applicable period only that portion
of the Plan Year during which the individual was eligible
for Matching Contributions;
(iv) Elective Contributions not applied to satisfy
the Code section 401(k)(3) limits and Qualified Nonelective
Contributions not treated as Elective Contributions may be
treated as Matching Contributions to the extent permitted by
Regulation section 1.401(m)-1(b)(5);
(v) in the event that the Plan satisfies the
requirements of Code sections 401(k), 410(a)(4), or 410(b)
only if aggregated with one or more
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<PAGE> 44
other plans with the same Plan Year, or if one or more other
plans with the same Plan Year satisfy such Code sections only
if aggregated with this Plan, then this section shall be
applied by determining the actual deferral ratios as if all
such plans were a single plan; and
(vi) any forfeitures under the Plan which are applied
against Matching Contributions shall be treated as Matching
Contributions.
(c) Actual contribution percentages. Each Plan Year, the
actual contribution ratios for all Highly Compensated Employees who are
eligible for Matching Contributions for a Plan Year shall be averaged
to determine the actual contribution percentage for the highly
compensated group for the Plan Year, and the actual contribution ratios
for all Employees who are not Highly Compensated Employees but are
eligible for Matching Contributions for the Plan Year shall be averaged
to determine the actual contribution percentage for the nonhighly
compensated group for the Plan Year.
(d) Actual contribution percentage tests. For a Plan Year, at
least one of the following tests must be satisfied:
(i) the highly compensated group's actual
contribution percentage for the Plan Year does not exceed 125%
of the prior year actual contribution percentage for the prior
year nonhighly compensated group; or
(ii) the excess of the actual contribution percentage
for the highly compensated group for the Plan Year over the
prior year actual contribution percentage for the prior year
nonhighly compensated group does not exceed two percentage
points, and the actual contribution percentage for the highly
compensated group for the Plan Year does not exceed twice the
prior year actual contribution percentage for the prior year
nonhighly compensated group.
For purposes of satisfying the above tests for a Plan Year, the "prior
year actual contribution percentage for the prior year nonhighly
compensated group" refers to the actual contribution percentage
determined for the immediately preceding Plan Year for the nonhighly
compensated group existing during such preceding Plan Year.
Notwithstanding the foregoing, in satisfying the above tests, the
Committee may elect, in accordance with Code section 401(m)(2) and
applicable regulations, to use the actual contribution percentage for
the nonhighly compensated group calculated for the current Plan Year.
(e) Multiple use test. In the event that (i) the actual
deferral percentage and actual contribution percentage for the highly
compensated group exceed
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<PAGE> 45
125% of the respective actual deferral and actual contribution
percentages for the nonhighly compensated group, and (ii) the sum of
the actual deferral percentage and the actual contribution percentage
for the highly compensated group exceeds the "aggregate limit" within
the meaning of Regulation section 1.401(m)-2(b)(3), the Administrator
shall reduce the actual contribution ratios of Highly Compensated
Employees who had both an actual deferral ratio and an actual
contribution ratio for the Plan Year to the extent required by such
section and in the same manner as described in paragraph (f) below.
(f) Adjustments by Administrator. If, prior to the time all
Matching Contributions for a Plan Year have been contributed to the
Trust, the Administrator determines that such contributions are being
made at a rate which will cause the Code section 401(m) limits to be
exceeded for the Plan Year, the Administrator may, in its sole
discretion, limit the amount of such contributions to be made with
respect to one or more Highly Compensated Employees for the balance of
the Plan Year by limiting the amount of such contributions to the
extent the Administrator deems appropriate.
(g) Excess aggregate contributions. If the Code section
401(m) limits have not been satisfied for a Plan Year after all
contributions for the Plan Year have been made, the excess of the
aggregate amount of the Matching Contributions (and any Qualified
Nonelective Contribution or elective deferral taken into account in
computing the actual contribution percentages) actually made on behalf
of Highly Compensated Employees for the Plan Year over the maximum
amount of such contributions permitted under Code section 401(m)(2)(A)
shall be considered to be "excess aggregate contributions". The
Committee will determine the amount of excess aggregate contributions
with respect to Participants who are Highly Compensated Employees in
the manner prescribed by Code section 401(m)(6)(C) and by applicable
regulations
(h) Distribution of excess aggregate contributions. A
Participant's excess aggregate contributions, adjusted for income, will
be designated by the Participating Employer as a distribution of excess
aggregate contributions, and distributed to the Participant. The income
allocable to excess aggregate contributions is equal to the allocable
gain or loss for the taxable year of the individual, but not the
allocable gain or loss for the period between the end of the taxable
year and the date of distribution (the "gap period"). Income allocable
to excess aggregate contributions for the taxable year shall be
determined by multiplying the gain or loss attributable to the
Participant's Matching Contribution Account balances by a fraction, the
numerator of which is the excess aggregate contributions for the
Participant for the Plan Year, and the denominator of which is the sum
of the Participant's Matching Contribution Account balances as of the
beginning of the Plan Year plus the Participant's Matching
Contributions
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<PAGE> 46
for the Plan Year. Distribution of excess aggregate contributions will
be made after the close of the Plan Year to which the contributions
relate, but within 12 months after the close of such Plan Year. Excess
aggregate contributions shall be treated as employer contributions for
purposes of Code sections 401(a)(4), 404, and 415 even if distributed
from the Plan.
(i) Recordkeeping requirement. The Administrator, on behalf
of the Participating Employers, shall maintain such records as are
necessary to demonstrate compliance with the Code section 401(m)
limits, including the extent to which Elective Contributions and
Qualified Nonelective Contributions are taken into account in
determining the actual contribution ratios.
(j) Excise tax where failure to correct. If the excess
aggregate contributions are not corrected within 2 1/2 months after the
close of the Plan Year to which they relate, the Participating
Employers will be liable for a 10 percent excise tax on the amount of
excess aggregate contributions attributable to them, to the extent
provided by Code section 4979. Qualified Nonelective Contributions
properly taken into account under this section for the Plan Year may
enable the Plan to avoid having excess aggregate contributions, even if
the contributions are made after the close of the 2 1/2 month period.
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<PAGE> 47
ARTICLE 12. SPECIAL TOP-HEAVY PROVISIONS.
12.1. PROVISIONS TO APPLY. The provisions of this Article shall apply
for any top-heavy Plan Year notwithstanding anything to the contrary in the
Plan.
12.2. MINIMUM CONTRIBUTION. For any Plan Year which is a top-heavy plan
year, the Participating Employers shall contribute to the Trust a minimum
contribution on behalf of each Participant who is not a key employee for such
year and who has not separated from service from the Affiliated Employers by the
end of the Plan Year, regardless of whether or not the Participant has elected
to make Elective Contributions for the Year. The minimum contribution shall, in
general, equal 3% of each such Participant's Compensation, but shall be subject
to the following special rules:
(a) If the largest contribution on behalf of a key employee
for such year, taking into account only Elective Contributions,
Matching Contributions (if any), Discretionary Contributions and
Qualified Nonelective Contributions, is equal to less than 3% of the
key employee's Compensation, such lesser percentage shall be the
minimum contribution percentage for Participants who are not key
employees. This special rule shall not apply, however, if the Plan is
required to be included in an aggregation group and enables a defined
benefit plan to meet the requirements of Code section 401(a)(4) or 410.
(b) No minimum contribution will be required with respect to
a Participant who is also covered by another top-heavy defined
contribution plan of an Affiliated Employer which meets the vesting
requirements of Code section 416(b) and under which the Participant
receives the top-heavy minimum contribution.
(c) If a Participant is also covered by a top-heavy defined
benefit plan of an Affiliated Employer, "5%" shall be substituted for
"3%" above in determining the minimum contribution.
(d) The minimum contribution with respect to any Participant
who is not a key employee for the particular year will be offset by any
Discretionary Contributions and any Qualified Nonelective
Contributions, but not any other type of contribution otherwise made
for the Participant's benefit for such year.
(e) If additional minimum contributions are required under
this Section, such contributions shall be credited to the Participant's
Discretionary Contribution Account.
(f) A minimum contribution required under this Section shall
be made even though, under other Plan provisions, the Participant would
not otherwise be
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<PAGE> 48
entitled to receive an allocation for the year because of (i) the
Participant's failure to complete 1,000 hours of service (or any
equivalent provided in the Plan), or (ii) the Participant's failure to
make mandatory contributions or Elective Contributions to the Plan, or
(iii) Compensation less than a stated amount.
12.3. ADJUSTMENT TO LIMITATION ON BENEFITS. For purposes of the Code
section 415 limits, the definitions of "defined contribution plan fraction" and
"defined benefit plan fraction" contained therein shall be modified, for any
Plan Year which is a top-heavy Plan Year, by substituting "1.0" for "1.25" in
Code sections 415(e)(2)(B) and 415(e)(3)(B).
12.4. DEFINITIONS. For purposes of these top-heavy provisions, the
following terms have the following meanings:
(a) "key employee" means a key employee described in Code
section 416(i)(l), and "non-key employee" means any employee who is not
a key employee (including employees who are former key employees);
(b) "top-heavy plan year" means a Plan Year if any of the
following conditions exist:
(i) the top-heavy ratio for the Plan exceeds 60
percent and the Plan is not part of any required aggregation
group or permissive aggregation group of plans;
(ii) this Plan is a part of a required aggregation
group of plans but not part of a permissive aggregation group
and the top-heavy ratio for the group of plans exceeds 60
percent; or
(iii) the Plan is part of a required aggregation
group and part of a permissive aggregation group of plans and
the top-heavy ratio for the permissive aggregation group
exceeds 60 percent.
(c) "top-heavy ratio":
(i) If the employer maintains one or more defined
contribution plans (including any Simplified Employee Pension
Plan) and the employer has not maintained any defined benefit
plan which during the 5-year period ending on the
determination date(s) has or has had accrued benefits, the
top-heavy ratio for the Plan alone or for the required or
permissive aggregation group as appropriate is a fraction, the
numerator of which is the sum of the account balances of all
key employees on the determination date(s) (including any part
of any account balance
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<PAGE> 49
distributed in the 5-year period ending on the determination
date(s)), and the denominator of which is the sum of all
account balances (including any part of an account balance
distributed in the 5-year period ending on the determination
date(s)), both computed in accordance with Code section 416.
Both the numerator and the denominator of the top-heavy ratio
are increased to reflect any contribution not actually made as
of the determination date, but which is required to be taken
into account on that date under Code section 416.
(ii) If the employer maintains one or more defined
contribution plans (including any Simplified Employee Pension
Plan) and the employer maintains or has maintained one or more
defined benefit plans which during the 5-year period ending on
the determination date(s) has or has had any accrued benefits,
the top-heavy ratio for any required or permissive aggregation
group as appropriate is a fraction, the numerator of which is
the sum of the account balances under the aggregated defined
contribution plan or plans for all key employees, determined
in accordance with (i) above, and the present value of accrued
benefits under the aggregated defined benefit plan or plans
for all key employees as of the determination date(s), and the
denominator of which is the sum of the account balances under
the aggregated defined contribution plan or plans for all
participants, determined in accordance with (i) above, and the
present value of all accrued benefits under the defined
benefit plan or plans for all participants as of the
determination date(s), all determined in accordance with Code
section 416. The accrued benefits under a defined benefit plan
in both the numerator and denominator of the top-heavy ratio
are increased for any distribution of an accrued benefit made
in the 5-year period ending on the determination date.
(iii) For purposes of (i) and (ii) above, the value
of account balances and the present value of accrued benefits
will be determined as of the most recent valuation date that
falls within or ends with the 12-month period ending on the
determination date, except as provided in Code section 416 for
the first and second plan years of a defined benefit plan. The
account balances and accrued benefits of a participant (A) who
is not a key employee but who was a key employee in a prior
year, or (B) who has not been credited with at least one Hour
of Service with any employer maintaining the plan at any time
during the 5-year period ending on the determination date will
be disregarded. The calculation of the top-heavy ratio, and
the extent to which distributions, rollovers, and transfers
are taken into account will be made in accordance with Code
section 416. Deductible employee contributions will not be
taken into account for purposes of computing the top-heavy
ratio. When
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<PAGE> 50
aggregating plans, the value of account balances and accrued
benefits will be calculated with reference to the
determination dates that fall within the same calendar year.
(iv) The accrued benefit of a Participant other than
a key employee shall be determined under (A) the method, if
any, that uniformly applies for accrual purposes under all
defined benefit plans maintained by the employer, or (B) if
there is no such method, as if such benefit accrued not more
rapidly than the slowest accrual rate permitted under the
fractional rule of Code section 411(b)(1)(C).
(d) The "permissive aggregation group" is the required
aggregation group of plans plus any other plan or plan of the employer
which, when considered as a group with the required aggregation group,
would continue to satisfy the requirements of Code sections 401(a)(4)
and 410.
(e) The "required aggregation group" is (i) each qualified
plan of the employer in which at least one key employee participates or
participated at any time during the determination period (regardless of
whether the plan has terminated), and (ii) any other qualified plan of
the employer which enables a plan described in (i) to meet the
requirements of Code sections 401(a)(4) and 410(b).
(f) For purposes of computing the top-heavy ratio, the
"valuation date" shall be the last day of the applicable plan year.
(g) For purposes of establishing present value to compute
the top-heavy ratio, any benefit shall be discounted only for mortality
and interest based on the interest and mortality rates specified in the
defined benefit plan(s), if applicable.
(h) The term "determination date" means, with respect to the
initial plan year of a plan, the last day of such plan year and, with
respect to any other plan year of a plan, the last day of the preceding
plan year of such plan. The term "applicable determination date" means,
with respect to the Plan, the determination date for the Plan Year of
reference and, with respect to any other plan, the determination date
for any plan year of such plan which falls within the same calendar
year as the applicable determination date of the Plan.
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<PAGE> 51
ARTICLE 13. MISCELLANEOUS.
13.1. EXCLUSIVE BENEFIT RULE. No part of the corpus or income of the
Trust allocable to the Plan will be used for or diverted to purposes other than
for the exclusive benefit of each Participant and Beneficiary, except as
otherwise provided under the provisions of the Plan relating to Qualified
Domestic Relations Orders, the payment of reasonable expenses of administering
the Plan, the return of contributions upon nondeductibility or mistake of fact,
or the failure of the Plan to qualify initially.
13.2. LIMITATION OF RIGHTS. Neither the establishment of the Plan or
the Trust, nor any amendment thereof, nor the creation of any fund or account,
nor the payment of any benefits, will be construed as giving to any Participant
or other person any legal or equitable right against any Participating Employer
or Committee or Trustee, except as provided herein, and in no event will the
terms of employment or service of any Participant be modified or in any way be
affected hereby. It is a condition of the Plan, and each Participant expressly
agrees by his or her participation herein, that each Participant will look
solely to the assets held in the Trust for the payment of any benefit to which
he or she is entitled under the Plan.
13.3. NONALIENABILITY OF BENEFITS. The benefits provided hereunder will
not be subject to the voluntary or involuntary alienation, assignment,
garnishment, attachment, execution or levy of any kind, and any attempt to cause
such benefits to be so subjected will not be recognized, except to such extent
as may be required by law, except that if the Committee receives any Qualified
Domestic Relations Order that requires the payment of benefits hereunder or the
segregation of any Account, such benefits shall be paid, and such Account
segregated, in accordance with the applicable requirements of such Order. In
addition, the Account balance may be pledged as security for a loan from the
Plan in accordance with the Plan's loan procedures.
13.4. ADEQUACY OF DELIVERY. Any payment to be made under the Plan by
the Trustee may be made by the Trustee's check. Mailing to a person or persons
entitled to distributions hereunder at the addresses designated by the
Participating Employer or Committee shall be adequate delivery by the Trustee of
such distributions for all purposes. In the event the whereabout of a person
entitled to benefits under the Plan cannot be determined after diligent search
by the Committee, the Committee may place the benefits in a federally insured,
interest-bearing bank account opened in the name of such person. Such action
shall constitute a full distribution of such benefits under the terms of the
Plan and Trust.
13.5. RECLASSIFICATION OF EMPLOYMENT STATUS. Notwithstanding anything
herein to the contrary, an individual who is not characterized or treated as a
common law employee of a Participating Employer shall not be eligible to
participate in the Plan. However, in the event that such an individual is
reclassified or deemed to be reclassified
- 46 -
<PAGE> 52
as a common law employee of a Participating Employer, the individual shall be
eligible to participate in the Plan as of the actual date of such
reclassification (to the extent such individual otherwise qualifies as an
Eligible Employee hereunder). If the effective date of any such reclassification
is prior to the actual date of such reclassification, in no event shall the
reclassified individual be eligible to participate in the Plan retroactively to
the effective date of such reclassification.
13.6. VETERANS' REEMPLOYMENT AND BENEFITS RIGHTS. Notwithstanding any
provision of the Plan to the contrary, contributions, benefits and service
credit with respect to qualified military service will be provided in accordance
with Code section 414(u).
13.7. GOVERNING LAW. The Plan and Trust will be construed, administered
and enforced according to the laws of Massachusetts to the extent such laws are
not preempted by ERISA.
- 47 -
<PAGE> 53
ARTICLE 14. DEFINITIONS.
Wherever used in the Plan, the following terms have the following
meanings:
14.1. "ACCOUNTS" mean, for any Participant, the accounts established
under the Plan to which contributions made for the Participant's benefit, and
any allocable income, expense, gain and loss, are allocated.
14.2. "AFFILIATED EMPLOYER" means (a) the Plan Sponsor, (b) any
corporation that is a member of a controlled group of corporations (as defined
in Code section 414(b)) of which the Plan Sponsor is also a member, (c) any
trade or business, whether or not incorporated, that is under common control (as
defined in Code section 414(c)) with the Plan Sponsor, (d) any trade or business
that is a member of an affiliated service group (as defined in Code section
414(m)) of which the Plan Sponsor is also a member, or (e) to the extent
required by Regulations issued under Code section 414(o), any other
organization; provided, that the term "Affiliated Employer" shall not include
any corporation or unincorporated trade or business prior to the date on which
such corporation, trade or business satisfies the affiliation or control tests
of, (b), (c), (d) or (e) above. In identifying any "Affiliated Employers" for
purposes of the Code section 415 limits, the definitions in Code sections 414(b)
and (c) shall be modified as provided in Code section 415(h).
14.3. "BENEFICIARY" means any person entitled to receive benefits under
the Plan upon the death of a Participant.
14.4. "BOARD OF DIRECTORS" means the members of the Board of Directors
of Boston Scientific Corporation.
14.5. "CODE" means the Internal Revenue Code of 1986, as amended from
time to time. Reference to any section or subsection of the Code includes
reference to any comparable or succeeding provisions of any legislation which
amends, supplements or replaces such section or subsection, and also includes
reference to any Regulation issued pursuant to or with respect to such section
or subsection.
14.6. "COMMITTEE" means the entity or persons appointed by the Board of
Directors to administer the Plan pursuant to its provisions.
14.7. "COMPANY STOCK" means any stock of the Plan Sponsor or an
Affiliated Employer constituting a "qualifying employer security" within the
meaning of section 407(d)(5) of ERISA.
14.8. "COMPENSATION" means,
- 48 -
<PAGE> 54
(a) for purposes of determining the Code section 415 limits and the
amount of any minimum contribution under the special top-heavy provisions, the
Participant's wages as defined in Code section 3401(a) for purposes of income
tax withholding at the source but determined without regard to any rules that
limit the remuneration included in wages based on the nature or location of the
employment or the services performed;
(b) for purposes of determining the status of an individual as a Highly
Compensated Employee or a key employee, the same as described in (a) above, but
increased by any such amounts that would have been received by the individual
from the Employer but for an election under Code section 125, 401(k), 402(h), or
403(b);
(c) for purposes of the limits under Sections 11.4 and 11.5,
"compensation" as defined under Code section 414(s) and the Treasury regulations
thereunder; and
(d) for all other purposes under the Plan, the same as in (a) above,
reduced by all of the following items (even if includible in gross income):
reimbursements or other expense allowances, bonuses, deferred compensation, and
moving expenses, provided however that any elective contributions made by the
Participating Employer that are not includible in gross income by reason of Code
section 125 or 402(e)(3) shall in all cases be includible as "Compensation" for
purposes of this paragraph (d). Notwithstanding the foregoing, for purposes of
allocating Discretionary Contributions for a Plan Year, commissions paid to any
field sales commissioned Employee who is a Highly Compensated Employee for such
Plan Year shall be taken into consideration only to the extent of the less of
(i) fifty percent of the amount of the commissions so paid, and (ii) the amount,
not in excess of the commissions so paid, which when added to all other amounts
paid such Employee and qualifying as Compensation results in an aggregate amount
of Compensation of $85,000.
(e) Compensation shall include only that compensation which is actually
paid to the Participant during the applicable Plan Year. For all purposes under
the Plan, Compensation for any individual will be limited for any Plan Year to
$160,000 as adjusted by the Secretary of the Treasury under Code section
401(a)(17). If the period for determining Compensation used in calculating a
Participant's allocation for a determination period is shorter than 12 months,
the annual Compensation limit shall be an amount equal to the otherwise
applicable limit multiplied by a fraction, the numerator of which is the number
of months in the period, and the denominator of which is 12.
14.9. "DISABILITY" means a medically determinable physical or mental
impairment which makes a Participant unable to engage in any substantial gainful
activity and can be expected to result in death or to be of long-continued and
indefinite duration, as determined by the Plan Sponsor or an Affiliated Employer
after taking the advice of a qualified physician.
- 49 -
<PAGE> 55
14.10. "DISCRETIONARY CONTRIBUTION" means a contribution made for the
benefit of a Participant by a Participating Employer in the discretion of the
Board of Directors.
14.11. "DISCRETIONARY CONTRIBUTION ACCOUNT" means an Account to which
Discretionary Contributions are allocated.
14.12. "ELECTIVE CONTRIBUTION" means a contribution made to the Plan
for the benefit of a Participant pursuant to a compensation reduction
authorization.
14.13. "ELECTIVE CONTRIBUTION ACCOUNT" means an Account to which
Elective Contributions are allocated.
14.14. "ELIGIBLE EMPLOYEE" means, subject to Section 13.5, any Employee
who
(a) is employed by a Participating Employer, and who, in the
opinion of his or her Participating Employer, may reasonably be
expected to complete 1,000 or more Hours of Service with a
Participating Employer in a Plan Year; or
(b) any other Employee employed by a Participating Employer
who has completed 1,000 or more Hours of Service in a computation
period or has previously been an Eligible Employee described in (a)
above.
The initial computation period shall be the 12-consecutive month period
beginning on the date the Employee first performs an Hour of Service
(the "employment commencement date"). The succeeding computation
periods commence with the first Plan Year commencing after the
Employee's employment commencement date. In no event shall a "leased
employee" within the meaning of Code section 414(n) become an Eligible
Employee until he or she becomes actually employed by a Participating
Employer.
14.15. "EMPLOYEE" means, effective as of January 1, 1989, any
individual employed by an Affiliated Employer, including any leased employee and
any other individual required to be treated as an employee pursuant to Code
sections 414(n) and 414(o).
14.16. "EMPLOYEE CONTRIBUTION" means the voluntary after-tax
contribution made by a Participant under the Plan.
14.17. "ENTRY DATE" means
(a) the first pay period commencement date on which the
Employee is an Eligible Employee and has satisfied the conditions of
Section 2.1(b)(3) and (4); and
- 50 -
<PAGE> 56
(b) the first pay period commencement date in each
subsequent calendar quarter.
For this purpose, a "pay period commencement date" means the first day of a full
pay period of the Employee.
14.18. "ERISA" means the Employee Retirement Income Security Act of
1974, as from time to time amended, and any successor statute or statutes of
similar import.
14.19. "HIGHLY COMPENSATED EMPLOYEE" means each individual employed by
an Affiliated Employer who (i) during such Plan Year or preceding Plan Year, is
a "5% owner" within the meaning of Code section 414(q), or (ii) during the
preceding Plan Year received Compensation in excess of $80,000 (as adjusted
under such Code section) and was in the "top paid group" as defined therein for
such Plan Year.
14.20. "HOUR OF SERVICE" means, with respect to any Employee,
(a) Each hour for which the Employee is paid or entitled to
payment for the performance of duties for an Affiliated Employer, each
such hour to be credited to the Employee for the computation period in
which the duties were performed;
(b) Each hour for which the Employee is directly or
indirectly paid or entitled to payment by any Affiliated Employer
(including payments made or due from a trust fund or insurer to which
the Affiliated Employer contributes or pays premiums) on account of a
period of time during which no duties are performed (irrespective of
whether the employment relationship has terminated) due to vacation,
holiday, illness, incapacity, disability, layoff, jury duty, military
duty, or leave of absence, each such hour to be credited to the
Employee for the computation period in which such period of time
occurs, subject to the following rules;
(i) No more than 501 Hours of Service shall be
credited under this paragraph (b) to the Employee on account
of any single continuous period during which the Employee
performs no duties;
(ii) Hours of Service shall not be credited under
this paragraph (b) to an Employee for a payment which solely
reimburses the Employee for medically related expenses
incurred by the Employee, or which is made or due under a
plan maintained solely for the purpose of complying with
applicable worker's compensation, unemployment compensation
or disability insurance laws; and
- 51 -
<PAGE> 57
(iii) If the period during which the Employee
performs no duties falls within two or more computation
periods, and if the payment made on account of such period
is not calculated on the basis of units of time, the number
of Hours of Service credited with respect to such period
shall be allocated between not more than the first two such
periods based on the amount of the payment divided by the
Employee's most recent hourly rate of Compensation before
the period during which no duties were performed;
(c) Each hour not counted under paragraph (a) or (b) for
which back pay, irrespective of mitigation of damages, has been either
awarded or agreed to be paid by any Affiliated Employer, each such hour
to be credited to the Employee for the computation period to which the
award or agreement for back pay pertains, provided that crediting of
Hours of Service under this paragraph (c) with respect to periods
described in paragraph (b) above shall be subject to the limitations
and special rules set forth in clauses (i), (ii) and (iii) of paragraph
(b);
(d) Each noncompensated hour while an Employee during a
period of absence from any Affiliated Employer in the armed forces of
the United States if the Employee returns to work for any Affiliated
Employer at a time when he or she has reemployment rights under federal
law, and each noncompensated hour while an Employee on an unpaid leave
of absence granted by the Employer; and
(e) Solely for purposes of Section 5.5, each hour not
counted under paragraph (a) or (b) for which the Employee is absent
form work for maternity or paternity reasons, provided that no more
than 501 Hours of Service shall be credited under this paragraph (e) to
the Employee. For purposes of this paragraph, an absence from work for
maternity or paternity reasons means an absence (1) by reason of the
pregnancy of the individual, (2) by reason of the birth of a child of
the individual, (3) by reason of the placement of a child with the
individual in connection with the adoption of such child by such
individual, or (4) for purposes of caring for such child for a period
beginning immediately following such birth or placement.
Hours of Service to be credited to an Employee under (a), (b) and (c) above will
be calculated and credited pursuant to paragraphs (b) and (c) of Section
2530.200b-2 of the Department of Labor Regulations, which are incorporated
herein by reference. Hours of Service to be credited to an Employee during a
period described in (d) and (e) above will be determined by the Committee with
reference to the individual's most recent normal work schedule, or at the rate
of eight hours per day in the event the Committee is unable to establish such
schedule.
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<PAGE> 58
14.21. "MATCHING CONTRIBUTION ACCOUNT" means an Account to which
Matching Contributions are allocated.
14.22. "NORMAL RETIREMENT AGE" means age 62.
14.23. "PARTICIPANT" means each Eligible Employee who participates in
the Plan pursuant to its provisions.
14.24. "PARTICIPATING EMPLOYER" means the Plan Sponsor and each other
Affiliated Employer listed on Schedule A.
14.25. "PLAN" means the Boston Scientific Corporation 401(k) Savings
Plan set forth herein, and all subsequent amendments thereto.
14.26. "PLAN SPONSOR" means Boston Scientific Corporation, a Delaware
Corporation.
14.27. "PLAN YEAR" means the calendar year.
14.28. "PREDECESSOR EMPLOYER" means any trade or business acquired by a
Participating Employer, or any entity from which a Participating Employer has
acquired substantially all of its assets.
14.29. "QUALIFIED DOMESTIC RELATIONS ORDER" means any judgment, decree
or order (including approval of a property settlement agreement) which
constitutes a "qualified domestic relations order" within the meaning of Code
section 414(p). A judgment, decree or order may still be considered to be a
Qualified Domestic Relations Order if it requires a distribution to an alternate
payee (or the segregation of accounts pending distribution to an alternate
payee) before the Participant is otherwise entitled to a distribution under the
Plan.
14.30. "QUALIFIED NONELECTIVE CONTRIBUTION" means a contribution made
in the discretion of the Plan Sponsor which is designated by the Plan Sponsor as
a Qualified Nonelective Contribution and which falls within the definition of a
"qualified nonelective contribution" under Regulation section 1.401(k)-1(g)(13).
14.31. "QNEC ACCOUNT" means an Account to which Qualified Nonelective
Contributions are allocated.
14.32. "REGULATION" means a regulation issued by the Department of
Treasury, including any final regulation, proposed regulation, temporary
regulation, as well as any modification of any such regulation contained in any
notice, revenue procedure, or similar pronouncement issued by the Internal
Revenue Service.
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<PAGE> 59
14.33. "REQUIRED BEGINNING DATE" for a Participant shall be determined
as follows:
(i) For a Participant who is a five percent owner (as defined
in Code section 416), the Required Beginning Date is April 1 following
the calendar year in which the Participant attains age 70 1/2.
(ii) For a Participant who is not a five percent owner, the
Required Beginning Date is April 1 following the later of (A) the
calendar year in which the Participant attains age 70 1/2, and (B) the
calendar year in which the Participant retires.
14.34. "ROLLOVER CONTRIBUTION" means a contribution made by a
Participant which satisfies the requirements for rollover contributions as set
forth in the Plan.
14.35. "SECTION" means a section of the Plan.
14.36. "TRUST" means the trust established under Section 3.12.
14.37. "TRUSTEE" means the person or persons who are at any time acting
as trustee under the Trust.
14.38. "VALUATION DATE" means each day on which the New York Stock
Exchange is open for trading.
14.39. "YEAR OF SERVICE FOR VESTING" means a Plan Year during which the
Employee completes at least 1,000 Hours of Service. The following special rules
shall apply:
(a) Unless otherwise provided in Schedule B, in the event the
Plan Sponsor acquires a business of another employer, through an
acquisition either of assets or stock of such other employer, an
Employee who was employed by such other employer immediately prior to
such acquisition shall have his or her prior service with such other
employer taken into account, as if it were service with an Affiliated
Employer.
(b) A "leased employee", within the meaning of Code section
414(n) shall accrue Years of Service for vesting purposes and shall be
credited with such Years of Service for Vesting upon hire by a
Participating Employer as a common law employee.
IN WITNESS WHEREOF, the Plan Sponsor has caused this instrument to be
- 54 -
<PAGE> 60
signed in its name and on its behalf by its duly authorized officer,
this day of , 1998.
------- --------------
BOSTON SCIENTIFIC CORPORATION
By:
---------------------------
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<PAGE> 61
Schedule A
----------
(As of January 1, 1996, except as otherwise noted)
Participating Employer State of Incorporation
---------------------- ----------------------
Boston Scientific Corporation Delaware
Boston Scientific Corporation
Northwest Technology Center, Inc.(1) Washington
Boston Scientific Sales, Inc. Delaware
Boston Scientific Technology, Inc. Minnesota
BSC Finance Corporation Indiana
BSC International Corporation Delaware
BSC Technology, Inc. Minnesota
Cardiovascular Imaging Systems, Inc. California
Celltechnix Corporation New Jersey
EP Technologies, Inc.(1) Delaware
EP Technologies Sales, Inc.(1) California
Heart Technology Manufacturing, Inc.(1) Washington
Meadox Distribution Company(1) New Jersey
Meadox Instruments, Inc.(1) New Jersey
Meadox Medicals, Inc.(1) New Jersey
- 56 -
<PAGE> 62
Participating Employer State of Incorporation
---------------------- ----------------------
Meadox Medicals Sales, Inc.(1) New Jersey
Meadox Technology, Inc.(1) Minnesota
Scimed Life Systems, Inc. Minnesota
Scimed, Inc. Minnesota
Scimed Technology Inc. Minnesota
Symbiosis Corporation(2) Florida
Vesica Medical, Inc. California
(1) Effective as of the close of December 31, 1996.
(2) Effective as of June 1, 1996.
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<PAGE> 63
Schedule B
----------
Special Provisions Regarding Former Participants in Other Plans
The following plans have been merged into this Plan as of the dates
indicated below. Any elections made by participants in such plans with respect
to contributions, beneficiaries, investments, loans or benefit distributions
shall carry over and be treated as if made under this Plan, except as otherwise
provided by the Committee.
1. Cardiovascular Imaging Systems, Inc. 401(k) Salary Reduction Plan
and Trust
On October 3, 1995, the Cardiovascular Imaging Systems, Inc. 401(k)
salary reduction plan was merged into this Plan.
Special participation rules (Section 2.1(c)): No
---
Special rules re allocation of transferred accounts
(Section 4.6(a)): No
---
Special Vesting rules (Sections 5.6 and 14.41): No
--
Special in-service withdrawal rules (Section 6.8(a)): No
---
QJSA rules applicable (Section 8.7): Yes
---
Optional forms of payment to preserve
(Sections 8.1 and 8.7):
Immediate life annuity.
Immediate life annuity with a period certain of 10, 15, or 20
years.
Immediate annuity for the life of the Participant, with a
survivor annuity for the Participant's beneficiary which is
100%, 66 2/3% or 50% of the amount payable during the life of
the Participant.
Any combination of the above options and the benefit forms
described in Section 8.1.
2. Scimed Life Systems, Inc. Retirement Savings and Profit Sharing Plan
Effective January 1, 1996, the Scimed Life Systems, Inc. Retirement
Savings and Profit
- 58 -
<PAGE> 64
Sharing Plan was merged into this Plan.
Special participation rules (Section 2.1(c)): No
---
Special rules re allocation of transferred accounts
(Section 4.6(a)): No
---
Special Vesting rules (Sections 5.6 and 14.41): No
---
Special in-service withdrawal rules (Section 6.8(a)): No
---
QJSA rules applicable (Section 8.7): No
---
Optional forms of payment to preserve
(Sections 8.1 and 8.7): No
---
3. Symbiosis Corporation 401(k) Plan and Trust
Effective June 1, 1996, the Symbiosis Corporation 401(k) Plan and Trust
was merged into this Plan.
Special Participation rules (Section 2.1(c)): No
---
Special Rules re allocation of transferred accounts
(Section 4.6(a)): No
---
Special Vesting rules (Sections 5.6 and 14.41): No
---
Special in-service withdrawal rules (Section 6.8(a)): No
---
QJSA rules applicable (Section 8.7): No
---
Optional forms of payment to preserve
(Sections 8.1 and 8.7): None
----
4. American Home Products Corporation Savings Plan
Effective June 1, 1996, the accounts under the American Home Products
Corporation Savings Plan attributable to Participants employed by Symbiosis
Corporation were merged into this Plan.
Special Participation rules (Section 2.1(c)): No
---
- 59 -
<PAGE> 65
Special Rules re allocation of transferred accounts
(Section 4.6(a)): No
---
Special Vesting Rules (Sections 5.6 and 14.41): No
---
Special in-service withdrawal rules (Section 6.8(a)):
Withdrawal from after-tax contribution account
(Once per Plan Year; $500 minimum)
QJSA rules applicable (Section 8.7): No
---
Optional forms of payment to preserve
(Sections 8.1 and 8.7): None
----
5. EPT 401(k) Plan
Effective as of the close of business on December 31, 1996, the EPT
401(k) Plan is hereby merged into this Plan.
- Special participation rules (Section 2.1(c)): Yes
---
(i) Any individual who is a participant in the EPT
401(k) Plan (the "Former Plan") on December 31, 1996 shall
become a Participant in the Plan as of January 1, 1997.
(ii) Each other Employee of EP Technologies, Inc.
shall be subject to the participation rules under Section 2.1.
- Special rules re allocation of transferred accounts
(Section 4.6(a)): No
---
- Special Vesting rules (Sections 5.6 and 14.38): Yes
---
(i) Any individual who is a participant in the EPT
401(k) Plan (the "Former Plan") on December 31, 1996 and who
is actively employed by the Plan Sponsor or an Affiliated
Employer on or after December 31, 1996 shall have a 100%
nonforfeitable interest in the portion of his or her Accounts
under this Plan that are attributable to the transfer of his
or her employer matching contribution account balance, if any,
from the Former Plan.
(ii) Any individual who is actively employed by EP
Technologies, Inc. on
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<PAGE> 66
December 31, 1996 and who has 3 or more years of service for
purposes of calculating vesting (as determined under the
Former Plan) shall have a vested interest in a percentage of
his or her Discretionary Contribution Account under the Plan,
if any, determined in accordance with the following schedule
and based on his or her Years of Service for Vesting:
Years of Service Applicable
for Vesting Nonforfeitable Percentage
---------------- -------------------------
3 but less than 4 75%
4 or more 100%
- Special in-service withdrawal rules (Section 6.8(a)):
- Hardship withdrawals allowed from any account which
is 100% vested.
- QJSA rules applicable (Section 8.7): No
----
- Optional forms of payment to preserve
(Sections 8.1 and 8.7): None
----
6. Heart Technology, Inc. 401(k) Profit Sharing Plan
Effective as of the close of business on December 31, 1996, the Heart
Technology, Inc. 401(k) Profit Sharing Plan is hereby merged into this Plan.
- Special Participation rules (Section 2.1(c)): Yes
---
(i) Any individual who is a participant in the Heart
Technology, Inc. 401(k) Profit Sharing Plan (the "Former
Plan") on December 31, 1996 shall become a Participant in the
Plan as of January 1, 1997.
(ii) Any individual who is an active employee of
Boston Scientific Corporation Northwest Technology Center,
Inc. on December 31, 1996 and who has satisfied the
eligibility requirements under the Former Plan as of December
31, 1996 (age 18 and the earlier of 6 months continuous
employment or 1 year of service), but who has not yet enrolled
in the Former Plan shall become a Participant in the Plan on
the first Entry Date on or after January 1, 1997 on which such
individual (a) is an Eligible Employee and (b) has in effect a
compensation reduction authorization described in Section 3.2.
- 61 -
<PAGE> 67
(iii) Any individual who is an active employee of
Boston Scientific Corporation Northwest Technology Center,
Inc. on December 31, 1996 and who has not yet satisfied the
eligibility requirements under the Former Plan as of December
31, 1996 shall become a Participant in the Plan as of the
Entry Date coinciding with or next following the date on which
the individual (a) satisfies the eligibility requirements
under Section 2.1, substituting age 18 for age 21 in Section
2.1(b)(3), (b) is an Eligible Employee and (c) has in effect a
compensation reduction authorization described in Section 3.2.
(iv) Each other Employee of Boston Scientific
Corporation Northwest Technology Center, Inc. shall be subject
to the participation rules under Section 2.1.
- Special Rules re allocation of transferred accounts
(Section 4.6(a)): No
----
- Special Vesting Rules (Sections 5.6 and 14.38): Yes
----
Any individual who is a participant in the Heart
Technology, Inc. 401(k) Profit Sharing Plan (the "Former
Plan") on December 31, 1996 and who is an active employee of
the Plan Sponsor or an Affiliated Employer on or after
December 31, 1996 shall have a 100% nonforfeitable interest in
the portion of his or her Accounts under this Plan that are
attributable to the transfer of his or her employer matching
contribution account balance, if any, from the Former Plan.
- Special in-service withdrawal rules (Section 6.8(a)): Yes
----
In-service withdrawals of rollover account; limited
to once per year.
- QJSA rules applicable (Section 8.7): No
----
- Optional forms of payment to preserve
(Sections 8.1 and 8.7): None
----
7. Meadox Medicals, Inc. Employees' Savings Plan
Effective as of the close of business on December 31, 1996, the Meadox
Medicals, Inc. Employees' Savings Plan is hereby merged into this Plan.
- Special Participation rules (Section 2.1(c)): Yes
----
(i) Any individual who is a participant in the Meadox
Medicals, Inc. Employees' Savings Plan (the "Former Plan") on
December 31, 1996 shall become
- 62 -
<PAGE> 68
a Participant in the Plan as of January 1, 1997.
(ii) Any individual who is an active employee of
Meadox Medicals, Inc. on December 31, 1996, but who has not
yet enrolled in the Former Plan shall become a Participant in
the Plan on any Entry Date on or after January 1, 1997,
provided on such Entry Date such individual (a) is an Eligible
Employee and (b) has in effect a compensation reduction
authorization described in Section 3.2.
(iii) Each other Employee of Meadox Medicals, Inc.
shall be subject to the participation rules under Section 2.1.
- Special Rules re allocation of transferred accounts
(Section 4.6(a)): No
----
- Special Vesting Rules (Sections 5.6 and 14.38): Yes
----
Any individual who is a participant in the Meadox
Medicals, Inc. Employees' Retirement Plan (the "Former Plan")
on December 31, 1996 and is an active employee of the Plan
Sponsor or an Affiliated Employer on or after December 31,
1996 shall have a 100% nonforfeitable interest in the portion
of his or her Accounts under this Plan that are attributable
to the transfer of his or her employer matching contribution
account balance, if any, from the Former Plan.
- Special in-service withdrawal rules (Section 6.8(a)): Yes
----
- After-tax contribution account. No
----
- QJSA rules applicable (Section 8.7): No
----
- Optional forms of payment to preserve
(Sections 8.1 and 8.7): None
----
-63-
<PAGE> 1
EXHIBIT 10.18
03/20/98
BOSTON SCIENTIFIC CORPORATION
GLOBAL EMPLOYEE STOCK OWNERSHIP PLAN
1. Purpose. The purpose of the Boston Scientific Corporation Global
Employee Stock Ownership Plan (the "Plan") is to encourage ownership of common
stock by employees of Boston Scientific Corporation and its Related Corporations
and to provide additional incentives for such employees to promote the success
of the business of the Company and its Related Corporations. The Plan is an
amendment and restatement of the Boston Scientific Corporation 1992 Employee
Stock Purchase Plan, as amended, and is intended to be an "employee stock
purchase plan" within the meaning of Section 423(b) of the Internal Revenue Code
of 1986, as amended.
2. Definitions. As used in this Plan, the following terms shall have
the meanings set forth below:
(a) Beneficiary means the person designated as beneficiary on
the Optionee's Membership Agreement or, if no such beneficiary is named
or no such Agreement is in effect at the Optionee's death, his or her
beneficiary as determined under the provisions of the Company's program
of life insurance for employees.
(b) Board means the Board of Directors of the Company.
(c) Code means the Internal Revenue Code of 1986, as amended,
or any statute successor thereto, and any regulations issued from time
to time thereunder.
(d) Committee means a committee of the Board appointed to
administer the Plan in accordance with Section 4, consisting of not
less than two directors of the Company who are not employees of the
Company or any Related Corporation, each appointed by the Board from
time to time to serve at its pleasure for the purpose of carrying out
the responsibilities of the Committee under the Plan, and such officers
or employees of the Company or a Participating Employee designated by
the Committee to administer the operation of the Plan. For any period
during which no Committee is in existence, all authority and
responsibility assigned the Committee under this Plan shall be
exercised, if at all, by the Board.
(e) Company means Boston Scientific Corporation, a Delaware
corporation (or any successor corporation).
(f) Compensation means the total salary or wages or other
taxable compensation (such as bonus payments, commissions, short-term
disability payments and wage or salary substitution payments) paid by a
Participating Employer to the Optionee during active employment
(including approved paid leaves of absences) as of a particular pay
date, exclusive of expense reimbursement, relocation allowances,
tuition reimbursement, adoption assistance benefits, earnings related
to stock options or other equity incentives, and post-employment
payments that may be computed from eligible compensation, such as
severance benefits, salary continuation after termination of Service,
redundancy pay, or termination indemnities.
(g) Effective Date means the first business day that the
Employees of a Participating Employer may participate in the Plan, as
determined by the Committee in its
<PAGE> 2
sole discretion.
(h) Eligible Employee means an Employee who is eligible under
the provisions of Section 7 to be granted an Option as of the first day
of an Offering Period.
(i) Employee means an individual who is regularly scheduled to
work for a Participating Employer for a continuous indefinite period of
employment.
(j) Entry Date means, with respect to an Eligible Employee
working for a Participating Employer, (1) the Effective Date for that
Employee, (2) following the Effective Date, the first business day of
each first and third calendar quarter of a calendar year, or (3) such
other date as the Committee may determine. For an Eligible Employee of
any affiliate of the Company who transfers to the permanent employment
of a Participating Employer, the "Entry Date" means the start of the
first practicable business day following the transfer, as determined by
the Committee, in accordance with the policies and procedures of the
Participating Employer.
(k) Fair Market Value means, with respect to Stock on a given
date, the closing price of the Stock as reported in The Wall Street
Journal for such date.
(l) Investment Date means, with respect to an Offering Period,
(1) the next following business day after the Offering Termination
Date, (2) the last business day of the next following calendar month,
if Stock is in fact purchased on the New York Stock Exchange, or (3)
such other date designated by the Committee.
(m) Membership Agreement means a written agreement described
in Section 8.2 whereby an Optionee authorizes a Participating Employer
to withhold payroll deductions from his or her Compensation.
(n) Offering Period means the period beginning, as determined
by the Committee, on (1) the first business day coincident with or next
following an Entry Date or (2) the first business day of the first and
third calendar quarters of a calendar year (the "Offering Commencement
Date") and ending on the last business day of the second and fourth
calendar quarters of a calendar year (the "Offering Termination Date")
or other generally six (6) month periods established by the Committee;
provided, however, that the current Offering Period may cover the
period from October 1, 1997 to June 30, 1998.
(o) Option means an option to purchase shares of Stock granted
under the Plan.
(p) Optionee means an Eligible Employee to whom an Option is
granted.
(q) Option Shares means shares of Stock subject to an Option.
(r) Participating Employer means the Company or any Related
Corporation
-2-
<PAGE> 3
designated by the Committee to participate in the Plan as of an Entry
Date.
(s) Plan means this Boston Scientific Corporation Global
Employee Stock Ownership Plan, as set forth herein and as it may be
amended from time to time.
(t) Related Corporation means the Company and every U.S.
corporation which is: (i) a direct or indirect eighty percent (80%) or
more-owned subsidiary of the Company; or (ii) a direct or indirect
fifty percent (50%) or more-owned subsidiary of the Company designated
by the Committee.
(u) Service means, as determined by the Participating
Employer, continuous regular employment by an individual with the
Company or one of the Related Corporations, including any approved
leaves of absence.
(v) Stock means the common stock, $.01 par value per share, of
the Company.
3. Term of the Plan. The Plan as amended and restated shall become
effective on October 1, 1997, provided that those amendments which require
shareholder approval shall be effective subject to approval by the shareholders
of the Company. No Option shall be granted under the Plan on or after September
30, 2007, but Options theretofore granted may extend beyond that date.
4. Administration. The Plan shall be administered by the Committee,
which shall have the authority and discretion to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
resolve all disputes arising under the Plan, to determine which Related
Corporations shall become Participating Employers and as of what dates, to
determine the terms of Options granted under the Plan, and to make all other
determinations necessary or advisable for the administration of the Plan. Any
determination of the Committee shall be final and binding upon all persons
having or claiming any interest under the Plan or under any Option granted
pursuant to the Plan.
5. Amendment and Termination. The Board may terminate or amend the Plan
at any time and from time to time; provided, however, that the Board may not,
without approval of the shareholders of the Company in a manner satisfying the
requirements of Section 423 of the Code, increase the maximum number of shares
of Stock available for purchase under the Plan. No termination of or amendment
of the Plan may adversely affect the rights of an Optionee in the reasonable
discretion of the Committee with respect to any Option held by the Optionee as
of the date of such termination or amendment without the Optionee's consent.
6. Shares of Stock Subject to the Plan. No more than an aggregate of
1,500,000 shares of Stock may be issued or delivered pursuant to the exercise of
Options granted under the Plan. Shares to be delivered upon the exercise of
Options may be either shares of Stock which are authorized but unissued or
shares of Stock held by the Company in its treasury or shares of Stock purchased
on the open market by the Company for issuance under this Plan. If an Option
expires or terminates for any reason without having been exercised in full, the
unpurchased
-3-
<PAGE> 4
shares subject to the Option shall become available for other Options granted
under the Plan. The Company shall, at all times during which Options are
outstanding, reserve and keep available shares of Stock sufficient to satisfy
such Options, and shall pay all fees and expenses incurred by the Company in
connection therewith. In the event of any capital change in the outstanding
Stock as contemplated by Section 8.9, the number and kind of shares of Stock
reserved and kept available by the Company shall be appropriately adjusted.
7. Eligibility. Each Employee of a Participating Employer shall be
granted an Option on the first day of each Offering Period coincident with or
next following the date on which such Employee meets all of the following
requirements:
(a) The Employee is customarily employed by a Participating
Employer for twenty (20) hours or more per week;
(b) The Employee will not, after grant of the Option, own
stock possessing five or more percent of the total combined voting
power or value of all classes of stock of the Company or of any Related
Corporation. For purposes of this paragraph (b), the rules of Section
424(d) of the Code shall apply in determining the stock ownership of
the Employee, and stock which the Employee may purchase under
outstanding options shall be treated as stock owned by the Employee;
and
(c) The Employee has properly completed a Membership Agreement
electing to participate in the Plan and has returned it to the payroll
department of the Company as described in Section 8.2.
An Employee who meets all of the foregoing requirements is referred to as an
"Eligible Employee."
8. Terms and Conditions of Options.
8.1 General. All Options granted to Eligible Employees shall comply
with the terms and conditions set forth in Sections 8.1 through 8.10. Subject to
Sections 8.2(d) and 8.8, each such Option shall entitle the Optionee to purchase
that number of shares calculated in accordance with Sections 8.1 through 8.10 or
such lesser number or value of shares established by the Committee as an
additional limitation on the maximum number of Option Shares available under an
Option.
8.2 Membership Agreement/Payroll Deductions.
(a) An Eligible Employee may elect to purchase shares of Stock
under his or her Option during an Offering Period by completing a
Membership Agreement and returning it to the personnel department of
the Participating Employer at least ten business days prior to the
beginning of such Offering Period. The Membership Agreement shall
indicate the percentage of the Eligible Employee's Compensation (from
1% through 10%, in multiples of 1%) that the Eligible Employee elects
to be withheld on pay dates occurring during the Offering Period.
-4-
<PAGE> 5
(b) After the commencement of the Offering Period, no Eligible
Employee shall be permitted to change the percentage of Compensation
elected to be withheld during that Offering Period. However, the
Eligible Employee may elect to discontinue his or her payroll
deductions at any time during an Offering Period and withdraw them by
submitting a written request therefore to the personnel department of
the Participating Employer no later than ten (10) business days prior
to the last day of the Offering Period. The change will be effective as
of the first pay date occurring as soon as practicable after the
Eligible Employee's written request has been received. As soon as
practicable following the last day of the Offering Period, he or she
shall receive a distribution of the accumulated payroll deductions,
without interest.
(c) Any Membership Agreement in effect for an Offering Period
shall remain in effect as to any subsequent Offering Period unless
revoked by the submission of a written request to discontinue payroll
deductions for that Offering Period or modified by submission of a new
Membership Agreement, or until the Optionee's termination of Service
for any reason.
(d) Notwithstanding the provisions of this Section 8, an
Eligible Employee may not be granted an Option if the Eligible
Employee's rights to purchase Stock under all employee stock purchase
plans (as defined in Section 423(b) of the Code) of the Company and its
Related Corporations accrue at a rate which exceeds $25,000 of Fair
Market Value of the Stock (determined at the time such option is
granted) for each calendar year in which such option is outstanding at
any time. The accrual of rights to purchase Stock shall be determined
in accordance with Section 423(b)(8) of the Code.
(e) An Optionee may purchase Stock under the Plan only by
payroll deduction. An Optionee may not make payroll deductions under
the Plan for any period or periods after his or her termination of
Service, even if he or she is then being paid salary continuation,
severance benefits or other similar forms of compensation.
8.3 Purchase Price. The purchase price of Option Shares shall be shared
by the Optionee and the Company. The Optionee's share with respect to Stock
purchased on an Investment Date for an Offering Period shall be (i) the lesser
of: (a) eighty-five percent (85%) of the Fair Market Value of the Stock on the
Offering Commencement Date; or (b) (whichever is applicable) eighty-five percent
(85%) of the Fair Market Value of the Stock on the Offering Termination Date, if
the Stock is acquired from the Company; or (2) eighty-five percent (85%) of the
actual purchase price for such Stock on the Investment Date if the Stock is, in
fact, purchased on the New York Stock Exchange. The Company's share shall be the
Fair Market Value or actual purchase price of the Stock (as the case may be)
purchased for the Offering Period, less the Optionee's share, as described in
the preceding sentence.
8.4 Exercise of Options. To the extent practicable, all of the
Optionee's payroll deductions accumulated during the Offering Period will be
applied to purchase Option Shares on the Investment Date. On such date, and
provided the Optionee is in-Service on the last day of the Offering Period, the
Optionee shall purchase the number of shares purchasable by his or her
-5-
<PAGE> 6
accumulated payroll deductions during the Offering Period, or, if less, the
maximum number of shares subject to the Option as provided in Section 8.1,
provided that:
(a) If the total number of shares which all Optionees elect to
purchase, together with any shares already purchased under the Plan,
exceeds the total number of shares which may be purchased under the
Plan pursuant to Section 6, the number of shares which each Optionee is
permitted to purchase shall be decreased pro rata based on the
Optionee's accumulated payroll deductions in relation to all
accumulated payroll deductions currently being withheld under the Plan;
and
(b) If the number of shares purchasable includes a fraction,
such number shall be adjusted to the next smaller whole number and the
purchase price shall be adjusted accordingly.
Accumulated payroll deductions, to the extent in excess of the aggregate
purchase price of the shares purchased by the Optionee on an Investment Date or
in excess of the $25,000 limit described in Section 8.2(d), shall be applied for
the next Offering Period. At the request of the Optionee, following an
Employee's withdrawal from the Plan, an Employee's termination of Service or as
may be required by law, the excess payroll deductions shall be refunded to the
Optionee, without interest, as soon as practicable.
8.5 Delivery of Stock.
(a) Except as provided below, as soon as administratively
practicable after the Investment Date, the Company shall deliver or
cause to be delivered to the Optionee a certificate or certificates for
the number of shares purchased by the Optionee for that Offering
Period. A Stock certificate representing the number of shares purchased
will be issued in the Optionee's name only, or if the Optionee so
requests in writing, not later than the last day of the Offering
Period, in the name of the Optionee and another person of legal age as
joint tenants with rights of survivorship. If any law or applicable
regulation of the Securities Exchange Commission or other body having
jurisdiction shall require that the Company or the Optionee take any
action in connection with the shares being purchased under the Option,
delivery of the certificate or certificates for such shares shall be
postponed until the necessary action shall have been completed, which
action shall be taken by the Company at its own expense, without
unreasonable delay.
(b) Notwithstanding the foregoing, the Company may elect to
hold for the benefit of the Optionee any shares otherwise to be
delivered to the Optionee pursuant to this Section 8.5, or to deliver
the same to such agents, trustees and fiduciaries for the benefit of
the Optionee as the Company may select, for the period transfer of such
shares is limited by this Plan (and thereafter, until the Optionee
requests delivery of such stock in writing). In that event, the
Optionee shall have all of the rights of a shareholder in the shares so
held by the Company or its agent, except as limited by the restriction
on transferability, from and after the issuance of the same and the
Company or its agent shall adopt reasonable procedures to enable the
Optionee to exercise such rights. In the event of the Optionee's death
while any shares are so held, such shares shall be delivered to the
-6-
<PAGE> 7
Optionee's Beneficiary promptly following the Committee's receipt of
evidence satisfactory to the Committee of the Optionee's death.
(c) The Company or the Participating Employer shall pay all
costs associated with issuing the Stock certificate or certificates
described in subparagraph (a) above.
(d) In lieu of issuing Stock certificates, the Committee may
establish electronic book entry procedures (such as DWAC) to record an
Optionee's Stock acquired under the Plan. Notwithstanding, the Optionee
shall always have the right to request the issuance of a Stock
certificate to evidence all or any number of the whole shares of Stock
he or she has purchased under the Plan.
8.6 Restrictions on Transfer.
(a) Options may not be assigned, transferred, pledged or
otherwise disposed of. An Option may not be exercised by anyone other
than the Optionee during the lifetime of the Optionee.
(b) Stock acquired by exercise of an Option hereunder may not
be assigned, transferred, pledged or other disposed of, except by will
or under the laws of descent and distribution, until the date which is
three (3) months after the last day of the Offering Period as of which
such shares were acquired (or the date of the death of the Optionee, if
earlier), but thereafter may be sold or otherwise transferred without
restriction. The Optionee shall agree in the Membership Agreement to
notify the Company of any transfer of the Shares within two years of
the first day of the Offering Period of those Shares. The Company shall
have the right to place a legend on all stock certificates instructing
the transfer agent to notify the Company of any transfer of the shares.
The Company shall also have the right to place a legend on certificates
setting forth the restriction on transferability of such shares.
8.7 Expiration. Each Option shall expire at the close of business on
the Investment Date or on such earlier date as may result from the operation of
Section 8.
8.8 Termination of Employment of Optionee. If an Optionee ceases for
any reason to be in-Service, whether due to death, retirement, voluntary
severance, involuntary severance, transfer, or disaffiliation of a Related
Corporation with the Company, his or her Option shall immediately expire, and
the Optionee's accumulated payroll deductions shall be returned, without
interest, as soon as practicable, to the Optionee or his or her Beneficiary, as
the case may be, by the Participating Employer. For purposes of this Section
8.8, an Optionee shall be deemed to be in-Service throughout any leave of
absence for military service, illness or other bona fide purpose which does not
exceed the longer of ninety days or the period during which the Optionee's
reemployment rights are guaranteed by statute or by contract. If the Optionee
does not return to Service prior to the termination of such period, his or her
Service shall be deemed to have ended on the ninety-first (91st) day of such
leave of absence. Distributions upon death will be made as soon as
administratively practicable after the Optionee's death upon presentation of
satisfactory proof of death to the Participating Employer.
-7-
<PAGE> 8
8.9 Capital Changes Affecting the Stock. In the event that, during an
Offering Period, a stock dividend is paid or becomes payable in respect of the
Stock or there occurs a split-up or contraction in the number of shares of
Stock, the number of shares for which the Option may thereafter be exercised and
the price to be paid for each such share shall be proportionately adjusted. In
the event that, after the commencement of the Offering Period, there occurs a
reclassification or change of outstanding shares of Stock or a consolidation or
merger of the Company with or into another corporation or a sale of conveyance,
substantially as a whole, of the property of the Company, the Optionee shall be
entitled on the last day of the Offering Period to receive shares of stock or
other securities equivalent in kind and value to the shares of stock he or she
would have held if he or she had exercised the Option in full immediately prior
to such reclassification, change, consolidation, merger, sale or conveyance and
had continued to hold such shares (together with all other shares and securities
thereafter issued in respect thereof) until the last day of the Offering Period.
In the event that there is to occur a recapitalization involving an increase in
the par value of the Stock which would result in a par value exceeding the
exercise price under an outstanding Option, the Company shall notify the
Optionee of such proposed recapitalization immediately upon its being
recommended by the Board of the Company's shareholders, after which the Optionee
shall have the right to exercise his or her Option prior to such
recapitalization; if the Optionee fails to exercise the Option prior to
recapitalization, the exercise price under the Option shall be appropriately
adjusted. In the event that, after the commencement of the Offering Period,
there occurs a dissolution or liquidation of the Company, except pursuant to a
transaction to which Section 424(a) of the Code applies, each Option shall
terminate, but the Optionee shall have the right to exercise his or her Option
prior to such dissolution or liquidation.
8.10 Return of Accumulated Payroll Deductions. In the event that the
Optionee or his or her Beneficiary is entitled to the return of accumulated
payroll deductions, whether by reason of an election to discontinue and withdraw
payroll deductions, termination of employment, retirement, death, or, at the
request of Optionee, in the event that accumulated payroll deductions exceed the
price of shares purchased or exceed the $25,000 limit described in Section
8.2(d), such amount shall be returned by the Participating Employer to the
Optionee or the Beneficiary, as the case may be, as soon as practicable
following the end of the Offering Period in which the same were deducted.
Accumulated payroll deductions held by the Participating Employer shall not bear
interest nor shall the Participating Employer be obligated to segregate the same
from any of its other assets.
9. No Enlargement of Employment Rights. Neither the establishment or
continuation of the Plan, nor the grant of any Option hereunder, shall be deemed
to give any employee the right to be retained in the employ of the Participating
Employer, or any successor to either, or to interfere with the right of the
Participating Employer or successor to discharge the employee at any time.
10. Tax Withholding. If, at any time, a Participating Employer is
required, under applicable laws and regulations, to withhold, or to make any
deduction of, any taxes or take any other action in connection any exercise of
an Option or transfer of shares of Stock, the Participating Employer shall have
the right to deduct from all amounts paid in cash any taxes
-8-
<PAGE> 9
required by law to be withheld therefrom, and in the case of shares of Stock,
the Optionee or his or her estate or Beneficiary shall be required to pay the
Participating Employer the amount of taxes required to be withheld, or, in lieu
thereof, the Participating Employer shall have the right to retain, or sell
without notice, a sufficient number of shares of Stock to cover the amount
required to be withheld, or to make other arrangements with respect to
withholding as it shall deem appropriate.
11. Participating Employer with Non-U.S. Residents. With respect to any
Participating Employer which employs Eligible Employees who reside outside of
the United States, and notwithstanding anything herein to the contrary, the
Committee may in its sole discretion amend the terms of the Plan, or an Option
granted under the Plan, in order to reflect the impact of local law and may,
where appropriate, establish one or more sub-plans to reflect such amended
provisions applicable to such Eligible Employees.
12. Governing Law. The Plan and all Options and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts, without regard to the conflict of laws principles
thereof.
-9-
<PAGE> 1
EXHIBIT 10.24
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 2 (the "Amendment") to that certain Employment
Agreement (the "Employment Agreement") dated as of November 8, 1994, as amended
by Amendment No. 1 dated as of November 22, 1995, by and among DALE A. SPENCER
(the "Employee"), BOSTON SCIENTIFIC CORPORATION, a Delaware corporation (the
"Company"), and SCIMED LIFE SYSTEMS, INC., a Minnesota corporation ("SCIMED") is
entered into as of October 21, 1997.
WHEREAS, the Employee, the Company and SCIMED entered into the
Employment Agreement effective November 8, 1994; and
WHEREAS, the Employee, the Company and SCIMED amended the Employment
Agreement by Amendment No. 1, effective November 22, 1995; and
WHEREAS, the Employee, the Company and SCIMED wish to modify further
the terms of the Employment Agreement;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and in consideration of the continued employment of the Employee by the
Company under the terms and conditions of the Employment Agreement as modified
by this Amendment, the parties agree as follows:
1. Unless otherwise specifically defined herein, all capitalized terms
have the meanings ascribed to them in the Employment Agreement.
2. Except as specifically amended, modified or supplemented herein,
the terms and conditions of the Employment Agreement remain unchanged and in
full force and effect. Any ambiguity or conflict between the terms and
conditions of this Amendment and those of the Employment Agreement shall be
governed by the terms of this Amendment.
3. The Employment Agreement, as amended by Amendment No. 1 thereto, is
hereby further amended by deleting Section 7 thereof in its entirety, and
substituting in its place the following:
<PAGE> 2
7. Part-Time Employee.
(a) Part-Time Employment. Effective March 1, 1996, Employee's
employment status changed from a full-time employee to a
regular part-time employee. Employee's status as a regular
part-time employee shall continue, subject to the terms and
conditions of this Employment Agreement. As a regular
part-time employee, Employee shall have such duties and
responsibilities and perform such other assignments as are
consistent with the Employee's expertise and experience and
previous services to the Company.
(b) Obligations. The Employee shall remain based in Minneapolis
and shall be obligated to perform services on behalf of the
Company for no more than 40 hours per month during the term of
his status as a regular part-time employee. Expense
reimbursement consistent with that given to senior executives
of the Company shall be provided to Employee by the Company.
As a part-time employee, Employee may provide consulting
services to other companies consistent with the provisions of
Section 8, provided that such services do not unreasonably
interfere with his obligations hereunder.
(c) Reporting Function. The Employee shall report directly to the
Chief Executive Officer of the Company and/or one or more
other senior executives of the Company designated by the Chief
Executive Officer.
(d) Term. The Employee's term as a regular part-time employee
shall extend through March 1, 2004, on which date his
employment will end. The Company may earlier terminate the
Employee's part-time employment, and the Employment Agreement,
as amended, only for Cause.
(e) Compensation. The Employee shall be compensated during his
term as a regular part-time employee at an annual rate in the
amount of the Employee's Base Compensation, subject to all
necessary withholding on salary, but Employee shall not be
eligible for any bonus. The Employee will continue to
participate in the company's medical, dental, life insurance
and disability plans and any other benefit plans the Company
offers to regular part-time employees.
<PAGE> 3
4. This Amendment may be executed in any number of counterparts, all of
which, taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
BOSTON SCIENTIFIC CORPORATION SCIMED LIFE SYSTEMS, INC.
By ____________________________________ By _____________________________
Peter M. Nicholas Lawrence C. Best
Chairman and Chief Executive Officer Chief Financial Officer
____________________________
Dale A. Spencer
<PAGE> 1
Exhibit 12.1
------------
UNAUDITED
BOSTON SCIENTIFIC CORPORATION
STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense $14,285 $11,518 $9,591 $8,378 $3,761
Capitalized interest 4,976
Debt issuance costs 65 501
Interest portion of rental expense 14,354 8,534 5,802 5,370 4,103
---------------------------------------------------------------
Total fixed charges $33,680 $20,553 $15,393 $13,748 $7,864
===============================================================
Earnings:
Income before income taxes and cumulative
effect of change in accounting $258,668 $303,330 $62,678 $219,703 $120,724
Fixed charges per above 33,680 20,553 15,393 13,748 7,864
LESS: capitalized interest 4,976
---------------------------------------------------------------
Total earnings, as adjusted $287,372 $323,883 $78,071 $233,451 $128,588
===============================================================
Ratio of earnings to fixed charges 8.53 15.76 5.07 16.98 16.35
===============================================================
</TABLE>
<PAGE> 1
EXHIBIT 13.1
GLOBAL RESOURCES
FOCUSED ON LOCAL NEEDS,
EVERYWHERE.
BOSTON SCIENTIFIC 1997 ANNUAL REPORT
BOSTON SCIENTIFIC
<PAGE> 2
BOSTON
SCIENTIFIC
BOSTON SCIENTIFIC - AN INTEGRATED, GLOBAL HEALTHCARE ENTERPRISE
Over the last three years, Boston Scientific focused intensely on creating and
rapidly building Strategic Mass. A concept introduced in our 1995 Annual Report,
Strategic Mass means selectively assembling the components required for future
success and leadership in our chosen business segments. Through a concerted
program of mergers and acquisitions, we have significantly broadened the
capabilities we offer our physician customers and the patients they treat around
the world. As we have added new companies, integrated new businesses, developed
new technologies and expanded into new geographies, we have literally
transformed ourselves into a new Boston Scientific - an integrated, global
healthcare enterprise.
Historically, our customers have come to know us as one of our individual
business units, while to our shareholders and the financial community, we were
Boston Scientific. Our new corporate identity better describes who we are to all
constituents by expressing the broader value of our combined organizations: a
sense of unity, of shared commitment, and of global leadership as a focused,
dynamic force in the field of less invasive medicine.
With our new identity, we present Boston Scientific to the world as a single
entity while continuing to build upon the powerful equity we have in our
business unit names. By unifying and strengthening the relationship between each
unit and the corporation, the new identity will underscore the clinical and
economic value of Boston Scientific as a global healthcare enterprise with an
unmatched team of professionals across a wide range of disciplines and
specialties.
Our new corporate identity is much more than simply a new look. It is an ongoing
reflection of our values, and it communicates how we will succeed as we go
forward - as a single, integrated enterprise effectively leveraging the
individual strengths of our business units, our geographies and our people on a
worldwide basis.
<PAGE> 3
Chairman's LETTER
Reflecting back on 1997, I am pleased to report that last year was another
extraordinary one for your company. We once again achieved record revenues,
maintained superior sales growth and momentum worldwide, and launched more new
products than ever before. We successfully integrated the Target team into our
worldwide organization. We welcomed many other new teammates to Boston
Scientific and established new area organizations in Asia Pacific and Latin
America. We implemented our new global information systems on schedule and
almost to completion, making enterprise-wide business planning a worldwide
reality in 1998 and thereby creating new opportunities for increased efficiency
and profitability. We initiated a new corporate identity program in order to
clarify and strengthen the image of our company so as to enable our customers to
better understand who we are and what we do. We continued the process of
consolidating and restructuring our operations worldwide by closing
manufacturing facilities in Denmark, France and Massachusetts while expanding
and strengthening our identified Centers of Excellence in Massachusetts,
Minnesota, Indiana, California, Florida, Washington, Ireland and Japan. We also
formalized long-term partnership agreements with a number of our group buying
customers in the United States, furthering our commitment to become an even more
valued partner to both large and small healthcare provider groups worldwide.
While we were busy discovering new and better ways to serve our customers and
further extend our leadership, we also became more appreciative of our
vulnerabilities. For example, a critical element of our goal to rapidly achieve
Strategic Mass included a massive investment over the past three years to
enlarge our presence in global markets outside of North America. While we have
enjoyed significant growth in this connection and have established ourselves as
the number one global enterprise in several of our industry segments, in 1997,
Asian and European currency markets worked against us and significantly reduced
the value of our operational successes. Further, significant and unexpected
reductions in reimbursement prices in France and Germany plus unwarranted delays
in product approvals and reimbursement coverage, principally in Japan,
collectively cost the company in excess of $200 million in planned revenue, much
of which fell directly to earnings. These phenomena are, of course, external and
for the most part beyond our control, and external events can have either
positive or negative effects during any given period. In 1997, the effect was
clearly negative and reduced business and financial flexibility. This also
magnified the challenges presented to our maturing organization by our own
highly ambitious plans.
While the Strategic Mass that we have achieved, which we now call the New Boston
Scientific, continues to create the potential for enormous competitive advantage
and great promise for strengthening our leadership position throughout the
world, we recognize, more clearly than ever, the work yet required to realize
fully the benefits of the New Boston Scientific.
<PAGE> 4
We operated throughout most of 1997 utilizing legacy information systems we
inherited with our many acquisitions. These were cobbled together for the short
term while we invested aggressively in a global systems project to supersede
them. The conversion to the new systems, now largely complete, has occurred with
remarkable speed and success. Our interim reliance on the older systems,
however, dramatically confirmed the urgent need to replace them. They simply
could not provide the kind of timely and accurate information needed to
knowledgeably manage our business, and our execution suffered. Throughout the
year, increases in working capital reduced our cash; visibility on manufacturing
costs was less than optimal; new product planning and execution were below our
goals; and inaccurate forecasting created a cascade of new challenges
throughout the worldwide operation that we had not previously experienced. While
we believe these effects are now largely behind us, they were unprecedented in
both occurrence and impact. As a result, our fundamental financial business
model was compromised in 1997. Period charges reduced gross margins, and lost
revenue opportunities and the cost of debt further reduced profitability.
Even as our business discipline and our business fundamentals were compromised
in 1997 by both external factors and internal issues, we were already
establishing plans and programs designed to restore this aspect of our business
to our historic standards. Every member of the Boston Scientific Team now better
understands how his or her role relates to this objective, and we are committed
to achieving rapid success.
While we are committed to demonstrate superior business practices and
accomplishments across all areas of business performance, we must not lose sight
of the underlying operational success we have experienced with our customers
and the market place in general. In 1997, our market shares again increased in
every market in which we competed worldwide and our unit growth was up
substantially, indicating that we improved more patients' lives than our sales
numbers suggest. Absent pricing reductions worldwide and exchange rate losses,
which understate and therefore misrepresent the impact we have on our customers,
our business model in 1997 would have looked quite different. If we had met our
own expectations and standards for execution, our business model would have
looked even better.
Mindful of this and now more appreciative of what we can and must do to restore
strong business fundamentals throughout the organization, we have established
clear goals and processes for ourselves in 1998.
SYSTEMS
As our investment in enterprise-wide systems winds down and this new
technology becomes an everyday way of life at Boston Scientific, we expect
to see significant improvements in process, planning and control. Not only
will formal planning and performance analysis become friendlier and more
timely, the full range of activities which affect the supply chain will
improve dramatically. We now have the opportunity to gain visibility
worldwide on working capital, requirements planning and logistics. These
are all areas where we struggled in 1997 as a result of the geographically
far-flung nature of our operations and the growing size and complexity of
our business.
GLOBALIZATION
As the new millennium approaches, we foresee more than half of our revenue
and activities based on commerce outside of the United States. We are
actively becoming a truly global enterprise. For Boston Scientific, this
means thinking transnationally about business organization and new product
opportunities; about
<PAGE> 5
increased collaborations with worldwide customers; about priorities based on
being first to market globally with innovation; and about governance and
management. It means benchmarking our own behavior and standards against
world-class best practices regardless of source, and having the courage to
measure ourselves against them.
THE TEAM
At the end of the day, it is the quality and competence of Boston Scientific
people that makes the real difference.
Each year, we develop our plan very carefully with the
worldwide organization. Our objectives are to insure
that everyone understands the overall plan, understands
their own role and contribution to the plan, possesses
the competency to perform successfully, and not only
believes in the plan and their own ability to [Boston Scientific
positively affect it, but also is a genuinely Executive Committee
enthusiastic member of the Team committed to the From top left to right:
achievement of success. Our traditional processes to Bob MacLean,
accomplish this were not adequate to support the New Jim Corbett,
Boston Scientific requirements. Consequently, we have Paul LaViolette,
created new and improved communication processes and Mike Berman,
are providing essential messages in multiple formats. Phil LeGoff,
We have developed competency models and self-help Pete Nicholas,
programs to enable Team members to improve their own Mike Mabrey,
effectiveness. We have revised monthly and quarterly Paul Sandman,
business review formats and content to insure we focus Larry Best,
on those elements of business activity which are most Art Rosenthal,
important to performance improvement, and we have John Abele]
simplified and clarified year-end performance-based
incentive programs to better align behavior and more
clearly focus the Team's attention on the most crucial
success factors.
We have also added more management depth and experience to
the Team. In particular, I would like to welcome two new
Boston Scientific executives. During the last quarter of
1997, Michel Darnaud joined us as President of Boston
Scientific Europe and Philip Le Goff was appointed Senior
Vice President and Group President of Boston Scientific
worldwide Vascular Businesses. Both Michel and Phil bring
great talent and leadership skills from successful
transnational experiences in the healthcare industry, and we
are fortunate to have attracted them to our company.
These senior management additions, as well as other
initiatives, are clearly aimed at broadening and
strengthening our Team. On-the-job training and business as
usual in and of itself may yield dividends in overall
organization efficiency and effectiveness, but this is not
enough. We must assure ourselves that we employ and retain
the very best people available throughout the organization
and that all are highly motivated. They must share together
a real sense of urgency and enthusiasm for what they do and
that what they do is characterized by speed, absolute
quality and unqualified success. Our goal is to strengthen
our organization and continuously improve individual and
Team effectiveness worldwide with processes which become
ingrained as a way of life at BSC.
<PAGE> 6
SUBSEQUENT EVENTS
1998 has certainly become the year of the stent in the medical device
industry. This class of device has overnight become the single largest
selling product in the history of our young industry. I am pleased to
report that during the months of December and January, we filed our
long-awaited PMA's with the U.S. Food & Drug Administration for the
Radius(TM) and NIR(TM) stent platforms. Boston Scientific has achieved
stent leadership outside of North America, and we expect to match that
performance in North America when these important new devices are approved
and made available to physicians and their patients in the United States.
Our comprehensive stent portfolio is discussed in detail later in this
report.
In closing, I would be remiss if I did not note that the healthcare industry in
the United States, and indeed worldwide, continues to experience dramatic
transformation and realignment. Within our segment of this system, consolidation
will continue at a brisk pace as the forces of cost, scale, efficiency, outcomes
and the demands of strategic focus continue to redefine the conventional wisdom
of our business.
Through this change, the mission of Boston Scientific, as shown on the next
page, remains clear. As we look back over our brief history as a company, "Our
Fantastic Voyage," we can now see more clearly our own transition from a small,
private startup company seeking to find its way (1979-1992); to a newly minted
public company with aspirations for leadership, finally with the currency to do
something about it (1992-1994); to a leader/consolidator/builder of Strategic
Mass in order to achieve better alignment with the new world of economic buyers
and national group purchasing organizations (1994-1997); to where we are today
poised on the threshold of the execution era. This change that surrounds us we
take as an opportunity and an advantage.
The Boston Scientific Team is solid, intact, and learning every day to move
faster and more efficiently, taking risks, stretching and extending itself on
behalf of its customers. We are guided by a set of proven values and Team
conviction that every product, every procedure, every technology, every device
we develop and sell provides the opportunity for a physician somewhere in the
world to reach out to sick patients and make them better. Boston Scientific is
an exhilarating company building for the future. Those who believe in our vision
for the future and share that belief with the BSC Team will be rewarded.
Thank you Boston Scientific Teammates, shareholders, customers and friends for
sharing our vision. Together our shared beliefs, commitments, loyalty and
unselfishness make our vision a reality.
Respectfully, [Pete M. Nicholas PHOTO]
/s/ Pete M Nicholas
Pete M. Nicholas
<PAGE> 7
Mission-driven, global resources focused on local needs everywhere. This is
much more than the theme of our 1997 annual report. It is a behavior that we
have adopted at Boston Scientific and one that we believe will enable continued
leadership in less invasive medicine. Our ongoing challenge is effectively and
efficiently harnessing global resources to improve patient outcomes and lower
treatment costs in ways that are meaningful in local markets. How we apply our
global strengths in product development, customer education, distribution and
the application of less invasive technologies with the responsiveness of a local
company is described on the following pages.
BOSTON SCIENTIFIC CORPORATION
MISSION STATEMENT
Since its origin in the late 1960s, Boston Scientific Corporation's mission
has been to improve the quality of patient care and the productivity of
healthcare delivery through the development 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 technologies which can reduce risk, trauma, cost, procedure
time, and the need for aftercare.
<PAGE> 8
WHERE ADVANCED EDUCATION PREPARES PHYSICIANS
TO RESPOND TO LOCAL NEEDS
Our definition of a global company is one that
successfully meets the specific local needs of
[PHOTO] customers around the world. In the field of less
invasive medicine, this local focus requires an
Every year, the entire understanding of the unique problems facing
Boston Scientific Japan physicians and their patients, and the ability to
team gets together to direct global resources to address them.
review the past year's
accomplishments and Our broad technology portfolio is a critical
discuss key opportunities resource as we focus on developing and leveraging
for the future. Here, technologies aimed at advancing the treatment of
Masashi Yamamoto, President prevalent diseases within a particular region. In
of Boston Scientific Japan Japan, where there are high incidences of certain
K.K., and other team types of cancer, Medi-tech is adapting
members begin their neuro-microcatheter and coil technologies
recently held 1998 annual originally developed by its sister business unit,
meeting by participating Target Therapeutics, to enable interventional
in the traditional radiologists to embolize liver tumors. As we
Japanese celebration of continue to develop and expand our less invasive
Kagami-wari. anti-cancer technologies, our Microvasive Urology
business unit is exploring a promising treatment
alternative for the most common form of bladder
cancer that combines local chemotherapy with heat
to create a synergistic effect that may be more
effective than either treatment alone.
Developing technologies to meet local needs is
only the beginning. Continued leadership in Japan
means helping our customers become skilled,
comfortable and productive with new interventional
techniques. For months prior to our Rotablator(R)
device approval, more than 200 Japanese
cardiologists from 90 hospitals participated in
advanced rotational atherectomy proctorship
programs with U.S. and European colleagues. When
reimbursement approval occurred in early march of
1998, prepared physicians hit the ground running
and were quickly able to bring the benefits of
this new technology to their patients.
[NET SALES We must also provide our customers with
GRAPH] "best-in-class" product training programs
conducted in an environment where interaction and
collaboration enable two-way learning. The Boston
Scientific Miyazaki Technology and Education
Center represents the next phase in our ongoing
commitment to the Japanese market. Equipped with a
150-seat auditorium for didactic training, as well
as procedural training rooms, the facility will
offer an intensive, hands-on environment in which
physicians and training specialists can share
skills, knowledge and experience directly with one
another. Most exciting about this initiative is
the connection with our physician customers that
will enable us to solve unique Japanese problems
and develop outcomes-oriented technologies that
reduce healthcare costs in an iterative and open
fashion.
Our efforts in Japan do more than meet local
needs. They demonstrate how we capitalize on the
unique global strength of Boston Scientific - by
thinking and acting as a Japanese-based
organization with access to global resources and
by applying what we learn from our customers in
Japan to meeting similar healthcare needs
throughout the world.
<PAGE> 9
"I think the best way for physicians to increase their knowledge about new
neurointerventional procedures is on a peer-to-peer basis from other physicians,
such as Dr. Boccardi, who have extensive clinical experience with them. Boston
Scientific's GDC Proctorship Program provides this essential, hands-on
training."
Dr. Yoshifumi Konishi (right) of Kyorin University Hospital, shown here
with Dr. Edoardo Boccardi of Niguarda Hospital, Milan, Italy
Scheduled to open in mid-1998, the Miyazaki
Technology and Education Center will include both [PHOTO]
advanced facilities for physician training and
product development operations for the Japanese
market. By bringing researchers in direct contact
with physicians, Boston Scientific Japan can
develop and refine technologies to meet local
customer needs. Where advanced education prepares
physicians to respond to local needs.
<PAGE> 10
Where DIRECT INVESTMENTS are bringing
more effective treatment within reach
[PHOTO: Members of Boston Scientific's Emerging Markets management team are
joined by Pete Nicholas, Chairman and CEO, for the facility dedication of our
recently opened Singapore Operations Center. Left to right: Jim Corbett,
Greg Barrett, Ed Northup, Pete Nicholas]
We are energized by the opportunity to provide more effective and affordable
healthcare treatments to physicians and their patients in less developed
countries. These regions, which include some of the largest and fastest-growing
populations in the world, have had few alternatives to highly invasive
procedures, sometimes performed under less than ideal conditions.
We have a unique opportunity to make a significant, positive difference in the
quality of life for thousands of people in markets such as Latin America, the
Middle East, China and Southeast Asia. We have opted to pursue a sales model
that places local Boston Scientific employees throughout the world and enables
us to more closely collaborate with our physician customers to develop
technologies and to realize optimal product utilization and economic value for
their needs. In addition, we are better able to access unique physician talents
in these markets and apply their insights globally. For example, we travel to
Buenos Aires, Argentina to work with Dr. Juan Parodi, a recognized leader and
pioneer in endovascular surgery, as part of our global development process.
As we grow the sales organization, our focus is first on providing advanced
sales and product training to every member of the team. We began the new year by
bringing together sales representatives from more than 20 countries to learn
side by side with their peers during an intensive training seminar. More
experienced colleagues from different areas of the world led many of the
sessions, conducted in nine languages, and shared their knowledge and insight.
When it was over, 300 professional, highly trained, enthusiastic sales
representatives returned to their home countries equipped to demonstrate the
value of less invasive technology solutions to local physicians and well
connected to their colleagues and the Boston Scientific knowledge base for
continuous learning.
Our ongoing supply chain integration initiatives and systems have made it
not only possible, but also practical for us to reach customers throughout this
part of the world quickly and efficiently. The opening of our Singapore facility
in early 1997 has enhanced this effort by creating a third global hub in the
Boston Scientific distribution network. Our global systems project will further
strengthen our ability to aggressively manage worldwide product inventory and
logistics through our Far East, South American, North American, European and
Japanese facilities. No matter where a product is sourced or how it travels
through the system, the goal is the same -- a seamless process that enables us
to get the product into the physician's hands overnight.
Leadership in Emerging Markets will be achieved and maintained if we follow a
few simple tenets of the Boston Scientific philosophy: customer intimacy is the
core; more effective and affordable healthcare is the outcome; direct, two-way,
face-to-face communication with local physicians is the method; and patients
around the world benefiting from less invasive solutions is the ultimate goal.
<PAGE> 11
[PHOTO]
In January of 1998, 300 marketing and sales representatives from 20 countries
gathered in Newport Beach, California, U.S.A. for a week of intensive training
in new technologies and market development.
Oscar Terk of Argentina was suffering from an abdominal aortic aneurysm (AAA)
and considered a poor risk for surgery when he was referred to Dr. Juan Parodi
of the Instituto Cardiovascular de Buenos Aires. Under local
anesthesia, the aneurysm was successfully treated with a
Meadox Vanguard(TM) Endovascular Stent Graft. Without any [PHOTO]
complications, Mr. Terk was able to return home three days
after the procedure.
<PAGE> 12
Where NEW TECHNOLOGIES help to manage health - and cost
INTELLECTUAL PROPERTY
Number of Patents Issued: January 1994, 145;
Year end 1997, 1000+; 1998, 2000+ pending.
[LINE CHART]
[We are extremely proud of the accomplishments of our research and development
teams. As shown here, their efforts play a key role in building and
strengthening our intellectual property.]
The economic and social pressures which erupted in 1997 throughout Europe have
dramatically increased the economic influence on healthcare purchasing de-
cisions virtually overnight. While the magnitude of this change is a significant
challenge for all participants in the medical device market, we see it
ultimately as a long-term opportunity for Boston Scientific.
We fundamentally believe that our focus on less invasive treatments and the
breadth of our Strategic Mass enables us to deliver better patient outcomes at a
lower total cost to society. In the past, proving clinical benefit was enough to
succeed, but the new economic environment across Europe requires similar rigor
in demonstrating that patients treated with our products require a lower total
cost of treatment for equivalent or better outcomes.
We are capturing data and building health economics modeling capabilities to
bring the right clinical and economic information to the new decision makers in
Europe and around the world: physicians, hospital purchasers, insurance
companies and governments. We are expanding our ability to precisely measure,
model and communicate the full economic benefits for each technology, and
because medical practices and reimbursement systems vary by country even within
Europe, we are taking a local approach where appropriate.
In response to changing customer needs, we are entering a new era of European
customer service and distribution capability. The investments we have made in
systems will begin paying off in 1998. Before mid-year, our central European
warehouse in The Netherlands will be linked real time electronically not only
with our international manufacturing center in Galway, Ireland, but with all of
our plants and distribution centers around the world. We will spend less time,
effort and money handling products while getting them to customers faster.
Incorporating manufacturing and development closer to the customer continues to
be an important theme for Boston Scientific. In the gastrointestinal cancer
arena, we are beginning to experience the benefits of close collaboration with
European GI endoscopists as colonic stents, being developed and manufactured in
Ireland, enter clinical trials in early 1998.
Continued growth in international markets and the outstanding performance of our
Galway workforce have led us to pursue a second Irish facility in Cork.
Initially, this facility will be a small international manufacturing center for
neuroradiology products developed by Boston Scientific's Target business unit,
today our third largest business in Europe. Ultimately, it will provide
additional capacity to serve growth markets.
Lasting growth and leadership in a Europe preparing for and then adapting to
unification will require close customer contact and fast response to changing
needs. Strategic Mass, leveraged locally by our European team, provides Boston
Scientific both the capability and the adaptability to excel.
<PAGE> 13
[PHOTO]
"Our Galway facility brings European product manufacturing and development
together under one roof for the first time. This creates a collaborative working
environment in which groups share continuous learning to create products of
ever-higher quality and manufacturability."
Michel Darnaud, President of Boston Scientific Europe
We believe that the economic constraints that have affected
[PHOTO] the healthcare environment across Europe only serve to
underscore the need for close, consultative relationships
between Boston Scientific sales team and physicians. Here,
Nicole Weimar, our German Microvasive Endoscopy sales
representative, and Prof. Velcovsky of the Klinik
Seltersberg of the JL University of Giessen, review clinical
and economic benefits associated with a new endoscopic
device.
<PAGE> 14
Where INNOVATION drives growth and greater efficiency
[PHOTO] Stents are the most important new technology in less
invasive medicine since the balloon dilatation
[Our employees have catheter. These tiny tubes and coils that expand and
been fully trained support diseased vessels already constitute a $1.2
on how to use our billion global market and the largest single product
global information category in interventional cardiology. While today
systems and are cardiology represents the most visible application, we
currently shipping are intently focused on continuous expansion of stent
more than 5,000 technologies into every specialty market we serve.
packages daily from
the Marina Bay Looking ahead, we expect that Scimed, our cardiology
Customer Fulfillment business unit, will introduce two coronary stents to
Center.] the U.S. market this year. The NIR(TM) stent, a product
that has received high marks from our European
physician customers and currently enjoys a leading
market share position there, is expected to launch in
the second half of 1998. The NIR is a highly flexible,
highly conformable, balloon-expandable stent. We will
also launch Radius(TM) this year, our first
self-expanding, nitinol stent. Key to Boston
Scientific's ability to treat a broad range of diseased
arteries is providing platforms with differential
performance characteristics in a variety of sizes --
all intended to equip the interventional physician with
the right stent for the right application.
While new technology energizes and motivates us, we
understand that the innovation is not complete until
physicians are bringing the benefits of the technology
to their patients. Our ability to accomplish this
requires a unique infrastructure that supports and
meets the needs of our customers. Throughout 1997, we
have worked diligently to create systems that will
enable more efficient distribution and impeccable,
consistent service quality. We began implementing a
$100 million global supply chain management system in
early 1996. Thanks to the intensive focus and
commitment of the team, our global SAP-based system
will be fully deployed in April of 1998. This system
will provide the vital information required to enhance
our business performance. The availability of
comprehensive data on customer demand and product
supply will enable more accurate sales activity
forecasting, as well as improved materials resource
planning and inventory management.
As we continue to focus on execution,
the combined capabilities of our
customer service and distribution teams
[ANNUAL EMPLOYEE GROWTH CHART] into our new Boston Scientific Customer
Fulfillment Center will further enhance
1996 1997 % CHANGE our ability to quickly and efficiently
respond to customer needs. Today we are
U.S. 7,664 8,623 13% able to ship more than 11,000 different
EUROPE 1,716 2,288 33% products, from every Boston Scientific
JAPAN 288 495 72% manufacturing facility, to locations
EMG. MKT. 20 297 1,385% around the world, including our other
regional distribution centers in The
Netherlands, Singapore and Japan.
It's all a part of our commitment to
realizing the economic and efficiency
benefits of integration, the greatest of
which is the ability to get the right
product to the right place at the right
time -- anywhere in the world.
<PAGE> 15
[PHOTO]
Boston Scientific's Marina Bay Customer Fulfillment Center opened in May of
1997. Located in Quincy, Massachusetts, U.S.A., the 1.3 million-square-foot
facility is equipped with state-of-the-art distribution equipment, including our
global information systems. By integrating inventory from all plants into one
central location, we expect to realize increased U.S. distribution efficiencies
of 17-20%.
Boston Scientific's ability to leverage global expertise to develop new
treatment solutions is well illustrated through our carotid stent technology
program being developed for multiple Boston Scientific specialty markets. The
team consists of employees from various functional areas across Boston
Scientific business units.
[PHOTO]
<PAGE> 16
OPTIMIZING STENT SOLUTIONS
Throughout the body are many types of tubes and vessels
which can become blocked or can malfunction due to disease
or injury. Stents are an important tool our physician [HUMAN BODY
customers use for long- term, less invasive treatment of SKELETON]
these problems. Figure 1 shows where Boston Scientific stent
technology is currently being applied as well as areas under
development. Figure 1
We apply the same principles of Strategic Mass to our stent
technology that we do across our entire business - product
line breadth and technology leverage to effectively provide
the right tool for the job. Because the variety of places
and problems which are treated with stents require unique
solutions, we have developed multiple technology platforms
and leveraged those platforms to where they provide the most
useful treatment (see Figure 2).
The next step in optimal stent solutions is to provide
adjunctive technologies which help stents perform better and
can also be therapies themselves. We are researching the use
of antiproliferative agents such as paclitaxel, genes and
other pharmacologically active compounds delivered in
coatings on stents or by special balloons to address vessel
restenosis and further increase long-term patient benefit.
- --------------------------------------------------------------------------------
Figure 2 The clinical applications for stenting are many and varied. We are
actively working to extend our multiplatform stent and delivery system
capabilities to provide our customers with optimal stent solutions
that are as unique and diverse as the diseased arteries, lumens and
vessels they treat.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
ANATOMICAL APPLICATION
- ----------------------------------------------------------------------------------------------
Biliary GI/Pulmonary Urological Coronary Peripheral Aortic Carotid
stent platform
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NIR(TM) X3 X2,3 X4
- ----------------------------------------------------------------------------------------------
RADIUS(TM) X3 X1,4
- ----------------------------------------------------------------------------------------------
SYMPHONY(R) X X X1,2
- ----------------------------------------------------------------------------------------------
STRECKER(TM) X X, X2 X2 X2
- ----------------------------------------------------------------------------------------------
VANGUARD(TM) X1,2
- ----------------------------------------------------------------------------------------------
SHORT-TERM
- ----------------------------------------------------------------------------------------------
IMPLANT X, X5
- ----------------------------------------------------------------------------------------------
DIAMOND(TM) X X
- ----------------------------------------------------------------------------------------------
PASSAGER(TM) X2
- ----------------------------------------------------------------------------------------------
</TABLE>
X. Available worldwide
1. Under investigation in the U.S.
2. Available for sale outside U.S. only
3. Pending U.S. approval
4. Under investigation outside U.S.
5. Trestle(TM)Prostatic Stent - available in Europe only
<PAGE> 17
EXHIBIT 13.1
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 1997
CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL TABLE OF CONTENTS
Financial Highlights F-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations F-2
Consolidated Statements of Operations F-7
Consolidated Balance Sheets F-8
Consolidated Statements of Stockholders' Equity F-10
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-12
Five-Year Selected Financial Data F-26
Report of Independent Auditors F-27
Quarterly Results of Operations F-28
Market for the Company's Common Stock
and Related Matters F-28
<PAGE> 18
FINANCIAL HIGHLIGHTS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,872,282 $1,551,238 $1,190,821
Gross profit 1,321,903 1,123,400 848,074
Operating income 268,992 313,171 52,111
Net income (loss) 139,334 167,094 (18,419)
Net income (loss) per common share - basic $0.72 $0.86 $(0.10)
Net income (loss) per common share - assuming dilution 0.70 0.84 (0.10)
</TABLE>
The above amounts include merger-related and special charges of $259 million
($192 million, net-of-tax), $142 million ($128 million, net-of-tax) and $272
million ($231 million, net-of-tax) recorded in 1997, 1996 and 1995,
respectively. See notes to consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the past three years, Boston Scientific Corporation (Boston Scientific or
the Company) has consummated numerous mergers and acquisitions that are
expected to improve the strategic position of the Company to take advantage of
additional significant growth opportunities in less invasive medicine. In 1995,
the Company merged with or acquired SCIMED Life Systems, Inc. (SCIMED),
Cardiovascular Imaging Systems, Inc. (CVIS), Vesica Medical, Inc. (Vesica),
Meadox Medicals, Inc. (Meadox) and Heart Technology, Inc. (Heart). In 1996, the
Company merged with or acquired EP Technologies, Inc. (EPT), Symbiosis
Corporation (Symbiosis) and Endotech Ltd. and MinTec Inc., and certain related
companies (Endotech/MinTec).
On April 8, 1997, the Company completed its merger with Target Therapeutics,
Inc. (Target) in a tax-free, stock-for-stock transaction accounted for as a
pooling-of-interests. Target designs, develops, manufactures and markets
catheter-based disposable and implantable medical devices used in minimally
invasive procedures to treat neurovascular diseases and disorders. In
conjunction with this merger, Target's stockholders received 1.07 shares of
Boston Scientific common stock in exchange for each share of Target common
stock. Approximately 16.5 million shares of the Company's common stock were
issued in connection with the Target acquisition.
The Company has substantially completed the integration of all mergers and
acquisitions consummated in 1995 and 1996. The Company expects to complete the
integration of Target by the end of 1998. 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 changes 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.
The restated historical results of operations are not necessarily indicative of
the operating results or financial position that would have occurred if the
mergers and acquisitions had been consummated during the periods presented, nor
are they necessarily indicative of future operating results or financial
position.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales increased 21% in 1997 to $1,872 million from $1,551 million in 1996.
International net 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 26%. Net income for the
year ended December 31, 1997, excluding merger-related and special charges,
increased 12% to $331 million from $295 million during the year ended December
31, 1996.
In 1997, the Company recorded merger-related expenses ($146 million) and
purchased research and development ($29 million), and the Company recorded
special charges related to inventory write-downs ($19 million),
litigation-related reserves ($34 million), and the impact of implementing a
recently issued accounting standard related to business process reengineering
($31 million). During 1996, the Company recorded merger-related expenses ($32
million) and purchased research and development ($110 million).
Reported net income for the year was $139 million, or $0.70 per share (diluted),
as compared to $167 million, or $0.84 per share, for the prior year.
F-2
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 19
United States (U.S.) revenues increased approximately 17% from 1996 to $1,076
million in 1997, while international revenues, including export sales,
increased approximately 27% from 1996 to $796 million in 1997. International
sales as a percentage of worldwide sales increased from 40% in 1996 to 43% in
1997. International sales during 1997 were negatively impacted compared to 1996
by approximately $82 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 19% and 27%, respectively, from 1996 to 1997.
Gross profit as a percentage of net sales was approximately 70.6% 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. Future
gross margins may be impacted by the Company's ability to effectively manage
its inventory level and mix. The Company is in the process of implementing a new
global information system that is expected to improve supply chain management.
The decrease in gross margin percentage is also partially due to 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.
Selling, general and administrative expenses increased 33% from $516 million in
1996 to $688 million in 1997, and increased as a percentage of sales from 33%
to 37% 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. The Company
believes the additional investments will enhance its competitive position in
the future.
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. The trend in countries
around the world toward more stringent regulatory requirements for product
clearance and more vigorous enforcement activities has generally caused or may
cause medical device manufacturers to experience more uncertainty, greater risk
and higher expenses.
During 1996 and 1997, the Company expanded its direct sales presence in Asia
Pacific and Latin America so as to be in a position to take advantage of
expanded market opportunities. The costs of expansion have negatively impacted
the Company's operating margins. The Company's ability to benefit from its
expansion may be limited by risks and uncertainties related to economic
conditions in these regions, in addition to competitive offerings,
infrastructure development, rights to intellectual property, and the ability of
the Company to implement its overall business strategy. 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. The Company believes that it will be able to realize improved long-term
returns on its investments with a direct selling presence in these regions.
The Company's 1997 operating expenses increased at a faster percentage than net
sales and the Company expects this relationship to continue during the first
half of 1998. However, the Company also expects that the additional investments
in infrastructure will enhance its competitive position in the second half of
1998 and beyond.
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 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
reimbursement levels and healthcare costs. Although these factors will continue
to 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.
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 was approximately 45% in 1996 and 38% in 1997.
The effective tax rates for 1996 and 1997 include the impact of special charges.
Excluding these items, the pro forma effective tax rate improved from
approximately 34% during 1996 to 32% during 1997. The reduction
F-3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 20
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
In 1997, the Company recorded a $31 million ($21 million, net-of-tax) cumulative
effect of change in accounting from implementing Emerging Issues Task Force 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 Company does not expect future costs
for the business process reengineering component of its global information
systems project to be material.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net sales increased 30% in 1996 to $1,551 million from $1,191 million in 1995.
Net income for the year increased to $167 million, or $0.84 per share (diluted),
as compared to a loss of $18 million, or $0.10 per share, in the prior year. Net
income for the year ended December 31, 1996, excluding special charges related
to 1996 and 1995 acquisitions, increased 39% to $295 million from $212 million
during the year ended December 31, 1995.
U.S. revenues increased approximately 20% from 1995 to $924 million in 1996,
while international revenues, including export sales, increased approximately
50% from 1995 to $627 million in 1996, or 57% excluding the negative impact of
exchange rate movements. International sales as a percentage of worldwide sales
increased from 35% in 1995 to 40% in 1996. Worldwide vascular sales increased
29% from 1995 to 1996 and worldwide nonvascular sales during the same periods
increased 26%.
During 1996, the Company accelerated its forward build and spend programs so as
to be in a position to take advantage of the expanded market opportunities. The
programs impacted the Company's manufacturing and selling, general and
administrative costs.
Gross profit as a percentage of net sales was approximately 72.4% and 71.2%
during 1996 and 1995, respectively. During 1996, the Company's gross margins
improved as a result of the Company's U.S. cost containment programs, an
increase in the percentage of international sales compared to U.S. sales, and
certain benefits of converting from selling through international distributors
to direct sales operations. However, the positive impact of these initiatives
was offset by the forward spend programs discussed previously, a slight decline
in average selling prices due to continuing pressure on healthcare costs and
increased competition, and a shift in the Company's product sales mix. In
addition, gross margins were negatively impacted by the unfavorable foreign
exchange rate movements discussed above.
Selling, general and administrative expenses increased 32% from $392 million in
1995 to $516 million in 1996, and remained approximately 33% of net sales. The
increase reflects continued expansion of the Company's domestic and
international sales organizations and related marketing support.
Royalty expenses decreased 35% from $26 million in 1995 to $17 million in 1996
and decreased from approximately 2% of net sales to 1% of net sales. The
decrease is primarily attributable to a reduction in sales of certain of the
Company's PTCA products that are subject to royalties. However, the reduction
was partially offset by royalties due under several strategic alliances that
the Company initiated in 1996 and prior years.
Research and development expenses increased 28% from $106 million in 1995 to
$135 million in 1996 and remained approximately 9% of net sales. The increase
in 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 $6 million in 1996 as compared to $16 million
in 1995. 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
finance several of the Company's strategic alliances and infrastructure build
during the second half of 1995 and throughout 1996. Interest expense increased
from $10 million in 1995 to $12 million in 1996. The increase in interest
expense is primarily attributable to interest on borrowings used principally to
finance the acquisitions of Symbiosis and Endotech/MinTec and the Company's
stock repurchase program. Other income (expense), net, changed from income of
$4 million in 1995 to expense of $5 million in 1996. The change is primarily
attributable to net foreign exchange losses recorded in 1996 of $2 million
compared to net gains of $8 million recorded in 1995.
The Company's effective tax rate was approximately 129% in 1995 and 45% in 1996.
The effective tax rates for 1995 and 1996 include the impact of special charges
(see discussion following). Excluding these items, the pro forma effective tax
rate improved from approximately 37% during 1995 to 34% during 1996. During
1995, the Company reorganized its international legal structure, which has
contributed to a reduction in the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company continued to invest in several strategic initiatives
and infrastructure in order to take advantage of certain growth opportunities
that exist in less invasive medicine. Cash, cash equivalents, and short-term
investments totaled approximately $80 million as of December 31, 1997 compared
to $118 million as of December 31, 1996. Working capital was reduced from $335
million at December 31, 1996 to $256 million at December 31, 1997, and cash
provided by operating activities decreased from $142 million during 1996 to $80
million during 1997. The decrease in cash and marketable securities is primarily
attributable to cash used to repurchase the Company's common stock, capital
expenditures incurred to expand the Company's manufacturing and distribution
facilities, additional strategic initiatives and payment of merger-related
costs. The cash expenditures were par-
F-4
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 21
tially offset by proceeds from operating activities and additional borrowings
under the Company's financing arrangements.
During 1997, accounts receivable increased $93 million as a result of the
Company's sales growth and the transition to selling directly to international
customers. Days sales outstanding has increased from 68 days in 1996 to 77 days
in 1997 primarily as a result of the growth in international sales. The
Company's bad debt provision may be impacted by its ability to effectively
collect receivables due from its international distributors. Inventory increased
$150 million during 1997 primarily as a result of stocking the NIR(TM) stent in
preparation of the Company's planned 1998 launch in the U.S. and Japan. The
remaining increase is a result of inefficiencies in the global supply chain. The
Company is committed to purchase approximately $75 million of NIR stents during
1998. The Company expects inventory levels to peak in mid-1998 and then begin to
decline as the NIR stent is launched in the U.S. and Japan, and as the Company's
new global supply chain becomes fully operational. Successful implementation of
the Company's supply chain initiatives is necessary to reduce the Company's
inventory to an acceptable level. Although no significant issues have arisen in
the past, there can be no assurance that current or future suppliers of the
Company's raw materials will be able to continue to meet the quality and
quantity demands of the Company at current suppliers' prices.
Cash used for investing activities for 1997 was $251 million and was primarily
related to property, plant and equipment costs associated with the Company's
expansion of manufacturing and distribution capacity.
During 1997, net cash provided by financing activities was approximately $162
million and consisted primarily of proceeds from issuance of commercial paper
and long-term borrowings and the exercise of stock options partially offset by
the acquisition of treasury stock.
In connection with its 1995 and 1996 mergers and acquisitions and the Company's
initial investment in Medinol, Ltd. (Medinol), the Company recorded
merger-related charges of approximately $272 million ($231 million, net-of-tax)
and $142 million ($128 million, net-of-tax), respectively. In addition, during
1997, the Company recorded special charges in connection with its acquisitions
of approximately $175 million ($135 million, net-of-tax). Estimated costs
include purchased research and development ($29 million) and those costs typical
in a merging of operations and relate to, among other things, rationalization of
facilities, workforce reductions, unwinding of various contractual commitments,
asset write-downs and other integration costs. The Company does not expect costs
incurred to complete purchased research and development projects to be
material. During 1997, cash payments related to these charges were
approximately $105 million and estimated cash payments for 1998 are $51 million.
The Company is authorized to purchase on the open market up to approximately 20
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 the
Company's obligations pursuant to its employee benefit and incentive plans.
During 1997, the Company repurchased 3.5 million shares of its common stock at
an aggregate cost of $188 million. Prior to 1997, 6.5 million shares of the
Company's common stock were repurchased under the program.
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 focusing on strategic initiatives and/or make
additional investments in existing relationships. In addition, the Company
expects to incur capital expenditures of approximately $230 million in 1998,
including completion of construction of additional manufacturing space and
completion of its global information system. The Company's new global
information system is Year 2000 compliant. The Company is assessing other
programs and products to determine if they are Year 2000 compliant and the
Company does not anticipate that additional compliance costs will have a
material impact on its business, operations or its financial condition.
In October 1997, the Company filed a Public Debt Registration Statement with
the U.S. Securities and Exchange Commission. Under the Registration Statement,
the Company may issue up to $500 million in debt securities in the public
market. In February 1998, the Company made an additional filing necessary to
issue $500 million of debt securities under the Registration Statement. The
Company expects the issuance to move forward and to receive the proceeds of the
issuance during March 1998. A significant portion of the net proceeds from the
sale of the securities will be used for repayment of indebtedness under the
Company's commercial paper program, and the remainder of the net proceeds of
this offering will be used principally to fund general corporate purposes. The
Company may borrow additional amounts under its revolving credit agreement in
the future, and the Company plans to increase its Japanese borrowing facilities
used primarily to discount its accounts receivable. The Company expects that
its cash and cash equivalents, marketable securities, cash flows from operating
activities, proceeds from the issuance of the debt securities noted above and
borrowing capacity will be sufficient to meet its projected operating cash
needs, including integration costs at least through the end of 1998. The Company
may need to increase its bank facilities during 1998 if it continues to execute
strategic initiatives, although there are no assurances that additional
financing can be or will be obtained.
MARKET RISK DISCLOSURES
The Company's floating and fixed rate debt obligations are subject to interest
rate risk. If interest rates increase 100 basis points in 1998, the increase
would not result in a material change in the Company's interest expense or the
fair value of the Company's debt obligations. A 100 basis point increase would
not result in a material increase in interest income or the fair value of the
Company's short-term investments.
The Company enters into forward 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
F-5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Company's foreign exchange contracts, which amounted to approximately $177
million at December 31, 1997, 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.
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 market values at December 31, 1997. In addition,
unhedged foreign currency balance sheet exposures as of December 31, 1997 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. Thus, certain 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.
LITIGATION
The Company is involved in various lawsuits, including 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 the 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. During 1997, the Company recorded
approximately $34 million of litigation-related reserves to cover costs of
defense and settlement, and unfavorable outcomes. The reserves are included in
selling, general and administrative expenses.
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: (a) the Company's
forward build and spend programs and its ability to benefit from investments in
expansion; (b) the Company's plans to continue to invest in its global systems
and worldwide manufacturing and distribution capacity; (c) the potential impacts
of continued consolidation among healthcare providers, trends towards managed
care, healthcare cost containment, more stringent regulatory requirements and
more vigorous enforcement activities; (d) the Company's belief that it is well
positioned to take advantage of opportunities for growth that exist in the
markets it serves; (e) 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; (f) the
research and development expenditures that will be incurred to complete
purchased research and development projects; (g) risks associated with
international operations; (h) the process and plan for the integration of
businesses acquired by the Company and the successful implementation of the
plan; (i) the potential effect of foreign currency fluctuations on revenues,
expenses and resulting margins and the trend toward increasing sales and
expenses denominated in foreign currencies; (j) the ability of the Company to
successfully manage accounts receivable and inventory levels and mix; (k) the
ability of the Company to meet its projected cash needs through the end of 1998;
(l) the Company's plans for launch of the NIR(TM) stent in the U.S. and Japan;
(m) the ability of global information systems to improve supply chain
management; (n) costs associated with implementing Year 2000 compliance and
business process reengineering; (o) the Company's belief that operating expenses
will increase at a faster percentage than net sales during the first half of
1998 and the expectation that the additional investments in infrastructure will
enhance the Company's competitive position in the second half of 1998 and
beyond; and (p) the ability of additional investments in sales and distribution
organizations to enhance the Company's future competitive position. 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, 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.
F-6
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 23
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,872,282 $ 1,551,238 $ 1,190,821
Cost of products sold 550,379 427,838 342,747
- ----------------------------------------------------------------------------------------------------------
Gross profit 1,321,903 1,123,400 848,074
Selling, general and administrative expenses 688,174 515,908 391,548
Royalties 22,177 17,061 26,233
Research and development expenses 167,194 134,919 105,788
Purchased research and development 29,475 110,000 67,946
Merger-related charges 145,891 32,341 204,448
- ----------------------------------------------------------------------------------------------------------
1,052,911 810,229 795,963
- ----------------------------------------------------------------------------------------------------------
Operating income 268,992 313,171 52,111
Other income (expense):
Interest and dividend income 3,706 6,297 16,311
Interest expense (14,285) (11,518) (9,591)
Other, net 255 (4,620) 3,847
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting 258,668 303,330 62,678
Income taxes 98,254 136,236 81,097
- ----------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting 160,414 167,094 (18,419)
Cumulative effect of change in accounting (net-of-tax) (21,080)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 139,334 $ 167,094 $ (18,419)
==========================================================================================================
Earnings (loss) per common share - basic:
Income (loss) before cumulative effect of change in accounting $ 0.82 $ 0.86 $ (0.10)
Cumulative effect of change in accounting (0.10)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per common share - basic $ 0.72 $ 0.86 $ (0.10)
==========================================================================================================
Earnings (loss) per common share - assuming dilution:
Income (loss) before cumulative effect
of change in accounting $ 0.80 $ 0.84 $ (0.10)
Cumulative effect of change in accounting (0.10)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per common share - assuming dilution $ 0.70 $ 0.84 $ (0.10)
==========================================================================================================
</TABLE>
See notes to consolidated financial statements.
F-7
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 24
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 57,993 $ 72,175
Short-term investments 22,316 45,606
Trade accounts receivable, net 413,838 321,025
Inventories 386,742 236,670
Deferred income taxes 146,956 97,364
Prepaid expenses and other current assets 36,176 43,977
- ------------------------------------------------------------------------
Total current assets 1,064,021 816,817
Property, plant, equipment and leaseholds, net 498,967 362,302
Other assets:
Intangibles, net 313,346 319,762
Investments 66,239 55,735
Other assets 25,234 30,429
- ------------------------------------------------------------------------
$1,967,807 $1,585,045
========================================================================
</TABLE>
See notes to consolidated financial statements.
F-8
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 25
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ 423,250 $ 212,500
Bank obligations 23,958 28,056
Accounts payable 98,878 66,877
Accrued expenses 161,236 96,907
Accrual for merger-related charges 68,358 48,144
Income taxes payable 26,039 27,403
Other current liabilities 6,292 1,929
- ---------------------------------------------------------------------------------------------
Total current liabilities 808,011 481,816
Long-term debt 46,325
Accrual for merger-related charges 8,283
Deferred income taxes 58,034 59,975
Other long-term liabilities 60,922 48,139
Commitments and contingencies
Stockholders' equity:
Preferred stock, $ .01 par value - authorized 25,000,000 shares,
none issued and outstanding
Common stock, $ .01 par value - authorized 300,000,000 shares,
195,611,491 shares issued at December 31, 1997 and
at December 31, 1996 1,956 1,956
Additional paid-in capital 432,556 437,074
Contingent stock repurchase obligation 18,295 24,855
Retained earnings 706,542 574,051
Foreign currency translation adjustment (94,279) (37,964)
Unrealized gain on available-for-sale securities, net 17,422 18,886
Treasury stock, at cost - 1,800,627 shares at December 31, 1997
and 643,991 shares at December 31, 1996 (96,260) (23,743)
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 986,232 995,115
- ---------------------------------------------------------------------------------------------
$ 1,967,807 $ 1,585,045
=============================================================================================
</TABLE>
See notes to consolidated financial statements.
F-9
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Contingent Foreign Gain On
Common Stock Additional Stock Currency Available-
Shares Par Paid-In Repurchase Retained Translation For-Sale
Issued Value Capital Obligation Earnings Adjustment Securities, Net
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 194,574 $ 1,945 $ 413,434 $ 437,296 $ (227) $ 13
Net loss (18,419)
Foreign currency
translation adjustment (14,352)
Issuance of common stock 461 5 3,362 (600)
Tax benefit relating to incentive
stock option and employee
stock purchase plans 14,180
Change in fiscal year of a
pooled entity (11,456)
Net change in equity investments 8,820
Other 76 136
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 195,035 1,950 431,052 406,957 (14,579) 8,833
Net income 167,094
Foreign currency
translation adjustment (23,385)
Issuance of common stock 576 6 (5,500)
Purchase of common stock
for treasury
Sale of stock repurchase obligation (24,855) $ 24,855
Tax benefit relating to incentive
stock option and employee
stock purchase plans 36,377
Net change in equity investments 10,053
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 195,611 1,956 437,074 24,855 574,051 (37,964) 18,886
Net income 139,334
Foreign currency
translation adjustment (56,315)
Issuance of common stock (47,713) (11,758)
Purchase of common stock
for treasury
Sale of stock
repurchase obligation (18,295) 18,295
Expiration of stock
repurchase obligation 24,855 (24,855)
Tax benefit relating to incentive
stock option and employee
stock purchase plans 36,635 4,915
Net change in equity investments (1,464)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 195,611 $ 1,956 $ 432,556 $ 18,295 $ 706,542 $ (94,279) $ 17,422
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury
Stock Total
- ---------------------------------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ (58,271) $ 794,190
Net loss (18,419)
Foreign currency
translation adjustment (14,352)
Issuance of common stock 31,975 34,742
Tax benefit relating to incentive
stock option and employee
stock purchase plans 14,180
Change in fiscal year of a
pooled entity (11,456)
Net change in equity investments 8,820
Other 212
- ---------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 (26,296) 807,917
Net income 167,094
Foreign currency
translation adjustment (23,385)
Issuance of common stock 66,385 60,891
Purchase of common stock
for treasury (66,355) (66,355)
Sale of stock repurchase obligation 2,523 2,523
Tax benefit relating to incentive
stock option and employee
stock purchase plans 36,377
Net change in equity investments 10,053
- ---------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 (23,743) 995,115
Net income 139,334
Foreign currency
translation adjustment (56,315)
Issuance of common stock 114,134 54,663
Purchase of common stock
for treasury (188,159) (188,159)
Sale of stock
repurchase obligation 1,508 1,508
Expiration of stock
repurchase obligation
Tax benefit relating to incentive
stock option and employee
stock purchase plans 41,550
Net change in equity investments (1,464)
- ---------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ (96,260) $ 986,232
===============================================================
</TABLE>
See notes to consolidated financial statements.
F-10
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 139,334 $ 167,094 $ (18,419)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Net cash adjustment to conform year end
of pooled entity (11,472)
Gain on sale of equity investments (10,526) (827)
Depreciation and amortization 86,692 66,317 43,396
Deferred income taxes (52,214) (11,749) (8,510)
Noncash special charges write-offs 37,104 14,378 15,237
Purchased research and development 29,475 110,000 67,946
Exchange (gain) loss 4,212 2,115 (7,617)
Increase (decrease) in cash flows from
operating assets and liabilities:
Trade account receivables (107,837) (105,370) (71,065)
Inventories (175,113) (90,980) (48,493)
Prepaid expenses and other current assets 9,751 (19,399) 8,844
Accounts payable and accrued expenses 101,378 31,342 12,111
Accrual for merger-related charges 28,489 (60,420) 67,312
Other liabilities (2,472) 32,175 (25,137)
Other, net (7,779) 7,303 8,403
- ------------------------------------------------------------------------------------------
Cash provided by operating activities 80,494 141,979 32,536
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment, net (220,097) (145,332) (74,800)
Net maturities of held-to-maturity
short-term investments 28,555 28,152 5,033
Purchases of available-for-sale securities (7,834) (74,947) (57,737)
Sales of available-for-sale securities 5,351 70,260 111,516
Acquisitions of businesses, net of cash acquired (18,076) (264,493) (96,792)
Payments for investments in certain technologies (39,066) (8,564) (67,351)
Other, net 205 (6,379) (2,304)
- ------------------------------------------------------------------------------------------
Cash used in investing activities (250,962) (401,303) (182,435)
FINANCING ACTIVITIES:
Net increase in commercial paper 210,750 212,500
Proceeds from notes payable and long-term borrowings 52,005 28,191
Net payments on notes payable, capital leases and
long-term borrowings (10,929) (27,816) (67,097)
Proceeds from issuances of shares of common stock,
net-of-tax benefits 96,213 77,642 48,922
Acquisitions of treasury stock,
net of proceeds from put options (186,651) (63,832)
Other, net 484 762 (107)
- ------------------------------------------------------------------------------------------
Cash provided by financing activities 161,872 199,256 9,909
Effect of foreign exchange rates on cash (5,586) (2,588) (4,939)
- ------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (14,182) (62,656) (144,929)
Cash and cash equivalents at beginning of period 72,175 134,831 279,760
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 57,993 $ 72,175 $ 134,831
==========================================================================================
</TABLE>
See notes to consolidated financial statements.
F-11
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note A to Note B)
NOTE A -- MERGERS AND ACQUISITIONS
On February 24, 1995, Boston Scientific Corporation (Boston Scientific or the
Company) completed its merger with SCIMED Life Systems, Inc. (SCIMED) in a
stock-for-stock transaction. The transaction, which is accounted for as a
pooling-of-interests, was effected through the exchange of 3.4152 shares of the
Company's common stock in exchange for each SCIMED share held. Approximately
52.7 million shares of common stock were issued in connection with the SCIMED
merger.
On March 9, 1995, the Company completed its merger with Cardiovascular Imaging
Systems, Inc. (CVIS), which is accounted for under the purchase method of
accounting. CVIS shareholders received $10.50 per share for an aggregate
purchase price of approximately $94 million (or approximately $82 million, net
of cash acquired, cash received and to be received from a third party under an
agreement, signed in conjunction with the acquisition, to license certain
intravascular ultrasound technology).
On March 23, 1995, the Company completed the acquisition of Vesica Medical, Inc.
(Vesica) which is accounted for under the purchase method of accounting. The
purchase price is not material to the Company's financial position or results of
operations and the acquisition did not have a material pro forma impact on the
Company's operations.
On November 16, 1995, the Company completed its merger with Meadox Medicals,
Inc. (Meadox). To effect the merger, Boston Scientific exchanged approximately
10.2 million shares of the Company's common stock for all the issued and
outstanding capital stock of Meadox on a fully-diluted basis in a
stock-for-stock, pooling-of-interests transaction.
On December 29, 1995, the Company completed its merger with Heart Technology,
Inc. (Heart) in a stock-for-stock transaction. The transaction, which is
accounted for as a pooling-of-interests, was effected through the exchange of
0.675 shares of the Company's common stock for each Heart share held.
Approximately 11.9 million shares of the Company's common stock were issued in
connection with the Heart merger.
On January 22, 1996, the Company completed its merger with EP Technologies, Inc.
(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 3.4 million
shares of the Company's common stock were issued in conjunction with the EPT
merger.
On March 14, 1996, the Company acquired Symbiosis Corporation (Symbiosis),
formerly a wholly-owned subsidiary of American Home Products Corporation. Boston
Scientific purchased Symbiosis for approximately $153 million in a cash
transaction. The acquisition was accounted for using the purchase method of
accounting.
On May 3, 1996, Boston Scientific acquired assets from Endotech, Ltd. and MinTec
Inc., and certain related companies (Endotech/MinTec). The Company purchased
Endotech/MinTec's assets for approximately $72 million in a cash transaction
accounted for using the purchase method of accounting.
On April 8, 1997, the Company completed its merger with Target Therapeutics,
Inc. (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 16.5 million shares of the Company's common
stock were issued in connection with the Target merger.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries, substantially all of which are
wholly-owned, and include the results of SCIMED, Meadox, Heart, EPT and Target
accounted for as poolings-of-interests, for all periods presented. The
statements also include the results of CVIS, beginning in March 1995, the
results of Symbiosis, beginning in March 1996 and the results of
Endotech/MinTec, beginning in May 1996. Investments in affiliates, representing
20% to 50% of the ownership of such companies, are accounted for under the
equity method. 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.
FISCAL YEAR: The Company has a fiscal year ending on December 31. In connection
with the SCIMED merger, effective January 1, 1995, SCIMED changed its fiscal
year end from the last day of February to December 31. As a result of the change
in SCIMED's fiscal year, the operations for the period January 1, 1995 through
February 28, 1995 have been included in the results of operations of Boston
Scientific both for the years ended December 31, 1995 and 1994. Summarized
results of SCIMED's operations for this two-month period are: Net sales: $55
million; Gross margin: $42 million; Operating income: $18 million; Net income:
$11 million.
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.
F-12
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 29
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 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 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 which, when
realized, have been within the range of management's expectations.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market.
PROPERTY, PLANT, EQUIPMENT AND LEASEHOLDS: 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 7-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 during 1997 was $5 million. 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); Purchased technologies (3-20 years); Excess of cost over net
assets acquired (15-40 years); Other intangibles (Various).
The Company examines the carrying value of its goodwill and other long-lived
intangible assets to determine whether there are any impairment losses. If
indicators of impairment were present in long-lived intangible assets used in
operations, and future cash flows were not 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 impair the value of material
long-lived intangible assets recorded in the accompanying consolidated financial
statements.
INCOME TAXES: The Company utilizes the 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 and 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,
1997, unremitted earnings of non-U.S. subsidiaries were $311 million. When
these earnings are distributed in the form of dividends or otherwise, the
Company will be subject to both U.S. income taxes and foreign withholding taxes
less an adjustment for applicable foreign tax credits. 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.
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, which amounted to $177 million at
December 31, 1997 and which were immaterial at December 31, 1996, 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 1997 and 1996, net foreign
currency transaction and translation net gains (losses) that are reflected as
Other Income (Expense) on the Consolidated Statements of Operations totaled
approximately $4 million and $2 million, respectively, of net foreign exchange
losses compared to $8 million of net foreign exchange gains in 1995.
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.
Returned merchandise will be accepted only with written authorization from the
Company. Accruals are made and evaluated for adequacy on a monthly basis for all
returns.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
F-13
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note B continued to Note E)
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 and Disclosure of Stock-Based Compensation".
ACCOUNTING CHANGE: The Company has 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 change in accounting.
NEW ACCOUNTING STANDARDS: The Company has not yet adopted SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" both of which will require adoption in
1998. The Company is in the process of determining the effect of adoption of
these statements on its consolidated financial statements and related
disclosures.
NET INCOME PER COMMON SHARE: In 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share". Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the Company's
previously reported primary earnings per share. All earnings per share amounts
for all periods presented have been restated to conform to the Statement 128
requirements.
RECLASSIFICATIONS: Certain prior years' amounts have been reclassified to
conform to the current years' presentation.
NOTE C -- CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents, and investments, stated at fair market value, consisted
of the following:
<TABLE>
<CAPTION>
Fair Gross Gross
Market Unrealized Unrealized Amortized
(In thousands) Value Gains Losses Cost
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Corporate obligations:
Within one year 828 828
U.S. debt securities:
Within one year 15,779 15,779
- ---------------------------------------------------------------------------------------------------------------------
$122,428 $31,079 $ 2,090 $93,439
=====================================================================================================================
DECEMBER 31, 1996
AVAILABLE-FOR-SALE:
Cash and money market accounts $ 60,426 $60,426
Equity securities (with a readily determinable fair value) 45,966 $31,580 $ 1,808 16,194
Corporate obligations:
Within one year 3,997 3,997
U.S. debt securities:
Within one year 9,765 9,765
- ---------------------------------------------------------------------------------------------------------------------
$120,154 $31,580 $ 1,808 $90,382
=====================================================================================================================
HELD-TO-MATURITY:
Corporate obligations:
Within one year $ 11,843 $11,843
U.S. debt securities:
Within one year 28,461 28,461
- ---------------------------------------------------------------------------------------------------------------------
$ 40,304 $40,304
=====================================================================================================================
</TABLE>
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, 1997 and 1996, the Company had investments totaling $24 million
and $13 million, respectively, in which the fair market value was not readily
determinable.
F-14
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 31
NOTE D -- OTHER BALANCE SHEET INFORMATION
Components of other selected captions in the Consolidated Balance Sheets at
December 31 consisted of:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
TRADE ACCOUNTS RECEIVABLE
Accounts receivable $444,317 $335,875
Less allowances 30,479 14,850
- --------------------------------------------------------------------------------
$413,838 $321,025
================================================================================
INVENTORIES
Finished goods $204,668 $130,696
Work-in-process 45,683 45,293
Raw materials 136,391 60,681
- --------------------------------------------------------------------------------
$386,742 $236,670
================================================================================
DEPRECIABLE ASSETS AND LEASEHOLDS
Land $ 45,213 $ 32,573
Buildings and improvements 247,873 175,473
Equipment, furniture and fixtures 354,344 280,780
Leasehold improvements 59,085 40,901
- --------------------------------------------------------------------------------
706,515 529,727
Less accumulated depreciation and amortization 207,548 167,425
- --------------------------------------------------------------------------------
$498,967 $362,302
================================================================================
INTANGIBLE ASSETS
Patents and trademarks $129,610 $121,149
Licenses 58,040 47,924
Purchased technologies 89,004 82,850
Excess of cost over net assets acquired 115,638 120,673
Other intangibles 13,768 13,547
- --------------------------------------------------------------------------------
406,060 386,143
Less accumulated amortization 92,714 66,381
- --------------------------------------------------------------------------------
$313,346 $319,762
================================================================================
ACCRUED EXPENSES
Payroll and related liabilities $ 40,547 $ 41,920
Other 120,689 54,987
- --------------------------------------------------------------------------------
$161,236 $ 96,907
================================================================================
</TABLE>
NOTE E -- CREDIT ARRANGEMENTS
The Company's borrowings at December 31 consisted of:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Commercial paper $423,250 $212,500
Bank obligations - short-term 23,958 28,056
Long-term debt 46,325
</TABLE>
At December 31, 1997, the Company had a $500 million revolving line of credit
with a syndicate of U.S. and international banks (the Credit Agreement). Under
the Credit Agreement, the Company has the option to borrow amounts at various
interest rates, payable quarterly in arrears. The terms of the Credit Agreement
extend to 2002. Use of the borrowings is unrestricted and the borrowings are
unsecured. The Credit Agreement requires the Company to maintain a specific
ratio of consolidated funded debt (as defined) to consolidated tangible net
worth (as defined) plus consolidated funded debt. At December 31, 1997, the
Company had no outstanding borrowings under the Credit Agreement.
The Company maintains a commercial paper program that is supported by the
Company's Credit Agreement. Outstanding commercial paper reduces available
borrowings under the Credit Agreement. At December 31, 1997, the Company had
approximately $423 million in commercial paper outstanding with interest rates
ranging from 5.84% to 7.35%, compared to $213 million outstanding with interest
rates ranging from 5.55% to 6.03% at December 31, 1996.
In October 1997, the Company filed a Public Debt Registration Statement with the
U.S. Securities and Exchange Commission. During the first quarter of 1998, the
Company plans to issue up to $500 million in debt securities under this
Registration Statement. A significant portion of the proceeds from the public
offering will be used to repay the Company's borrowings under its commercial
paper program.
The Company has uncommitted credit facilities with several Japanese banks that
provide for borrowings and promissory notes discounting of up to 10.5 billion
yen, or approximately $81 million. At December 31, 1997 and 1996, borrowings
F-15
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note E continued to Note H)
outstanding under these credit facilities were 2.7 billion yen (approximately
$21 million at December 31, 1997) and were borrowed at rates of approximately
1%. During 1997, approximately $194 million of receivables were discounted
through promissory notes compared to $130 million during 1996. At December 31,
1997, approximately $50 million of receivables were discounted at average
interest rates of approximately 1.6%; thus, the net availability under these
credit lines was $10 million.
During July 1997, the Company borrowed 6 billion yen (approximately $46 million
at December 31, 1997) under a fixed interest rate (2.22%) financing arrangement
with a syndicate of Japanese banks. The borrowings are payable in 2002.
Interest paid, including interest paid under capital leases and mortgage loans,
but excluding interest paid on a patent litigation judgment (in 1995), amounted
to $19 million in 1997, $13 million in 1996, and $6 million in 1995.
NOTE F -- LEASES
Rent expense amounted to $37 million in 1997, $22 million in 1996 and $15
million in 1995. These amounts include rent expense paid to related parties of
$1 million during each of 1997, 1996 and 1995.
Future minimum rental commitments as of December 31, 1997 under noncancelable
capital and operating lease agreements are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- --------------------------------------------------------------------------------
Capital Operating
(In thousands) Leases Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 4,139 $ 28,490
1999 1,306 25,553
2000 1,159 16,860
2001 1,156 9,123
2002 1,174 7,931
Thereafter 7,445 53,289
- --------------------------------------------------------------------------------
Total minimum lease payments 16,379 $141,246
================================================================================
Amount representing interest 5,954
- -------------------------------------------------------------
Present value of minimum
lease payments $10,425
=============================================================
</TABLE>
NOTE G -- 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.
FORWARD FOREIGN EXCHANGE CONTRACTS: The fair values of the Company's forward
foreign exchange contracts, which amounted to $177 million at December 31, 1997
and which were immaterial at December 31, 1996, are based on quoted market
prices of comparable contracts.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash, cash
equivalents,
and investments $122,428 $122,428 $160,458 $160,458
Liabilities:
Commercial paper 423,250 423,250 212,500 212,500
Bank obligations -
short-term 23,958 23,958 28,056 28,056
Long-term debt 46,325 47,255
</TABLE>
F-16
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 33
NOTE H-INCOME TAXES
Income (loss) before income taxes and cumulative effect of change in accounting
consisted of:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $178,381 $253,239 $ 75,448
Foreign 80,287 50,091 (12,770)
- --------------------------------------------------------------------------------
$258,668 $303,330 $ 62,678
================================================================================
</TABLE>
The related provision for income taxes consisted of:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 108,444 $ 116,191 $ 67,617
State 14,567 9,108 6,615
Foreign 20,010 22,686 15,375
- --------------------------------------------------------------------------------
143,021 147,985 89,607
================================================================================
Deferred:
Federal (30,123) 4,175 3,759
State (5,648) 522 606
Foreign (8,996) (16,446) (12,875)
- --------------------------------------------------------------------------------
(44,767) (11,749) (8,510)
================================================================================
$ 98,254 $ 136,236 $ 81,097
================================================================================
</TABLE>
The reconciliation of taxes on income at the federal statutory rate to the
actual provision for income taxes is:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $ 90,534 $ 106,166 $ 21,938
State income taxes, net of federal benefit 7,760 8,778 4,706
Effect of foreign taxes (13,732) 3,641 1,925
Non-deductible merger-related expenses and
purchased research and development 14,957 19,902 53,510
Other, net (1,265) (2,251) (982)
- --------------------------------------------------------------------------------
$ 98,254 $ 136,236 $ 81,097
================================================================================
</TABLE>
F-17
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note H continued to Note J)
Significant components of the Company's deferred tax assets and liabilities at
December 31 consisted of:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Inventory costs $ 26,170 $ 8,890
Deferred intercompany sales 70,057 59,357
Tax benefit of net operating loss and tax credits 28,808 26,359
Reserves and accruals 16,317 11,520
Litigation-related reserves 15,518 839
Reengineering costs 7,447
Merger-related charges 28,742 26,069
Other 19,894 12,391
- --------------------------------------------------------------------------------
Deferred tax assets 212,953 145,425
Less valuation allowance on deferred tax assets 23,250 24,050
- --------------------------------------------------------------------------------
$ 189,703 $ 121,375
================================================================================
Deferred tax liabilities:
Tax over book depreciation $ (26,542) $ (42,459)
Unremitted earnings of subsidiaries (52,104) (26,921)
Capitalized expenses (9,192) (1,396)
Other (1,376) (2,324)
- --------------------------------------------------------------------------------
Deferred tax liabilities (89,214) (73,100)
================================================================================
Deferred SFAS No. 115 adjustment (11,567) (10,886)
- --------------------------------------------------------------------------------
$ 88,922 $ 37,389
================================================================================
</TABLE>
At December 31, 1997, the Company had U.S. tax net operating loss carryforwards
and research and development tax credits of approximately $17 million that will
expire periodically beginning in the year 2002. In addition, the Company had
foreign net operating loss carryforwards of $12 million that will expire
periodically beginning in the year 2000. The Company established a valuation
allowance of $23 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 $89 million in 1997, $85 million in 1996 and $83
million in 1995.
NOTE I -- STOCKHOLDERS' EQUITY
PREFERRED STOCK: The Company is authorized to issue 25 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, 1997, the Company had no shares of preferred stock outstanding.
COMMON STOCK: The Company is authorized to issue 300 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 20
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. During 1997, the
Company repurchased approximately
F-18
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 35
3.5 million shares of its common stock at an aggregate cost of $188 million.
Prior to 1997, a total of 6.5 million shares of the Company's common stock was
repurchased under the program.
As part of the stock repurchase program, the Company has been selling European
equity put options to an independent broker-dealer. Each option, if exercised,
obligates the Company to purchase from the broker-dealer a specified number of
shares of the Company's common stock at a predetermined exercise price. The put
options are exercisable only on the first anniversary of the date the options
were sold. Proceeds are recorded as a reduction to the cost of the Company's
treasury stock. During 1996, the Company sold European put options for 600,000
shares and received proceeds of approximately $3 million. The put options for
these 600,000 shares expired during 1997. During 1997, the Company sold put
options for 329,000 shares and received proceeds of approximately $2 million.
Repurchase prices relating to put options outstanding at December 31, 1997
range from $55 per share to $56 per share. The Company's contingent obligation
to repurchase shares upon exercise of the outstanding put options approximated
$18 million at December 31, 1997.
NOTE J -- STOCK OWNERSHIP PLANS
EMPLOYEE AND DIRECTOR STOCK OWNERSHIP PLANS
Boston Scientific's 1992 and 1995 Long-Term Incentive Plans provide for the
issuance of up to 20 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
(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 7,500 shares, 1,000
shares and 29,000 shares were issued to employees during 1997, 1996 and 1995,
respectively.
Boston Scientific's 1992 Non-Employee Directors' Stock Option Plan provides for
the issuance of up to 100,000 shares of common stock and authorizes the
automatic grant to outside directors of options to acquire 2,000 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 24 million at December 31, 1997.
If the Company had elected to recognize compensation expense for the granting
of options under the aforementioned 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 and earnings per share
would have been reported as the following pro forma amounts:
<TABLE>
<CAPTION>
(In thousands, Year Ended December 31,
except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $ 139,334 $ 167,094 $ (18,419)
Pro forma 111,908 151,820 (24,901)
- --------------------------------------------------------------------------------
Earnings (loss) per common share -
assuming dilution
As reported $ 0.70 $ 0.84 $ (0.10)
Pro forma 0.56 0.76 (0.13)
- --------------------------------------------------------------------------------
</TABLE>
The weighted average grant-date fair value of options granted during 1997, 1996
and 1995, calculated using the Black-Scholes options pricing model, is $18.16,
$14.41 and $10.12, respectively.
The fair value of the stock options used to calculate the pro forma net income
and earnings per share amounts above is estimated using the Black-Scholes
options pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 35.90% 37.70% 37.70%
Risk-free interest rate 6.42% 6.12% 5.93%
Actual forfeitures 670,000 341,000 142,000
Expected life 4.0 3.7 4.0
</TABLE>
The effects of expensing the estimated fair value of stock options on 1997,
1996 and 1995 pro forma amounts are not necessarily representative of the
effects on reporting the results of operations for future years as the periods
presented include only one, two and three years of option grants under the
Company's plans.
F-19
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 36
Notes to Consolidated Financial Statements
(Note J continued to Note L)
Information related to stock options at December 31 under the aforementioned
stock ownership plans is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(Option amounts in thousands) Options Price Options Price Options Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 14,539 $ 22.84 14,699 $ 16.55 13,562 $ 11.67
Granted 5,358 49.40 3,327 41.04 4,430 27.69
Exercised (2,553) 17.95 (2,974) 12.46 (2,677) 10.83
Canceled (741) 37.15 (513) 20.72 (616) 14.16
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31 16,603 31.51 14,539 22.84 14,699 16.55
=======================================================================================================
Exercisable at December 31 6,115 $ 18.15 5,392 $ 15.85 5,973 $ 13.51
=======================================================================================================
</TABLE>
Below is additional information related to stock options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$00.00-15.00 4,401 5.62 $10.76 3,144 $10.58
15.01-30.00 4,240 5.95 24.45 2,307 21.85
30.01-45.00 2,885 8.50 40.60 606 39.87
45.01-60.00 4,913 9.33 49.68 45 51.99
60.01-75.00 164 9.33 66.99 13 62.43
- ---------------------------------------------------------------------------------
16,603 7.34 $31.51 6,115 $18.15
=================================================================================
</TABLE>
STOCK PURCHASE PLAN
Boston Scientific's 1992 Employee Stock Purchase Plan (Stock Purchase Plan)
provides for the granting of options to purchase up to 1.5 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 a
number of shares equal to not more than 10% of the employee's eligible
compensation divided by 85% of the fair market value of the Company's common
stock as of the beginning of that offering period. Such options may be exercised
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 1997, approximately 120,000 shares were issued at prices ranging from
$46.909 to $48.663 per share. During 1996, approximately 120,000 shares were
issued at prices ranging from $36.125 to $39.419 per share, and, during 1995,
approximately 133,000 shares were issued at prices ranging from $13.60 to
$21.463 per share. At December 31, 1997, there were approximately 970,000
shares available for future issuance.
F-20
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 37
NOTE K -- EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands,
except per share data)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC:
Net income (loss) $139,334 $167,094 $ (18,419)
================================================================================
Weighted average
shares outstanding 194,573 193,509 190,787
================================================================================
Net income (loss) per
common share $ 0.72 $ 0.86 $ (0.10)
================================================================================
ASSUMING DILUTION:
Net income (loss) $139,334 $167,094 $ (18,419)
================================================================================
Weighted average
shares outstanding 194,573 193,509 190,787
Net effect of dilutive
put options 14
Net effect of dilutive
stock options 5,301 5,844
- --------------------------------------------------------------------------------
Total 199,888 199,353 190,787
================================================================================
Net income (loss) per
common share $ 0.70 $ 0.84 $ (0.10)
================================================================================
</TABLE>
At December 31, 1997, approximately 5 million stock options were not included in
the diluted computation of earnings per share because they would have been
antidilutive.
NOTE L -- COMMITMENTS AND CONTINGENCIES
Beginning in 1993, Schneider (Europe) AG and Schneider (USA) Inc., subsidiaries
of Pfizer, Inc., alleged that the Company's Synergy (TM) products infringe one
of their patents. On May 13, 1994, the Company filed a lawsuit against them in
the U.S. District Court for the District of Massachusetts seeking a declaratory
judgment that this patent is invalid and that the Company's Synergy products do
not infringe the patent. The Company subsequently amended its complaint to seek
a declaratory judgment that the patent is unenforceable. The Schneider companies
filed counterclaims against the Company, alleging the Company's willful
infringement of the patent and seeking monetary and injunctive relief. In
October 1997, the District Court granted the Company's motion for summary
judgment on noninfringement, and ruled that the Company cannot litigate the
issues of validity and enforceability, which had previously been litigated by
SCIMED Life Systems, Inc. (SCIMED), the Company's subsidiary. Both parties have
filed notices of appeal. The Company ceased marketing its Synergy catheters in
August 1996.
On May 31, 1994, SCIMED 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 FLOWTRACK-40 (TM) and RX ELIPSE (TM) PTCA
catheters. On November 17, 1995, SCIMED filed a suit for patent infringement
against ACS, alleging willful infringement of three of SCIMED's U.S. patents by
the ACS RX LIFESTREAM (TM) PTCA catheter. Both suits were filed in the U.S.
District Court for the Northern District of California seeking monetary and
injunctive relief. The cases were sent to consolidated arbitration for a
threshold determination of one issue covered by the November 27, 1991 settlement
agreement between the parties. On March 14, 1997, the arbitration panel reached
a final determination in the consolidated arbitration. Pursuant to this
determination, the Company is continuing its action as to the ELIPSE product and
has dismissed the actions as to the FLOWTRACK and LIFESTREAM products. ACS has
answered, denying the allegations of the complaint. In January 1998, the Company
moved to add the ACS RX MULTILINK (TM) (stent delivery system) to its complaint.
Trial is scheduled to begin in late 1998 or early 1999.
SCIMED has also accused ACS's RX MULTILINK HP (TM) stent delivery system
and ACS's RX ROCKET (TM) and RX COMET (TM) PTCA catheters of infringing several
SCIMED patents. These claims, as well, are subject to arbitration relating to a
threshold determination under the November 27, 1991 settlement agreement. The
hearing in the combined arbitration on these products is scheduled to begin on
May 11, 1998. If SCIMED is successful in the arbitration, it intends immediately
to commence patent infringement litigation to enforce its rights under the
relevant patents against ACS.
On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,
alleging willful infringement of four U.S. patents licensed to ACS by SCIMED'S
EXPRESS PLUS (TM) and EXPRESS PLUS II (TM) PTCA catheters. 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 scheduled to begin in November 1998.
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 (TM) 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 complaint. Trial is
scheduled to begin in November 1998 as to the EXPRESS PLUS products and January
1999 as to the BANDIT product.
On December 15, 1995, the Company and SCIMED filed a suit for restraint of
trade, unfair competition and conspiracy to monopolize against ACS and the
Schneider companies, alleging certain violations of state and federal antitrust
laws aris-
F-21
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note L continued)
ing from the improper prosecution, enforcement and cross-licensing of U.S.
patents relating to rapid exchange balloon dilatation angioplasty catheters.
Suit was filed in the U.S. District Court for the District of Massachusetts and
seeks monetary, declaratory and injunctive relief. In October 1997, the court
granted the defendants' motion to dismiss. The Company has filed a notice of
appeal.
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.
On November 9, 1994, Target Therapeutics, Inc. (Target) filed a lawsuit in the
U.S. District Court for the Northern District of California alleging that
SCIMED's VENTURE(R) and VENTURE II(TM) microcatheters and Cordis Corporation's
(Cordis) TRANSIT(R) and RAPIDTRANSIT(TM) microcatheters infringe a patent
assigned to Target. On May 2, 1996, the District Court entered an order granting
a preliminary injunction to Target prohibiting SCIMED and Cordis from marketing
or selling the accused products. On July 1, 1996, the Court of Appeals for the
Federal Circuit stayed the preliminary injunction pending a decision on SCIMED's
appeal of the District Court's order. Upon the recent merger between the Company
and Target, the lawsuit was dismissed as to the Company. Subsequently, the Court
of Appeals vacated the preliminary injunction. The lawsuit was dismissed as to
Cordis pursuant to a Settlement Agreement signed January 9, 1998.
On October 3, 1995, Cordis Endovascular, Inc. and Cordis filed a suit alleging
patent infringement against Target Therapeutics, Inc. (Target) alleging that
Target's DASHER(R) guidewires, FASGUIDE(R) catheters and TRACKER(R) and
FASTRACKER(R) guide microcatheters infringe three patents owned by Cordis. The
lawsuit was dismissed pursuant to a Settlement Agreement signed January 9, 1998.
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. The lawsuit seeks a declaratory judgment that the Company has infringed
the Bard patent, preliminary and permanent injunctions enjoining the
manufacture, use or sale of the MaxForce TTS catheter or any other infringing
product, monetary damages and expenses. After a jury trial in June 1997, the
jury returned a verdict finding that the Company infringed the Bard patent and
awarded damages to Bard in the amount of $10.8 million. No judgment has been
entered pending trial on the Company's claim that the patent was obtained by
inequitable conduct. The Company intends to appeal any judgment entered on the
jury verdict. The Company no longer markets the accused devices.
On February 28, 1997, C.R. Bard, Inc. (Bard) filed a suit for patent
infringement against SCIMED alleging that SCIMED's WAVE(TM) and SURPASS(TM)
catheters are infringing a patent assigned to Bard. The suit was filed in the
U.S. District Court for the District of New Jersey seeking monetary and
injunctive relief. The lawsuit was dismissed pursuant to a Settlement Agreement
signed December 4, 1997.
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. The court has requested that an expert be named to provide the
court technical advice, and the parties have submitted suggestions; an expert
has not yet been chosen.
On March 25, 1996, Cordis filed a suit for patent infringement against SCIMED,
alleging the infringement of five U.S. patents by SCIMED's LEAP(TM) 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 scheduled for June
1998.
On March 13, 1997, the Company (through its subsidiaries) filed suits in The
Netherlands and the United Kingdom, and on March 17, 1997 filed suit in France,
seeking a declaration of noninfringement for the Company's LEAP balloon in
relation to a European patent owned by Cordis. The United Kingdom suit has been
dismissed for lack of controversy and the Netherlands suit has been withdrawn. A
decision in the suit in France is expected late in 1998.
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). A response is expected in April 1998. The Company appealed
the court's decision to present questions to the EPO. A hearing on the appeal is
set for June 16, 1998.
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
F-22
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 39
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 scheduled for November 1998.
On December 13, 1996, the Superior Court of the State of Arizona granted the
motion of Impra, Inc. (Impra) to add the Company as an additional defendant in
Impra's case against Endomed, Inc. (Endomed). Impra (now a subsidiary of C.R.
Bard, Inc.) alleges that Endomed misappropriated certain Impra trade secrets and
that the Company acted in concert with Endomed to utilize the technology. On the
same date, Endomed and the Company were preliminarily enjoined, among other
things, from any further use or disclosure of the technology. The Company has
answered, denying the allegations of the complaint. Trial is scheduled to begin
in April 1998.
On March 13, 1997, the Company (through its subsidiaries) filed suits against
Johnson & Johnson Company (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(TM) 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. Trial begins in the United Kingdom on March 23, 1998. On March 18,
1997, the Company (through its subsidiary) filed a similar suit in Germany, but
seeking only a declaration of noninfringement for the NIR stent relative to the
two patents. 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 stent relative to one of the European patents
licensed to Ethicon and a declaration of invalidity in relation to that patent
(in Italy and Spain only). Ethicon and other Johnson & Johnson subsidiaries
filed a cross-border suit in The Netherlands on March 17, 1997, alleging that
the NIR 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. The Johnson & Johnson entities thereafter filed a similar cross-border
proceeding in The Netherlands with respect to the 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 stent will be
found not to infringe the patents. Johnson & Johnson has appealed this decision
with respect to one of the patents. A hearing on Johnson & Johnson's appeal of
the denial of relief is expected to be held on March 10, 1998; a hearing on the
merits is expected late in 1998.
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that its NIR stent infringes one of Ethicon's patents. A
hearing is scheduled for June 19, 1998.
On March 13, 1997, the Company filed a Motion to Intervene in Johnson & Johnson
Interventional Systems Co. et al. v. Cook, Incorporated et al., an action in the
U.S. District Court for the Southern District of Indiana. The motion seeks
intervention for the purpose of modifying the present protective order to
direct the Clerk of Court to retain, and the parties and their counsel not to
destroy, materials and testimony assembled in that action. By agreement, the
Company is receiving access to the documents and materials.
On June 16, 1997, the Company and SCIMED filed a suit against Johnson & Johnson
and related entities in the U.S. District Court for the District of
Massachusetts seeking a declaratory judgment of noninfringement for the NIR
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. In October 1997, Johnson & Johnson's motion to
dismiss the suit was denied. Johnson & Johnson has answered, denying the
allegations of the complaint, and counterclaiming for patent infringement. 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 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 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 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.
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 par-
F-23
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note L continued to Note O)
ticular 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.
During 1997, the Company recorded approximately $34 million of
litigation-related reserves to cover costs of defense and settlement, and
unfavorable outcomes. The reserves are included in selling, general and
administrative expenses.
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 M -- BUSINESS COMBINATIONS
In 1997, the Company increased to approximately 25% its voting ownership in
Medinol, Ltd. (Medinol), a developer of innovative technologies for
cardiovascular applications. Accordingly, the Company has retroactively applied
the equity method of accounting to account for this investment which had been
accounted for under the cost method since 1995, the year of the Company's
original investment. This accounting had the effect of increasing the amount of
the previously reported charges for purchased research and development and
reducing net earnings in 1995 by $35 million, or approximately $0.18 per share.
The effect of this change in 1996 and 1997 was not significant.
In 1997, Boston Scientific consummated its merger with Target. The acquisition
is accounted for as a pooling-of-interests (see Note A), thus, the combined
consolidated financial statements serve as the basis for historical financial
statements of Boston Scientific. Combined and separate results of Boston
Scientific and Target for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Combined
Boston Boston
(In thousands) Scientific Target Scientific
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED
DECEMBER 31,1996:
Net sales $ 1,462,043 $ 89,195 $ 1,551,238
Net income (loss) 167,420 (326) 167,094
YEAR ENDED
DECEMBER 31,1995:
Net sales $ 1,129,185 $ 61,636 $ 1,190,821
Net income (loss) (28,994) 10,575 (18,419)
- --------------------------------------------------------------------------------
</TABLE>
Target's net sales, gross profit and net income for the three months ended March
31, 1997 were approximately $31 million, $24 million and $2 million,
respectively. The restated financial data is not necessarily indicative of the
operating results or financial position that would have occurred if the Target
merger had been consummated during the periods presented, nor is it necessarily
indicative of future operating results or financial position.
NOTE N -- MERGER-RELATED CHARGES AND EXPENSES
In 1997, the Company recorded merger-related charges of $175 million ($135
million, net-of-tax). Charges include $29 million for purchased research and
development recorded in conjunction with accounting for the Company's additional
investment in Medinol ($12 million) and the Company's other strategic
acquisitions ($17 million), $16 million in direct transaction costs and $96
million of estimated costs to be incurred in merging the separate operating
business of Target with subsidiaries of the Company. The remaining amounts
represent primarily adjustments to merger-related charges recorded in 1996 and
1995 based on actual costs incurred or changes in estimates (approximately $15
million) and write-downs of assets in connection with the Company's
implementation of a global information system.
In connection with the mergers and acquisitions consummated in 1996 and 1995
(see Note A) and the Company's initial investment in Medinol, the Company
recorded merger-related charges of $142 million ($128 million, net-of-tax) and
$272 million ($231 million, net-of-tax), respectively.
Estimated costs include those typical in a merging of operations and relate to,
among other things, rationalization of facilities, workforce reductions,
unwinding of various contractual commitments, asset write-downs and other
integration costs. The merger-related charges are determined based on formal
plans approved by the Company's management using the best information available
to it at the time. The workforce-related initiatives involve substantially all
of the Company's employee groups. The amounts the Company may ultimately incur
may change as the plans are executed.
F-24
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 41
The activity impacting the accrual related to these charges during 1997 and
1996, net of reclassifications made by management based on available
information, is summarized in the table below:
<TABLE>
<CAPTION>
Balance at Charges to Charges Charges to Charges Balance at
December 31, Operations in Utilized in Operations in Utilized in December 31
(In thousands) 1995 1996 1996 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Facilities $ 25,642 $ 7,118 $ 13,863 $ 8,193 $ 7,101 $ 19,989
Workforce reductions 31,863 3,655 9,621 24,655 25,310 25,242
Contractual commitments 50,921 1,940 44,705 52,673 31,495 29,334
Asset write-downs 7,541 4,497 5,790 27,602 18,048 15,802
Direct transaction and other costs 19,291 15,131 28,063 32,768 27,836 11,291
- ------------------------------------------------------------------------------------------------------------------------------------
Total $135,258 $32,341 $102,042 $145,891 $109,790 $101,658
====================================================================================================================================
</TABLE>
The December 31, 1997 accrual for merger-related and special charges is
classified within the balance sheet as follows:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
<S> <C>
Accrual for merger-related charges - current $ 68,358
Property, plant, equipment and leaseholds, net 25,017
Accrual for merger-related charges - non-current 8,283
- --------------------------------------------------------------------------------
$101,658
================================================================================
</TABLE>
Most of the plans are expected to be completed by the end of 1998. Cash outlays
to complete the balance of the Company's initiative to integrate the businesses
related to all mergers and acquisitions consummated since 1994 are estimated to
be approximately $59 million.
NOTE O -- FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Boston Scientific is a worldwide developer, manufacturer and marketer of medical
devices for less invasive procedures and operates in one segment. Sales between
geographic areas are made at prices which would approximate transfers to
unaffiliated distributors. In the presentation below, the profit derived from
such transfers is attributed to the area in which the sale to the unaffiliated
customer is eventually made. Because of the interdependence of the geographic
areas, the operating profit as presented may not be representative of the
geographic distribution which would occur if the areas were not interdependent.
In addition, comparison of operating results between geographic areas and
between years may be impacted by foreign currency fluctuations.
<TABLE>
<CAPTION>
Corporate
United Asia Expenses Consolidated
(In thousands) States Europe Pacific and Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Direct sales to unaffiliated customers $ 1,076,292 $ 336,512 $ 403,851 $ 18,461 $ 1,835,116
Export sales 6,446 30,720 37,166
Transfers between areas 430,993 207,302 $(638,295)
- -----------------------------------------------------------------------------------------------------------------------------------
1,513,731 574,534 403,851 18,461 (638,295) 1,872,282
Operating income without special charges 306,992 70,800 189,549 (70,233) 497,108
Operating income with special charges 235,639 (12,326) 149,662 (103,983) 268,992
Identifiable assets 1,599,263 683,669 360,942 17,166 (693,233) 1,967,807
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Direct sales to unaffiliated customers $ 924,205 $ 270,301 $ 214,482 $ 6,306 $ 1,415,294
Export sales 105,884 30,060 135,944
Transfers between areas 224,315 116,970 $(341,285)
- -----------------------------------------------------------------------------------------------------------------------------------
1,254,404 417,331 214,482 6,306 (341,285) 1,551,238
Operating income without special charges 302,118 77,622 118,985 (43,213) 455,512
Operating income with special charges 198,672 39,727 117,985 (43,213) 313,171
Identifiable assets 1,434,777 410,331 209,997 5,956 (476,016) 1,585,045
- -----------------------------------------------------------------------------------------------------------------------------------
1995
Direct sales to unaffiliated customers $ 772,986 $ 189,631 $ 111,266 $ 1,073,883
Export sales 97,471 19,467 116,938
Transfers between areas 148,852 112,620 $(261,472)
- -----------------------------------------------------------------------------------------------------------------------------------
1,019,309 321,718 111,266 (261,472) 1,190,821
Operating income without special charges 220,039 64,558 65,473 (25,565) 324,505
Operating income with special charges (2,053) 21,761 57,968 (25,565) 52,111
Identifiable assets 1,057,221 200,687 120,932 (219,395) 1,159,445
</TABLE>
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of special charges.
F-25
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 42
FIVE-YEAR SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $ 1,872,282 $ 1,551,238 $ 1,190,821 $932,969 $779,894
Gross profit 1,321,903 1,123,400 848,074 638,872 535,243
Selling, general and administrative expenses 688,174 515,908 391,548 311,296 333,285
Royalties 22,177 17,061 26,233 25,682 24,473
Research and development expenses 167,194 134,919 105,788 86,320 69,045
Purchased research and development 29,475 110,000 67,946
Merger-related charges 145,891 32,341 204,448
Total operating expenses 1,052,911 810,229 795,963 423,298 426,803
Operating income 268,992 313,171 52,111 215,574 108,440
Income (loss) before cumulative effect of
change in accounting 160,414 167,094 (18,419) 142,274 73,731
Cumulative effect of change in accounting (net-of-tax) (21,080)
Net income (loss) $139,334 $ 167,094 $ (18,419) $142,274 $ 73,731
Income (loss) per common share before cumulative
effect of change in accounting:
Basic $ 0.82 $ 0.86 $ (0.10) $ 0.76 $ 0.40
Assuming dilution 0.80 0.84 (0.10) 0.75 0.39
Net income (loss) per common share:
Basic $ 0.72 $ 0.86 $ (0.10) $ 0.76 $ 0.40
Assuming dilution 0.70 0.84 (0.10) 0.75 0.39
Weighted average shares outstanding-assuming dilution 199,888 199,353 190,787 189,563 187,283
</TABLE>
In addition to the merger-related charges noted in the Operating Data, the
Company also recorded $34 million and $67 million of litigation-related charges
which are included in selling, general and administrative expenses in 1997 and
1993, respectively.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 256,010 $ 335,001 $ 344,609 $ 475,255 $362,816
Total assets 1,967,807 1,585,045 1,159,445 1,114,433 840,104
Commercial paper 423,250 212,500
Bank obligations-short-term 23,958 28,056 57,520 88,948 57,141
Long-term debt, net of current portion 46,325 4,162 16,800 3,671
Stockholders' equity 986,232 995,115 807,917 794,190 601,844
Book value per common share $ 4.93 $ 4.99 $ 4.23 $ 4.19 $ 3.21
</TABLE>
F-26
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 43
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, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As more fully described in Note B, 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 20, 1998
F-27
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 44
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Net sales $430,531 $ 473,749 $474,773 $493,229
Gross profit 309,474 342,294 338,866 331,269
Operating income (loss) 112,915 (18,972) 124,351 50,698
Income (loss) before cumulative effect of
change in accounting 75,436 (26,896) 88,405 23,469
Net income (loss) 75,436 (26,896) 88,405 2,389
Net income (loss) per common share -
assuming dilution $ 0.38 $ (0.14) $ 0.44 $ 0.01
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net sales $343,553 $ 379,237 $395,788 $432,660
Gross profit 251,598 277,851 284,564 309,387
Operating income 38,708 41,968 109,123 123,372
Net income 2,190 13,089 71,234 80,581
Net income per common share -
assuming dilution $ 0.01 $ 0.07 $ 0.36 $ 0.40
</TABLE>
During the second and fourth quarters of 1997, the Company recorded
merger-related charges and purchased research and development totaling $158
million and $17 million, respectively. In addition, during the fourth quarter
of 1997, the Company recorded 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 change in accounting. During the first and second quarters of 1996,
the Company recorded merger-related charges and purchased research and
development totaling $69 million and $73 million, respectively.
All earnings per share amounts presented have been restated to conform to SFAS
No. 128 "Earnings per Share" requirements (see Note B).
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.
<TABLE>
<CAPTION>
High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
1997
First Quarter $ 71.500 $ 58.625
Second Quarter 62.938 41.000
Third Quarter 78.438 53.250
Fourth Quarter 59.750 41.000
</TABLE>
<TABLE>
<CAPTION>
High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
1996
First Quarter $ 51.625 $ 39.875
Second Quarter 47.375 37.750
Third Quarter 57.625 39.625
Fourth Quarter 61.500 52.875
</TABLE>
The Company has never paid dividends, other than in March 1992, when the Company
paid a one-time dividend of an aggregate of $20 million, or $0.212 per share,
to holders of common stock. The $0.212 per share is based on Boston
Scientific's weighted average number of the common shares outstanding at the
time the dividend was declared rather than the restated weighted average number
of the common shares outstanding.
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, 1997, there were approximately 9,300 record holders of the
Company's common stock.
F-28
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 45
<TABLE>
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS CORPORATE HEADQUARTERS STOCKHOLDER INFORMATION
- ----------------------------------------- ---------------------------------- ---------------------------------------
John E. Abele Boston Scientific Corporation Stock Listing
Director, Founder Chairman One Boston Scientific Place Boston Scientific Corporation
Natick, MA 01760-1537 common stock is traded on the
+* Charles J. Aschauer, Jr. 508-650-8000 NYSE under the symbol "BSX".
Director, Retired Executive 508-647-2200 (Investor Relations
Vice President and Director of Facsimile) TRANSFER AGENT
Abbott Laboratories www.bsci.com Inquiries concerning the transfer
or exchange of shares, lost stock
+ Randall F. Bellows REGIONAL HEADQUARTERS certificates, duplicate mailings
Director, Retired Executive Vice ---------------------------------- or changes of address should be
President of Cobe Laboratories, Inc. directed to the Company's
Boston Scientific Argentina S.A. Transfer Agent at:
Michael Berman Buenos Aires, Argentina
President - Scimed Life Systems, Inc. BANKBOSTON N.A.
and Group President - Boston Scientific c/o BostonEquiserve, L.P.
Cardiology Businesses International B.V. Post Office Box 8040
Paris, France Boston, MA 02266-8040
Lawrence C. Best 781-575-3100
Senior Vice President - Boston Scientific Asia www. Equiserve.com
Finance & Administration and Chief Pacific Pte. Ltd.
Financial Officer Singapore INDEPENDENT AUDITORS
Ernst & Young LLP
Joseph A. Ciffolillo Boston Scientific Japan K.K. Boston, Massachusetts
Director, Retired Executive Vice Tokyo, Japan
President and Chief Operating Officer ANNUAL MEETING
of Boston Scientific Corporation TECHNOLOGY CENTERS The annual meeting for shareholders
---------------------------------- will take place on Tuesday, May 5,
Philip P. Le Goff 1998, beginning at 10:00 a.m. at
Senior Vice President and Group San Jose, CA, USA BankBoston, Corporate Headquarters,
President - Vascular Businesses Miami, FL, USA 100 Federal Street, Boston.
Spencer, IN, USA
James M. Corbett Natick, MA, USA INVESTOR INFORMATION REQUESTS
President, Quincy, MA, USA Investors, shareholders and security
Boston Scientific International Watertown, MA, USA analysts seeking information about
Maple Grove, MN, USA the Company should call Investor
+* Joel L. Fleishman Oakland, NJ, USA Relations at (508) 650-8555 or refer
Director, President of The Atlantic Redmond, WA, USA to the Company's website at
Philanthropic Service Company, Inc. Galway, Ireland www.bsci.com.
and Professor of Law and Public Tel Aviv, Israel
Policy, Duke University A copy of Form 10-K filed with the
Securities and Exchange Commission
* Lawrence L. Horsch may be obtained upon written
Director, Chairman of Eagle request to the Company.
Management & Financial Corp.
Address requests to:
Paul A. LaViolette Investor Relations
Senior Vice President and Group Boston Scientific Corporation
President - Nonvascular Businesses One Boston Scientific Place
Natick, MA 01760-1537
C. Michael Mabrey 508-650-8555
Senior Vice President - Operations 508-647-2200 (Facsimile)
Robert G. MacLean
Senior Vice President -
Human Resources
* N.J. Nicholas, Jr.
Director, Private Investor
Peter (Pete) M. Nicholas
Director, Founder, 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
* Member of the Audit Committee
+ Member of the Compensation Committee
</TABLE>
<PAGE> 46
Boston
Scientific
Boston Scientific Corporation
One Boston Scientific Place
Natick, MA 01760-1537
508.650.8000
www.bsci.com
(C) 1998 Boston Scientific Corporation
1127-AR-98
Global Resources
<PAGE> 1
Exhibit 21
SUBSIDIARIES
AS OF MARCH 24, 1998
NAME PLACE OF INCORPORATION
Interventional Therapeutics Corporation California
Interventional Therapeutics International California
BSC International Corporation Delaware
Boston Scientific Sales, Inc. Delaware
EP Technologies, Inc. Delaware
EP Technologies Sales, Inc. Delaware
Meadox Medicals Sales, Inc. Delaware
Target Therapeutics, Inc. Delaware
Target Therapeutics International, Inc. Delaware
Symbiosis Corporation Florida
Boston Scientific Finance Corporation Indiana
Boston Scientific Finance Trust Massachusetts
Boston Scientific Securities Corporation Massachusetts
SCIMED Life Systems, Inc. Minnesota
SciMed, Inc. Minnesota
SCIMED Foundation Minnesota
<PAGE> 2
Celltechnix Corporation New Jersey
Meadox Distribution Company New Jersey
Meadox Instruments, Inc. New Jersey
Meadox Medicals, Inc. New Jersey
Boston Scientific Corporation
Northwest Technology Center, Inc. Washington
Heart Technology Manufacturing, Inc. Washington
Boston Scientific Argentina S.A. Argentina
Boston Scientific Pty. Ltd. Australia
Boston Scientific Ges.m.b.H. Austria
BSC FSC, INC. Barbados
Boston Scientific FSC Corporation Barbados
Heart Technology FSC, Inc. Barbados
Target Therapeutics International Sales Corporation Barbados
Boston Scientific Benelux SA Belgium
Boston Scientific Europe S.P.R.L. Belgium
Boston Scientific do Brasil Ltda. Brazil
Boston Scientific Ltd. Canada
Boston Scientific Latin America B.V. (Chile) Ltda. Chile
BSC International Medical Trading (Shanghai) Co., Ltd. China
Boston Scientific Colombia S.A. Colombia
<PAGE> 3
Boston Scientific Ceska Republika, s.r.o. Czech Republic
Boston Scientific A/S Denmark
Boston Scientific Denmark A/S Denmark
Boston Scientific Limited England
Meadox (U.K.) Limited England
SCIMED Life Systems Limited England
Target Therapeutics International UK, LTD England
Antheor SNC France
Boston Scientific S.A. France
Boston Scientific Medizintechnik GmbH Germany
Boston Scientific Hong Kong Limited Hong Kong
Boston Scientific Hungary Trading
Limited Liability Company Hungary
BSC International Holding Limited Ireland
Boston Scientific Cork Limited Ireland
Boston Scientific Distribution Company Ireland
Boston Scientific Distribution Ireland Limited Ireland
Boston Scientific Ireland Limited Ireland
Boston Scientific Limited Ireland
Boston Scientific S.p.A. Italy
Boston Scientific Japan K.K. Japan
Target-BSJ K.K. Japan
<PAGE> 4
Boston Scientific Korea Co., Ltd. Korea
Boston Scientific (Malaysia) Sdn. Bhd. Malaysia
Boston Scientific de Mexico, S.A. de C.V. Mexico
Boston Scientific B.V. Netherlands
Boston Scientific Benelux B.V. Netherlands
Boston Scientific Eastern Europe B.V. Netherlands
Boston Scientific Far East B.V. Netherlands
Boston Scientific International B.V. Netherlands
Boston Scientific Latin America B.V. Netherlands
Boston Scientific New Zealand Limited New Zealand
Boston Scientific Norway AS Norway
Boston Scientific Philippines, Inc. Philippines
Boston Scientific Polska sp. z o. o. Poland
Boston Scientific Puerto Rico, Inc. Puerto Rico
Boston Scientific Asia Pacific Pte. Ltd. Singapore
Boston Scientific (South Africa) (Proprietary) Limited South Africa
Boston Scientific Iberica, S.A. Spain
Boston Scientific Nordic AB Sweden
Boston Scientific AG Switzerland
Boston Scientific Switzerland S.a.r.l. Switzerland
Boston Scientific (Thailand) Ltd. Thailand
Boston Scientific Uruguay S.A. Uruguay
<PAGE> 5
Boston Scientific International Corporation Virgin Islands
MM Foreign Sales Corporation Virgin Islands
<PAGE> 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 20, 1998, included
in the 1997 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, 33-99766, 33-80265, 333-02256, 333-25033,
and 333-25037) and in the Registration Statements (Forms S-3 Nos. 333-03022 and
333-37255) of our report dated February 20, 1998, 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 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 117,761
<SECURITIES> 73,937
<RECEIVABLES> 244,710
<ALLOWANCES> 0
<INVENTORY> 176,131
<CURRENT-ASSETS> 638,904
<PP&E> 280,690
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,309,985
<CURRENT-LIABILITIES> 425,333
<BONDS> 0
0
0
<COMMON> 1,956
<OTHER-SE> 848,883
<TOTAL-LIABILITY-AND-EQUITY> 1,309,985
<SALES> 343,553
<TOTAL-REVENUES> 343,553
<CGS> 91,955
<TOTAL-COSTS> 91,955
<OTHER-EXPENSES> 212,890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,581
<INCOME-PRETAX> 37,430
<INCOME-TAX> 35,240
<INCOME-CONTINUING> 2,190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,190
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 61,168
<SECURITIES> 58,391
<RECEIVABLES> 282,591
<ALLOWANCES> 0
<INVENTORY> 199,164
<CURRENT-ASSETS> 646,668
<PP&E> 300,427
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,326,913
<CURRENT-LIABILITIES> 483,044
<BONDS> 0
0
0
<COMMON> 1,956
<OTHER-SE> 823,965
<TOTAL-LIABILITY-AND-EQUITY> 1,326,913
<SALES> 722,790
<TOTAL-REVENUES> 722,790
<CGS> 193,341
<TOTAL-COSTS> 193,341
<OTHER-EXPENSES> 448,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,794
<INCOME-PRETAX> 76,494
<INCOME-TAX> 61,215
<INCOME-CONTINUING> 15,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,279
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 69,999
<SECURITIES> 47,703
<RECEIVABLES> 301,971
<ALLOWANCES> 0
<INVENTORY> 219,386
<CURRENT-ASSETS> 704,030
<PP&E> 334,170
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,421,802
<CURRENT-LIABILITIES> 509,366
<BONDS> 0
0
0
<COMMON> 1,956
<OTHER-SE> 900,957
<TOTAL-LIABILITY-AND-EQUITY> 1,421,802
<SALES> 1,118,578
<TOTAL-REVENUES> 1,118,578
<CGS> 304,565
<TOTAL-COSTS> 304,565
<OTHER-EXPENSES> 624,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,297
<INCOME-PRETAX> 183,967
<INCOME-TAX> 97,454
<INCOME-CONTINUING> 86,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,513
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.43
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 72,175
<SECURITIES> 45,606
<RECEIVABLES> 335,875
<ALLOWANCES> 14,850
<INVENTORY> 236,670
<CURRENT-ASSETS> 816,817
<PP&E> 529,727
<DEPRECIATION> 167,425
<TOTAL-ASSETS> 1,585,045
<CURRENT-LIABILITIES> 481,816
<BONDS> 0
0
0
<COMMON> 1,956
<OTHER-SE> 993,159
<TOTAL-LIABILITY-AND-EQUITY> 1,585,045
<SALES> 1,551,238
<TOTAL-REVENUES> 1,551,238
<CGS> 427,838
<TOTAL-COSTS> 427,838
<OTHER-EXPENSES> 810,229
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