-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VKSrb3YMJQ7JqCsM8HyahQytlEkeO5Wu8VtyQ6k7UJ5DqN7k4MSXLuF9Gox40bd3 Nu04Q+/ME9AS+jTnYyTeqg== 0000950135-99-001689.txt : 19990402 0000950135-99-001689.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950135-99-001689 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON SCIENTIFIC CORP CENTRAL INDEX KEY: 0000885725 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 042695240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-11083 FILM NUMBER: 99579692 BUSINESS ADDRESS: STREET 1: ONE BOSTON SCIENTIFIC PL CITY: NATICK STATE: MA ZIP: 01760-1537 BUSINESS PHONE: 5086508000 10-K/A 1 BOSTON SCIENTIFIC CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------- 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 -------------------------------------- BOSTON SCIENTIFIC CORPORATION (Exact name of Company as specified in its charter) DELAWARE 04-2695240 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ONE BOSTON SCIENTIFIC PLACE, NATICK, MASSACHUSETTS 01760-1537 (Address, including zip code, of principal executive offices) (508) 650-8000 (Company's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE (Title of class) Securities registered pursuant to Section 12(g) of the Act: NONE -------------------------------------- Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. --- 2 The aggregate market value of Common Stock held by non-affiliates (persons other than directors, executive officers, and related family entities) of the Company was approximately $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. 2 3 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 - ------------------------------------------------------------------------------- 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) 3 4 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:
ALLIANCE PARTNER PRODUCT TYPE NATURE OF ALLIANCE - ---------------- ------------ ------------------ 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
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 4 5 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 5 6 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 6 7 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. 7 8 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. 8 9 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 9 10 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. 10 11 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 11 12 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 12 13 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. 13 14 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 14 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 15 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 16 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, 17 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. 18 19 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. 19 20 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. 20 21 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. 21 22 Joseph A. Ciffolillo joined the Company in 1983 as President of Medi-tech. In 1988, he was also named President of Microvasive, and in 1989 he became Executive Vice President and Chief Operating Officer of the Company. In 1992, Mr. Ciffolillo became a Director of the Company. In April 1996, he retired from his position as an executive officer of the Company, but continues to serve as a Director. Mr. Ciffolillo also serves as a director of CompDent Corporation, CardioThoracic Systems, Inc. and Innovasive Devices, Inc. Mr. Ciffolillo received a B.A. degree from Bucknell University. He is also a trustee for Bucknell University. James M. Corbett joined the Company as Vice President--International, President of Boston Scientific International in February 1995, and in May 1997 became Senior Vice President - International. Previously, he was the Vice President and Business Manager of SCIMED International for SCIMED Life Systems, Inc. from October 1992 to February 1995. Prior to joining SCIMED, Mr. Corbett served as General Manager for Baxter Japan, based in Tokyo, responsible for Baxter's Cardiovascular Business from December 1989 to October 1992, and held a series of sales and marketing positions with the Baxter/American Hospital Supply Organization since 1982. Mr. Corbett received his B.S. degree in Business from the University of Kansas. Joel L. Fleishman joined the Company in October 1992 as a Director. Mr. Fleishman became President of The Atlantic Philanthropic Service Company, Inc. in September 1993. He is also Professor of Law and Public Policy and has served in various administrative positions, including First Senior Vice President, at Duke University, since 1971. Mr. Fleishman is a founding member of the governing board of the Duke Center for Health Policy Research and Education and was the founding director of Duke University's Terry Sanford Institute of Public Policy. He is the director of the Samuel and Ronnie Heyman Center for Ethics, Public Policy and the Professions. Mr. Fleishman also serves as Vice-Chairman of the Board of Trustees of the Urban Institute. Mr. Fleishman received A.B., M.A. and J.D. degrees from the University of North Carolina at Chapel Hill, and an L.L.M. degree from Yale University. Lawrence L. Horsch joined the Company as a Director in February 1995. Previously, he had been Chairman of the Board of SCIMED Life Systems, Inc. from 1977 to June 1994 and a Director through February 1995. Since 1990, Mr. Horsch has served as Chairman of Eagle Management & Financial Corp., a management consulting firm. He was Chairman and Chief Executive Officer of Munsingwear, Inc., from 1987 to 1990. Mr. Horsch received a B.A. degree from the University of St. Thomas and an M.B.A. degree from Northwestern University. 22 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. 23 24 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. 24 25 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. 25 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 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 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 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 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 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 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 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 34 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ------------------------------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ---------------------------------------------------------------------------------- (in thousands) YEAR ENDED DECEMBER 31, 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
(1) Charges for sales return allowances, net of actual sales returns. (2) Uncollectible accounts written off. Certain prior years' amounts have been reclassified to conform to the current years' presentation. EX-12.1 2 UNAUDITED STATEMENT OF COMPUTATION OF RATIOS 1 Exhibit 12.1 ------------ UNAUDITED BOSTON SCIENTIFIC CORPORATION STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (In thousands)
Year Ended December 31, --------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------------------------------------------------------- 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 ===============================================================
EX-13.1 3 BOSTON SCIENTIFIC CONSOLIDATED FINANCIAL STATEMENT 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 2 FINANCIAL HIGHLIGHTS (UNAUDITED) (In thousands, except per share data)
YEAR ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Restated 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)
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 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 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 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 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 7 CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Restated 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) ==========================================================================================================
See notes to consolidated financial statements. F-7 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 8 CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
December 31, 1997 1996 - ------------------------------------------------------------------------ Restated 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 ========================================================================
See notes to consolidated financial statements. F-8 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 9 CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands, except share and per share data)
December 31, 1997 1996 - --------------------------------------------------------------------------------------------- Restated 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 =============================================================================================
See notes to consolidated financial statements. F-9 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 10 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
Treasury Restated Stock Total - --------------------------------------------------------------- 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 ===============================================================
See notes to consolidated financial statements. F-10 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 11 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------ Restated 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 ==========================================================================================
See notes to consolidated financial statements. F-11 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 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 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 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:
Fair Gross Gross Market Unrealized Unrealized Amortized (In thousands) Value Gains Losses Cost - --------------------------------------------------------------------------------------------------------------------- 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 =====================================================================================================================
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 15 NOTE D -- OTHER BALANCE SHEET INFORMATION Components of other selected captions in the Consolidated Balance Sheets at December 31 consisted of:
(In thousands) 1997 1996 - -------------------------------------------------------------------------------- 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 ================================================================================
NOTE E -- CREDIT ARRANGEMENTS The Company's borrowings at December 31 consisted of:
(In thousands) 1997 1996 - ---------------------------------------------------------- Commercial paper $423,250 $212,500 Bank obligations - short-term 23,958 28,056 Long-term debt 46,325
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 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:
Year Ending December 31, - -------------------------------------------------------------------------------- Capital Operating (In thousands) Leases Leases - -------------------------------------------------------------------------------- 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 =============================================================
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:
1997 1996 - -------------------------------------------------------------------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - -------------------------------------------------------------------------------- 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
F-16 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 17 NOTE H-INCOME TAXES Income (loss) before income taxes and cumulative effect of change in accounting consisted of:
Year Ended December 31, - -------------------------------------------------------------------------------- (In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Domestic $178,381 $253,239 $ 75,448 Foreign 36,750 50,091 (12,770) - -------------------------------------------------------------------------------- $215,131 $303,330 $ 62,678 ================================================================================
The related provision for income taxes consisted of:
Year Ended December 31, - -------------------------------------------------------------------------------- (In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- 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 ================================================================================
The reconciliation of taxes on income at the federal statutory rate to the actual provision for income taxes is:
Year Ended December 31, - -------------------------------------------------------------------------------- (In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- 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 ================================================================================
F-17 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 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:
(In thousands) 1997 1996 - -------------------------------------------------------------------------------- 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 ================================================================================
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 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:
(In thousands, Year Ended December 31, except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------
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:
1997 1996 1995 - -------------------------------------------------------------------------------- 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
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 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:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise (Option amounts in thousands) Options Price Options Price Options Price - ------------------------------------------------------------------------------------------------------- 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 =======================================================================================================
Below is additional information related to stock options outstanding and exercisable at December 31, 1997:
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 - --------------------------------------------------------------------------------- $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 =================================================================================
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 21 NOTE K -- EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- (In thousands, except per share data) - -------------------------------------------------------------------------------- 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) ================================================================================
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 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 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 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:
Combined Boston Boston (In thousands) Scientific Target Scientific - -------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------
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 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:
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
The December 31, 1997 accrual for merger-related and special charges is classified within the balance sheet as follows:
(In thousands) - -------------------------------------------------------------------------------- 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 ================================================================================
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.
Corporate United Asia Expenses Consolidated (In thousands) States Europe Pacific and Other Eliminations Total - ----------------------------------------------------------------------------------------------------------------------------------- 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
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 26 FIVE-YEAR SELECTED FINANCIAL DATA (In thousands, except per share data)
Year Ended December 31, 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Restated 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
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.
Year Ended December 31, 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- Restated 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
F-26 BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 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 28 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (In thousands, except per share data)
Three Months Ended March 31, June 30, September 30, December 31, - -------------------------------------------------------------------------------------------------------- Restated 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
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.
High Low - -------------------------------------------------------------------------------- 1997 First Quarter $ 35.750 $ 29.313 Second Quarter 31.469 20.500 Third Quarter 39.219 26.625 Fourth Quarter 29.875 20.500
High Low - -------------------------------------------------------------------------------- 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
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 EX-23.1 4 CONSENT OF ERNST & YOUNG 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 EX-27.1 5 RESTATED FDS FOR 3 MONTHS ENDED 3/31/96
5 1,000 U.S. DOLLARS 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 1 117,761 73,937 244,710 0 176,131 638,904 280,690 0 1,309,985 425,333 0 0 0 1,956 848,883 1,309,985 343,553 343,553 91,955 91,955 212,890 0 1,581 37,430 35,240 2,190 0 0 0 2,190 0.01 0.01
EX-27.2 6 RESTATED FDS FOR 6 MONTHS ENDED 6/30/96
5 1,000 U.S. DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 61,168 58,391 282,591 0 199,164 646,668 300,427 0 1,326,913 483,044 0 0 0 1,956 823,965 1,326,913 722,790 722,790 193,341 193,341 448,773 0 4,794 76,494 61,215 15,279 0 0 0 15,279 0.04 0.04
EX-27.3 7 RESTATED FDS FOR 9 MONTHS ENDED 9/30/96
5 1,000 U.S. DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 69,999 47,703 301,971 0 219,386 704,030 334,170 0 1,421,802 509,366 0 0 0 1,956 900,957 1,421,802 1,118,578 1,118,578 304,565 304,565 624,214 0 8,297 183,967 97,454 86,513 0 0 0 86,513 0.22 0.22
EX-27.4 8 RESTATED FDS FOR 12 MONTHS ENDED 12/31/96
5 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 72,175 45,606 335,875 14,850 236,670 816,817 529,727 167,425 1,585,045 481,816 0 0 0 1,956 993,159 1,585,045 1,551,238 1,551,238 427,838 427,838 810,229 0 11,518 303,330 136,236 167,094 0 0 0 167,094 0.43 0.42
EX-27.5 9 RESTATED FDS FOR 3 MONTHS ENDED 3/31/97
5 1,000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 87,640 32,932 317,445 0 267,858 862,605 396,561 0 1,663,616 505,902 0 0 0 1,956 1,045,210 1,663,616 425,892 425,892 119,906 119,906 203,430 0 3,298 102,233 33,715 68,518 0 0 0 68,518 0.18 0.17
EX-27.6 10 RESTATED FDS FOR 6 MONTHS ENDED 6/30/97
5 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 54,141 32,178 339,929 0 308,753 895,993 608,014 186,311 1,728,841 673,475 0 0 0 1,956 934,440 1,728,841 889,204 889,204 250,317 250,317 564,696 0 6,651 69,785 34,456 35,329 0 0 0 35,329 0.09 0.09
EX-27.7 11 RESTATED FDS FOR 9 MONTHS ENDED 9/30/97
5 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 54,269 42,670 350,481 0 366,472 979,090 652,398 196,315 1,836,338 667,733 49,855 0 0 1,956 998,244 1,836,338 1,350,850 1,350,850 384,911 384,911 779,211 0 9,629 184,146 68,694 115,452 0 0 0 115,452 0.30 0.29
EX-27.8 12 RESTATED FDS FOR 12 MONTHS ENDED 12/31/97
5 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 57,993 22,316 395,942 30,479 391,580 1,020,484 706,515 207,548 1,924,270 793,408 46,325 0 0 1,956 955,342 1,924,270 1,830,778 1,830,778 545,541 545,541 1,059,782 0 14,285 215,131 83,651 131,480 0 0 (21,080) 110,400 0.28 0.28
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