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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 1)
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 Consolidated Financial Information filed with the
Securities and Exchange Commission as an exhibit hereto and the Proxy Statement
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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I. INTRODUCTION
On November 3, 1998, Boston Scientific Corporation (the "Company") announced it
had detected the occurrence of business irregularities in the operations of its
Japanese subsidiary. As a result, the Company has restated its 1997 results as
well as its quarterly results for the first three quarters of 1998, which allows
for more accurate period to period comparisons (see Note B to the Consolidated
Financial Statements).
In addition, all historical share and per share amounts have been restated to
reflect the Company's November 30, 1998 two-for-one common stock split in the
form of a 100% stock dividend, except for share amounts presented in the
Consolidated Balance Sheets and the Consolidated Statements of Stockholders'
Equity which reflect the actual share amount outstanding for each period
presented.
Financial statement information and related disclosures included in this
amended filing reflect, where appropriate, changes as a result of the
restatements.
All other information is presented as of the original filing date and has not
been updated in this amended filing.
PART I
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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 $1.83 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(R) stent distribution rights to Medinol
(NIR is a registered trademark of stent products
Medinol Ltd., 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 41% 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 broadly categorized as vascular or nonvascular,
depending on the anatomical system and procedure in which a product is intended
to be used. Generally, vascular products are employed in procedures affecting
the heart and systems which carry blood, while nonvascular products are employed
in procedures affecting other systems and organs. In 1997, approximately 78% of
the Company's net sales were derived from its vascular business, approximately
21% from its nonvascular business and approximately 1% from other business. The
Company's principal vascular and nonvascular products are offered in the
following medical areas:
VASCULAR
Coronary Revascularization. The Company markets a broad line of products used to
treat patients with atherosclerosis. Atherosclerosis, a coronary vessel disease
and a principal cause of heart attacks, is characterized by a thickening of the
walls of the arteries and a narrowing of arterial lumens (openings) caused by
the progressive development of deposits of plaque. Atherosclerosis results in
reduced blood flow to the muscle of the heart. The majority of the
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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 41% 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 Consolidated Financial Information
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 Consolidated Financial
Information filed as 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 55 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. 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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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 Consolidated Financial
Information (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 $32.6875, as adjusted to reflect the Company's
November 30, 1998 two-for-one common stock split in the form of a 100% common
stock dividend.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Five-Year Selected Financial Data"
included in the Company's 1997 Consolidated Financial Information (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 Consolidated Financial Information (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 Consolidated
Financial Information (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 Consolidated Financial Information (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 Consolidated Financial Information
(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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<PAGE> 26
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 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 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
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 filed with
the Commission on or before April 30, 1998 are incorporated herein by reference.
26
<PAGE> 27
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 (Exhibit 10.17,
Annual Report on Form 10-K for the year ended December 31,
1997, File No. 1-11083).
10.18 -- Boston Scientific Corporation Global Employee Stock Ownership
Plan, as Amended and Restated (Exhibit 10.18, Annual Report
on Form 10-K for the year ended December 31, 1997, File
No. 1-11083).
10.19 -- Boston Scientific Corporation Deferred Compensation Plan,
Effective January 1, 1996 (Exhibit 10.17, Annual Report on
Form 10-K for the year ended December 31, 1996, File No.
1-11083).
10.20 -- Form of 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 (Exhibit 10.24, Annual Report on Form 10-K for the
year ended December 31, 1997, File No. 1-11083).
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 Consolidated Financial Information.
13.2 -- Report of Independent Auditors, Ernst & Young LLP (included in
the Company's Consolidated Financial Information, 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 (Exhibit 21, Annual Report on Form 10-K for the
year ended December 31, 1997, File No. 1-11083).
*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 -- Restated 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 29, 1999
BOSTON SCIENTIFIC CORPORATION
By: /s/ LAWRENCE C. BEST
---------------------------------
Lawrence C. Best
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Dated: March 29, 1999 /s/ JOHN E. ABELE
---------------------------------
John E. Abele
Director, Founder
Dated: March 29, 1999 /s/ CHARLES J. ASCHAUER, JR.
---------------------------------
Charles J. Aschauer, Jr.
Director
Dated: March 29, 1999 /s/ RANDALL F. BELLOWS
---------------------------------
Randall F. Bellows
Director
Dated: March 29, 1999 /s/ LAWRENCE C. BEST
---------------------------------
Lawrence C. Best
Senior Vice President--Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 29, 1999 /s/ JOSEPH A. CIFFOLILLO
---------------------------------
Joseph A. Ciffolillo
Director
Dated: March 29, 1999 /s/ JOEL L. FLEISHMAN
---------------------------------
Joel L. Fleishman
Director
31
<PAGE> 32
Dated: March 29, 1999 /s/ LAWRENCE L. HORSCH
---------------------------------
Lawrence L. Horsch
Director
Dated: March 29, 1999 /s/ N.J. NICHOLAS, JR.
---------------------------------
N.J. Nicholas, Jr.
Director
Dated: March 29, 1999 /s/ PETER M. NICHOLAS
---------------------------------
Peter M. Nicholas
Director, Founder, Chairman of
the Board (Principal Executive
Officer)
Dated: March 29, 1999 /s/ DALE A. SPENCER
---------------------------------
Dale A. Spencer
Director
Dated: March 29, 1999 ---------------------------------
James R. Tobin
Director, President and Chief
Executive Officer
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 Consolidated Financial Information
filed as Exhibit 13.1 hereto):
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 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 $215,131 $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 $243,835 $323,883 $78,071 $233,451 $128,588
===============================================================
Ratio of earnings to fixed charges 7.24 15.76 5.07 16.98 16.35
===============================================================
</TABLE>
<PAGE> 1
EXHIBIT 13.1
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 1997
CONSOLIDATED FINANCIAL INFORMATION
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> 2
FINANCIAL HIGHLIGHTS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
Restated
<S> <C> <C> <C>
Net sales $1,830,778 $1,551,238 $1,190,821
Gross profit 1,285,237 1,123,400 848,074
Operating income 225,455 313,171 52,111
Net income (loss) 110,400 167,094 (18,419)
Net income (loss) per common share - basic $0.28 $0.43 $(0.05)
Net income (loss) per common share - assuming dilution 0.28 0.42 (0.05)
</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
On November 3, 1998, the Company announced it had detected the occurrence of
business irregularities in the operations of its Japanese subsidiary. As a
result, the Company has restated its 1997 results which allows for more
accurate period to period comparisons. The restatement resulted in a decrease
in revenues from $1,872 million, previously reported, to $1,831 million for the
year ended December 31, 1997. Net income decreased from $139 million, previously
reported, to $110 million for the same period.
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 33 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 18% in 1997 to $1,831 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 23%. Net income for the
year ended December 31, 1997, excluding merger-related and special charges,
increased approximately 2% to $302 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 $110 million, or $0.28 per share (diluted),
as compared to $167 million, or $0.42 per share, for the prior year.
F-2
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 3
United States (U.S.) revenues increased approximately 16% from 1996 to $1,076
million in 1997, while international revenues, including export sales,
increased approximately 20% from 1996 to $755 million in 1997. International
sales as a percentage of worldwide sales increased from 40% in 1996 to 41% in
1997. International sales during 1997 were negatively impacted compared to 1996
by approximately $77 million of unfavorable exchange rate movements caused
primarily by the strengthening of the U.S. dollar versus major European
currencies and the Japanese yen. Worldwide vascular and nonvascular sales
increased 16% and 26%, respectively, from 1996 to 1997.
Gross profit as a percentage of net sales was approximately 70.2% and 72.4%
during 1997 and 1996, respectively. The decline in gross margins during 1997 is
primarily attributable to write-downs for excess and obsolete inventory. 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 35% from $516 million in
1996 to $695 million in 1997, and increased as a percentage of sales from 33%
to 38% 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 39% 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 approximately 32% during 1997. The reduction
F-3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 4
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 $0.42 per share (diluted),
as compared to a loss of $18 million, or $0.05 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 $227 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> 5
tially offset by proceeds from operating activities and additional borrowings
under the Company's financing arrangements.
During 1997, accounts receivable increased $44 million as a result of the
Company's sales growth and the transition to selling directly to international
customers. The Company's bad debt provision may be impacted by its ability to
effectively collect receivables due from its international distributors.
Inventory increased $155 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 40
million shares of the Company's common stock. Purchases will be made at
prevailing prices as market conditions and cash availability warrant. Stock
repurchased under the Company's systematic plan will be used to satisfy the
Company's obligations pursuant to its employee benefit and incentive plans.
During 1997, the Company repurchased 7 million shares of its common stock at
an aggregate cost of $188 million. Prior to 1997, 13 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> 6
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> 7
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Restated
<S> <C> <C> <C>
Net sales $ 1,830,778 $ 1,551,238 $ 1,190,821
Cost of products sold 545,541 427,838 342,747
- ----------------------------------------------------------------------------------------------------------
Gross profit 1,285,237 1,123,400 848,074
Selling, general and administrative expenses 695,045 515,908 391,548
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
- ----------------------------------------------------------------------------------------------------------
1,059,782 810,229 795,963
- ----------------------------------------------------------------------------------------------------------
Operating income 225,455 313,171 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 215,131 303,330 62,678
Income taxes 83,651 136,236 81,097
- ----------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting 131,480 167,094 (18,419)
Cumulative effect of change in accounting (net-of-tax) (21,080)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 110,400 $ 167,094 $ (18,419)
==========================================================================================================
Earnings (loss) per common share - basic:
Income (loss) before cumulative effect of change in accounting $ 0.34 $ 0.43 $ (0.05)
Cumulative effect of change in accounting (0.06)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per common share - basic $ 0.28 $ 0.43 $ (0.05)
==========================================================================================================
Earnings (loss) per common share - assuming dilution:
Income (loss) before cumulative effect
of change in accounting $ 0.33 $ 0.42 $ (0.05)
Cumulative effect of change in accounting (0.05)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per common share - assuming dilution $ 0.28 $ 0.42 $ (0.05)
==========================================================================================================
</TABLE>
See notes to consolidated financial statements.
F-7
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------
Restated
<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 365,463 321,025
Inventories 391,580 236,670
Deferred income taxes 146,956 97,364
Prepaid expenses and other current assets 36,176 43,977
- ------------------------------------------------------------------------
Total current assets 1,020,484 816,817
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
- ------------------------------------------------------------------------
$1,924,270 $1,585,045
========================================================================
</TABLE>
See notes to consolidated financial statements.
F-8
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 9
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------
Restated
<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 11,436 27,403
Other current liabilities 6,292 1,929
- ---------------------------------------------------------------------------------------------
Total current liabilities 793,408 481,816
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 677,608 574,051
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 957,298 995,115
- ---------------------------------------------------------------------------------------------
$ 1,924,270 $ 1,585,045
=============================================================================================
</TABLE>
See notes to consolidated financial statements.
F-9
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 10
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
Restated 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 110,400
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 $ 677,608 $ (94,279) $ 17,422
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury
Restated 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 110,400
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) $ 957,298
===============================================================
</TABLE>
See notes to consolidated financial statements.
F-10
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------
Restated
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 110,400 $ 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 (59,462) (105,370) (71,065)
Inventories (179,951) (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 (17,075) 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> 12
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
105.4 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
20.4 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 23.8 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 6.8 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 33 million shares of the Company's common
stock were issued in connection with the Target merger.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: On November 3, 1998, the Company announced it had
detected the occurrence of business irregularities in the operations of its
Japanese subsidiary. As a result, the Company has restated its 1997 results
which allows for more accurate period to period comparisons. The restatement
resulted in a decrease in revenues from $1,872 million, previously reported, to
$1,831 million for the year ended December 31, 1997. Net income decreased from
$139 million, previously reported, to $110 million for the same period.
In addition, all historical share and per share amounts have been restated to
reflect the Company's 1998 two-for-one stock split except for share amounts
presented in the Consolidated Balance Sheets and the Consolidated Statements of
Stockholders' Equity which reflect the actual share amounts outstanding for each
period presented.
Financial statement information and related disclosures reflect, where
appropriate, changes as a result of the restatement. Unless otherwise stated,
information is presented as of the original filing date, and has not been
updated.
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> 13
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> 14
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> 15
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 $395,942 $335,875
Less allowances 30,479 14,850
- --------------------------------------------------------------------------------
$365,463 $321,025
================================================================================
INVENTORIES
Finished goods $209,506 $130,696
Work-in-process 45,683 45,293
Raw materials 136,391 60,681
- --------------------------------------------------------------------------------
$391,580 $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> 16
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> 17
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 36,750 50,091 (12,770)
- --------------------------------------------------------------------------------
$215,131 $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 $ 97,237 $ 116,191 $ 67,617
State 14,567 9,108 6,615
Foreign 16,614 22,686 15,375
- --------------------------------------------------------------------------------
128,418 147,985 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)
================================================================================
$ 83,651 $ 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 $ 75,296 $ 106,166 $ 21,938
State income taxes, net of federal benefit 7,760 8,778 4,706
Effect of foreign taxes (9,981) 3,641 1,925
Non-deductible merger-related expenses and
purchased research and development 14,957 19,902 53,510
Other, net (4,381) (2,251) (982)
- --------------------------------------------------------------------------------
$ 83,651 $ 136,236 $ 81,097
================================================================================
</TABLE>
F-17
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 18
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 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 shares of common stock, $.01
par value per share. Holders of common stock are entitled to one vote per share.
Holders of common stock are entitled to receive dividends when and if declared
by the Board of Directors and to share ratably in the assets of the Company
legally available for distribution to its stockholders in the event of
liquidation. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The holders of common stock do not have
cumulative voting rights. The holders of a majority of the shares of common
stock can elect all of the Directors and can control the management and affairs
of the Company.
The Company is authorized to purchase on the open market up to approximately 40
million shares of the Company's common stock. Purchases will be made at
prevailing prices as market conditions and cash availability warrant. Stock
repurchased under the Company's systematic plan will be used to satisfy its
obligations pursuant to employee benefit and incentive plans. During 1997, the
Company repurchased approximately
F-18
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 19
7 million shares of its common stock at an aggregate cost of $188 million.
Prior to 1997, a total of 13 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 1.2
million shares and received proceeds of approximately $3 million. The put
options for these 1.2 million shares expired during 1997. During 1997, the
Company sold put options for 658,000 shares and received proceeds of
approximately $2 million. Repurchase prices relating to put options outstanding
at December 31, 1997 range from $27.50 per share to $28.00 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 40 million shares of common stock. The terms of these two
plans are similar. The plans cover officers, employees and consultants of and to
the Company and provide for the grant of various incentives, including
qualified and non-qualified options, stock grants, share appreciation rights
and performance awards. Options granted to purchase shares of common stock are
either immediately exercisable or exercisable in installments as determined by
an appointed committee consisting of two or more non-employee directors
(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 15,000 shares, 2,000
shares and 58,000 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 200,000 shares of common stock and authorizes the
automatic grant to outside directors of options to acquire 4,000 shares of
common stock generally on the date of each annual meeting of the Stockholders
of the Company. Options under this plan are exercisable ratably over a
three-year period and expire ten years from the date of grant.
Shares reserved for future issuance under all of the Company's plans totaled
approximately 48 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 $ 110,400 $ 167,094 $ (18,419)
Pro forma 82,974 151,820 (24,901)
- --------------------------------------------------------------------------------
Earnings (loss) per common share -
assuming dilution
As reported $ 0.28 $ 0.42 $ (0.05)
Pro forma 0.21 0.38 (0.07)
- --------------------------------------------------------------------------------
</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 $9.08,
$7.21 and $5.06, 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 1,340,000 682,000 284,000
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> 20
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 29,078 $ 11.42 29,398 $ 8.28 27,124 $ 5.84
Granted 10,716 24.70 6,654 20.52 8,860 13.85
Exercised (5,106) 8.98 (5,948) 6.23 (5,354) 5.42
Canceled (1,482) 18.58 (1,026) 10.36 (1,232) 7.08
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31 33,206 15.76 29,078 11.42 29,398 8.28
=======================================================================================================
Exercisable at December 31 12,230 $ 9.08 10,784 $ 7.93 11,946 $ 6.76
=======================================================================================================
</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- 7.50 8,802 5.62 $ 5.38 6,288 $ 5.29
$ 7.51-15.00 8,480 5.95 12.23 4,614 10.93
$15.01-22.50 5,770 8.50 20.30 1,212 19.94
$22.51-30.00 9,826 9.33 24.84 90 26.00
$30.01-37.50 328 9.33 33.50 26 31.22
- ---------------------------------------------------------------------------------
33,206 7.34 $15.76 12,230 $ 9.08
=================================================================================
</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 3 million shares of
the Company's common stock to all eligible employees. Under the Stock Purchase
Plan, each eligible employee is granted, at the beginning of each period
designated by the Committee as an offering period, an option to purchase 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 240,000 shares were issued at prices ranging from
$23.45 to $24.33 per share. During 1996, approximately 240,000 shares were
issued at prices ranging from $18.06 to $19.71 per share, and, during 1995,
approximately 266,000 shares were issued at prices ranging from $6.80 to
$10.73 per share. At December 31, 1997, there were approximately 1,940,000
shares available for future issuance.
F-20
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 21
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) $110,400 $167,094 $ (18,419)
================================================================================
Weighted average
shares outstanding 389,146 387,018 381,574
================================================================================
Net income (loss) per
common share $ 0.28 $ 0.43 $ (0.05)
================================================================================
ASSUMING DILUTION:
Net income (loss) $110,400 $167,094 $ (18,419)
================================================================================
Weighted average
shares outstanding 389,146 387,018 381,574
Net effect of dilutive
put options 28
Net effect of dilutive
stock options 10,602 11,688
- --------------------------------------------------------------------------------
Total 399,776 398,706 381,574
================================================================================
Net income (loss) per
common share $ 0.28 $ 0.42 $ (0.05)
================================================================================
</TABLE>
At December 31, 1997, approximately 10 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> 22
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> 23
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> 24
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> 25
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 $ 362,347 $ 18,461 $ 1,793,612
Export sales 6,446 30,720 37,166
Transfers between areas 430,993 207,302 $(638,295)
- -----------------------------------------------------------------------------------------------------------------------------------
1,513,731 574,534 362,347 18,461 (638,295) 1,830,778
Operating income without special charges 306,992 70,800 146,012 (70,233) 453,571
Operating income with special charges 235,639 (12,326) 106,125 (103,983) 225,455
Identifiable assets 1,599,263 683,669 317,405 17,166 (693,233) 1,924,270
- -----------------------------------------------------------------------------------------------------------------------------------
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> 26
FIVE-YEAR SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Restated
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $ 1,830,778 $ 1,551,238 $ 1,190,821 $932,969 $779,894
Gross profit 1,285,237 1,123,400 848,074 638,872 535,243
Selling, general and administrative expenses 695,045 515,908 391,548 311,296 333,285
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 1,059,782 810,229 795,963 423,298 426,803
Operating income 225,455 313,171 52,111 215,574 108,440
Income (loss) before cumulative effect of
change in accounting 131,480 167,094 (18,419) 142,274 73,731
Cumulative effect of change in accounting (net-of-tax) (21,080)
Net income (loss) $110,400 $ 167,094 $ (18,419) $142,274 $ 73,731
Income (loss) per common share before cumulative
effect of change in accounting:
Basic $ 0.34 $ 0.43 $ (0.05) $ 0.38 $ 0.20
Assuming dilution 0.33 0.42 (0.05) 0.38 0.20
Net income (loss) per common share:
Basic $ 0.28 $ 0.43 $ (0.05) $ 0.38 $ 0.20
Assuming dilution 0.28 0.42 (0.05) 0.38 0.20
Weighted average shares outstanding-assuming dilution 399,776 398,706 381,574 379,126 374,566
</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
- --------------------------------------------------------------------------------------------------------------------
Restated
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 227,076 $ 335,001 $ 344,609 $ 475,255 $362,816
Total assets 1,924,270 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 957,298 995,115 807,917 794,190 601,844
Book value per common share $ 2.47 $ 2.50 $ 2.12 $ 2.10 $ 1.61
</TABLE>
F-26
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 27
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.
As more fully described in Note B, under the caption Basis of Presentation, the
Company has restated its financial statements.
/S/ Ernst & Young LLP
- --------------------------------
Boston, Massachusetts
February 20, 1998, except for the first,
second and third paragraphs of Note B, as to
which the date is February 16, 1999
F-27
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------------------------
Restated
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Net sales $425,892 $ 463,312 $461,646 $479,928
Gross profit 305,986 332,901 327,052 319,298
Operating income (loss) 102,556 (28,365) 112,537 38,727
Income (loss) before cumulative effect of
change in accounting 68,518 (33,189) 80,123 16,028
Net income (loss) 68,518 (33,189) 80,123 (5,052)
Net income (loss) per common share -
assuming dilution $ 0.17 $ (0.09) $ 0.20 $ (0.01)
- --------------------------------------------------------------------------------------------------------
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 $ 0.03 $ 0.18 $ 0.20
</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).
On November 3, 1998, the Company announced it had detected the occurrence of
business irregularities in the operations of its Japanese subsidiary. As a
result, the Company has restated its quarterly results for 1997 which allows for
more accurate period to period comparisions. The restatement resulted in a
decrease in revenues of $42 million for the year ended December 31, 1997.
Revenues, as previously reported, were $431 million, $474 million, $475
million and $493 million for the quarters ended March 31, 1997, June 30, 1997,
September 30, 1997, and December 31, 1997, respectively. Net income (loss), as
previously reported, was $75 million, $(27) million, $88 million, and
$2 million for the quarters ended March 31, 1997, June 30, 1997, September 30,
1997, and December 31, 1997, respectively.
The Company paid a two-for-one stock split on November 30, 1998. All historical
amounts above have been restated to reflect the stock split.
Market for the Company's Common Stock and Related Matters (unaudited)
The following table shows the market range for the Company's common stock based
on reported sales prices on the New York Stock Exchange. All amounts below
reflect the impact of the Company's two-for-one common stock split which was
effected in the form of a 100% stock dividend paid in the fourth quarter of
1998.
<TABLE>
<CAPTION>
High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
1997
First Quarter $ 35.750 $ 29.313
Second Quarter 31.469 20.500
Third Quarter 39.219 26.625
Fourth Quarter 29.875 20.500
</TABLE>
<TABLE>
<CAPTION>
High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
1996
First Quarter $ 25.813 $ 19.938
Second Quarter 23.688 18.875
Third Quarter 28.813 19.813
Fourth Quarter 30.750 26.438
</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> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the use of our report dated February 20, 1998, except for the
first, second and third paragraphs of Note B, as to which the date is February
16, 1999, with respect to the consolidated financial statements of Boston
Scientific Corporation, as restated, both of which are incorporated by reference
in this Form 10-K/A from Exhibit 13.1 thereto.
Our audits also included the financial statement schedule of Boston Scientific
Corporation listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Forms S-8 Nos. 33-57242, 33-89772, 33-93790, 33-99766, 33-80265, 333-02256,
333-25033, and 333-25037) and in the Registration Statements (Forms S-3 Nos.
333-37255, 333-64887, and 333-64991) of our report dated February 20, 1998,
except for the first, second and third paragraphs of Note B, as to which the
date is February 16, 1999, with respect to the consolidated financial
statements, as restated, incorporated by reference herein, and our report
included in the preceding paragraph with respect to the financial statement
schedule included in this Form 10-K/A of Boston Scientific Corporation.
ERNST & YOUNG LLP
Boston, Massachusetts
March 25, 1999
<TABLE> <S> <C>
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<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
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<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> 0.04
<EPS-DILUTED> 0.04
</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> 0.22
<EPS-DILUTED> 0.22
</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
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,518
<INCOME-PRETAX> 303,330
<INCOME-TAX> 136,236
<INCOME-CONTINUING> 167,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,094
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 87,640
<SECURITIES> 32,932
<RECEIVABLES> 317,445
<ALLOWANCES> 0
<INVENTORY> 267,858
<CURRENT-ASSETS> 862,605
<PP&E> 396,561
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,663,616
<CURRENT-LIABILITIES> 505,902
<BONDS> 0
0
0
<COMMON> 1,956
<OTHER-SE> 1,045,210
<TOTAL-LIABILITY-AND-EQUITY> 1,663,616
<SALES> 425,892
<TOTAL-REVENUES> 425,892
<CGS> 119,906
<TOTAL-COSTS> 119,906
<OTHER-EXPENSES> 203,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,298
<INCOME-PRETAX> 102,233
<INCOME-TAX> 33,715
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<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
<TABLE> <S> <C>
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<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
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<SECURITIES> 32,178
<RECEIVABLES> 339,929
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<DEPRECIATION> 186,311
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0
0
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<TOTAL-COSTS> 250,317
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<CHANGES> 0
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<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
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<SECURITIES> 42,670
<RECEIVABLES> 350,481
<ALLOWANCES> 0
<INVENTORY> 366,472
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<PP&E> 652,398
<DEPRECIATION> 196,315
<TOTAL-ASSETS> 1,836,338
<CURRENT-LIABILITIES> 667,733
<BONDS> 49,855
0
0
<COMMON> 1,956
<OTHER-SE> 998,244
<TOTAL-LIABILITY-AND-EQUITY> 1,836,338
<SALES> 1,350,850
<TOTAL-REVENUES> 1,350,850
<CGS> 384,911
<TOTAL-COSTS> 384,911
<OTHER-EXPENSES> 779,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,629
<INCOME-PRETAX> 184,146
<INCOME-TAX> 68,694
<INCOME-CONTINUING> 115,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,452
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
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<RECEIVABLES> 395,942
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<PP&E> 706,515
<DEPRECIATION> 207,548
<TOTAL-ASSETS> 1,924,270
<CURRENT-LIABILITIES> 793,408
<BONDS> 46,325
0
0
<COMMON> 1,956
<OTHER-SE> 955,342
<TOTAL-LIABILITY-AND-EQUITY> 1,924,270
<SALES> 1,830,778
<TOTAL-REVENUES> 1,830,778
<CGS> 545,541
<TOTAL-COSTS> 545,541
<OTHER-EXPENSES> 1,059,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,285
<INCOME-PRETAX> 215,131
<INCOME-TAX> 83,651
<INCOME-CONTINUING> 131,480
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (21,080)
<NET-INCOME> 110,400
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
