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EXHIBIT 13.1
GLOBAL RESOURCES
FOCUSED ON LOCAL NEEDS,
EVERYWHERE.
BOSTON SCIENTIFIC 1997 ANNUAL REPORT
BOSTON SCIENTIFIC
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BOSTON
SCIENTIFIC
BOSTON SCIENTIFIC - AN INTEGRATED, GLOBAL HEALTHCARE ENTERPRISE
Over the last three years, Boston Scientific focused intensely on creating and
rapidly building Strategic Mass. A concept introduced in our 1995 Annual Report,
Strategic Mass means selectively assembling the components required for future
success and leadership in our chosen business segments. Through a concerted
program of mergers and acquisitions, we have significantly broadened the
capabilities we offer our physician customers and the patients they treat around
the world. As we have added new companies, integrated new businesses, developed
new technologies and expanded into new geographies, we have literally
transformed ourselves into a new Boston Scientific - an integrated, global
healthcare enterprise.
Historically, our customers have come to know us as one of our individual
business units, while to our shareholders and the financial community, we were
Boston Scientific. Our new corporate identity better describes who we are to all
constituents by expressing the broader value of our combined organizations: a
sense of unity, of shared commitment, and of global leadership as a focused,
dynamic force in the field of less invasive medicine.
With our new identity, we present Boston Scientific to the world as a single
entity while continuing to build upon the powerful equity we have in our
business unit names. By unifying and strengthening the relationship between each
unit and the corporation, the new identity will underscore the clinical and
economic value of Boston Scientific as a global healthcare enterprise with an
unmatched team of professionals across a wide range of disciplines and
specialties.
Our new corporate identity is much more than simply a new look. It is an ongoing
reflection of our values, and it communicates how we will succeed as we go
forward - as a single, integrated enterprise effectively leveraging the
individual strengths of our business units, our geographies and our people on a
worldwide basis.
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Chairman's LETTER
Reflecting back on 1997, I am pleased to report that last year was another
extraordinary one for your company. We once again achieved record revenues,
maintained superior sales growth and momentum worldwide, and launched more new
products than ever before. We successfully integrated the Target team into our
worldwide organization. We welcomed many other new teammates to Boston
Scientific and established new area organizations in Asia Pacific and Latin
America. We implemented our new global information systems on schedule and
almost to completion, making enterprise-wide business planning a worldwide
reality in 1998 and thereby creating new opportunities for increased efficiency
and profitability. We initiated a new corporate identity program in order to
clarify and strengthen the image of our company so as to enable our customers to
better understand who we are and what we do. We continued the process of
consolidating and restructuring our operations worldwide by closing
manufacturing facilities in Denmark, France and Massachusetts while expanding
and strengthening our identified Centers of Excellence in Massachusetts,
Minnesota, Indiana, California, Florida, Washington, Ireland and Japan. We also
formalized long-term partnership agreements with a number of our group buying
customers in the United States, furthering our commitment to become an even more
valued partner to both large and small healthcare provider groups worldwide.
While we were busy discovering new and better ways to serve our customers and
further extend our leadership, we also became more appreciative of our
vulnerabilities. For example, a critical element of our goal to rapidly achieve
Strategic Mass included a massive investment over the past three years to
enlarge our presence in global markets outside of North America. While we have
enjoyed significant growth in this connection and have established ourselves as
the number one global enterprise in several of our industry segments, in 1997,
Asian and European currency markets worked against us and significantly reduced
the value of our operational successes. Further, significant and unexpected
reductions in reimbursement prices in France and Germany plus unwarranted delays
in product approvals and reimbursement coverage, principally in Japan,
collectively cost the company in excess of $200 million in planned revenue, much
of which fell directly to earnings. These phenomena are, of course, external and
for the most part beyond our control, and external events can have either
positive or negative effects during any given period. In 1997, the effect was
clearly negative and reduced business and financial flexibility. This also
magnified the challenges presented to our maturing organization by our own
highly ambitious plans.
While the Strategic Mass that we have achieved, which we now call the New Boston
Scientific, continues to create the potential for enormous competitive advantage
and great promise for strengthening our leadership position throughout the
world, we recognize, more clearly than ever, the work yet required to realize
fully the benefits of the New Boston Scientific.
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We operated throughout most of 1997 utilizing legacy information systems we
inherited with our many acquisitions. These were cobbled together for the short
term while we invested aggressively in a global systems project to supersede
them. The conversion to the new systems, now largely complete, has occurred with
remarkable speed and success. Our interim reliance on the older systems,
however, dramatically confirmed the urgent need to replace them. They simply
could not provide the kind of timely and accurate information needed to
knowledgeably manage our business, and our execution suffered. Throughout the
year, increases in working capital reduced our cash; visibility on manufacturing
costs was less than optimal; new product planning and execution were below our
goals; and inaccurate forecasting created a cascade of new challenges
throughout the worldwide operation that we had not previously experienced. While
we believe these effects are now largely behind us, they were unprecedented in
both occurrence and impact. As a result, our fundamental financial business
model was compromised in 1997. Period charges reduced gross margins, and lost
revenue opportunities and the cost of debt further reduced profitability.
Even as our business discipline and our business fundamentals were compromised
in 1997 by both external factors and internal issues, we were already
establishing plans and programs designed to restore this aspect of our business
to our historic standards. Every member of the Boston Scientific Team now better
understands how his or her role relates to this objective, and we are committed
to achieving rapid success.
While we are committed to demonstrate superior business practices and
accomplishments across all areas of business performance, we must not lose sight
of the underlying operational success we have experienced with our customers
and the market place in general. In 1997, our market shares again increased in
every market in which we competed worldwide and our unit growth was up
substantially, indicating that we improved more patients' lives than our sales
numbers suggest. Absent pricing reductions worldwide and exchange rate losses,
which understate and therefore misrepresent the impact we have on our customers,
our business model in 1997 would have looked quite different. If we had met our
own expectations and standards for execution, our business model would have
looked even better.
Mindful of this and now more appreciative of what we can and must do to restore
strong business fundamentals throughout the organization, we have established
clear goals and processes for ourselves in 1998.
SYSTEMS
As our investment in enterprise-wide systems winds down and this new
technology becomes an everyday way of life at Boston Scientific, we expect
to see significant improvements in process, planning and control. Not only
will formal planning and performance analysis become friendlier and more
timely, the full range of activities which affect the supply chain will
improve dramatically. We now have the opportunity to gain visibility
worldwide on working capital, requirements planning and logistics. These
are all areas where we struggled in 1997 as a result of the geographically
far-flung nature of our operations and the growing size and complexity of
our business.
GLOBALIZATION
As the new millennium approaches, we foresee more than half of our revenue
and activities based on commerce outside of the United States. We are
actively becoming a truly global enterprise. For Boston Scientific, this
means thinking transnationally about business organization and new product
opportunities; about
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increased collaborations with worldwide customers; about priorities based on
being first to market globally with innovation; and about governance and
management. It means benchmarking our own behavior and standards against
world-class best practices regardless of source, and having the courage to
measure ourselves against them.
THE TEAM
At the end of the day, it is the quality and competence of Boston Scientific
people that makes the real difference.
Each year, we develop our plan very carefully with the
worldwide organization. Our objectives are to insure
that everyone understands the overall plan, understands
their own role and contribution to the plan, possesses
the competency to perform successfully, and not only
believes in the plan and their own ability to [Boston Scientific
positively affect it, but also is a genuinely Executive Committee
enthusiastic member of the Team committed to the From top left to right:
achievement of success. Our traditional processes to Bob MacLean,
accomplish this were not adequate to support the New Jim Corbett,
Boston Scientific requirements. Consequently, we have Paul LaViolette,
created new and improved communication processes and Mike Berman,
are providing essential messages in multiple formats. Phil LeGoff,
We have developed competency models and self-help Pete Nicholas,
programs to enable Team members to improve their own Mike Mabrey,
effectiveness. We have revised monthly and quarterly Paul Sandman,
business review formats and content to insure we focus Larry Best,
on those elements of business activity which are most Art Rosenthal,
important to performance improvement, and we have John Abele]
simplified and clarified year-end performance-based
incentive programs to better align behavior and more
clearly focus the Team's attention on the most crucial
success factors.
We have also added more management depth and experience to
the Team. In particular, I would like to welcome two new
Boston Scientific executives. During the last quarter of
1997, Michel Darnaud joined us as President of Boston
Scientific Europe and Philip Le Goff was appointed Senior
Vice President and Group President of Boston Scientific
worldwide Vascular Businesses. Both Michel and Phil bring
great talent and leadership skills from successful
transnational experiences in the healthcare industry, and we
are fortunate to have attracted them to our company.
These senior management additions, as well as other
initiatives, are clearly aimed at broadening and
strengthening our Team. On-the-job training and business as
usual in and of itself may yield dividends in overall
organization efficiency and effectiveness, but this is not
enough. We must assure ourselves that we employ and retain
the very best people available throughout the organization
and that all are highly motivated. They must share together
a real sense of urgency and enthusiasm for what they do and
that what they do is characterized by speed, absolute
quality and unqualified success. Our goal is to strengthen
our organization and continuously improve individual and
Team effectiveness worldwide with processes which become
ingrained as a way of life at BSC.
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SUBSEQUENT EVENTS
1998 has certainly become the year of the stent in the medical device
industry. This class of device has overnight become the single largest
selling product in the history of our young industry. I am pleased to
report that during the months of December and January, we filed our
long-awaited PMA's with the U.S. Food & Drug Administration for the
Radius(TM) and NIR(TM) stent platforms. Boston Scientific has achieved
stent leadership outside of North America, and we expect to match that
performance in North America when these important new devices are approved
and made available to physicians and their patients in the United States.
Our comprehensive stent portfolio is discussed in detail later in this
report.
In closing, I would be remiss if I did not note that the healthcare industry in
the United States, and indeed worldwide, continues to experience dramatic
transformation and realignment. Within our segment of this system, consolidation
will continue at a brisk pace as the forces of cost, scale, efficiency, outcomes
and the demands of strategic focus continue to redefine the conventional wisdom
of our business.
Through this change, the mission of Boston Scientific, as shown on the next
page, remains clear. As we look back over our brief history as a company, "Our
Fantastic Voyage," we can now see more clearly our own transition from a small,
private startup company seeking to find its way (1979-1992); to a newly minted
public company with aspirations for leadership, finally with the currency to do
something about it (1992-1994); to a leader/consolidator/builder of Strategic
Mass in order to achieve better alignment with the new world of economic buyers
and national group purchasing organizations (1994-1997); to where we are today
poised on the threshold of the execution era. This change that surrounds us we
take as an opportunity and an advantage.
The Boston Scientific Team is solid, intact, and learning every day to move
faster and more efficiently, taking risks, stretching and extending itself on
behalf of its customers. We are guided by a set of proven values and Team
conviction that every product, every procedure, every technology, every device
we develop and sell provides the opportunity for a physician somewhere in the
world to reach out to sick patients and make them better. Boston Scientific is
an exhilarating company building for the future. Those who believe in our vision
for the future and share that belief with the BSC Team will be rewarded.
Thank you Boston Scientific Teammates, shareholders, customers and friends for
sharing our vision. Together our shared beliefs, commitments, loyalty and
unselfishness make our vision a reality.
Respectfully, [Pete M. Nicholas PHOTO]
/s/ Pete M Nicholas
Pete M. Nicholas
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Mission-driven, global resources focused on local needs everywhere. This is
much more than the theme of our 1997 annual report. It is a behavior that we
have adopted at Boston Scientific and one that we believe will enable continued
leadership in less invasive medicine. Our ongoing challenge is effectively and
efficiently harnessing global resources to improve patient outcomes and lower
treatment costs in ways that are meaningful in local markets. How we apply our
global strengths in product development, customer education, distribution and
the application of less invasive technologies with the responsiveness of a local
company is described on the following pages.
BOSTON SCIENTIFIC CORPORATION
MISSION STATEMENT
Since its origin in the late 1960s, Boston Scientific Corporation's mission
has been to improve the quality of patient care and the productivity of
healthcare delivery through the development and advocacy of less invasive
medical devices and procedures. This is accomplished through the continuing
refinement of existing products and procedures and the investigation and
development of new technologies which can reduce risk, trauma, cost, procedure
time, and the need for aftercare.
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WHERE ADVANCED EDUCATION PREPARES PHYSICIANS
TO RESPOND TO LOCAL NEEDS
Our definition of a global company is one that
successfully meets the specific local needs of
[PHOTO] customers around the world. In the field of less
invasive medicine, this local focus requires an
Every year, the entire understanding of the unique problems facing
Boston Scientific Japan physicians and their patients, and the ability to
team gets together to direct global resources to address them.
review the past year's
accomplishments and Our broad technology portfolio is a critical
discuss key opportunities resource as we focus on developing and leveraging
for the future. Here, technologies aimed at advancing the treatment of
Masashi Yamamoto, President prevalent diseases within a particular region. In
of Boston Scientific Japan Japan, where there are high incidences of certain
K.K., and other team types of cancer, Medi-tech is adapting
members begin their neuro-microcatheter and coil technologies
recently held 1998 annual originally developed by its sister business unit,
meeting by participating Target Therapeutics, to enable interventional
in the traditional radiologists to embolize liver tumors. As we
Japanese celebration of continue to develop and expand our less invasive
Kagami-wari. anti-cancer technologies, our Microvasive Urology
business unit is exploring a promising treatment
alternative for the most common form of bladder
cancer that combines local chemotherapy with heat
to create a synergistic effect that may be more
effective than either treatment alone.
Developing technologies to meet local needs is
only the beginning. Continued leadership in Japan
means helping our customers become skilled,
comfortable and productive with new interventional
techniques. For months prior to our Rotablator(R)
device approval, more than 200 Japanese
cardiologists from 90 hospitals participated in
advanced rotational atherectomy proctorship
programs with U.S. and European colleagues. When
reimbursement approval occurred in early march of
1998, prepared physicians hit the ground running
and were quickly able to bring the benefits of
this new technology to their patients.
[NET SALES We must also provide our customers with
GRAPH] "best-in-class" product training programs
conducted in an environment where interaction and
collaboration enable two-way learning. The Boston
Scientific Miyazaki Technology and Education
Center represents the next phase in our ongoing
commitment to the Japanese market. Equipped with a
150-seat auditorium for didactic training, as well
as procedural training rooms, the facility will
offer an intensive, hands-on environment in which
physicians and training specialists can share
skills, knowledge and experience directly with one
another. Most exciting about this initiative is
the connection with our physician customers that
will enable us to solve unique Japanese problems
and develop outcomes-oriented technologies that
reduce healthcare costs in an iterative and open
fashion.
Our efforts in Japan do more than meet local
needs. They demonstrate how we capitalize on the
unique global strength of Boston Scientific - by
thinking and acting as a Japanese-based
organization with access to global resources and
by applying what we learn from our customers in
Japan to meeting similar healthcare needs
throughout the world.
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"I think the best way for physicians to increase their knowledge about new
neurointerventional procedures is on a peer-to-peer basis from other physicians,
such as Dr. Boccardi, who have extensive clinical experience with them. Boston
Scientific's GDC Proctorship Program provides this essential, hands-on
training."
Dr. Yoshifumi Konishi (right) of Kyorin University Hospital, shown here
with Dr. Edoardo Boccardi of Niguarda Hospital, Milan, Italy
Scheduled to open in mid-1998, the Miyazaki
Technology and Education Center will include both [PHOTO]
advanced facilities for physician training and
product development operations for the Japanese
market. By bringing researchers in direct contact
with physicians, Boston Scientific Japan can
develop and refine technologies to meet local
customer needs. Where advanced education prepares
physicians to respond to local needs.
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Where DIRECT INVESTMENTS are bringing
more effective treatment within reach
[PHOTO: Members of Boston Scientific's Emerging Markets management team are
joined by Pete Nicholas, Chairman and CEO, for the facility dedication of our
recently opened Singapore Operations Center. Left to right: Jim Corbett,
Greg Barrett, Ed Northup, Pete Nicholas]
We are energized by the opportunity to provide more effective and affordable
healthcare treatments to physicians and their patients in less developed
countries. These regions, which include some of the largest and fastest-growing
populations in the world, have had few alternatives to highly invasive
procedures, sometimes performed under less than ideal conditions.
We have a unique opportunity to make a significant, positive difference in the
quality of life for thousands of people in markets such as Latin America, the
Middle East, China and Southeast Asia. We have opted to pursue a sales model
that places local Boston Scientific employees throughout the world and enables
us to more closely collaborate with our physician customers to develop
technologies and to realize optimal product utilization and economic value for
their needs. In addition, we are better able to access unique physician talents
in these markets and apply their insights globally. For example, we travel to
Buenos Aires, Argentina to work with Dr. Juan Parodi, a recognized leader and
pioneer in endovascular surgery, as part of our global development process.
As we grow the sales organization, our focus is first on providing advanced
sales and product training to every member of the team. We began the new year by
bringing together sales representatives from more than 20 countries to learn
side by side with their peers during an intensive training seminar. More
experienced colleagues from different areas of the world led many of the
sessions, conducted in nine languages, and shared their knowledge and insight.
When it was over, 300 professional, highly trained, enthusiastic sales
representatives returned to their home countries equipped to demonstrate the
value of less invasive technology solutions to local physicians and well
connected to their colleagues and the Boston Scientific knowledge base for
continuous learning.
Our ongoing supply chain integration initiatives and systems have made it
not only possible, but also practical for us to reach customers throughout this
part of the world quickly and efficiently. The opening of our Singapore facility
in early 1997 has enhanced this effort by creating a third global hub in the
Boston Scientific distribution network. Our global systems project will further
strengthen our ability to aggressively manage worldwide product inventory and
logistics through our Far East, South American, North American, European and
Japanese facilities. No matter where a product is sourced or how it travels
through the system, the goal is the same -- a seamless process that enables us
to get the product into the physician's hands overnight.
Leadership in Emerging Markets will be achieved and maintained if we follow a
few simple tenets of the Boston Scientific philosophy: customer intimacy is the
core; more effective and affordable healthcare is the outcome; direct, two-way,
face-to-face communication with local physicians is the method; and patients
around the world benefiting from less invasive solutions is the ultimate goal.
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[PHOTO]
In January of 1998, 300 marketing and sales representatives from 20 countries
gathered in Newport Beach, California, U.S.A. for a week of intensive training
in new technologies and market development.
Oscar Terk of Argentina was suffering from an abdominal aortic aneurysm (AAA)
and considered a poor risk for surgery when he was referred to Dr. Juan Parodi
of the Instituto Cardiovascular de Buenos Aires. Under local
anesthesia, the aneurysm was successfully treated with a
Meadox Vanguard(TM) Endovascular Stent Graft. Without any [PHOTO]
complications, Mr. Terk was able to return home three days
after the procedure.
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Where NEW TECHNOLOGIES help to manage health - and cost
INTELLECTUAL PROPERTY
Number of Patents Issued: January 1994, 145;
Year end 1997, 1000+; 1998, 2000+ pending.
[LINE CHART]
[We are extremely proud of the accomplishments of our research and development
teams. As shown here, their efforts play a key role in building and
strengthening our intellectual property.]
The economic and social pressures which erupted in 1997 throughout Europe have
dramatically increased the economic influence on healthcare purchasing de-
cisions virtually overnight. While the magnitude of this change is a significant
challenge for all participants in the medical device market, we see it
ultimately as a long-term opportunity for Boston Scientific.
We fundamentally believe that our focus on less invasive treatments and the
breadth of our Strategic Mass enables us to deliver better patient outcomes at a
lower total cost to society. In the past, proving clinical benefit was enough to
succeed, but the new economic environment across Europe requires similar rigor
in demonstrating that patients treated with our products require a lower total
cost of treatment for equivalent or better outcomes.
We are capturing data and building health economics modeling capabilities to
bring the right clinical and economic information to the new decision makers in
Europe and around the world: physicians, hospital purchasers, insurance
companies and governments. We are expanding our ability to precisely measure,
model and communicate the full economic benefits for each technology, and
because medical practices and reimbursement systems vary by country even within
Europe, we are taking a local approach where appropriate.
In response to changing customer needs, we are entering a new era of European
customer service and distribution capability. The investments we have made in
systems will begin paying off in 1998. Before mid-year, our central European
warehouse in The Netherlands will be linked real time electronically not only
with our international manufacturing center in Galway, Ireland, but with all of
our plants and distribution centers around the world. We will spend less time,
effort and money handling products while getting them to customers faster.
Incorporating manufacturing and development closer to the customer continues to
be an important theme for Boston Scientific. In the gastrointestinal cancer
arena, we are beginning to experience the benefits of close collaboration with
European GI endoscopists as colonic stents, being developed and manufactured in
Ireland, enter clinical trials in early 1998.
Continued growth in international markets and the outstanding performance of our
Galway workforce have led us to pursue a second Irish facility in Cork.
Initially, this facility will be a small international manufacturing center for
neuroradiology products developed by Boston Scientific's Target business unit,
today our third largest business in Europe. Ultimately, it will provide
additional capacity to serve growth markets.
Lasting growth and leadership in a Europe preparing for and then adapting to
unification will require close customer contact and fast response to changing
needs. Strategic Mass, leveraged locally by our European team, provides Boston
Scientific both the capability and the adaptability to excel.
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[PHOTO]
"Our Galway facility brings European product manufacturing and development
together under one roof for the first time. This creates a collaborative working
environment in which groups share continuous learning to create products of
ever-higher quality and manufacturability."
Michel Darnaud, President of Boston Scientific Europe
We believe that the economic constraints that have affected
[PHOTO] the healthcare environment across Europe only serve to
underscore the need for close, consultative relationships
between Boston Scientific sales team and physicians. Here,
Nicole Weimar, our German Microvasive Endoscopy sales
representative, and Prof. Velcovsky of the Klinik
Seltersberg of the JL University of Giessen, review clinical
and economic benefits associated with a new endoscopic
device.
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Where INNOVATION drives growth and greater efficiency
[PHOTO] Stents are the most important new technology in less
invasive medicine since the balloon dilatation
[Our employees have catheter. These tiny tubes and coils that expand and
been fully trained support diseased vessels already constitute a $1.2
on how to use our billion global market and the largest single product
global information category in interventional cardiology. While today
systems and are cardiology represents the most visible application, we
currently shipping are intently focused on continuous expansion of stent
more than 5,000 technologies into every specialty market we serve.
packages daily from
the Marina Bay Looking ahead, we expect that Scimed, our cardiology
Customer Fulfillment business unit, will introduce two coronary stents to
Center.] the U.S. market this year. The NIR(TM) stent, a product
that has received high marks from our European
physician customers and currently enjoys a leading
market share position there, is expected to launch in
the second half of 1998. The NIR is a highly flexible,
highly conformable, balloon-expandable stent. We will
also launch Radius(TM) this year, our first
self-expanding, nitinol stent. Key to Boston
Scientific's ability to treat a broad range of diseased
arteries is providing platforms with differential
performance characteristics in a variety of sizes --
all intended to equip the interventional physician with
the right stent for the right application.
While new technology energizes and motivates us, we
understand that the innovation is not complete until
physicians are bringing the benefits of the technology
to their patients. Our ability to accomplish this
requires a unique infrastructure that supports and
meets the needs of our customers. Throughout 1997, we
have worked diligently to create systems that will
enable more efficient distribution and impeccable,
consistent service quality. We began implementing a
$100 million global supply chain management system in
early 1996. Thanks to the intensive focus and
commitment of the team, our global SAP-based system
will be fully deployed in April of 1998. This system
will provide the vital information required to enhance
our business performance. The availability of
comprehensive data on customer demand and product
supply will enable more accurate sales activity
forecasting, as well as improved materials resource
planning and inventory management.
As we continue to focus on execution,
the combined capabilities of our
customer service and distribution teams
[ANNUAL EMPLOYEE GROWTH CHART] into our new Boston Scientific Customer
Fulfillment Center will further enhance
1996 1997 % CHANGE our ability to quickly and efficiently
respond to customer needs. Today we are
U.S. 7,664 8,623 13% able to ship more than 11,000 different
EUROPE 1,716 2,288 33% products, from every Boston Scientific
JAPAN 288 495 72% manufacturing facility, to locations
EMG. MKT. 20 297 1,385% around the world, including our other
regional distribution centers in The
Netherlands, Singapore and Japan.
It's all a part of our commitment to
realizing the economic and efficiency
benefits of integration, the greatest of
which is the ability to get the right
product to the right place at the right
time -- anywhere in the world.
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[PHOTO]
Boston Scientific's Marina Bay Customer Fulfillment Center opened in May of
1997. Located in Quincy, Massachusetts, U.S.A., the 1.3 million-square-foot
facility is equipped with state-of-the-art distribution equipment, including our
global information systems. By integrating inventory from all plants into one
central location, we expect to realize increased U.S. distribution efficiencies
of 17-20%.
Boston Scientific's ability to leverage global expertise to develop new
treatment solutions is well illustrated through our carotid stent technology
program being developed for multiple Boston Scientific specialty markets. The
team consists of employees from various functional areas across Boston
Scientific business units.
[PHOTO]
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OPTIMIZING STENT SOLUTIONS
Throughout the body are many types of tubes and vessels
which can become blocked or can malfunction due to disease
or injury. Stents are an important tool our physician [HUMAN BODY
customers use for long- term, less invasive treatment of SKELETON]
these problems. Figure 1 shows where Boston Scientific stent
technology is currently being applied as well as areas under
development. Figure 1
We apply the same principles of Strategic Mass to our stent
technology that we do across our entire business - product
line breadth and technology leverage to effectively provide
the right tool for the job. Because the variety of places
and problems which are treated with stents require unique
solutions, we have developed multiple technology platforms
and leveraged those platforms to where they provide the most
useful treatment (see Figure 2).
The next step in optimal stent solutions is to provide
adjunctive technologies which help stents perform better and
can also be therapies themselves. We are researching the use
of antiproliferative agents such as paclitaxel, genes and
other pharmacologically active compounds delivered in
coatings on stents or by special balloons to address vessel
restenosis and further increase long-term patient benefit.
- --------------------------------------------------------------------------------
Figure 2 The clinical applications for stenting are many and varied. We are
actively working to extend our multiplatform stent and delivery system
capabilities to provide our customers with optimal stent solutions
that are as unique and diverse as the diseased arteries, lumens and
vessels they treat.
- ----------------------------------------------------------------------------------------------
ANATOMICAL APPLICATION
- ----------------------------------------------------------------------------------------------
Biliary GI/Pulmonary Urological Coronary Peripheral Aortic Carotid
stent platform
- ----------------------------------------------------------------------------------------------
NIR(TM) X3 X2,3 X4
- ----------------------------------------------------------------------------------------------
RADIUS(TM) X3 X1,4
- ----------------------------------------------------------------------------------------------
SYMPHONY(R) X X X1,2
- ----------------------------------------------------------------------------------------------
STRECKER(TM) X X, X2 X2 X2
- ----------------------------------------------------------------------------------------------
VANGUARD(TM) X1,2
- ----------------------------------------------------------------------------------------------
SHORT-TERM
- ----------------------------------------------------------------------------------------------
IMPLANT X, X5
- ----------------------------------------------------------------------------------------------
DIAMOND(TM) X X
- ----------------------------------------------------------------------------------------------
PASSAGER(TM) X2
- ----------------------------------------------------------------------------------------------
X. Available worldwide
1. Under investigation in the U.S.
2. Available for sale outside U.S. only
3. Pending U.S. approval
4. Under investigation outside U.S.
5. Trestle(TM)Prostatic Stent - available in Europe only
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EXHIBIT 13.1
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES 1997
CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL TABLE OF CONTENTS
Financial Highlights F-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations F-2
Consolidated Statements of Operations F-7
Consolidated Balance Sheets F-8
Consolidated Statements of Stockholders' Equity F-10
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-12
Five-Year Selected Financial Data F-26
Report of Independent Auditors F-27
Quarterly Results of Operations F-28
Market for the Company's Common Stock
and Related Matters F-28
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FINANCIAL HIGHLIGHTS (UNAUDITED)
(In thousands, except per share data)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
Net sales $1,872,282 $1,551,238 $1,190,821
Gross profit 1,321,903 1,123,400 848,074
Operating income 268,992 313,171 52,111
Net income (loss) 139,334 167,094 (18,419)
Net income (loss) per common share - basic $0.72 $0.86 $(0.10)
Net income (loss) per common share - assuming dilution 0.70 0.84 (0.10)
The above amounts include merger-related and special charges of $259 million
($192 million, net-of-tax), $142 million ($128 million, net-of-tax) and $272
million ($231 million, net-of-tax) recorded in 1997, 1996 and 1995,
respectively. See notes to consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the past three years, Boston Scientific Corporation (Boston Scientific or
the Company) has consummated numerous mergers and acquisitions that are
expected to improve the strategic position of the Company to take advantage of
additional significant growth opportunities in less invasive medicine. In 1995,
the Company merged with or acquired SCIMED Life Systems, Inc. (SCIMED),
Cardiovascular Imaging Systems, Inc. (CVIS), Vesica Medical, Inc. (Vesica),
Meadox Medicals, Inc. (Meadox) and Heart Technology, Inc. (Heart). In 1996, the
Company merged with or acquired EP Technologies, Inc. (EPT), Symbiosis
Corporation (Symbiosis) and Endotech Ltd. and MinTec Inc., and certain related
companies (Endotech/MinTec).
On April 8, 1997, the Company completed its merger with Target Therapeutics,
Inc. (Target) in a tax-free, stock-for-stock transaction accounted for as a
pooling-of-interests. Target designs, develops, manufactures and markets
catheter-based disposable and implantable medical devices used in minimally
invasive procedures to treat neurovascular diseases and disorders. In
conjunction with this merger, Target's stockholders received 1.07 shares of
Boston Scientific common stock in exchange for each share of Target common
stock. Approximately 16.5 million shares of the Company's common stock were
issued in connection with the Target acquisition.
The Company has substantially completed the integration of all mergers and
acquisitions consummated in 1995 and 1996. The Company expects to complete the
integration of Target by the end of 1998. Management believes it has developed a
sound plan for continuing and concluding the integration process, and that it
will achieve that plan. However, in view of the number of major transactions
undertaken by the Company, the dramatic changes in the size of the Company and
the complexity of its organization resulting from these transactions,
management also believes that the successful implementation of its plan presents
a significant degree of difficulty. The failure to integrate these businesses
effectively could adversely affect the Company's operating results in the near
term, and could impair the Company's ability to realize the strategic and
financial objectives of these transactions.
The restated historical results of operations are not necessarily indicative of
the operating results or financial position that would have occurred if the
mergers and acquisitions had been consummated during the periods presented, nor
are they necessarily indicative of future operating results or financial
position.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales increased 21% in 1997 to $1,872 million from $1,551 million in 1996.
International net sales for the year were adversely impacted by changes in
foreign currency exchange rates. Without the impact of changes in exchange
rates, net sales for the year increased approximately 26%. Net income for the
year ended December 31, 1997, excluding merger-related and special charges,
increased 12% to $331 million from $295 million during the year ended December
31, 1996.
In 1997, the Company recorded merger-related expenses ($146 million) and
purchased research and development ($29 million), and the Company recorded
special charges related to inventory write-downs ($19 million),
litigation-related reserves ($34 million), and the impact of implementing a
recently issued accounting standard related to business process reengineering
($31 million). During 1996, the Company recorded merger-related expenses ($32
million) and purchased research and development ($110 million).
Reported net income for the year was $139 million, or $0.70 per share (diluted),
as compared to $167 million, or $0.84 per share, for the prior year.
F-2
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
19
United States (U.S.) revenues increased approximately 17% from 1996 to $1,076
million in 1997, while international revenues, including export sales,
increased approximately 27% from 1996 to $796 million in 1997. International
sales as a percentage of worldwide sales increased from 40% in 1996 to 43% in
1997. International sales during 1997 were negatively impacted compared to 1996
by approximately $82 million of unfavorable exchange rate movements caused
primarily by the strengthening of the U.S. dollar versus major European
currencies and the Japanese yen. Worldwide vascular and nonvascular sales
increased 19% and 27%, respectively, from 1996 to 1997.
Gross profit as a percentage of net sales was approximately 70.6% and 72.4%
during 1997 and 1996, respectively. The decline in gross margins during 1997 is
primarily attributable to write-downs for excess and obsolete inventory. Future
gross margins may be impacted by the Company's ability to effectively manage
its inventory level and mix. The Company is in the process of implementing a new
global information system that is expected to improve supply chain management.
The decrease in gross margin percentage is also partially due to a decline in
average selling prices as a result of continuing pressure on healthcare costs
and increased competition. In addition, gross margins were negatively impacted
by the unfavorable foreign exchange rate movements discussed above. The
negative impact of the above conditions was partially offset by the Company's
U.S. cost containment programs and the positive gross margin impact of selected
new product offerings.
Selling, general and administrative expenses increased 33% from $516 million in
1996 to $688 million in 1997, and increased as a percentage of sales from 33%
to 37% of net sales. The increase includes $34 million in litigation-related
reserves recorded in 1997. In addition, the Company continued to expand its
domestic and international sales and distribution organizations. The Company
believes the additional investments will enhance its competitive position in
the future.
Royalty expenses remained at approximately 1% of net sales while increasing 30%
from $17 million in 1996 to $22 million in 1997. The increase in overall
royalty expense dollars is due to increased sales and royalties due under
several strategic alliances that the Company initiated in 1997 and prior years.
Research and development expenses remained at approximately 9% of net sales
while increasing 24% from $135 million in 1996 to $167 million in 1997. The
increase in research and development dollars reflects increased spending in
regulatory, clinical research and various other product development programs,
and reflects the Company's continued commitment to refine existing products and
procedures and to develop new technologies that provide simpler, less traumatic,
less costly and more efficient diagnosis and treatment. The trend in countries
around the world toward more stringent regulatory requirements for product
clearance and more vigorous enforcement activities has generally caused or may
cause medical device manufacturers to experience more uncertainty, greater risk
and higher expenses.
During 1996 and 1997, the Company expanded its direct sales presence in Asia
Pacific and Latin America so as to be in a position to take advantage of
expanded market opportunities. The costs of expansion have negatively impacted
the Company's operating margins. The Company's ability to benefit from its
expansion may be limited by risks and uncertainties related to economic
conditions in these regions, in addition to competitive offerings,
infrastructure development, rights to intellectual property, and the ability of
the Company to implement its overall business strategy. Further, any significant
changes in the political, regulatory or economic environment where the Company
conducts international operations may have a material impact on revenues and
profits. The Company believes that it will be able to realize improved long-term
returns on its investments with a direct selling presence in these regions.
The Company's 1997 operating expenses increased at a faster percentage than net
sales and the Company expects this relationship to continue during the first
half of 1998. However, the Company also expects that the additional investments
in infrastructure will enhance its competitive position in the second half of
1998 and beyond.
Uncertainty remains with regard to future changes within the healthcare
industry. The trend towards managed care and economically motivated buyers in
the U.S. may result in continued pressure on selling prices of certain products
and resulting compression on gross margins. The U.S. marketplace is
increasingly characterized by consolidation among healthcare providers and
purchasers of medical devices who prefer to limit the number of suppliers from
whom they purchase medical products. There can be no assurance that these
entities will continue to purchase products from the Company. In addition,
international markets are also being affected by economic pressure to contain
reimbursement levels and healthcare costs. Although these factors will continue
to impact the rate at which Boston Scientific can grow, the Company believes
that it is well positioned to take advantage of opportunities for growth that
exist in the markets it serves.
Interest and dividend income was $4 million as compared to $6 million in 1996.
The decrease is primarily attributable to a decrease in the Company's average
cash and marketable securities balance resulting from the use of cash to fund
the Company's working capital, finance several of the Company's recent
acquisitions and alliances and to repurchase the Company's common stock.
Interest expense increased from $12 million in 1996 to $14 million in 1997. The
overall increase in interest expense is primarily attributable to a higher
outstanding balance related to the Company's commercial paper borrowings. Other
income (expense), net, changed from expense of $5 million in 1996 to less than
$1 million of income in 1997. The change is primarily attributable to net gains
on sales of equity investments of approximately $11 million compared to net
gains of $1 million in 1996.
The Company's effective tax rate was approximately 45% in 1996 and 38% in 1997.
The effective tax rates for 1996 and 1997 include the impact of special charges.
Excluding these items, the pro forma effective tax rate improved from
approximately 34% during 1996 to 32% during 1997. The reduction
F-3
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
20
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
in the Company's effective tax rate, excluding the impact of special charges, is
primarily due to increased business in lower tax geographies and certain tax
planning initiatives.
In 1997, the Company recorded a $31 million ($21 million, net-of-tax) cumulative
effect of change in accounting from implementing Emerging Issues Task Force No.
97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract
or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation." The Company does not expect future costs
for the business process reengineering component of its global information
systems project to be material.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net sales increased 30% in 1996 to $1,551 million from $1,191 million in 1995.
Net income for the year increased to $167 million, or $0.84 per share (diluted),
as compared to a loss of $18 million, or $0.10 per share, in the prior year. Net
income for the year ended December 31, 1996, excluding special charges related
to 1996 and 1995 acquisitions, increased 39% to $295 million from $212 million
during the year ended December 31, 1995.
U.S. revenues increased approximately 20% from 1995 to $924 million in 1996,
while international revenues, including export sales, increased approximately
50% from 1995 to $627 million in 1996, or 57% excluding the negative impact of
exchange rate movements. International sales as a percentage of worldwide sales
increased from 35% in 1995 to 40% in 1996. Worldwide vascular sales increased
29% from 1995 to 1996 and worldwide nonvascular sales during the same periods
increased 26%.
During 1996, the Company accelerated its forward build and spend programs so as
to be in a position to take advantage of the expanded market opportunities. The
programs impacted the Company's manufacturing and selling, general and
administrative costs.
Gross profit as a percentage of net sales was approximately 72.4% and 71.2%
during 1996 and 1995, respectively. During 1996, the Company's gross margins
improved as a result of the Company's U.S. cost containment programs, an
increase in the percentage of international sales compared to U.S. sales, and
certain benefits of converting from selling through international distributors
to direct sales operations. However, the positive impact of these initiatives
was offset by the forward spend programs discussed previously, a slight decline
in average selling prices due to continuing pressure on healthcare costs and
increased competition, and a shift in the Company's product sales mix. In
addition, gross margins were negatively impacted by the unfavorable foreign
exchange rate movements discussed above.
Selling, general and administrative expenses increased 32% from $392 million in
1995 to $516 million in 1996, and remained approximately 33% of net sales. The
increase reflects continued expansion of the Company's domestic and
international sales organizations and related marketing support.
Royalty expenses decreased 35% from $26 million in 1995 to $17 million in 1996
and decreased from approximately 2% of net sales to 1% of net sales. The
decrease is primarily attributable to a reduction in sales of certain of the
Company's PTCA products that are subject to royalties. However, the reduction
was partially offset by royalties due under several strategic alliances that
the Company initiated in 1996 and prior years.
Research and development expenses increased 28% from $106 million in 1995 to
$135 million in 1996 and remained approximately 9% of net sales. The increase
in dollars reflects increased spending in regulatory, clinical research and
various other product development programs, and reflects the Company's continued
commitment to refine existing products and procedures and to develop new
technologies that provide simpler, less traumatic, less costly and more
efficient diagnosis and treatment.
Interest and dividend income was $6 million in 1996 as compared to $16 million
in 1995. The decrease is primarily attributable to a decrease in the Company's
average cash and marketable securities balance resulting from the use of cash to
finance several of the Company's strategic alliances and infrastructure build
during the second half of 1995 and throughout 1996. Interest expense increased
from $10 million in 1995 to $12 million in 1996. The increase in interest
expense is primarily attributable to interest on borrowings used principally to
finance the acquisitions of Symbiosis and Endotech/MinTec and the Company's
stock repurchase program. Other income (expense), net, changed from income of
$4 million in 1995 to expense of $5 million in 1996. The change is primarily
attributable to net foreign exchange losses recorded in 1996 of $2 million
compared to net gains of $8 million recorded in 1995.
The Company's effective tax rate was approximately 129% in 1995 and 45% in 1996.
The effective tax rates for 1995 and 1996 include the impact of special charges
(see discussion following). Excluding these items, the pro forma effective tax
rate improved from approximately 37% during 1995 to 34% during 1996. During
1995, the Company reorganized its international legal structure, which has
contributed to a reduction in the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company continued to invest in several strategic initiatives
and infrastructure in order to take advantage of certain growth opportunities
that exist in less invasive medicine. Cash, cash equivalents, and short-term
investments totaled approximately $80 million as of December 31, 1997 compared
to $118 million as of December 31, 1996. Working capital was reduced from $335
million at December 31, 1996 to $256 million at December 31, 1997, and cash
provided by operating activities decreased from $142 million during 1996 to $80
million during 1997. The decrease in cash and marketable securities is primarily
attributable to cash used to repurchase the Company's common stock, capital
expenditures incurred to expand the Company's manufacturing and distribution
facilities, additional strategic initiatives and payment of merger-related
costs. The cash expenditures were par-
F-4
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
21
tially offset by proceeds from operating activities and additional borrowings
under the Company's financing arrangements.
During 1997, accounts receivable increased $93 million as a result of the
Company's sales growth and the transition to selling directly to international
customers. Days sales outstanding has increased from 68 days in 1996 to 77 days
in 1997 primarily as a result of the growth in international sales. The
Company's bad debt provision may be impacted by its ability to effectively
collect receivables due from its international distributors. Inventory increased
$150 million during 1997 primarily as a result of stocking the NIR(TM) stent in
preparation of the Company's planned 1998 launch in the U.S. and Japan. The
remaining increase is a result of inefficiencies in the global supply chain. The
Company is committed to purchase approximately $75 million of NIR stents during
1998. The Company expects inventory levels to peak in mid-1998 and then begin to
decline as the NIR stent is launched in the U.S. and Japan, and as the Company's
new global supply chain becomes fully operational. Successful implementation of
the Company's supply chain initiatives is necessary to reduce the Company's
inventory to an acceptable level. Although no significant issues have arisen in
the past, there can be no assurance that current or future suppliers of the
Company's raw materials will be able to continue to meet the quality and
quantity demands of the Company at current suppliers' prices.
Cash used for investing activities for 1997 was $251 million and was primarily
related to property, plant and equipment costs associated with the Company's
expansion of manufacturing and distribution capacity.
During 1997, net cash provided by financing activities was approximately $162
million and consisted primarily of proceeds from issuance of commercial paper
and long-term borrowings and the exercise of stock options partially offset by
the acquisition of treasury stock.
In connection with its 1995 and 1996 mergers and acquisitions and the Company's
initial investment in Medinol, Ltd. (Medinol), the Company recorded
merger-related charges of approximately $272 million ($231 million, net-of-tax)
and $142 million ($128 million, net-of-tax), respectively. In addition, during
1997, the Company recorded special charges in connection with its acquisitions
of approximately $175 million ($135 million, net-of-tax). Estimated costs
include purchased research and development ($29 million) and those costs typical
in a merging of operations and relate to, among other things, rationalization of
facilities, workforce reductions, unwinding of various contractual commitments,
asset write-downs and other integration costs. The Company does not expect costs
incurred to complete purchased research and development projects to be
material. During 1997, cash payments related to these charges were
approximately $105 million and estimated cash payments for 1998 are $51 million.
The Company is authorized to purchase on the open market up to approximately 20
million shares of the Company's common stock. Purchases will be made at
prevailing prices as market conditions and cash availability warrant. Stock
repurchased under the Company's systematic plan will be used to satisfy the
Company's obligations pursuant to its employee benefit and incentive plans.
During 1997, the Company repurchased 3.5 million shares of its common stock at
an aggregate cost of $188 million. Prior to 1997, 6.5 million shares of the
Company's common stock were repurchased under the program.
Since early 1995, the Company has entered into several transactions involving
acquisitions and alliances, certain of which have involved equity investments.
As the healthcare environment continues to undergo rapid change, management
expects that it will continue focusing on strategic initiatives and/or make
additional investments in existing relationships. In addition, the Company
expects to incur capital expenditures of approximately $230 million in 1998,
including completion of construction of additional manufacturing space and
completion of its global information system. The Company's new global
information system is Year 2000 compliant. The Company is assessing other
programs and products to determine if they are Year 2000 compliant and the
Company does not anticipate that additional compliance costs will have a
material impact on its business, operations or its financial condition.
In October 1997, the Company filed a Public Debt Registration Statement with
the U.S. Securities and Exchange Commission. Under the Registration Statement,
the Company may issue up to $500 million in debt securities in the public
market. In February 1998, the Company made an additional filing necessary to
issue $500 million of debt securities under the Registration Statement. The
Company expects the issuance to move forward and to receive the proceeds of the
issuance during March 1998. A significant portion of the net proceeds from the
sale of the securities will be used for repayment of indebtedness under the
Company's commercial paper program, and the remainder of the net proceeds of
this offering will be used principally to fund general corporate purposes. The
Company may borrow additional amounts under its revolving credit agreement in
the future, and the Company plans to increase its Japanese borrowing facilities
used primarily to discount its accounts receivable. The Company expects that
its cash and cash equivalents, marketable securities, cash flows from operating
activities, proceeds from the issuance of the debt securities noted above and
borrowing capacity will be sufficient to meet its projected operating cash
needs, including integration costs at least through the end of 1998. The Company
may need to increase its bank facilities during 1998 if it continues to execute
strategic initiatives, although there are no assurances that additional
financing can be or will be obtained.
MARKET RISK DISCLOSURES
The Company's floating and fixed rate debt obligations are subject to interest
rate risk. If interest rates increase 100 basis points in 1998, the increase
would not result in a material change in the Company's interest expense or the
fair value of the Company's debt obligations. A 100 basis point increase would
not result in a material increase in interest income or the fair value of the
Company's short-term investments.
The Company enters into forward foreign exchange contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with
commitments, generally one to six months. The Company does not engage in
speculation. The
F-5
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Company's foreign exchange contracts, which amounted to approximately $177
million at December 31, 1997, should not subject the Company to material risk
due to exchange rate movements because gains and losses on these contracts
should offset losses and gains on the assets and liabilities being hedged.
Although the Company engages in hedging transactions that may offset the effect
of fluctuations in foreign currency exchange rates on foreign currency
denominated assets and liabilities, financial exposure may nonetheless result,
primarily from the timing of transactions and the movement of exchange rates.
The short-term nature of these contracts has resulted in these instruments
having insignificant fair market values at December 31, 1997. In addition,
unhedged foreign currency balance sheet exposures as of December 31, 1997 are
not expected to result in a significant loss of earnings or cash flows. As the
Company has expanded its international operations, its sales and expenses
denominated in foreign currencies have expanded and that trend is expected to
continue. Thus, certain sales and expenses have been, and are expected to be,
subject to the effect of foreign currency fluctuations and these fluctuations
may have an impact on margins. The Company's sensitivity analysis of the effects
of changes in foreign currency exchange rates does not factor in a potential
change in sales levels or local currency selling prices.
LITIGATION
The Company is involved in various lawsuits, including product liability suits,
from time to time in the normal course of business. In management's opinion, the
Company is not currently involved in any legal proceeding other than those
specifically identified in the notes to the consolidated financial statements
which, individually or in the aggregate, could have a material effect on the
financial condition, operations and cash flows of the Company. The Company
believes that it has meritorious defenses against claims that it has infringed
patents of others. However, there can be no assurance that the Company will
prevail in any particular case. An adverse outcome in one or more cases in
which the Company's products are accused of patent infringement could have a
material adverse effect on the Company. During 1997, the Company recorded
approximately $34 million of litigation-related reserves to cover costs of
defense and settlement, and unfavorable outcomes. The reserves are included in
selling, general and administrative expenses.
Further product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against such product
liability losses as could otherwise materially affect the Company's financial
position.
CAUTIONARY STATEMENT FOR PURPOSES OF THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements contained in this report
include, but are not limited to, statements with respect to: (a) the Company's
forward build and spend programs and its ability to benefit from investments in
expansion; (b) the Company's plans to continue to invest in its global systems
and worldwide manufacturing and distribution capacity; (c) the potential impacts
of continued consolidation among healthcare providers, trends towards managed
care, healthcare cost containment, more stringent regulatory requirements and
more vigorous enforcement activities; (d) the Company's belief that it is well
positioned to take advantage of opportunities for growth that exist in the
markets it serves; (e) the Company's continued commitment to refine existing
products and procedures and to develop new technologies that provide simpler,
less traumatic, less costly and more efficient diagnosis and treatment; (f) the
research and development expenditures that will be incurred to complete
purchased research and development projects; (g) risks associated with
international operations; (h) the process and plan for the integration of
businesses acquired by the Company and the successful implementation of the
plan; (i) the potential effect of foreign currency fluctuations on revenues,
expenses and resulting margins and the trend toward increasing sales and
expenses denominated in foreign currencies; (j) the ability of the Company to
successfully manage accounts receivable and inventory levels and mix; (k) the
ability of the Company to meet its projected cash needs through the end of 1998;
(l) the Company's plans for launch of the NIR(TM) stent in the U.S. and Japan;
(m) the ability of global information systems to improve supply chain
management; (n) costs associated with implementing Year 2000 compliance and
business process reengineering; (o) the Company's belief that operating expenses
will increase at a faster percentage than net sales during the first half of
1998 and the expectation that the additional investments in infrastructure will
enhance the Company's competitive position in the second half of 1998 and
beyond; and (p) the ability of additional investments in sales and distribution
organizations to enhance the Company's future competitive position. Several
important factors, in addition to the specific factors discussed in connection
with such forward-looking statements individually, could affect the future
results of the Company and could cause those results to differ materially from
those expressed in the forward-looking statements contained herein. Such
additional factors include, among other things, future economic, competitive and
regulatory conditions, demographic trends, financial market conditions and
future business decisions of Boston Scientific and its competitors, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of Boston Scientific. Therefore, the Company wishes to caution each
reader of this report to consider carefully these factors as well as the
specific factors discussed with each forward-looking statement in this report
and as disclosed in the Company's filings with the Securities and Exchange
Commission as such factors, in some cases, have affected, and in the future
(together with other factors) could affect, the ability of the Company to
implement its business strategy and may cause actual results to differ
materially from those contemplated by the statements expressed herein.
F-6
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
23
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Net sales $ 1,872,282 $ 1,551,238 $ 1,190,821
Cost of products sold 550,379 427,838 342,747
- ----------------------------------------------------------------------------------------------------------
Gross profit 1,321,903 1,123,400 848,074
Selling, general and administrative expenses 688,174 515,908 391,548
Royalties 22,177 17,061 26,233
Research and development expenses 167,194 134,919 105,788
Purchased research and development 29,475 110,000 67,946
Merger-related charges 145,891 32,341 204,448
- ----------------------------------------------------------------------------------------------------------
1,052,911 810,229 795,963
- ----------------------------------------------------------------------------------------------------------
Operating income 268,992 313,171 52,111
Other income (expense):
Interest and dividend income 3,706 6,297 16,311
Interest expense (14,285) (11,518) (9,591)
Other, net 255 (4,620) 3,847
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting 258,668 303,330 62,678
Income taxes 98,254 136,236 81,097
- ----------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting 160,414 167,094 (18,419)
Cumulative effect of change in accounting (net-of-tax) (21,080)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 139,334 $ 167,094 $ (18,419)
==========================================================================================================
Earnings (loss) per common share - basic:
Income (loss) before cumulative effect of change in accounting $ 0.82 $ 0.86 $ (0.10)
Cumulative effect of change in accounting (0.10)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per common share - basic $ 0.72 $ 0.86 $ (0.10)
==========================================================================================================
Earnings (loss) per common share - assuming dilution:
Income (loss) before cumulative effect
of change in accounting $ 0.80 $ 0.84 $ (0.10)
Cumulative effect of change in accounting (0.10)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per common share - assuming dilution $ 0.70 $ 0.84 $ (0.10)
==========================================================================================================
See notes to consolidated financial statements.
F-7
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
24
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, 1997 1996
- ------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 57,993 $ 72,175
Short-term investments 22,316 45,606
Trade accounts receivable, net 413,838 321,025
Inventories 386,742 236,670
Deferred income taxes 146,956 97,364
Prepaid expenses and other current assets 36,176 43,977
- ------------------------------------------------------------------------
Total current assets 1,064,021 816,817
Property, plant, equipment and leaseholds, net 498,967 362,302
Other assets:
Intangibles, net 313,346 319,762
Investments 66,239 55,735
Other assets 25,234 30,429
- ------------------------------------------------------------------------
$1,967,807 $1,585,045
========================================================================
See notes to consolidated financial statements.
F-8
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
25
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share and per share data)
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ 423,250 $ 212,500
Bank obligations 23,958 28,056
Accounts payable 98,878 66,877
Accrued expenses 161,236 96,907
Accrual for merger-related charges 68,358 48,144
Income taxes payable 26,039 27,403
Other current liabilities 6,292 1,929
- ---------------------------------------------------------------------------------------------
Total current liabilities 808,011 481,816
Long-term debt 46,325
Accrual for merger-related charges 8,283
Deferred income taxes 58,034 59,975
Other long-term liabilities 60,922 48,139
Commitments and contingencies
Stockholders' equity:
Preferred stock, $ .01 par value - authorized 25,000,000 shares,
none issued and outstanding
Common stock, $ .01 par value - authorized 300,000,000 shares,
195,611,491 shares issued at December 31, 1997 and
at December 31, 1996 1,956 1,956
Additional paid-in capital 432,556 437,074
Contingent stock repurchase obligation 18,295 24,855
Retained earnings 706,542 574,051
Foreign currency translation adjustment (94,279) (37,964)
Unrealized gain on available-for-sale securities, net 17,422 18,886
Treasury stock, at cost - 1,800,627 shares at December 31, 1997
and 643,991 shares at December 31, 1996 (96,260) (23,743)
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 986,232 995,115
- ---------------------------------------------------------------------------------------------
$ 1,967,807 $ 1,585,045
=============================================================================================
See notes to consolidated financial statements.
F-9
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
26
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
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 139,334
Foreign currency
translation adjustment (56,315)
Issuance of common stock (47,713) (11,758)
Purchase of common stock
for treasury
Sale of stock
repurchase obligation (18,295) 18,295
Expiration of stock
repurchase obligation 24,855 (24,855)
Tax benefit relating to incentive
stock option and employee
stock purchase plans 36,635 4,915
Net change in equity investments (1,464)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 195,611 $ 1,956 $ 432,556 $ 18,295 $ 706,542 $ (94,279) $ 17,422
====================================================================================================================================
Treasury
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 139,334
Foreign currency
translation adjustment (56,315)
Issuance of common stock 114,134 54,663
Purchase of common stock
for treasury (188,159) (188,159)
Sale of stock
repurchase obligation 1,508 1,508
Expiration of stock
repurchase obligation
Tax benefit relating to incentive
stock option and employee
stock purchase plans 41,550
Net change in equity investments (1,464)
- ---------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ (96,260) $ 986,232
===============================================================
See notes to consolidated financial statements.
F-10
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 139,334 $ 167,094 $ (18,419)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Net cash adjustment to conform year end
of pooled entity (11,472)
Gain on sale of equity investments (10,526) (827)
Depreciation and amortization 86,692 66,317 43,396
Deferred income taxes (52,214) (11,749) (8,510)
Noncash special charges write-offs 37,104 14,378 15,237
Purchased research and development 29,475 110,000 67,946
Exchange (gain) loss 4,212 2,115 (7,617)
Increase (decrease) in cash flows from
operating assets and liabilities:
Trade account receivables (107,837) (105,370) (71,065)
Inventories (175,113) (90,980) (48,493)
Prepaid expenses and other current assets 9,751 (19,399) 8,844
Accounts payable and accrued expenses 101,378 31,342 12,111
Accrual for merger-related charges 28,489 (60,420) 67,312
Other liabilities (2,472) 32,175 (25,137)
Other, net (7,779) 7,303 8,403
- ------------------------------------------------------------------------------------------
Cash provided by operating activities 80,494 141,979 32,536
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment, net (220,097) (145,332) (74,800)
Net maturities of held-to-maturity
short-term investments 28,555 28,152 5,033
Purchases of available-for-sale securities (7,834) (74,947) (57,737)
Sales of available-for-sale securities 5,351 70,260 111,516
Acquisitions of businesses, net of cash acquired (18,076) (264,493) (96,792)
Payments for investments in certain technologies (39,066) (8,564) (67,351)
Other, net 205 (6,379) (2,304)
- ------------------------------------------------------------------------------------------
Cash used in investing activities (250,962) (401,303) (182,435)
FINANCING ACTIVITIES:
Net increase in commercial paper 210,750 212,500
Proceeds from notes payable and long-term borrowings 52,005 28,191
Net payments on notes payable, capital leases and
long-term borrowings (10,929) (27,816) (67,097)
Proceeds from issuances of shares of common stock,
net-of-tax benefits 96,213 77,642 48,922
Acquisitions of treasury stock,
net of proceeds from put options (186,651) (63,832)
Other, net 484 762 (107)
- ------------------------------------------------------------------------------------------
Cash provided by financing activities 161,872 199,256 9,909
Effect of foreign exchange rates on cash (5,586) (2,588) (4,939)
- ------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (14,182) (62,656) (144,929)
Cash and cash equivalents at beginning of period 72,175 134,831 279,760
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 57,993 $ 72,175 $ 134,831
==========================================================================================
See notes to consolidated financial statements.
F-11
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note A to Note B)
NOTE A -- MERGERS AND ACQUISITIONS
On February 24, 1995, Boston Scientific Corporation (Boston Scientific or the
Company) completed its merger with SCIMED Life Systems, Inc. (SCIMED) in a
stock-for-stock transaction. The transaction, which is accounted for as a
pooling-of-interests, was effected through the exchange of 3.4152 shares of the
Company's common stock in exchange for each SCIMED share held. Approximately
52.7 million shares of common stock were issued in connection with the SCIMED
merger.
On March 9, 1995, the Company completed its merger with Cardiovascular Imaging
Systems, Inc. (CVIS), which is accounted for under the purchase method of
accounting. CVIS shareholders received $10.50 per share for an aggregate
purchase price of approximately $94 million (or approximately $82 million, net
of cash acquired, cash received and to be received from a third party under an
agreement, signed in conjunction with the acquisition, to license certain
intravascular ultrasound technology).
On March 23, 1995, the Company completed the acquisition of Vesica Medical, Inc.
(Vesica) which is accounted for under the purchase method of accounting. The
purchase price is not material to the Company's financial position or results of
operations and the acquisition did not have a material pro forma impact on the
Company's operations.
On November 16, 1995, the Company completed its merger with Meadox Medicals,
Inc. (Meadox). To effect the merger, Boston Scientific exchanged approximately
10.2 million shares of the Company's common stock for all the issued and
outstanding capital stock of Meadox on a fully-diluted basis in a
stock-for-stock, pooling-of-interests transaction.
On December 29, 1995, the Company completed its merger with Heart Technology,
Inc. (Heart) in a stock-for-stock transaction. The transaction, which is
accounted for as a pooling-of-interests, was effected through the exchange of
0.675 shares of the Company's common stock for each Heart share held.
Approximately 11.9 million shares of the Company's common stock were issued in
connection with the Heart merger.
On January 22, 1996, the Company completed its merger with EP Technologies, Inc.
(EPT) in a stock-for-stock transaction. The transaction, which is accounted for
as a pooling-of-interests, was effected through the exchange of 0.297 shares of
the Company's common stock for each EPT share held. Approximately 3.4 million
shares of the Company's common stock were issued in conjunction with the EPT
merger.
On March 14, 1996, the Company acquired Symbiosis Corporation (Symbiosis),
formerly a wholly-owned subsidiary of American Home Products Corporation. Boston
Scientific purchased Symbiosis for approximately $153 million in a cash
transaction. The acquisition was accounted for using the purchase method of
accounting.
On May 3, 1996, Boston Scientific acquired assets from Endotech, Ltd. and MinTec
Inc., and certain related companies (Endotech/MinTec). The Company purchased
Endotech/MinTec's assets for approximately $72 million in a cash transaction
accounted for using the purchase method of accounting.
On April 8, 1997, the Company completed its merger with Target Therapeutics,
Inc. (Target) in a tax-free, stock-for-stock transaction accounted for as a
pooling-of-interests. In conjunction with this merger, Target's stockholders
received 1.07 shares of the Company's common stock in exchange for each share of
Target common stock. Approximately 16.5 million shares of the Company's common
stock were issued in connection with the Target merger.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries, substantially all of which are
wholly-owned, and include the results of SCIMED, Meadox, Heart, EPT and Target
accounted for as poolings-of-interests, for all periods presented. The
statements also include the results of CVIS, beginning in March 1995, the
results of Symbiosis, beginning in March 1996 and the results of
Endotech/MinTec, beginning in May 1996. Investments in affiliates, representing
20% to 50% of the ownership of such companies, are accounted for under the
equity method. Investments in affiliates, representing less than 20% of the
ownership of such companies, are accounted for under the cost method.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FISCAL YEAR: The Company has a fiscal year ending on December 31. In connection
with the SCIMED merger, effective January 1, 1995, SCIMED changed its fiscal
year end from the last day of February to December 31. As a result of the change
in SCIMED's fiscal year, the operations for the period January 1, 1995 through
February 28, 1995 have been included in the results of operations of Boston
Scientific both for the years ended December 31, 1995 and 1994. Summarized
results of SCIMED's operations for this two-month period are: Net sales: $55
million; Gross margin: $42 million; Operating income: $18 million; Net income:
$11 million.
TRANSLATION OF FOREIGN CURRENCY: All assets and liabilities of foreign
subsidiaries are translated at the rate of exchange at year end while sales and
expenses are translated at the average rates in effect during the year. The net
effect of these translation adjustments is shown in the accompanying financial
statements as a component of stockholders' equity.
F-12
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
29
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS: Short-term investments are recorded at fair value, which
approximates cost.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the
Company to concentration of credit risk consist primarily of temporary cash and
cash equivalents, marketable securities and accounts receivable. The Company
invests its excess cash primarily in high quality securities and limits the
amount of credit exposure to any one financial institution. The Company's
investment policy limits exposure to concentration of credit risk and changes in
market conditions.
The Company provides credit, in the normal course of business, primarily to
hospitals, private and governmental institutions and healthcare agencies and
doctors' offices. The Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses which, when
realized, have been within the range of management's expectations.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market.
PROPERTY, PLANT, EQUIPMENT AND LEASEHOLDS: Property, plant, equipment and
leaseholds are stated at historical cost. Expenditures for maintenance and
repairs are charged to expense; betterments are capitalized. The Company
provides for depreciation and amortization by the straight-line method at rates
which are intended to depreciate and amortize the cost of these assets over
their estimated useful lives. Buildings and improvements are depreciated over a
15- to 40-year life; equipment, furniture and fixtures are depreciated over a 2-
to 7-year life. Leasehold improvements are amortized on a straight-line basis
over the shorter of the useful life of the improvement or the term of the lease.
The Company capitalizes interest incurred on funds used to construct property,
plant and equipment. Interest capitalized during 1997 was $5 million. The
Company receives grant money equal to a percentage of expenditures on eligible
capital equipment which is recorded as deferred income and recognized ratably
over the life of the underlying assets. The grant money would be repayable, in
whole or in part, should the Company fail to meet certain employment goals.
INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line
method over the following lives: Patents and trademarks (3-20 years); Licenses
(2-20 years); Purchased technologies (3-20 years); Excess of cost over net
assets acquired (15-40 years); Other intangibles (Various).
The Company examines the carrying value of its goodwill and other long-lived
intangible assets to determine whether there are any impairment losses. If
indicators of impairment were present in long-lived intangible assets used in
operations, and future cash flows were not sufficient to recover the assets'
carrying amount, an impairment loss would be charged to expense in the period
identified. No event has been identified that would impair the value of material
long-lived intangible assets recorded in the accompanying consolidated financial
statements.
INCOME TAXES: The Company utilizes the liability method for accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Taxes are not provided on unremitted earnings of subsidiaries outside the United
States (U.S.) where such earnings are permanently reinvested. At December 31,
1997, unremitted earnings of non-U.S. subsidiaries were $311 million. When
these earnings are distributed in the form of dividends or otherwise, the
Company will be subject to both U.S. income taxes and foreign withholding taxes
less an adjustment for applicable foreign tax credits. It is not practical to
estimate the amount of taxes payable on these foreign earnings. Research and
development tax credits are recorded as a reduction in income tax expense in
the year realized.
FOREIGN EXCHANGE CONTRACTS: The Company enters into forward foreign exchange
contracts to hedge foreign currency transactions on a continuing basis for
periods consistent with commitments. The Company does not engage in speculation.
The Company's foreign exchange contracts, which amounted to $177 million at
December 31, 1997 and which were immaterial at December 31, 1996, do not
subject the Company to material balance sheet risk due to exchange rate
movements because gains and losses on these contracts offset losses and gains on
the assets and liabilities being hedged. During 1997 and 1996, net foreign
currency transaction and translation net gains (losses) that are reflected as
Other Income (Expense) on the Consolidated Statements of Operations totaled
approximately $4 million and $2 million, respectively, of net foreign exchange
losses compared to $8 million of net foreign exchange gains in 1995.
Although the Company engages in hedging transactions that may offset the effect
of fluctuations in foreign currency exchange rates on foreign currency
denominated assets and liabilities, financial exposure may nonetheless result,
primarily from the timing of transactions and the movement of exchange rates.
Further, any significant changes in the political, regulatory or economic
environment where the Company conducts international operations may have a
material impact on revenues and profits.
REVENUE RECOGNITION: The Company recognizes revenue from the sale of its
products when the products are shipped to its customers. The Company allows its
customers to return certain products for credit. The Company also allows
customers to return defective or damaged products for credit or replacement.
Returned merchandise will be accepted only with written authorization from the
Company. Accruals are made and evaluated for adequacy on a monthly basis for all
returns.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
F-13
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note B continued to Note E)
STOCK COMPENSATION ARRANGEMENTS: The Company accounts for its stock compensation
arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and intends to continue to do so. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting and Disclosure of Stock-Based Compensation".
ACCOUNTING CHANGE: The Company has implemented Emerging Issues Task Force (EITF)
No. 97-13 "Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project that Combines Business Process Reengineering and
Information Technology Transformation," the effect of which ($31 million or $21
million, net-of-tax) is reflected as a cumulative change in accounting.
NEW ACCOUNTING STANDARDS: The Company has not yet adopted SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" both of which will require adoption in
1998. The Company is in the process of determining the effect of adoption of
these statements on its consolidated financial statements and related
disclosures.
NET INCOME PER COMMON SHARE: In 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share". Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the Company's
previously reported primary earnings per share. All earnings per share amounts
for all periods presented have been restated to conform to the Statement 128
requirements.
RECLASSIFICATIONS: Certain prior years' amounts have been reclassified to
conform to the current years' presentation.
NOTE C -- CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents, and investments, stated at fair market value, consisted
of the following:
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
31
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 $444,317 $335,875
Less allowances 30,479 14,850
- --------------------------------------------------------------------------------
$413,838 $321,025
================================================================================
INVENTORIES
Finished goods $204,668 $130,696
Work-in-process 45,683 45,293
Raw materials 136,391 60,681
- --------------------------------------------------------------------------------
$386,742 $236,670
================================================================================
DEPRECIABLE ASSETS AND LEASEHOLDS
Land $ 45,213 $ 32,573
Buildings and improvements 247,873 175,473
Equipment, furniture and fixtures 354,344 280,780
Leasehold improvements 59,085 40,901
- --------------------------------------------------------------------------------
706,515 529,727
Less accumulated depreciation and amortization 207,548 167,425
- --------------------------------------------------------------------------------
$498,967 $362,302
================================================================================
INTANGIBLE ASSETS
Patents and trademarks $129,610 $121,149
Licenses 58,040 47,924
Purchased technologies 89,004 82,850
Excess of cost over net assets acquired 115,638 120,673
Other intangibles 13,768 13,547
- --------------------------------------------------------------------------------
406,060 386,143
Less accumulated amortization 92,714 66,381
- --------------------------------------------------------------------------------
$313,346 $319,762
================================================================================
ACCRUED EXPENSES
Payroll and related liabilities $ 40,547 $ 41,920
Other 120,689 54,987
- --------------------------------------------------------------------------------
$161,236 $ 96,907
================================================================================
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
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note E continued to Note H)
outstanding under these credit facilities were 2.7 billion yen (approximately
$21 million at December 31, 1997) and were borrowed at rates of approximately
1%. During 1997, approximately $194 million of receivables were discounted
through promissory notes compared to $130 million during 1996. At December 31,
1997, approximately $50 million of receivables were discounted at average
interest rates of approximately 1.6%; thus, the net availability under these
credit lines was $10 million.
During July 1997, the Company borrowed 6 billion yen (approximately $46 million
at December 31, 1997) under a fixed interest rate (2.22%) financing arrangement
with a syndicate of Japanese banks. The borrowings are payable in 2002.
Interest paid, including interest paid under capital leases and mortgage loans,
but excluding interest paid on a patent litigation judgment (in 1995), amounted
to $19 million in 1997, $13 million in 1996, and $6 million in 1995.
NOTE F -- LEASES
Rent expense amounted to $37 million in 1997, $22 million in 1996 and $15
million in 1995. These amounts include rent expense paid to related parties of
$1 million during each of 1997, 1996 and 1995.
Future minimum rental commitments as of December 31, 1997 under noncancelable
capital and operating lease agreements are as follows:
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
33
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 80,287 50,091 (12,770)
- --------------------------------------------------------------------------------
$258,668 $303,330 $ 62,678
================================================================================
The related provision for income taxes consisted of:
Year Ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $ 108,444 $ 116,191 $ 67,617
State 14,567 9,108 6,615
Foreign 20,010 22,686 15,375
- --------------------------------------------------------------------------------
143,021 147,985 89,607
================================================================================
Deferred:
Federal (30,123) 4,175 3,759
State (5,648) 522 606
Foreign (8,996) (16,446) (12,875)
- --------------------------------------------------------------------------------
(44,767) (11,749) (8,510)
================================================================================
$ 98,254 $ 136,236 $ 81,097
================================================================================
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 $ 90,534 $ 106,166 $ 21,938
State income taxes, net of federal benefit 7,760 8,778 4,706
Effect of foreign taxes (13,732) 3,641 1,925
Non-deductible merger-related expenses and
purchased research and development 14,957 19,902 53,510
Other, net (1,265) (2,251) (982)
- --------------------------------------------------------------------------------
$ 98,254 $ 136,236 $ 81,097
================================================================================
F-17
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note H continued to Note J)
Significant components of the Company's deferred tax assets and liabilities at
December 31 consisted of:
(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 25 million shares of
preferred stock in one or more series and to fix the powers, designations,
preferences and relative, participating, option or other rights thereof,
including dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences and the number of shares constituting any series,
without any further vote or action by the Company's stockholders. At December
31, 1997, the Company had no shares of preferred stock outstanding.
COMMON STOCK: The Company is authorized to issue 300 million shares of common
stock, $.01 par value per share. Holders of common stock are entitled to one
vote per share. Holders of common stock are entitled to receive dividends when
and if declared by the Board of Directors and to share ratably in the assets of
the Company legally available for distribution to its stockholders in the event
of liquidation. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The holders of common stock do not have
cumulative voting rights. The holders of a majority of the shares of common
stock can elect all of the Directors and can control the management and affairs
of the Company.
The Company is authorized to purchase on the open market up to approximately 20
million shares of the Company's common stock. Purchases will be made at
prevailing prices as market conditions and cash availability warrant. Stock
repurchased under the Company's systematic plan will be used to satisfy its
obligations pursuant to employee benefit and incentive plans. During 1997, the
Company repurchased approximately
F-18
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
35
3.5 million shares of its common stock at an aggregate cost of $188 million.
Prior to 1997, a total of 6.5 million shares of the Company's common stock was
repurchased under the program.
As part of the stock repurchase program, the Company has been selling European
equity put options to an independent broker-dealer. Each option, if exercised,
obligates the Company to purchase from the broker-dealer a specified number of
shares of the Company's common stock at a predetermined exercise price. The put
options are exercisable only on the first anniversary of the date the options
were sold. Proceeds are recorded as a reduction to the cost of the Company's
treasury stock. During 1996, the Company sold European put options for 600,000
shares and received proceeds of approximately $3 million. The put options for
these 600,000 shares expired during 1997. During 1997, the Company sold put
options for 329,000 shares and received proceeds of approximately $2 million.
Repurchase prices relating to put options outstanding at December 31, 1997
range from $55 per share to $56 per share. The Company's contingent obligation
to repurchase shares upon exercise of the outstanding put options approximated
$18 million at December 31, 1997.
NOTE J -- STOCK OWNERSHIP PLANS
EMPLOYEE AND DIRECTOR STOCK OWNERSHIP PLANS
Boston Scientific's 1992 and 1995 Long-Term Incentive Plans provide for the
issuance of up to 20 million shares of common stock. The terms of these two
plans are similar. The plans cover officers, employees and consultants of and to
the Company and provide for the grant of various incentives, including
qualified and non-qualified options, stock grants, share appreciation rights
and performance awards. Options granted to purchase shares of common stock are
either immediately exercisable or exercisable in installments as determined by
an appointed committee consisting of two or more non-employee directors
(Committee), and, in the case of any qualified options, expire within ten years
from date of grant. In the case of qualified options, if an employee owns more
than 10% of the voting power of all classes of stock, the option granted will be
at 110% of the fair market value of the Company's common stock on the date of
grant, and will expire over a period not to exceed five years.
The Committee may also make stock grants in which shares of common stock may be
issued to officers, employees and consultants at a purchase price less than fair
market value. The terms and conditions of such issuances, including whether
achievement of individual or Company performance targets is required for the
retention of such awards, are determined by the Committee. The Committee may
also issue shares of common stock and/or authorize cash awards under the
incentive plans in recognition of the achievement of long-term performance
objectives established by the Committee. Stock grants for 7,500 shares, 1,000
shares and 29,000 shares were issued to employees during 1997, 1996 and 1995,
respectively.
Boston Scientific's 1992 Non-Employee Directors' Stock Option Plan provides for
the issuance of up to 100,000 shares of common stock and authorizes the
automatic grant to outside directors of options to acquire 2,000 shares of
common stock generally on the date of each annual meeting of the Stockholders
of the Company. Options under this plan are exercisable ratably over a
three-year period and expire ten years from the date of grant.
Shares reserved for future issuance under all of the Company's plans totaled
approximately 24 million at December 31, 1997.
If the Company had elected to recognize compensation expense for the granting
of options under the aforementioned stock option plans based on the fair values
at the grant dates consistent with the methodology prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation", net income and earnings per share
would have been reported as the following pro forma amounts:
(In thousands, Year Ended December 31,
except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
Net income (loss)
As reported $ 139,334 $ 167,094 $ (18,419)
Pro forma 111,908 151,820 (24,901)
- --------------------------------------------------------------------------------
Earnings (loss) per common share -
assuming dilution
As reported $ 0.70 $ 0.84 $ (0.10)
Pro forma 0.56 0.76 (0.13)
- --------------------------------------------------------------------------------
The weighted average grant-date fair value of options granted during 1997, 1996
and 1995, calculated using the Black-Scholes options pricing model, is $18.16,
$14.41 and $10.12, respectively.
The fair value of the stock options used to calculate the pro forma net income
and earnings per share amounts above is estimated using the Black-Scholes
options pricing model with the following weighted average assumptions:
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 670,000 341,000 142,000
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
36
Notes to Consolidated Financial Statements
(Note J continued to Note L)
Information related to stock options at December 31 under the aforementioned
stock ownership plans is as follows:
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 14,539 $ 22.84 14,699 $ 16.55 13,562 $ 11.67
Granted 5,358 49.40 3,327 41.04 4,430 27.69
Exercised (2,553) 17.95 (2,974) 12.46 (2,677) 10.83
Canceled (741) 37.15 (513) 20.72 (616) 14.16
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31 16,603 31.51 14,539 22.84 14,699 16.55
=======================================================================================================
Exercisable at December 31 6,115 $ 18.15 5,392 $ 15.85 5,973 $ 13.51
=======================================================================================================
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
- ---------------------------------------------------------------------------------
$00.00-15.00 4,401 5.62 $10.76 3,144 $10.58
15.01-30.00 4,240 5.95 24.45 2,307 21.85
30.01-45.00 2,885 8.50 40.60 606 39.87
45.01-60.00 4,913 9.33 49.68 45 51.99
60.01-75.00 164 9.33 66.99 13 62.43
- ---------------------------------------------------------------------------------
16,603 7.34 $31.51 6,115 $18.15
=================================================================================
STOCK PURCHASE PLAN
Boston Scientific's 1992 Employee Stock Purchase Plan (Stock Purchase Plan)
provides for the granting of options to purchase up to 1.5 million shares of
the Company's common stock to all eligible employees. Under the Stock Purchase
Plan, each eligible employee is granted, at the beginning of each period
designated by the Committee as an offering period, an option to purchase a
number of shares equal to not more than 10% of the employee's eligible
compensation divided by 85% of the fair market value of the Company's common
stock as of the beginning of that offering period. Such options may be exercised
only to the extent of accumulated payroll deductions at the end of the offering
period, at a purchase price equal to 85% of the fair market value of the
Company's common stock at the beginning or end of each offering period,
whichever is less.
During 1997, approximately 120,000 shares were issued at prices ranging from
$46.909 to $48.663 per share. During 1996, approximately 120,000 shares were
issued at prices ranging from $36.125 to $39.419 per share, and, during 1995,
approximately 133,000 shares were issued at prices ranging from $13.60 to
$21.463 per share. At December 31, 1997, there were approximately 970,000
shares available for future issuance.
F-20
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
37
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) $139,334 $167,094 $ (18,419)
================================================================================
Weighted average
shares outstanding 194,573 193,509 190,787
================================================================================
Net income (loss) per
common share $ 0.72 $ 0.86 $ (0.10)
================================================================================
ASSUMING DILUTION:
Net income (loss) $139,334 $167,094 $ (18,419)
================================================================================
Weighted average
shares outstanding 194,573 193,509 190,787
Net effect of dilutive
put options 14
Net effect of dilutive
stock options 5,301 5,844
- --------------------------------------------------------------------------------
Total 199,888 199,353 190,787
================================================================================
Net income (loss) per
common share $ 0.70 $ 0.84 $ (0.10)
================================================================================
At December 31, 1997, approximately 5 million stock options were not included in
the diluted computation of earnings per share because they would have been
antidilutive.
NOTE L -- COMMITMENTS AND CONTINGENCIES
Beginning in 1993, Schneider (Europe) AG and Schneider (USA) Inc., subsidiaries
of Pfizer, Inc., alleged that the Company's Synergy (TM) products infringe one
of their patents. On May 13, 1994, the Company filed a lawsuit against them in
the U.S. District Court for the District of Massachusetts seeking a declaratory
judgment that this patent is invalid and that the Company's Synergy products do
not infringe the patent. The Company subsequently amended its complaint to seek
a declaratory judgment that the patent is unenforceable. The Schneider companies
filed counterclaims against the Company, alleging the Company's willful
infringement of the patent and seeking monetary and injunctive relief. In
October 1997, the District Court granted the Company's motion for summary
judgment on noninfringement, and ruled that the Company cannot litigate the
issues of validity and enforceability, which had previously been litigated by
SCIMED Life Systems, Inc. (SCIMED), the Company's subsidiary. Both parties have
filed notices of appeal. The Company ceased marketing its Synergy catheters in
August 1996.
On May 31, 1994, SCIMED filed a suit for patent infringement against Advanced
Cardiovascular Systems, Inc. (ACS), alleging willful infringement of two of
SCIMED's U.S. patents by ACS's FLOWTRACK-40 (TM) and RX ELIPSE (TM) PTCA
catheters. On November 17, 1995, SCIMED filed a suit for patent infringement
against ACS, alleging willful infringement of three of SCIMED's U.S. patents by
the ACS RX LIFESTREAM (TM) PTCA catheter. Both suits were filed in the U.S.
District Court for the Northern District of California seeking monetary and
injunctive relief. The cases were sent to consolidated arbitration for a
threshold determination of one issue covered by the November 27, 1991 settlement
agreement between the parties. On March 14, 1997, the arbitration panel reached
a final determination in the consolidated arbitration. Pursuant to this
determination, the Company is continuing its action as to the ELIPSE product and
has dismissed the actions as to the FLOWTRACK and LIFESTREAM products. ACS has
answered, denying the allegations of the complaint. In January 1998, the Company
moved to add the ACS RX MULTILINK (TM) (stent delivery system) to its complaint.
Trial is scheduled to begin in late 1998 or early 1999.
SCIMED has also accused ACS's RX MULTILINK HP (TM) stent delivery system
and ACS's RX ROCKET (TM) and RX COMET (TM) PTCA catheters of infringing several
SCIMED patents. These claims, as well, are subject to arbitration relating to a
threshold determination under the November 27, 1991 settlement agreement. The
hearing in the combined arbitration on these products is scheduled to begin on
May 11, 1998. If SCIMED is successful in the arbitration, it intends immediately
to commence patent infringement litigation to enforce its rights under the
relevant patents against ACS.
On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,
alleging willful infringement of four U.S. patents licensed to ACS by SCIMED'S
EXPRESS PLUS (TM) and EXPRESS PLUS II (TM) PTCA catheters. Suit was filed in the
U.S. District Court for the Northern District of California and seeks monetary
and injunctive relief. SCIMED has answered, denying the allegations of the
complaint. Trial is scheduled to begin in November 1998.
On March 12, 1996, ACS filed two suits for patent infringement against SCIMED,
alleging in one case the willful infringement of a U.S. patent by SCIMED's
EXPRESS PLUS, EXPRESS PLUS II and LEAP (TM) EXPRESS PLUS PTCA catheters,
and in the other case the willful infringement of a U.S. patent by SCIMED's
BANDIT (TM) PTCA catheter. The suits were filed in the U.S. District Court for
the Northern District of California and seek monetary and injunctive relief.
SCIMED has answered, denying the allegations of the complaint. Trial is
scheduled to begin in November 1998 as to the EXPRESS PLUS products and January
1999 as to the BANDIT product.
On December 15, 1995, the Company and SCIMED filed a suit for restraint of
trade, unfair competition and conspiracy to monopolize against ACS and the
Schneider companies, alleging certain violations of state and federal antitrust
laws aris-
F-21
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note L continued)
ing from the improper prosecution, enforcement and cross-licensing of U.S.
patents relating to rapid exchange balloon dilatation angioplasty catheters.
Suit was filed in the U.S. District Court for the District of Massachusetts and
seeks monetary, declaratory and injunctive relief. In October 1997, the court
granted the defendants' motion to dismiss. The Company has filed a notice of
appeal.
On September 16, 1997, ACS filed a suit for patent infringement against the
Company and SCIMED, alleging that SCIMED's REBEL(TM) PTCA catheter infringes
two U.S. patents licensed to ACS and one U.S. patent owned by ACS. Suit was
filed in the U.S. District Court for the Northern District of California seeking
monetary damages, injunctive relief and that the patents be adjudged valid,
enforceable and infringed. The Company and SCIMED have answered, denying the
allegations in the complaint.
On November 9, 1994, Target Therapeutics, Inc. (Target) filed a lawsuit in the
U.S. District Court for the Northern District of California alleging that
SCIMED's VENTURE(R) and VENTURE II(TM) microcatheters and Cordis Corporation's
(Cordis) TRANSIT(R) and RAPIDTRANSIT(TM) microcatheters infringe a patent
assigned to Target. On May 2, 1996, the District Court entered an order granting
a preliminary injunction to Target prohibiting SCIMED and Cordis from marketing
or selling the accused products. On July 1, 1996, the Court of Appeals for the
Federal Circuit stayed the preliminary injunction pending a decision on SCIMED's
appeal of the District Court's order. Upon the recent merger between the Company
and Target, the lawsuit was dismissed as to the Company. Subsequently, the Court
of Appeals vacated the preliminary injunction. The lawsuit was dismissed as to
Cordis pursuant to a Settlement Agreement signed January 9, 1998.
On October 3, 1995, Cordis Endovascular, Inc. and Cordis filed a suit alleging
patent infringement against Target Therapeutics, Inc. (Target) alleging that
Target's DASHER(R) guidewires, FASGUIDE(R) catheters and TRACKER(R) and
FASTRACKER(R) guide microcatheters infringe three patents owned by Cordis. The
lawsuit was dismissed pursuant to a Settlement Agreement signed January 9, 1998.
On April 5, 1995, C.R. Bard, Inc. (Bard) filed a lawsuit in the U.S. District
Court for the District of Delaware alleging that certain Company products,
including the Company's MaxForce TTS(TM) catheter, infringe a patent assigned
to Bard. The lawsuit seeks a declaratory judgment that the Company has infringed
the Bard patent, preliminary and permanent injunctions enjoining the
manufacture, use or sale of the MaxForce TTS catheter or any other infringing
product, monetary damages and expenses. After a jury trial in June 1997, the
jury returned a verdict finding that the Company infringed the Bard patent and
awarded damages to Bard in the amount of $10.8 million. No judgment has been
entered pending trial on the Company's claim that the patent was obtained by
inequitable conduct. The Company intends to appeal any judgment entered on the
jury verdict. The Company no longer markets the accused devices.
On February 28, 1997, C.R. Bard, Inc. (Bard) filed a suit for patent
infringement against SCIMED alleging that SCIMED's WAVE(TM) and SURPASS(TM)
catheters are infringing a patent assigned to Bard. The suit was filed in the
U.S. District Court for the District of New Jersey seeking monetary and
injunctive relief. The lawsuit was dismissed pursuant to a Settlement Agreement
signed December 4, 1997.
On March 7, 1996, Cook, Inc. (Cook) filed suit in the Regional Court, Munich
Division for Patent Disputes, in Munich, Germany against MinTec, Inc. Minimally
Invasive Technologies alleging that the Cragg EndoPro(TM) System I and
Stentor(TM) endovascular device infringe a certain Cook patent. Since the
purchase of the assets of the Endotech/MinTec companies by the Company, the
Company has assumed control of the litigation. The defendant answered, denying
the allegations. The court has requested that an expert be named to provide the
court technical advice, and the parties have submitted suggestions; an expert
has not yet been chosen.
On March 25, 1996, Cordis filed a suit for patent infringement against SCIMED,
alleging the infringement of five U.S. patents by SCIMED's LEAP(TM) balloon
material, used in certain SCIMED catheter products, including SCIMED's BANDIT
and EXPRESS PLUS catheters. The suit was filed in the U.S. District Court for
the District of Minnesota and seeks monetary and injunctive relief. SCIMED has
answered, denying the allegations of the complaint. Trial is scheduled for June
1998.
On March 13, 1997, the Company (through its subsidiaries) filed suits in The
Netherlands and the United Kingdom, and on March 17, 1997 filed suit in France,
seeking a declaration of noninfringement for the Company's LEAP balloon in
relation to a European patent owned by Cordis. The United Kingdom suit has been
dismissed for lack of controversy and the Netherlands suit has been withdrawn. A
decision in the suit in France is expected late in 1998.
On July 18, 1997, Cordis filed a cross border suit in The Netherlands against
various subsidiaries of the Company, alleging that the LEAP balloon infringes
one of Cordis' European patents. In this action, Cordis requested expedited
relief, including an injunction, covering The Netherlands, Germany, France, the
United Kingdom and Italy. The court posed certain questions to the European
Patent Office (EPO). A response is expected in April 1998. The Company appealed
the court's decision to present questions to the EPO. A hearing on the appeal is
set for June 16, 1998.
On March 27, 1997, SCIMED filed suit for patent infringement against Cordis
alleging willful infringement of several SCIMED U.S. patents by Cordis'
TRACKSTAR 14(TM), TRACKSTAR 18(TM), OLYMPIX(TM), POWERGRIP(TM), SLEEK(TM),
SLEUTH(TM), THOR(TM), TITAN(TM) and VALOR(TM) catheters. The suit was filed in
the U.S. District Court for the
F-22
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
39
District of Minnesota, Fourth District, seeking monetary and injunctive relief.
The parties have agreed to add Cordis' CHARGER(TM) and HELIX(TM) catheters to
the suit. Cordis has answered, denying the allegations of the complaint. Trial
is scheduled for November 1998.
On December 13, 1996, the Superior Court of the State of Arizona granted the
motion of Impra, Inc. (Impra) to add the Company as an additional defendant in
Impra's case against Endomed, Inc. (Endomed). Impra (now a subsidiary of C.R.
Bard, Inc.) alleges that Endomed misappropriated certain Impra trade secrets and
that the Company acted in concert with Endomed to utilize the technology. On the
same date, Endomed and the Company were preliminarily enjoined, among other
things, from any further use or disclosure of the technology. The Company has
answered, denying the allegations of the complaint. Trial is scheduled to begin
in April 1998.
On March 13, 1997, the Company (through its subsidiaries) filed suits against
Johnson & Johnson Company (Johnson & Johnson) (through its subsidiaries) in The
Netherlands, the United Kingdom and Belgium, and on March 17, 1997 filed suit in
France, seeking a declaration of noninfringement for the NIR(TM) stent relative
to two European patents licensed to Ethicon, Inc. (Ethicon), a Johnson & Johnson
subsidiary, as well as a declaration of invalidity with respect to those
patents. Trial begins in the United Kingdom on March 23, 1998. On March 18,
1997, the Company (through its subsidiary) filed a similar suit in Germany, but
seeking only a declaration of noninfringement for the NIR stent relative to the
two patents. On March 20, 21 and 22, 1997, the Company (through its
subsidiaries) filed additional suits against Johnson & Johnson (through its
subsidiaries) in Sweden, Italy and Spain, respectively, seeking a declaration of
noninfringement for the NIR stent relative to one of the European patents
licensed to Ethicon and a declaration of invalidity in relation to that patent
(in Italy and Spain only). Ethicon and other Johnson & Johnson subsidiaries
filed a cross-border suit in The Netherlands on March 17, 1997, alleging that
the NIR stent infringes one of the European patents licensed to Ethicon. In this
action, the Johnson & Johnson entities requested relief, including provisional
relief (a preliminary injunction), covering Austria, Belgium, France, Greece,
Italy, The Netherlands, Norway, Spain, Sweden, Switzerland and the United
Kingdom. The Johnson & Johnson entities thereafter filed a similar cross-border
proceeding in The Netherlands with respect to the second European patent
licensed to Ethicon. Johnson & Johnson subsequently withdrew its request for
cross-border relief in the United Kingdom. In October 1997, Johnson & Johnson's
request for provisional cross-border relief on both patents was denied by the
Dutch court, on the ground that it is "very likely" that the NIR stent will be
found not to infringe the patents. Johnson & Johnson has appealed this decision
with respect to one of the patents. A hearing on Johnson & Johnson's appeal of
the denial of relief is expected to be held on March 10, 1998; a hearing on the
merits is expected late in 1998.
On May 6, 1997, Ethicon Endosurgery, Inc. sued the Company in Dusseldorf,
Germany, alleging that its NIR stent infringes one of Ethicon's patents. A
hearing is scheduled for June 19, 1998.
On March 13, 1997, the Company filed a Motion to Intervene in Johnson & Johnson
Interventional Systems Co. et al. v. Cook, Incorporated et al., an action in the
U.S. District Court for the Southern District of Indiana. The motion seeks
intervention for the purpose of modifying the present protective order to
direct the Clerk of Court to retain, and the parties and their counsel not to
destroy, materials and testimony assembled in that action. By agreement, the
Company is receiving access to the documents and materials.
On June 16, 1997, the Company and SCIMED filed a suit against Johnson & Johnson
and related entities in the U.S. District Court for the District of
Massachusetts seeking a declaratory judgment of noninfringement for the NIR
stent relative to two patents licensed to Johnson & Johnson and that the two
patents are invalid and unenforceable. The Company subsequently amended its
complaint to add a third patent. In October 1997, Johnson & Johnson's motion to
dismiss the suit was denied. Johnson & Johnson has answered, denying the
allegations of the complaint, and counterclaiming for patent infringement. This
action has been consolidated with the Delaware action described below.
On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR stent infringes certain
Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court
of Canada seeking a declaration of infringement, monetary damages and
injunctive relief. The Company has answered, denying allegations of the
complaint.
On October 22, 1997, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the importation and use of the NIR stent
infringes two patents owned by Cordis. The suit was filed in the U.S. District
Court for the District of Delaware seeking monetary damages, injunctive relief
and that the patents be adjudged valid, enforceable and infringed. The Company
and SCIMED have answered the complaint, denying Cordis' allegations. The
Massachusetts case described above has been consolidated with this action.
The Company is involved in various other lawsuits from time to time. In
management's opinion, the Company is not currently involved in any legal
proceedings other than those specifically identified above which, individually
or in the aggregate, could have a material effect on the financial condition,
operations or cash flows of the Company.
The Company believes that it has meritorious defenses against claims that it has
infringed patents of others. However, there can be no assurance that the Company
will prevail in any par-
F-23
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note L continued to Note O)
ticular case. An adverse outcome in one or more cases in which the Company's
products are accused of patent infringement could have a material adverse effect
on the Company.
During 1997, the Company recorded approximately $34 million of
litigation-related reserves to cover costs of defense and settlement, and
unfavorable outcomes. The reserves are included in selling, general and
administrative expenses.
Further, product liability claims may be asserted in the future relative to
events not known to management at the present time. The Company has insurance
coverage which management believes is adequate to protect against product
liability losses as could otherwise materially affect the Company's financial
position.
NOTE M -- BUSINESS COMBINATIONS
In 1997, the Company increased to approximately 25% its voting ownership in
Medinol, Ltd. (Medinol), a developer of innovative technologies for
cardiovascular applications. Accordingly, the Company has retroactively applied
the equity method of accounting to account for this investment which had been
accounted for under the cost method since 1995, the year of the Company's
original investment. This accounting had the effect of increasing the amount of
the previously reported charges for purchased research and development and
reducing net earnings in 1995 by $35 million, or approximately $0.18 per share.
The effect of this change in 1996 and 1997 was not significant.
In 1997, Boston Scientific consummated its merger with Target. The acquisition
is accounted for as a pooling-of-interests (see Note A), thus, the combined
consolidated financial statements serve as the basis for historical financial
statements of Boston Scientific. Combined and separate results of Boston
Scientific and Target for 1996 and 1995 are as follows:
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
41
The activity impacting the accrual related to these charges during 1997 and
1996, net of reclassifications made by management based on available
information, is summarized in the table below:
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 $ 403,851 $ 18,461 $ 1,835,116
Export sales 6,446 30,720 37,166
Transfers between areas 430,993 207,302 $(638,295)
- -----------------------------------------------------------------------------------------------------------------------------------
1,513,731 574,534 403,851 18,461 (638,295) 1,872,282
Operating income without special charges 306,992 70,800 189,549 (70,233) 497,108
Operating income with special charges 235,639 (12,326) 149,662 (103,983) 268,992
Identifiable assets 1,599,263 683,669 360,942 17,166 (693,233) 1,967,807
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Direct sales to unaffiliated customers $ 924,205 $ 270,301 $ 214,482 $ 6,306 $ 1,415,294
Export sales 105,884 30,060 135,944
Transfers between areas 224,315 116,970 $(341,285)
- -----------------------------------------------------------------------------------------------------------------------------------
1,254,404 417,331 214,482 6,306 (341,285) 1,551,238
Operating income without special charges 302,118 77,622 118,985 (43,213) 455,512
Operating income with special charges 198,672 39,727 117,985 (43,213) 313,171
Identifiable assets 1,434,777 410,331 209,997 5,956 (476,016) 1,585,045
- -----------------------------------------------------------------------------------------------------------------------------------
1995
Direct sales to unaffiliated customers $ 772,986 $ 189,631 $ 111,266 $ 1,073,883
Export sales 97,471 19,467 116,938
Transfers between areas 148,852 112,620 $(261,472)
- -----------------------------------------------------------------------------------------------------------------------------------
1,019,309 321,718 111,266 (261,472) 1,190,821
Operating income without special charges 220,039 64,558 65,473 (25,565) 324,505
Operating income with special charges (2,053) 21,761 57,968 (25,565) 52,111
Identifiable assets 1,057,221 200,687 120,932 (219,395) 1,159,445
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
42
FIVE-YEAR SELECTED FINANCIAL DATA
(In thousands, except per share data)
Year Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Net sales $ 1,872,282 $ 1,551,238 $ 1,190,821 $932,969 $779,894
Gross profit 1,321,903 1,123,400 848,074 638,872 535,243
Selling, general and administrative expenses 688,174 515,908 391,548 311,296 333,285
Royalties 22,177 17,061 26,233 25,682 24,473
Research and development expenses 167,194 134,919 105,788 86,320 69,045
Purchased research and development 29,475 110,000 67,946
Merger-related charges 145,891 32,341 204,448
Total operating expenses 1,052,911 810,229 795,963 423,298 426,803
Operating income 268,992 313,171 52,111 215,574 108,440
Income (loss) before cumulative effect of
change in accounting 160,414 167,094 (18,419) 142,274 73,731
Cumulative effect of change in accounting (net-of-tax) (21,080)
Net income (loss) $139,334 $ 167,094 $ (18,419) $142,274 $ 73,731
Income (loss) per common share before cumulative
effect of change in accounting:
Basic $ 0.82 $ 0.86 $ (0.10) $ 0.76 $ 0.40
Assuming dilution 0.80 0.84 (0.10) 0.75 0.39
Net income (loss) per common share:
Basic $ 0.72 $ 0.86 $ (0.10) $ 0.76 $ 0.40
Assuming dilution 0.70 0.84 (0.10) 0.75 0.39
Weighted average shares outstanding-assuming dilution 199,888 199,353 190,787 189,563 187,283
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
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 256,010 $ 335,001 $ 344,609 $ 475,255 $362,816
Total assets 1,967,807 1,585,045 1,159,445 1,114,433 840,104
Commercial paper 423,250 212,500
Bank obligations-short-term 23,958 28,056 57,520 88,948 57,141
Long-term debt, net of current portion 46,325 4,162 16,800 3,671
Stockholders' equity 986,232 995,115 807,917 794,190 601,844
Book value per common share $ 4.93 $ 4.99 $ 4.23 $ 4.19 $ 3.21
F-26
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
43
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
BOSTON SCIENTIFIC CORPORATION
We have audited the accompanying consolidated balance sheets of Boston
Scientific Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Boston Scientific
Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As more fully described in Note B, the Company changed its accounting policy to
conform to the consensus reached by the FASB Emerging Issues Task Force on its
Issue No. 97-13.
/S/ Ernst & Young LLP
- --------------------------------
Boston, Massachusetts
February 20, 1998
F-27
BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
44
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three Months Ended March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Net sales $430,531 $ 473,749 $474,773 $493,229
Gross profit 309,474 342,294 338,866 331,269
Operating income (loss) 112,915 (18,972) 124,351 50,698
Income (loss) before cumulative effect of
change in accounting 75,436 (26,896) 88,405 23,469
Net income (loss) 75,436 (26,896) 88,405 2,389
Net income (loss) per common share -
assuming dilution $ 0.38 $ (0.14) $ 0.44 $ 0.01
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net sales $343,553 $ 379,237 $395,788 $432,660
Gross profit 251,598 277,851 284,564 309,387
Operating income 38,708 41,968 109,123 123,372
Net income 2,190 13,089 71,234 80,581
Net income per common share -
assuming dilution $ 0.01 $ 0.07 $ 0.36 $ 0.40
During the second and fourth quarters of 1997, the Company recorded
merger-related charges and purchased research and development totaling $158
million and $17 million, respectively. In addition, during the fourth quarter
of 1997, the Company recorded inventory write-downs ($19 million),
litigation-related reserves ($34 million) and implemented EITF No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology Transformation," the effect of which ($31 million) is reflected as a
cumulative change in accounting. During the first and second quarters of 1996,
the Company recorded merger-related charges and purchased research and
development totaling $69 million and $73 million, respectively.
All earnings per share amounts presented have been restated to conform to SFAS
No. 128 "Earnings per Share" requirements (see Note B).
Market for the Company's Common Stock and Related Matters (unaudited)
The following table shows the market range for the Company's common stock based
on reported sales prices on the New York Stock Exchange.
High Low
- --------------------------------------------------------------------------------
1997
First Quarter $ 71.500 $ 58.625
Second Quarter 62.938 41.000
Third Quarter 78.438 53.250
Fourth Quarter 59.750 41.000
High Low
- --------------------------------------------------------------------------------
1996
First Quarter $ 51.625 $ 39.875
Second Quarter 47.375 37.750
Third Quarter 57.625 39.625
Fourth Quarter 61.500 52.875
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
45
EXECUTIVE OFFICERS AND DIRECTORS CORPORATE HEADQUARTERS STOCKHOLDER INFORMATION
- ----------------------------------------- ---------------------------------- ---------------------------------------
John E. Abele Boston Scientific Corporation Stock Listing
Director, Founder Chairman One Boston Scientific Place Boston Scientific Corporation
Natick, MA 01760-1537 common stock is traded on the
+* Charles J. Aschauer, Jr. 508-650-8000 NYSE under the symbol "BSX".
Director, Retired Executive 508-647-2200 (Investor Relations
Vice President and Director of Facsimile) TRANSFER AGENT
Abbott Laboratories www.bsci.com Inquiries concerning the transfer
or exchange of shares, lost stock
+ Randall F. Bellows REGIONAL HEADQUARTERS certificates, duplicate mailings
Director, Retired Executive Vice ---------------------------------- or changes of address should be
President of Cobe Laboratories, Inc. directed to the Company's
Boston Scientific Argentina S.A. Transfer Agent at:
Michael Berman Buenos Aires, Argentina
President - Scimed Life Systems, Inc. BANKBOSTON N.A.
and Group President - Boston Scientific c/o BostonEquiserve, L.P.
Cardiology Businesses International B.V. Post Office Box 8040
Paris, France Boston, MA 02266-8040
Lawrence C. Best 781-575-3100
Senior Vice President - Boston Scientific Asia www. Equiserve.com
Finance & Administration and Chief Pacific Pte. Ltd.
Financial Officer Singapore INDEPENDENT AUDITORS
Ernst & Young LLP
Joseph A. Ciffolillo Boston Scientific Japan K.K. Boston, Massachusetts
Director, Retired Executive Vice Tokyo, Japan
President and Chief Operating Officer ANNUAL MEETING
of Boston Scientific Corporation TECHNOLOGY CENTERS The annual meeting for shareholders
---------------------------------- will take place on Tuesday, May 5,
Philip P. Le Goff 1998, beginning at 10:00 a.m. at
Senior Vice President and Group San Jose, CA, USA BankBoston, Corporate Headquarters,
President - Vascular Businesses Miami, FL, USA 100 Federal Street, Boston.
Spencer, IN, USA
James M. Corbett Natick, MA, USA INVESTOR INFORMATION REQUESTS
President, Quincy, MA, USA Investors, shareholders and security
Boston Scientific International Watertown, MA, USA analysts seeking information about
Maple Grove, MN, USA the Company should call Investor
+* Joel L. Fleishman Oakland, NJ, USA Relations at (508) 650-8555 or refer
Director, President of The Atlantic Redmond, WA, USA to the Company's website at
Philanthropic Service Company, Inc. Galway, Ireland www.bsci.com.
and Professor of Law and Public Tel Aviv, Israel
Policy, Duke University A copy of Form 10-K filed with the
Securities and Exchange Commission
* Lawrence L. Horsch may be obtained upon written
Director, Chairman of Eagle request to the Company.
Management & Financial Corp.
Address requests to:
Paul A. LaViolette Investor Relations
Senior Vice President and Group Boston Scientific Corporation
President - Nonvascular Businesses One Boston Scientific Place
Natick, MA 01760-1537
C. Michael Mabrey 508-650-8555
Senior Vice President - Operations 508-647-2200 (Facsimile)
Robert G. MacLean
Senior Vice President -
Human Resources
* N.J. Nicholas, Jr.
Director, Private Investor
Peter (Pete) M. Nicholas
Director, Founder, Chief Executive
Officer and Chairman of the Board
Arthur L. Rosenthal
Senior Vice President and
Chief Development Officer
Paul W. Sandman
Senior Vice President,
Secretary and General Counsel
Dale A. Spencer
Director, Former Executive
Vice President of Boston
Scientific Corporation
* Member of the Audit Committee
+ Member of the Compensation Committee
46
Boston
Scientific
Boston Scientific Corporation
One Boston Scientific Place
Natick, MA 01760-1537
508.650.8000
www.bsci.com
(C) 1998 Boston Scientific Corporation
1127-AR-98
Global Resources