Boston Scientific

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Medical devices

Boston Scientific - 10-Q quarterly report FY

Text size:

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

-------------------

FORM 10-Q

/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT

OF 1934

For the quarterly period ended: June 30, 1996

Commission file number: 1-11083

BOSTON SCIENTIFIC CORPORATION

-----------------------------

(Exact name of registrant as specified in its charter)

DELAWARE 04-2695240

-------- ----------

(State or other jurisdiction (I.R.S. Employer

of incorporation or organization) Identification No.)

One Boston Scientific Place, Natick, Massachusetts 01760-1537

- -------------------------------------------------- ----------

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (508) 650-8000

-------------

Former name, former address and former fiscal year, if changed since last

report.

Indicate by check mark whether the registrant (1) has filed all reports required

to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during

the preceding 12 months (or for such shorter period that the registrant was

required to file such reports), and (2) has been subject to such filing

requirements for the past 90 days. Yes X No ----- -----

Indicate the number of shares outstanding of each of the issuer's classes of

common stock, as of the last practicable date.

Shares Outstanding

Class as of June 30, 1996

----- -------------------

Common Stock, $.01 Par Value 177,198,169

Page 1 of 110

---

Exhibit Index on Page 28

Part I

Financial Information

Item 1. Financial Statements

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

<TABLE>

June 30, December 31,

In thousands, except share data 1996 1995

- ----------------------------------------------------------------------------------

Assets

Current assets:

Cash and cash equivalents $ 52,698 $ 117,321

Marketable securities 25,432 43,832

Trade accounts receivable, net 266,284 214,232

Inventories 190,331 148,572

Prepaid expenses and other current assets 48,581 32,688

-----------------------

Total current assets 583,326 556,645

Property, plant, equipment and leaseholds, net 287,195 256,093

Intangibles, net 295,652 137,704

Other investments and assets 91,562 149,446

-----------------------

$1,257,735 $1,099,888

=======================

</TABLE>

See notes to unaudited condensed consolidated financial statements.

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (continued)

(Unaudited)

<TABLE>

June 30, December 31,

In thousands, except share data 1996 1995

- ----------------------------------------------------------------------------------

Liabilities and Stockholders' Equity

Current liabilities:

Commercial paper $ 235,000

Bank obligations 25,724 $ 57,520

Accounts payable and accrued expenses 116,947 106,322

Accrual related to special charges 71,064 80,144

Other current liabilities 16,601 29,691

-----------------------

Total current liabilities 465,336 273,677

Long term liabilities 16,978 52,061

Commitments and contingencies

Contingent stock repurchase obligation 24,855

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, 179,101,866 shares issued at

June 30, 1996 and 179,079,298 at December 31, 1995 1,791 1,791

Additional paid-in capital 377,795 386,610

Retained earnings 440,470 417,951

Foreign currency translation adjustment (23,297) (14,739)

Unrealized gain on available-for-sale securities, net 11,935 8,833

Treasury stock, at cost - 1,903,697 shares at

June 30, 1996 and 2,425,490 shares at

December 31, 1995 (58,128) (26,296)

-----------------------

Total stockholders' equity 750,566 774,150

-----------------------

$1,257,735 $1,099,888

=======================

</TABLE>

See notes to unaudited condensed consolidated financial statements.

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

<TABLE>

Three months ended Six months ended

June 30, June 30,

In thousands, except share and per share data 1996 1995 1996 1995

- --------------------------------------------------------------------------------------------------------------

Net sales $357,188 $277,952 $679,571 $540,861

Cost of products sold 94,884 82,077 180,518 160,859

------------------------- -------------------------

Gross profit 262,304 195,875 499,053 380,002

Selling, general and administrative expenses 118,495 91,638 222,535 172,537

Research and development expenses 28,693 22,683 54,446 44,197

Royalties 3,828 7,002 7,710 14,748

Special charges 59,666 128,341 124,749

------------------------- -------------------------

210,682 121,323 413,032 356,231

------------------------- -------------------------

Operating income 51,622 74,552 86,021 23,771

Other income (expense):

Interest and dividend income 1,071 3,121 2,840 7,640

Interest expense (3,202) (2,660) (4,492) (5,381)

Other, net (1,670) 2,716 (3,690) 6,314

------------------------- -------------------------

Income before income taxes 47,821 77,729 80,679 32,344

Income taxes 24,311 28,700 58,160 47,377

------------------------- -------------------------

Net income (loss) $23,510 $49,029 $22,519 ($15,033)

========================= =========================

Primary net income (loss) per common share $0.13 $0.27 $0.13 ($0.09)

========================= =========================

Primary weighted average number of common shares 182,662,000 179,160,000 179,857,000 174,669,000

========================= =========================

Fully diluted net income (loss) per common share $0.13 $0.27 $0.12 ($0.09)

========================= =========================

Fully diluted weighted average number of common shares 182,871,000 179,543,000 182,397,000 174,669,000

========================= =========================

</TABLE>

See notes to unaudited condensed consolidated financial statements.

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholder's Equity

(Unaudited)

<TABLE>

Six Months Ended June 30, 1996

--------------------------------------------------------------------------------------------

Foreign

Common Stock Additional Currency

------------------------ Paid in Retained Translation Unrealized Treasury

Shares Issued Par Value Capital Earnings Adjustment Gain Stock Total

--------------------------------------------------------------------------------------------

(In thousands, except share data)

Balance at December 31, 1995 179,079,298 $1,791 $386,610 $417,951 $(14,739) $ 8,833 $(26,296) $774,150

Net income 22,519 22,519

Foreign currency translation

adjustment (8,558) (8,558)

Issuance of Common Stock under

options, warrants and stock purchase

plans 22,568 (635) 17,958 17,323

Purchase of Common Stock for treasury (52,313) (52,313)

Contingent stock repurchase obligation (24,855) 2,523 (22,332)

Tax benefit relating to stock option

and employee stock purchase plans 16,379 16,379

Net change in equity investments 3,102 3,102

Other 296 296

Balance at June 30, 1996 179,101,866 $1,791 $377,795 $440,470 $(23,297) $11,935 $(58,128) $750,566

</TABLE>

See notes to unaudited condensed consolidated financial statements.

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flow

(Unaudited)

<TABLE>

Six Months Ended

June 30,

In thousands 1996 1995

- -----------------------------------------------------------------------------------

Cash provided by operating activities $ 20,104 $ 32,381

Investing activities:

Purchases of property, plant, and equipment (44,872) (37,437)

Net maturities of marketable securities 18,400 22,857

Payment for purchase of Symbiosis Corporation,

net of cash acquired (153,907)

Payment for purchase of Cardiovascular Imaging

Systems, Inc., net of cash acquired (87,783)

Payment for purchase of MinTec Inc.,

net of cash acquired (71,160)

Payment for acquisition of minority interest ownership

in a subsidiary (16,513)

Net payments for other acquistions of certain technologies (3,229) (9,830)

Investments and other (3,720) (1,065)

--------------------

Cash used in investing activities (275,001) (113,258)

Financing actvities:

Net increase in commercial paper 235,000

Net payments on notes payable and capital leases (28,224) (19,393)

Proceeds from exercise of stock options, warrants

and stock purchase plans 17,323 21,480

Acquisitions of treasury stock, net of proceeds from

put options (49,790)

Tax benefit relating to stock option and employee

stock purchase plans 16,379 9,209

Other 704 1,167

--------------------

Cash provided by financing activities 191,392 12,463

Effect of foreign exchange rates on cash (1,118) (873)

--------------------

Net decrease in cash and cash equivalents (64,623) (69,287)

Cash and cash equivalents at beginning of period 117,321 269,282

--------------------

Cash and cash equivalents at end of period $ 52,698 $199,995

====================

Supplemental Schedule of Noncash Investing

and Financing Activities:

Payments due in connection with purchase of technology $ 10,000

</TABLE>

See notes to unaudited condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 1996

Note A - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have

been prepared in accordance with generally accepted accounting principles for

interim financial information and with the instructions to Form 10-Q and

Article 10 of Regulation S-X. Accordingly, they do not include all of the

information and footnotes required by generally accepted accounting principles

for complete financial statements. In the opinion of management, all

adjustments (consisting only of normal recurring accruals) considered

necessary for a fair presentation have been included. Operating results for

the three and six-month periods ended June 30, 1996 are not necessarily

indicative of the results that may be expected for the year ending December

31, 1996. For further information, refer to the consolidated financial

statements and footnotes thereto incorporated by reference in the Boston

Scientific Corporation's Annual Report on Form 10-K for the year ended

December 31, 1995.

Certain prior year's amounts have been reclassified to conform to the current

year presentation.

Note B - Acquisitions

On January 22, 1996, Boston Scientific Corporation (the Company) completed its

merger of EP Technologies, Inc. (EPT) in a stock-for-stock transaction. The

transaction, which was 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. The accompanying

unaudited condensed consolidated financial statements have been restated to

include the accounts and operations of EPT for all prior periods.

Separate results of the combining entities for the six months ended June 30,

1995 are as follows (in thousands):

<TABLE>

Combined

Boston Boston

Scientific EPT Scientific

----------------------------------

Net sales $529,729 $11,132 $540,861

Net loss $(14,048) $ (985) $(15,033)

</TABLE>

Note B - Acquisitions (continued)

On March 14, 1996, the Company acquired Symbiosis Corporation (Symbiosis),

formerly a wholly-owned subsidiary of American Home Products Corporation.

Boston Scientific purchased Symbiosis, a developer and manufacturer of

specialty medical devices, for approximately $153 million in a cash

transaction. The acquisition was accounted for using the purchase method of

accounting. Accordingly, the purchase price was allocated to the assets

acquired based on their estimated fair values. This accounting treatment

resulted in approximately $146 million of intangible assets that will be

amortized over their estimated period of benefit. Approximately $38.7 million

of the acquisition cost represented purchased research and development. The

Company also recorded a deferred tax liability of approximately $38.7 million

representing the tax effect of timing differences recorded as part of the

acquisition.

The following unaudited pro forma information presents a summary of

consolidated results of operations of the Company and Symbiosis as if the

acquisition had occurred at the beginning of 1995, with pro forma adjustments

to give effect to purchased research and development, amortization of

intangibles, reduction in interest income on acquisition financing and certain

other adjustments, together with the related tax effects:

<TABLE>

For the Six Months

Ended June 30,

1996 1995

---------------

Net sales $683,747 $573,828

Net income (loss) $ 60,826 $(53,218)

Primary net income (loss) per common share $ .34 $ (.30)

Fully diluted net income (loss) per common share $ .33 $ (.30)

</TABLE>

On May 3, 1996, Boston Scientific acquired assets from Endotech, Ltd. and

MinTec Inc., and certain related companies (Endotech/MinTec), a privately held

company dedicated to the development of stent graft technology for the repair

of diseased blood vessels. The Company purchased Endotech/MinTec's assets for

approximately $72 million in a cash transaction. The transaction, which was

accounted for under the purchase method of accounting, was financed from the

Company's available cash and borrowings under its financing arrangements (see

Notes C and D). The purchase price was allocated to the assets acquired based

on their estimated fair values. The treatment resulted in approximately $12

million of intangible assets that will be amortized over their estimated

period of benefit. Approximately $57.3 million of the acquisition cost

represented purchased research and development. The acquisition did not have

a material pro forma impact on the Company's operations.

Note C - Merger-Related Charges

In the first six months of 1996, the Company recorded special charges of

$128.3 million ($113.7 million net-of tax) which primarily related to the

merger with EPT and the acquisitions of Symbiosis and Endotech/MinTec.

Charges include $96.0 million for purchased research and development, $4.6

million in direct transaction costs, and $12.2 million of estimated costs to

be incurred in merging the separate operating businesses of EPT with

subsidiaries of the Company. 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 writedowns and other integration costs. The majority of

the remaining $15.5 million, which is primarily non-deductible for tax

purposes, represents a change in management's estimates of the merger-related

charges recorded in 1995. The change to prior year estimates relate primarily

to the costs of unwinding various contractual obligations and the

rationalization of facilities.

The special charges are determined based on formal plans approved by 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.

Note D - Credit Arrangements

At December 31, 1995, the Company had line of credit agreements with two U.S.

banks (the Credit Agreements) that provided maximum worldwide borrowings of

$71 million. On April 1, the Company increased its maximum worldwide

borrowings provided under the Credit Agreements to $121 million. The term of

the increased borrowings extended through June 7, 1996, at which time, the

Credit Agreements were terminated and replaced by a new $350 million revolving

line of credit with a syndicate of U.S. and international banks (New Credit

Agreement). Under the New Credit Agreement, the Company has the option to

borrow amounts at various interest rates, payable quarterly in arrears. The

term of the borrowings extends through June 6, 2002; use of the borrowings is

unrestricted and the borrowings are unsecured. The New Credit Agreement

requires the Company to maintain a minimum consolidated tangible net worth and

a ratio of consolidated funded debt to consolidated tangible net worth. At

June 30, 1996, the Company had no outstanding borrowings under the New Credit

Agreement.

During the second quarter of 1996, the Company initiated a commercial paper

program and borrowed $236.5 million under the program. The commercial paper

is supported by the Company's New Credit Agreement; outstanding commercial

paper reduces available borrowings under the New Credit Agreement. Proceeds

from issuing the commercial paper were used for repayment of a $100 million

short term seller-financed loan associated with the acquisition of Symbiosis,

repayment of borrowings under the Credit Agreements, and repurchase of the

Company's common stock. The remaining proceeds primarily were used for

general operating purposes. At June 30, 1996, the Company had approximately

$235 million in commercial paper outstanding with interest rates ranging from

5.60% to 5.65%.

Note E - Inventories

The components of inventory consist of the following (in thousands):

<TABLE>

June 30, December 31,

1996 1995

-----------------------

Finished goods $103,607 $ 76,531

Work-in-process 39,138 35,179

Raw materials 47,586 36,862

-------------------

$190,331 $148,572

===================

</TABLE>

Note F - Stockholders' Equity

During the second quarter of 1996, the Company resumed its program to

repurchase stock. The Board of Directors authorized the Company to purchase

on the open market up to 15,000,000 shares of the Company's common stock in

addition to the stock repurchased during 1993. Purchases will be made at

prevailing prices as market conditions and cash availability warrant.

Repurchased stock will be used to satisfy the Company's obligations pursuant

to its employee benefit and incentive plans. During the second quarter of

1996, the Company repurchased 1,262,500 shares of its common stock at an

aggregate cost of $52.3 million.

As part of the stock repurchase program, during the second quarter of 1996,

the Company sold 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. During the second

quarter of 1996, the Company sold European put options for 600,000 shares and

received proceeds of approximately $2.5 million. Proceeds are recorded as a

reduction to the cost of the Company's treasury stock. Repurchase prices

relating to put options outstanding at June 30, 1996 range from $41.10 per

share to $41.75 per share. The Company's contingent obligation to repurchase

shares upon exercise of the outstanding put options approximated $24.9 million

at June 30, 1996. At June 30, 1996, the aggregate contingent repurchase

obligation has been reclassified from permanent equity and is presented as a

contingent stock repurchase obligation.

Note G - Accounting Pronouncement

As of January 1, 1996, the Company adopted Statement of Financial Accounting

Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and

Long-Lived Assets to be Disposed Of", which establishes criteria for the

recognition and measurement of impairment loss associated with long-lived

assets. Adoption of this standard had no material impact on the Company's

financial position or results of operations.

Note H - Commitments and Contingencies

Schneider (Europe) AG and Schneider (USA) Inc. (the Schneider companies),

subsidiaries of Pfizer, Inc., have 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 United States Federal 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 Schneider companies filed counterclaims against the Company, alleging the

Company's willful infringement of the patent and seeking monetary and

injunctive relief. The parties have made cross motions for summary judgment

on various aspects of the case.

On May 31, 1994, SCIMED Life Systems, Inc. (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 FLOWTRACK-40(TM)

and RX ELIPSE(TM) PTCA catheters. Suit was filed in the U.S. District Court

for the Northern District of California and seeks monetary and injunctive

relief. The case has been sent to arbitration for a threshold determination

of one issue covered by the November 27, 1991 Settlement Agreement (the

Settlement Agreement) between the parties. That arbitration is scheduled for

hearing in October 1996.

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. Suit was filed in the U.S. District Court for

the Northern District of California and seeks monetary and injunctive relief.

The case has also been sent to arbitration under the terms of the Settlement

Agreement, and has been consolidated with the arbitration hearing scheduled

to be held in October 1996.

On October 10, 1995, ACS filed a suit for patent infringement against SCIMED,

alleging willful infringement of four U.S. patents 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.

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 arising 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. The defendants have moved for dismissal.

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 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 both complaints.

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 and VENTURE II microcatheters infringe a patent assigned to

Target. On May 2, 1996, the District Court entered an order granting a

preliminary injunction prohibiting SCIMED from marketing or selling the

accused product. 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.

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 Max Force TTS(TM) catheter, infringes a patent

assigned to Bard. The lawsuit seeks a declaratory judgment that the Company

has infringed the Bard patent, as well as a monetary and injunctive relief.

The Company has answered, denying the allegations of the complaint.

On March 7, 1996, Cook Inc. filed suit in the Regional Court, Munich, Division

for Patent Disputes in Munich Germany against MinTec, Inc. Minimally Invasive

Technologies as named defendant alleging that the Cragg EndoPro(TM) System I

and Stentor(TM) endovascular devices 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's answer has

not been filed.

On March 25, 1996, Cordis Corporation, a subsidiary of Johnson & Johnson

Company, 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 models of SCIMED's BANDIT and EXPRESS PLUS products. 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.

On September 1, 1995, a purported class action lawsuit was filed in the Court

of Chancery in the State of Delaware in and for New Castle County, captioned

Kinder v. Auth, et al., alleging breaches of fiduciary duty by the Board of

Directors of Heart Technology, Heart Technology and the Company in connection

with the Agreement and Plan of Merger entered into between the Company and

Heart Technology. In January 1996, the parties agreed to settle the suit for

an amount the Company does not deem to be material.

On June 12, 1995, the Trustee in Bankruptcy for SMEC, Inc. filed a complaint

in the U.S. Bankruptcy Court in Nashville, Tennessee alleging that a

transaction between Datascope Corp. and the Company constitutes a fraudulent

settlement of prior litigation among the Trustee, Datascope Corp., IABP Corp.

and the Company. The complaint further alleges violation of the Racketeer

Influenced and Corrupt Organizations Act. The Company has answered, denying

the allegations of the complaint.

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 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.

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.

Item 2. Management's Discussion and Analysis of Financial Condition and

Results of Operations

Net sales in the second quarter of 1996 increased 28.5% to $357.2 million as

compared to $278.0 million in the second quarter of 1995. The Company

reported net income for the second quarter of 1996 of $23.5 million including

special charges ($47.2 million net-of-tax) primarily related to its recent

acquisition of Endotech/MinTec. Net income for the second quarter, excluding

special charges related to recent acquisitions, increased 44.3% to $70.7

million from $49.0 million in the second quarter of 1995.

Net sales for the six month period ended June 30, 1996 increased 25.6% to

$679.6 as compared to $540.9 million in the first half of 1995. The Company

reported net income for the six month period ended June 30, 1996 of $22.5

million including special charges ($128.3 million or $113.7 million net-of-tax)

related to recent acquisitions compared to a net loss of $15.0 million

including special charges ($124.7 million or $112.1 million net-of-tax) for

the same period in 1995. Net income for the first half of 1996, excluding

special charges related to recent acquisitions, increased 40.3% to $136.2

million from $97.1 million in the first half of 1995.

Revenues in the United States grew approximately 18.7% during the second

quarter compared to the same period of the prior year. International

revenues, including export sales, increased approximately 48.4% during the

second quarter compared to the same period in the prior year and were

negatively impacted by approximately $8.4 million due to changes in foreign

currency exchange rates. Revenues in the United States grew approximately

16.6% during the first six months of 1996 compared to the same period of the

prior year. International revenues, including export sales, increased

approximately 44.0% during the first six months of 1996 compared to the same

period in the prior year and were negatively impacted by approximately $10.1

million due to changes in foreign currency exchange rates. The increase in

international sales reflects results from the Company's strategy to build its

international organization.

Gross profit as a percentage of net sales improved from 70.5% in the three

months ended June 30, 1995 to 73.4% in the three months ended June 30, 1996,

and improved from 70.3% in the six months ended June 30, 1995 to 73.4% in the

six months ended June 30, 1996. The improvement in the Company's gross

margins is primarily due to 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 partially offset by a slight decline in average selling prices due to

continuing efforts to contain healthcare costs and increased competition.

Uncertainty remains with regard to future changes within the health care

industry. Continued consolidation among U.S. health care providers and the

trend towards managed care in the United States may result in continued

pressure on selling prices of certain products and resulting compression on

gross margins. In addition, international markets are also being effected by

economic pressure to contain health care 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.

Selling, general and administrative expenses increased 29.3% from $91.6

million in the three months ended June 30, 1995 to $118.5 million in the three

months ended June 30, 1996. Selling, general and administrative expenses

increased 29.0% from $172.5 million to $222.5 million from the first six

months of 1995 to 1996, respectively. The increase in overall expense dollars

reflects continued expansion of the Company's domestic and international sales

organizations and related marketing support, an increase in legal expenses

incurred to strengthen and defend the Company's patent position, and

amortization of intangibles acquired during 1995 and 1996.

Research and development expenses increased 26.5% from $22.7 million in the

second quarter of 1995 to $28.7 million in the second quarter of 1996, and

23.2% from $44.2 million in the first six months of 1995 to $54.4 million in

the first six months of 1996. Research and development expenses remained

relatively constant as a percentage of sales (8.2% in the second quarter of

1995 and 8.0% in the second quarter of 1996). 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. The trend toward more stringent regulatory oversight in

countries around the world for product clearance and enforcement activities

has generally caused or may cause medical device manufacturers to experience

more uncertainty, greater risk and higher expenses. In addition, regulatory

approval times for new products continues to be lengthy, a concern of medical

device manufacturers generally.

Royalty expenses decreased 45.3% from $7.0 million in the second quarter of

1995 to $3.8 million in the second quarter of 1996, and 47.7% from $14.7

million in the first six months of 1995 to $7.7 million in the first six

months of 1996. Royalty expenses decreased from approximately 2.5% of net

sales in the second quarter of 1995 to 1.1% of net sales in the second quarter

of 1996. The decrease in royalties is primarily attributable to a reduction

in sales of certain of the Company's PTCA products that are subject to

royalties.

In the first six months of 1996, the Company recorded special charges of

$128.3 million ($113.7 million net-of tax) which primarily related to the

merger with EPT and the acquisitions of Symbiosis and Endotech/MinTec.

Charges include $96.0 million for purchased research and development, $4.6

million in direct transaction costs, and $12.2 million of estimated costs to

be incurred in merging the EPT business with subsidiaries of the Company.

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 writedowns and other

integration costs. The majority of the remaining $15.5 million, which is

primarily non-deductible for tax purposes, represents a change in management's

estimates of the merger-related charges recorded in 1995. The change to prior

year estimates relate primarily to the costs of unwinding various contractual

obligations and the rationalization of facilities. In the first half of 1995,

the Company recorded special charges of $124.7 million ($112.1 million, net-

of-tax) in connection with the acquisitions of SCIMED, CVIS and Vesica.

Charges included $32.6 million for purchased research and development, $21.1

million in direct transaction costs, and $71.0 million of estimated costs to

be incurred in merging the SCIMED business with subsidiaries of the Company.

Estimated costs included those typical in a merging of operations and relate

to, among other things, rationalization of facilities, workforce reductions,

unwinding of various contractual commitments, asset writedowns and other

integration costs. The special charges are determined based on formal plans

approved by Company's management using the best information available to it at

the time. The amounts the Company may ultimately incur may change as the

plans are executed.

Interest and dividend income was $1.1 million in the second quarter of 1996

compared to $3.1 million in the second quarter of 1995, and $2.8 million in

the first six months of 1996 compared to $7.6 million in the first six months

of 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 acquisitions and

alliances during the second half of 1995 and the first half of 1996. Interest

expense increased from $2.7 million in the second quarter of 1995 to $3.2

million in the second quarter of 1996. The increase in interest expense is

primarily attributable to interest on a $100 million short term seller-

financed loan associated with the acquisition of Symbiosis and the Company's

issuance of commercial paper. Interest expense decreased from $5.4 million in

the first six months of 1995 to $4.5 million in the first six months of 1996.

The decrease in interest expense for the six month period is primarily

attributable to decreased foreign borrowings since the first quarter of 1995

partially offset by interest on the $100 million short term seller-financed

loan and the Company's issuance of commercial paper. Other income (expense),

net, decreased from $2.7 million in the second quarter of 1995 to ($1.7

million) in the second quarter of 1996, and from $6.3 million in the first six

months of 1995 to ($3.7 million) in the first six months of 1996. The

decrease is primarily attributable to approximately $3.1 million of net

foreign exchange transaction gains recorded in the second quarter of 1995, as

compared to approximately $0.8 million of net foreign exchange transaction

losses recorded in the second quarter of 1996, and approximately $6.3 million

of net foreign exchange transaction gains recorded in the first six months of

1995 as compared to approximately $2.2 million of net foreign exchange

transaction losses in the first six months of 1996.

The Company's effective tax rate, excluding the impact on special charges,

improved from approximately 36.9% in the second quarter of 1995 to 34.2% in

the second quarter of 1996. The Company's effective tax rate, excluding the

impact on special charges, was approximately 38.2% in the six months of 1995

as compared to 34.8% in the first six months of 1996. The effective tax rate

including special charges was 50.8% in the second quarter of 1996 compared to

36.9% in the second quarter of 1995, and 72.1% in the first six months of 1996

compared to 146.5% in the first six months of 1995. The reduction in the

Company's effective tax rate, excluding the impact of special charges, is

primarily due to increased business in lower tax geographies and other tax

initiatives.

On January 22, 1996, the Company completed its merger of EP Technologies, Inc.

(EPT) in a stock-for-stock transaction. The transaction, which was 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.