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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
SCHEDULE 13E-4
______________
ISSUER TENDER OFFER STATEMENT
(Pursuant to Section 13(e)(1) of the
Securities Exchange Act of 1934)
___________________
ELI LILLY AND COMPANY
(Name of Issuer)
ELI LILLY AND COMPANY
(Name of Person(s) Filing Statement)
COMMON STOCK, without
par value
(Title of Class of Securities)
532457 10 8
(CUSIP Number of Class of Securities)
Rebecca O. Goss
ELI LILLY AND COMPANY
Lilly Corporate Center
Indianapolis, Indiana 46285
(317) 276-2000
-Copy to-
Bernard E. Kury
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019-6092
(212) 259-8000
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of
Person(s) Filing Statement)
August 21, 1995
(Date Tender Offer First Published, Sent
or Given to Security Holders)
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Calculation of Filing Fee
Transaction Valuation/1/ Amount of Filing Fee
$1,247,106,017 $249,421.20
[ X ] Check box if any part of the fee is offset as provided by Rule 0-
11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: $456,827.59
Form or Registration No.: Registration Statement on Form S-4
(No. 33-93716)
Filing party: Guidant Corporation
Date Filed: June 6, 1995
---------------------------
/1/ Estimated solely for purposes of calculating the filing fee and computed
pursuant to Rule 0-11(a)(4) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). This amount assumes the acquisition by Eli Lilly and
Company of 16,504,298 shares of its common stock for $75 9/16 per share, the
average of the high and low sales prices of a share of such common stock as
reported on the New York Stock Exchange Composite Tape on August 17, 1995.
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This Schedule 13E-4 relates to an offer by Eli Lilly and Company (the
"Company") to exchange (the "Exchange Offer") 57,600,000 shares of Common Stock,
without par value, of Guidant Corporation (the "Guidant Common Stock") which the
Company owns for shares of the Company's Common Stock, without par value, upon
the terms and subject to the conditions stated in the Offering Circular -
Prospectus dated August 21, 1995 (the "Offering Circular - Prospectus") attached
hereto as Exhibit A(2) and the related Letter of Transmittal attached hereto as
Exhibit A(4).
Item 1. Security and Issuer.
(a) The name of the issuer is Eli Lilly and Company and the address of its
principal executive office is Lilly Corporate Center, Indianapolis, Indiana
46285.
(b) The exact title and amount of the class of securities being sought are:
up to 16,504,298 shares of Common Stock, without par value, of the Company (the
"Shares"). As of July 31, 1995, 292,011,493 Shares were outstanding. With
respect to the consideration being offered for the Shares, the cover page of the
Offering Circular - Prospectus and the sections of the Offering Circular -
Prospectus entitled "Offering Circular -Prospectus Summary," "The Transaction,"
"The Exchange Offer" and "Price Range of Guidant Common Stock and Dividends" are
hereby incorporated herein by reference. With respect to whether any Shares
will be purchased from any officer, director or affiliate of the Company, the
second, third, fourth and fifth paragraphs of the section of the Offering
Circular - Prospectus entitled "Relationship Between Guidant and Lilly--Other"
are hereby incorporated herein by reference.
(c) Reference is made to the section of the Offering Circular - Prospectus
entitled "Price Range of Lilly Common Stock and Dividends" which is hereby
incorporated herein by reference.
(d) Not applicable.
Item 2. Source and Amount of Funds or Other Consideration.
(a) The consideration being offered by the Company in exchange for the
Shares are shares of Guidant Common Stock owned by the Company. Holders of
Shares who will be entitled to receive a fractional share of Guidant Common
Stock will be paid cash in lieu of such fractional share. Reference is made to
the sections of the Offering Circular -Prospectus entitled "The Transaction" and
"The Exchange Offer--Terms of The Exchange Offer" which are hereby incorporated
herein by reference. The maximum number of
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shares of Guidant Common Stock that will be exchanged for the Shares shall be
57,600,000 shares, or approximately 80.2%, of the 71,860,000 shares of Guidant
Common Stock outstanding.
(b) Not applicable.
Item 3. Purpose of the Tender Offer and Plans or Proposals of the Issuer or
Affiliate.
With respect to the purpose of the Exchange Offer, disposition of
securities acquired and plans or proposals of the Company, the sections of the
Offering Circular - Prospectus entitled "Purpose and Effects of the Transaction"
and "The Transaction--Accounting Treatment of the Transaction" are hereby
incorporated herein by reference.
(a) With respect to the acquisition by any person of additional securities
of the Company, or the disposition of securities of the Company, the Cover Page
of the Offering Circular - Prospectus and the Sections of the Offering Circular
- Prospectus entitled "Offering Circular - Prospectus Summary--The Transaction,"
"The Transaction" and "The Spin-Off" are hereby incorporated herein by
reference.
(b) - (j) Not applicable.
Item 4. Interest in Securities of the Issuer.
(a) Except as set forth in the first paragraph of the section of the
Offering Circular - Prospectus entitled "Relationship Between Guidant and
Lilly--Other" which is hereby incorporated herein by reference, no transaction
with respect to the Shares was effected during the period of 40 business days
prior to the date hereof by the Company, or to the Company's knowledge, its
directors or executive officers, or any of the directors or executive officers
of any of its subsidiaries, or any associate or subsidiary of any such person
(including any director or executive officer of any such subsidiary).
Item 5. Contracts, Arrangements, Understandings or Relationships with Respect
to the Issuer's Securities.
Neither the Company nor, to the best of the Company's knowledge, any of its
directors or executive officers, or any of the directors or executive officers
of any of its subsidiaries, is party to any contract, arrangement, understanding
or relationship relating, directly or indirectly, to the Exchange Offer with
respect to any securities of the Company required to be disclosed herein.
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Item 6. Persons Retained, Employed or to Be Compensated.
Neither the Company nor any person on behalf of the Company will pay any
commission or other remuneration to any broker, dealer, salesman or other person
for soliciting exchanges of the Shares except as set forth in the section of the
Offering Circular - Prospectus entitled "The Exchange Offer--Fees and Expenses"
which is hereby incorporated herein by reference. Regular employees of the
Company may solicit exchanges from holders of the Shares but they will not
receive additional compensation therefor.
Item 7. Financial Information.
(a)(1) - (2) Reference is made to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, and the financial statements
included therein, said report is incorporated by reference in the Offering
Circular - Prospectus, and the sections of the Offering Circular - Prospectus
entitled "Offering Circular -Prospectus Summary--Summary Consolidated Financial
Data of Lilly" and "Selected Consolidated Financial Data of Lilly"; said
sections and financial statements are hereby incorporated herein by reference.
(a)(3) - (4) With respect to the ratio of earnings to fixed charges and
book value per share, reference is made to the sections in the Offering Circular
- Prospectus entitled "Offering Circular - Prospectus Summary--Summary
Consolidated Financial Data of Lilly" and "Selected Consolidated Financial Data
of Lilly"; said sections are hereby incorporated herein by reference.
(b) Reference is made to the sections of the Offering Circular - Prospectus
entitled "Offering Circular -Prospectus Summary--Summary Consolidated Financial
Data of Lilly" and "Unaudited Pro Forma Consolidated Financial Information of
Lilly"; said sections are hereby incorporated herein by reference.
Item 8. Additional Information.
(a) None.
(b) The information set forth in the section of the Offering Circular -
Prospectus entitled "The Transaction--Regulatory Approvals" is hereby
incorporated herein by reference.
(c) Not applicable.
(d) None.
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(e) Additional information with respect to the Exchange Offer and related
matters is included throughout the Offering Circular - Prospectus and the Letter
of Transmittal, which are attached hereto as Exhibits A(2) and A(4),
respectively and which are hereby incorporated herein by reference in its
entirety. The Company is not aware of any jurisdiction in which the making of
the Exchange Offer or the tender of the Shares would not be in compliance with
the laws of such jurisdiction. However, the Company reserves the right to
exclude holders in any jurisdiction in which it is asserted that the Exchange
Offer cannot lawfully be made. So long as the Company makes a good faith effort
to comply with any state law deemed applicable to the Exchange Offer, if it
cannot do so, the Company believes that the exclusion of holders residing in
such state(s) is permitted under Rule 13e-4(f)(9) promulgated under the Exchange
Act.
Item 9. Material to be Filed as Exhibits.
(a)(1) Press Releases dated June 6, 1995 and August 21, 1995.
(a)(2) Offering Circular - Prospectus dated August 21, 1995.
(a)(3) Letter dated August 21, 1995, from Randall L. Tobias, Chairman of
the Board and Chief Executive Officer, to the Company's
Shareholders.
(a)(4) Letter of Transmittal.
(a)(5) Letter from the Company to Securities Dealers, Commercial Banks,
Trust Companies and other Nominees.
(a)(6) Form of Letter to Clients.
(a)(7) Notice of Guaranteed Delivery.
(a)(8) Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
(a)(9) Question and Answer Letter.
(a)(10) Advertisement to be printed in the Wall Street Journal on August
21, 1995.
(b) Not applicable.
(c) Not applicable.
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(d) Not applicable.
(e) See Exhibit (a)(2) above.
(f) Not applicable.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: August 21, 1995
ELI LILLY AND COMPANY
By /s/ James M. Cornelius
----------------------------------
Name: James M. Cornelius
Title: Vice President,
Finance and Chief
Financial Officer
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June 6, 1995 EXHIBIT(a)(1)
Guidant Files Registration Statement With SEC for Lilly's Split-Off
Eli Lilly and Co. and Guidant Corp. announced today that Guidant has filed a
registration statement with the Securities and Exchange Commission that outlines
the split-off plan for the remaining equity interest held by Lilly in Guidant.
The proposed split-off would be achieved through an exchange offer whereby Lilly
shareholders would be given the opportunity to exchange some of or all their
Lilly stock for Guidant common stock. Following review by the SEC and depending
upon market conditions, the split-off is expected to be completed during the
fall of 1995. Specific terms of the transaction will be communicated by mail at
the commencement of the exchange offer.
In January 1994, Lilly announced that it was separating its medical devices and
diagnostics businesses from its core pharmaceutical business to better focus its
resources on global pharmaceutical operations and further maximize shareholder
value. The formation of Guidant, which comprises five of the nine MDD
businesses, was announced in June 1994, and an initial public offering of
slightly less than 20 percent of its common stock took place in December. The
completion of the split-off transactions would conclude the divestiture of
Guidant from Lilly.
Eli Lilly and Co. is a global research-based pharmaceutical corporation
headquartered in Indianapolis, Ind., that is working with its customers
worldwide to ensure that diseases are prevented, managed and cured with maximum
benefit and minimum cost to patients and society. Lilly focuses its research
efforts on five disease categories: central-nervous-system and related diseases;
endocrine disorders, including diabetes and osteoporosis; infectious diseases;
cancer; and cardiovascular diseases.
A leader in the medical device industry, Guidant Corp. provides innovative,
cost-effective products and services to the global cardiology and minimally
invasive surgery marketplaces. Guidant comprises Advanced Cardiovascular Systems
Inc. (ACS), Cardiac Pacemakers Inc. (CPI), Devices for Vascular Intervention
Inc. (DVI), Heart Rhythm Technologies Inc. (HRT), and Origin Medsytems Inc.
<PAGE>
August 21, 1995
Lilly Commences Guidant Exchange Offer
Eli Lilly and Company and Guidant Corporation announced today the commencement
of an offer to Lilly shareholders to exchange some or all of their shares of
Lilly Common Stock for shares of Guidant Common Stock.
Under the terms of the exchange offer, Lilly shareholders who tender their
shares for exchange will receive 3.49 shares of Guidant Common Stock for each
share of Lilly Common Stock tendered, up to an aggregate of 16,504,298 Lilly
shares, or approximately 5.7 percent of the Lilly shares currently outstanding.
The exchange offer is conditioned upon, among other things, a minimum of
8,252,149 shares of Lilly Common Stock being validly tendered and not withdrawn
prior to the expiration of the exchange offer.
The exchange offer, which is being made by means of an offering circular-
prospectus, will expire at midnight (EDT) on September 18, 1995. The exchange
agent for the exchange offer is The First National Bank of Boston, the dealer
manager in the United States is Morgan Stanley & Co. Inc. and the information
agent is D.F. King & Co. Inc.
In January 1994, Lilly announced that it was separating its medical devices and
diagnostics businesses from its core pharmaceutical business. The formation of
Guidant, which comprises five of the nine businesses that formerly made up
Lilly's Medical Device and Diagnostics Division, was announced in June 1994, and
an initial public offering of slightly less than 20 percent of its common stock
took place in December 1994.
Lilly is a global research-based pharmaceutical corporation headquartered in
Indianapolis, Ind., that is dedicated to creating and delivering superior health
care solutions--by combining pharmaceutical innovation, existing pharmaceutical
technology, disease prevention and management and information technologies--in
order to provide customers worldwide with optimal clinical and economic
outcomes.
A leader in the medical device industry, Guidant Corporation provides
innovative, cost-effective products and services to the global cardiology and
minimally invasive surgery marketplaces. Guidant comprises Advanced
Cardiovascular Systems Inc. (ACS), Cardiac Pacemakers Inc. (CPI), Devices for
Vascular Intervention Inc. (DVI), Heart Rhythm Technologies Incorporated (HRT),
Origin Medsytems Inc. and the company's international affiliates.
<PAGE>
EXHIBIT(a)(2)
OFFERING CIRCULAR - PROSPECTUS
Eli Lilly and Company
Offer to Exchange
3.49 shares of Common Stock of Guidant Corporation
for each share of Common Stock of Eli Lilly and Company
THE EXCHANGE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY,SEPTEMBER 18, 1995,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
----------------
ELI LILLY AND COMPANY, AN INDIANA CORPORATION ("LILLY"), HAS DETERMINED TO
DISTRIBUTE THE SHARES IT OWNS OF GUIDANT CORPORATION, AN INDIANA CORPORATION
("GUIDANT" OR THE "COMPANY"), TO LILLY SHAREHOLDERS BY OFFERING TO EXCHANGE
3.49 SHARES OF COMMON STOCK OF GUIDANT, WITHOUT PAR VALUE ("GUIDANT COMMON
STOCK"), FOR EACH SHARE OF COMMON STOCK OF LILLY, WITHOUT PAR VALUE ("LILLY
COMMON STOCK"), UP TO AN AGGREGATE OF 16,504,298 SHARES OF LILLY COMMON STOCK
TENDERED AND EXCHANGED, UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH
HEREIN AND IN THE RELATED LETTER OF TRANSMITTAL (WHICH TOGETHER CONSTITUTE THE
"EXCHANGE OFFER"). A HOLDER OF LILLY COMMON STOCK HAS THE RIGHT TO TENDER ALL,
NONE OR A PORTION, OF SUCH HOLDER'S SHARES OF LILLY COMMON STOCK. LILLY
CURRENTLY HOLDS 57,600,000 SHARES OF GUIDANT COMMON STOCK. IF MORE THAN
16,504,298 SHARES OF LILLY COMMON STOCK ARE VALIDLY TENDERED AND NOT WITHDRAWN
ON OR PRIOR TO THE EXPIRATION DATE (AS DEFINED HEREIN) OF THE EXCHANGE OFFER,
LILLY WILL ACCEPT SUCH SHARES FOR EXCHANGE ON A PRO RATA BASIS AS DESCRIBED
HEREIN. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS AS SET FORTH UNDER
"THE EXCHANGE OFFER--CERTAIN CONDITIONS TO THE EXCHANGE OFFER," INCLUDING AT
LEAST 8,252,149 SHARES OF LILLY COMMON STOCK (APPROXIMATELY 2.8% OF THE
OUTSTANDING LILLY COMMON STOCK AND A SUFFICIENT NUMBER OF SHARES TO RESULT IN
AT LEAST 50% OF THE GUIDANT COMMON STOCK OWNED BY LILLY BEING EXCHANGED
PURSUANT TO THE EXCHANGE OFFER) BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR
TO THE EXPIRATION DATE OF THE EXCHANGE OFFER. IF FEWER THAN 16,504,298 SHARES
OF LILLY COMMON STOCK (BUT AT LEAST 8,252,149 SHARES) ARE TENDERED AND
EXCHANGED FOR GUIDANT COMMON STOCK PURSUANT TO THE EXCHANGE OFFER AND LILLY
ACCORDINGLY CONTINUES TO OWN SHARES OF GUIDANT COMMON STOCK AFTER CONSUMMATION
OF THE EXCHANGE OFFER, AS SOON AS PRACTICABLE THEREAFTER, LILLY WILL EFFECT A
PRO RATA DISTRIBUTION OF ITS REMAINING SHARES OF GUIDANT COMMON STOCK TO
HOLDERS OF LILLY COMMON STOCK REMAINING AFTER CONSUMMATION OF THE EXCHANGE
OFFER (THE "SPIN-OFF"; TOGETHER WITH THE EXCHANGE OFFER, THE "TRANSACTION").
(CONTINUED ON FOLLOWING PAGE)
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
The Dealer Manager in the United States for the Exchange Offer is:
MORGAN STANLEY & CO.
Incorporated
August 21, 1995
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(Cover continued from previous page)
Neither the Board of Directors of Lilly nor Lilly makes any recommendation
to any shareholder whether to tender or refrain from tendering shares of Lilly
Common Stock pursuant to the Exchange Offer. Each shareholder of Lilly must
make his or her own decision whether to tender pursuant to the Exchange Offer
and, if so, how many shares to tender after reading this Offering Circular -
Prospectus and consulting with his or her advisors based on his or her own
financial position and requirements. This Offering Circular - Prospectus
relates to all shares of Guidant Common Stock to be distributed pursuant to
the Exchange Offer and any spin-off.
SEE "RISK FACTORS" ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD
BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
The shares of Guidant Common Stock are listed and traded on the New York
Stock Exchange, Inc. (the "NYSE") and the Pacific Stock Exchange Incorporated
("PSE"). The shares of Lilly Common Stock are listed and traded on the NYSE
and the PSE and the stock exchanges of London, Tokyo, Zurich, Basel and
Geneva. On February 13, 1995, the last trading day prior to the announcement
of the Transaction, the closing sale prices as reported in the consolidated
transactions reporting system on the NYSE per share of Lilly Common Stock and
Guidant Common Stock were $64 7/8 and $19, respectively. On August 18, 1995,
the last trading day before Lilly commenced the Exchange Offer, the closing
sale prices as reported in the consolidated transactions reporting system on
the NYSE per share of Lilly Common Stock and Guidant Common Stock were $76 3/8
and $24 3/4, respectively. As of July 31, 1995, there were 292,011,493 shares
of Lilly Common Stock outstanding.
Any shareholder desiring to accept the Exchange Offer should either (1)
request his or her broker, dealer, commercial bank, trust company or nominee
to effect the transactions for him or her or (2) complete the Letter of
Transmittal or a facsimile thereof, sign it in the place required, have the
signature thereon guaranteed if required by the Letter of Transmittal and
forward it and any other required documents to The First National Bank of
Boston (the "Exchange Agent"), and either deliver the certificates for such
shares of Lilly Common Stock to the Exchange Agent along with the Letter of
Transmittal or tender such shares of Lilly Common Stock pursuant to the
procedure for book-entry transfer set forth in "The Exchange Offer--Procedures
for Tendering Shares of Lilly Common Stock." Shareholders having shares of
Lilly Common Stock registered in the name of a broker, dealer, commercial
bank, trust company or nominee must contact such person if they desire to
tender their shares of Lilly Common Stock. Lilly will not pay any fees or
commissions to any broker or dealer or any other person (other than the Dealer
Manager and the Soliciting Dealers (as defined herein)) for soliciting shares
of Lilly Common Stock pursuant to the Exchange Offer. See "The Exchange
Offer--Fees and Expenses." Shareholders who wish to tender shares of Lilly
Common Stock and whose certificates for such shares are not immediately
available should tender such shares by following the procedures for guaranteed
delivery set forth in "The Exchange Offer--Guaranteed Delivery Procedures."
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THIS
OFFERING CIRCULAR -PROSPECTUS AND THE LETTER OF TRANSMITTAL SHOULD BE DIRECTED
TO D.F. KING & CO., INC. (THE "INFORMATION AGENT") OR THE DEALER MANAGER IN
THE UNITED STATES, MORGAN STANLEY & CO. INCORPORATED, AT THEIR RESPECTIVE
ADDRESSES AND TELEPHONE NUMBERS SET FORTH ON THE BACK COVER HEREOF.
No person has been authorized to give any information or to make any
representations other than those contained in this Offering Circular -
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by Lilly or Guidant or any other
person. This Offering Circular - Prospectus does not constitute an offer to
sell, or the solicitation of an offer to buy, any securities other than the
securities to which it relates or any offer to sell, or the solicitation of an
offer to buy, such securities in any circumstances in which such offer or
solicitation is unlawful. Neither the delivery of this Offering Circular -
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of Lilly or
Guidant since the date hereof or that the information contained herein is
correct as of any time subsequent to its date.
In accordance with various state securities laws applicable to the Exchange
Offer which require the Exchange Offer to be made to the public by a licensed
broker or dealer, the Exchange Offer is hereby made to shareholders residing
in each such state by Morgan Stanley & Co. Incorporated, as Dealer Manager, on
behalf of Lilly.
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AVAILABLE INFORMATION
Guidant has filed a Registration Statement on Form S-4 under the Securities
Act of 1933, as amended (the "Securities Act"), with the Securities and
Exchange Commission (the "Commission") with respect to the securities offered
hereby (the "Registration Statement"). Lilly has filed a Schedule 13E-4 Issuer
Tender Offer Statement (the "Schedule 13E-4") under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), with the Commission with respect to
the Exchange Offer. This Offering Circular -Prospectus does not contain all the
information set forth in the Registration Statement, the Schedule 13E-4 and the
exhibits thereto, to which reference is hereby made. Statements contained in
this Offering Circular - Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The material features of any such contract or
other document are described herein.
Each of Lilly and Guidant is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports, proxy and information
statements and other information with the Commission. The Registration
Statement, the Schedule 13E-4, reports, proxy and information statements and
other information can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at the Citicorp Center,
500 West Madison, Room 1400, Chicago, Illinois 60661 and 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can also be
obtained at prescribed rates by writing to the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
reports, proxy and information statements and other information concerning
Lilly and Guidant can be inspected at the offices of the NYSE, 20 Broad Street,
New York, New York 10005 and the PSE, 301 Pine Street, San Francisco,
California 94101.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by Lilly with the Commission pursuant
to the Exchange Act and are incorporated herein by reference and made a part of
this Offering Circular - Prospectus: (i) Lilly's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994; (ii) Lilly's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995; (iii) Lilly's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1995; (iv) Lilly's
Current Report on Form 8-K filed on June 12, 1995; (v) the description of Lilly
Common Stock contained in Lilly's registration statement under the Exchange Act
with respect to Lilly Common Stock filed with the Commission, including any
amendments or reports filed for the purpose of updating that description; and
(vi) the description of the Lilly Preferred Stock Purchase Rights contained in
Lilly's Registration Statement on Form 8-A, dated July 18, 1988.
All documents and reports filed by Lilly with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Offering Circular - Prospectus and prior to the termination of the
offering of the shares of Guidant Common Stock shall be deemed to be
incorporated herein by reference and made a part of this Offering Circular -
Prospectus from the date of filing of such documents or reports. Any statement
contained in a document or report incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Offering Circular -Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Offering Circular -
Prospectus.
THIS OFFERING CIRCULAR - PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF DOCUMENTS
INCORPORATED BY REFERENCE (OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE
AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM
THIS OFFERING CIRCULAR - PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST
TO THE INFORMATION AGENT, D.F. KING & CO., INC. THE INFORMATION AGENT'S
TELEPHONE NUMBER IS: IN THE UNITED STATES, (800) 207-3158; IN EUROPE, (44) 171-
600-5005 (CALL COLLECT); AND OUTSIDE THE UNITED STATES AND EUROPE, (212) 269-
5550 (CALL COLLECT). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD BE MADE PRIOR TO SEPTEMBER 11, 1995.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 3
OFFERING CIRCULAR - PROSPECTUS SUMMARY..................................... 6
Eli Lilly and Company..................................................... 6
Guidant Corporation....................................................... 6
Risk Factors.............................................................. 8
The Transaction........................................................... 8
Purpose and Effects of the Transaction.................................... 8
Price Range and Dividends................................................. 8
The Exchange Offer........................................................ 9
Summary Consolidated Financial Data of Guidant............................ 12
Summary Consolidated Financial Data of Lilly.............................. 13
RISK FACTORS............................................................... 14
Tendering and Nontendering Shareholders Affected Differently by the
Transaction.............................................................. 14
Tax Treatment of the Transaction.......................................... 14
Market Uncertainties with Respect to Guidant Common Stock and Lilly Common
Stock.................................................................... 14
Stringent Government Regulation........................................... 15
Dependence on Patents and Proprietary Rights.............................. 15
Reliance on Trade Secrets and Proprietary Technology...................... 15
Substantial Patent Litigation............................................. 15
Significant Competition and Continual Technological Change................ 16
Dependence on Sole Sources of Supply...................................... 16
Cost Pressures on Medical Technology...................................... 16
Potential Impact of Proposed Health Care Reform........................... 16
Limitations on Third Party Reimbursement.................................. 17
Potential Impact of HHS Investigation Regarding Reimbursement Procedures.. 17
Potential Product Liability; Product Recalls.............................. 18
Substantial Leverage; Restrictions Imposed on Guidant by the Credit
Agreements............................................................... 18
Anti-Takeover Provisions.................................................. 18
Potential Tax Liability of Guidant........................................ 19
PURPOSE AND EFFECTS OF THE TRANSACTION..................................... 19
THE TRANSACTION............................................................ 20
General................................................................... 20
Regulatory Approvals...................................................... 20
Appraisal Rights.......................................................... 21
</TABLE>
<TABLE>
<S> <C>
Accounting Treatment of the Transaction................................... 21
THE EXCHANGE OFFER......................................................... 21
Terms of the Exchange Offer............................................... 21
Tenders for Exchange by Holders of Fewer Than 100 Shares of Lilly Common
Stock.................................................................... 23
Exchange of Shares of Lilly Common Stock.................................. 23
Procedures for Tendering Shares of Lilly Common Stock..................... 25
Procedures for Tendering Dividend Reinvestment and Stock Purchase Plan
Shares of Lilly Common Stock............................................. 26
Guaranteed Delivery Procedures............................................ 26
Withdrawal Rights......................................................... 27
Extension of Tender Period; Termination; Amendment........................ 28
Certain Conditions of the Exchange Offer.................................. 29
Fees and Expenses......................................................... 31
Miscellaneous............................................................. 32
THE SPIN-OFF............................................................... 33
PRICE RANGE OF LILLY COMMON STOCK AND DIVIDENDS............................ 34
PRICE RANGE OF GUIDANT COMMON STOCK AND DIVIDENDS.......................... 34
BUSINESS OF LILLY.......................................................... 35
Products and Services..................................................... 35
Research and Development.................................................. 36
Marketing................................................................. 37
Patents and Licenses...................................................... 37
Competition............................................................... 38
Governmental Regulation................................................... 38
SELECTED CONSOLIDATED FINANCIAL DATA OF GUIDANT............................ 39
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF GUIDANT.......... 40
SELECTED CONSOLIDATED FINANCIAL DATA OF LILLY.............................. 44
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF LILLY............ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GUIDANT..................................................... 50
Operating Results--
Six Months Ended June 30, 1995 Versus Six Months Ended June 30, 1994..... 50
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Operating Results--
Year Ended December 31, 1994 Versus Year Ended December 31, 1993.......... 53
Operating Results--
Year Ended December 31, 1993 Versus Year Ended December 31, 1992.......... 55
Quarterly Information...................................................... 57
Liquidity and Financial Condition.......................................... 57
Regulatory and Legal Matters............................................... 58
Health Care Reform......................................................... 59
BUSINESS OF GUIDANT......................................................... 59
Health Care Trends......................................................... 60
Business Strategy.......................................................... 60
Vascular Intervention...................................................... 61
Cardiac Rhythm Management.................................................. 67
Minimally Invasive Surgery................................................. 73
Sales and Marketing........................................................ 74
Research and Development................................................... 76
Manufacturing.............................................................. 77
Quality Control Systems.................................................... 78
Competition................................................................ 78
Patents, Trademarks, Proprietary Rights and Licenses....................... 79
Governmental Regulation.................................................... 80
Health Care Reform; Third Party Reimbursement.............................. 81
Product Liability and Insurance............................................ 83
Environmental Compliance................................................... 83
Properties................................................................. 83
Employees.................................................................. 84
Legal Proceedings.......................................................... 84
MANAGEMENT OF GUIDANT....................................................... 85
Directors and Executive Officers........................................... 85
Management Biographies..................................................... 85
Ownership of Guidant Common Stock by Directors and Officers of Guidant..... 88
Ownership of Lilly Common Stock by Directors and Officers of Guidant....... 89
Terms of Directors and Officers............................................ 89
Transitional Board......................................................... 90
</TABLE>
<TABLE>
<S> <C>
Committees of the Board.................................................... 90
Compensation of Directors.................................................. 91
Executive Compensation..................................................... 92
PRINCIPAL SHAREHOLDER OF GUIDANT COMMON STOCK............................... 96
PRINCIPAL SHAREHOLDERS OF LILLY COMMON STOCK................................ 96
DESCRIPTION OF GUIDANT CAPITAL STOCK........................................ 97
Common Stock............................................................... 97
Preferred Stock............................................................ 97
Certain Articles of Incorporation and By-Laws Provisions and Indiana Anti-
Takeover Provisions....................................................... 98
Shareholder Rights Plan.................................................... 100
Listing.................................................................... 102
Transfer Agent and Registrar............................................... 102
SHARES ELIGIBLE FOR FUTURE SALE............................................. 102
DESCRIPTION OF THE GUIDANT CREDIT AGREEMENTS................................ 103
COMPARISON OF RIGHTS OF SHAREHOLDERS OF LILLY AND GUIDANT................... 104
RELATIONSHIP BETWEEN GUIDANT AND LILLY...................................... 104
Other...................................................................... 107
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 108
ACCOUNTING TREATMENT OF THE TRANSACTION..................................... 109
LEGAL MATTERS............................................................... 109
EXPERTS..................................................................... 109
INDEX TO FINANCIAL STATEMENTS............................................... F-1
GLOSSARY OF SELECTED MEDICAL TERMS.......................................... G-1
</TABLE>
5
<PAGE>
OFFERING CIRCULAR - PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included or incorporated by reference in this Offering Circular -
Prospectus. See "Glossary of Selected Medical Terms" for the definitions of
certain medical terms used herein.
ELI LILLY AND COMPANY
Lilly was incorporated in 1901 under the laws of the state of Indiana to
succeed to the drug manufacturing business founded in Indianapolis, Indiana, in
1876 by Colonel Eli Lilly. Lilly is engaged in the discovery, development,
manufacture, and sale of products and the provision of services in one industry
segment--Life Sciences. Lilly's principal products are human pharmaceuticals
and animal health products. Products are manufactured or distributed through
owned or leased facilities in the United States, Puerto Rico, and 26 other
countries, in 19 of which Lilly owns or has an interest in manufacturing
facilities. Its products are sold in approximately 117 countries. Through its
PCS Health Systems, Inc. ("PCS") subsidiary, Lilly also provides pharmacy
benefit management services in the United States.
Most of Lilly's products were discovered or developed through Lilly's
research and development activities, and the success of Lilly's business
depends to a great extent on the introduction of new products resulting from
these research and development activities. Research efforts are primarily
directed toward the discovery of products to diagnose and treat diseases in
human beings and animals and to increase the efficiency of animal food
production.
GUIDANT CORPORATION
Guidant was incorporated in Indiana on September 9, 1994 to be the parent of
five of the nine businesses in the Medical Devices and Diagnostics ("MDD")
Division of Lilly and its subsidiaries.
Guidant designs, develops, manufactures and markets a broad range of products
for use in vascular intervention, primarily the treatment of coronary artery
disease ("CAD"), cardiac rhythm management ("CRM") and other forms of minimally
invasive surgery ("MIS"). Guidant is a worldwide leader, based on revenues, in
percutaneous transluminal coronary angioplasty ("PTCA") and atherectomy, which
are minimally invasive procedures used for opening blocked coronary arteries.
In addition, Guidant has developed proprietary positions in atherectomy
catheters, guidewires and perfusion catheters. Guidant is also a worldwide
leader, based on revenues, in implantable cardioverter defibrillator ("ICD")
systems. Guidant also designs, manufactures and markets a full line of
implantable pacemaker systems used in the treatment of slow or irregular
arrhythmias. In addition, Guidant develops, manufactures and markets products
for use in MIS procedures with products for access, vision, dissection and
retraction, focusing on laparoscopic market opportunities in cardiovascular,
general, thoracic and urologic surgeries. Guidant's net sales for the year
ended December 31, 1994 were $862.4 million.
Guidant's business strategy is to design, develop, manufacture and market
innovative, high quality therapeutic products principally for use in treating
cardiovascular disease and performing minimally invasive surgical procedures,
resulting in improved quality of patient care and reduced treatment costs. This
strategy has led to a consistent record of innovative product introductions,
certain of which have fundamentally changed the treatment of cardiovascular
disease. These product introductions include, in 1985, the first programmable
implantable defibrillator for the treatment of fast arrhythmias, and in 1991,
the first endocardial defibrillation lead system which provided for a
significant reduction in implantation mortality, morbidity and cost, while
eliminating the need for highly invasive open chest procedures. Guidant
pioneered the development of certain products for use with PTCA and atherectomy
procedures with the introduction of perfusion, rapid exchange ("RX"), over-the-
wire ("OTW") and atherectomy catheters and guidewires as
6
<PAGE>
less invasive and more cost-effective methods for treating blocked coronary
arteries than coronary artery bypass graft surgery ("CABG").
Guidant is committed to ongoing product innovation and has invested
significant resources in its new product development program. For the year
ended December 31, 1994, 45% of Guidant's total revenues were generated from
sales of products and product extensions introduced since January 1, 1993. As
of June 30, 1995, Guidant's in-house research and development group, including
engineers, technicians and scientists, numbered 773 employees. In addition to
maintaining physician advisory boards, Guidant maintains relationships with
customers and physicians who assist Guidant in directing and focusing new
product development. Guidant has integrated its product development program
with manufacturing, marketing and regulatory resources to improve product
quality, reduce manufacturing costs and accelerate product development.
Recent product introductions by Guidant include, in March 1995, the ACS RX
LIFESTREAM, a high performance, low profile perfusion catheter with extended
pressure capability. In October 1993, Guidant introduced the ACS RX ELIPSE
catheter, a unique elliptically shaped catheter providing clinicians with the
characteristics needed to reach and dilate most lesions, and in August 1993,
Guidant introduced the ACS EDGE OTW catheter with enhanced maneuverability,
providing easier access to the lesion site. Additionally, in March 1993,
Guidant introduced the ACS RX FLOWTRACK 40 perfusion catheter, which is
designed to improve access to coronary blockages while allowing physicians to
perform PTCA without interrupting blood flow. In May 1993, Guidant introduced
in Europe the VIGOR family of pacemakers, a sophisticated adaptive-rate
pacemaker line, complementing Guidant's existing pacemaker products. In October
1994, Guidant introduced the VIGOR DDD into the United States market, followed
by release of the VIGOR SSI in March 1995. In June 1995, Guidant market
released the VIGOR DR and VIGOR SR, a state of the art adaptive-rate pacemaker
product line. In October 1994, Guidant market released the VENTAK P3, the
VENTAK PRx III and the new ENDOTAK DSP defibrillation lead into the European
market. In May 1995, Guidant market released both the VENTAK PRx II and VENTAK
PRx III/ENDOTAK defibrillation systems into the United States. The VENTAK PRx
III, which is approximately 30% smaller than its market released predecessors,
along with the VENTAK PRx II, offer a full range of programmable features,
including a biphasic waveform, stored intracardiac electrograms and extensive
diagnostics. Both products utilize Guidant's new Model 2950
Programmer/Recorder/Monitor ("PRM") which provides for a simple and easy to use
graphical user interface. In May 1995, Guidant also obtained approval for
commercial market release in the United States for the ENDOTAK Model 115, which
is a shorter version of its ENDOTAK defibrillation lead.
In the United States, Guidant generally markets its products through its
direct sales force. Internationally, Guidant uses a combination of direct sales
representatives and independent distributors. Guidant continues to evaluate
opportunities to sell directly to its customers in markets outside the United
States. Guidant currently sells its products in 67 countries and continues to
expand its international marketing efforts. International sales accounted for
28% and 31% of Guidant's net sales for 1993 and 1994, respectively.
Guidant's vascular intervention operations are conducted through its
subsidiaries Advanced Cardiovascular Systems, Inc. ("ACS") and Devices for
Vascular Intervention, Inc. ("DVI"), its CRM operations are conducted through
its subsidiaries Cardiac Pacemakers, Inc. ("CPI") and Heart Rhythm Technologies
Incorporated ("HRT") and its operations relating to MIS products are conducted
through its subsidiary Origin Medsystems, Inc. ("Origin"). Guidant also
conducts its business outside the United States through its various
international subsidiaries. Guidant's principal executive offices are located
at 111 Monument Circle, 29th Floor, Indianapolis, Indiana 46204-5129. Guidant's
telephone number is (317) 971-2000.
7
<PAGE>
RISK FACTORS
Set forth below are the principal factors which Guidant believes represent
all of the material risks in an investment in the Guidant Common Stock offered
hereby: tendering and nontendering shareholders affected differently by the
Transaction; tax treatment of the Transaction; market uncertainties with
respect to Guidant Common Stock and Lilly Common Stock; stringent government
regulation of Guidant's products; Guidant's dependence on patents and
proprietary rights; Guidant's reliance on trade secrets and proprietary
technology; substantial patent litigation in the medical devices industry;
significant competition and continual technological change in the medical
devices industry; Guidant's dependence on sole sources of supply; cost
pressures on medical technology; potential impact of proposed health care
reform; limitations on third party reimbursement; potential impact of an
investigation by the United States Department of Health and Human Services
regarding reimbursement procedures; potential product liability and product
recalls; substantial leverage; restrictions imposed on Guidant by the Credit
Agreements (as defined herein); anti-takeover provisions; and potential tax
liability of Guidant.
THE TRANSACTION
Pursuant to the Exchange Offer, Lilly is offering, upon the terms and subject
to the conditions thereof, to exchange 3.49 shares of Guidant Common Stock for
each share of Lilly Common Stock up to an aggregate of 16,504,298 shares of
Lilly Common Stock. As of July 31, 1995, there were 292,011,493 shares of Lilly
Common Stock outstanding.
If fewer than 16,504,298 shares of Lilly Common Stock (but at least 8,252,149
shares) are tendered and exchanged for Guidant Common Stock pursuant to the
Exchange Offer and Lilly accordingly continues to own shares of Guidant Common
Stock after consummation of the Exchange Offer, Lilly will, as soon as
practicable thereafter, effect the Spin-Off of the remaining shares of Guidant
Common Stock owned by Lilly as a pro rata distribution to holders of Lilly
Common Stock remaining after consummation of the Exchange Offer. Lilly
currently holds 57,600,000 shares of Guidant Common Stock.
PURPOSE AND EFFECTS OF THE TRANSACTION
Lilly announced in January 1994 that it had decided to separate its MDD
Division from its core pharmaceutical business. The decision was based on a
thorough strategic review by Lilly of its operations. The Transaction will,
among other things, (i) allow Guidant to implement more focused incentive
compensation programs (including an employee stock ownership plan) designed to
better attract, retain and motivate employees by offering employees the ability
to own equity in a medical device company, (ii) permit each company to focus
its managerial and financial resources on the growth of its business and (iii)
enhance the competitive positions of Lilly's core pharmaceutical business and
Guidant's medical device business. In addition, Lilly believes that the
Transaction will maximize shareholder value for both Lilly and Guidant.
In June 1994, Lilly announced that it intended to form Guidant to be the
parent of five of the nine businesses in the MDD Division of Lilly and its
subsidiaries. In December 1994, 14,260,000 newly issued shares of Guidant
Common Stock were sold pursuant to an initial public offering (the "Offering").
Lilly currently beneficially owns 80.2% of the outstanding shares of Guidant
Common Stock. As part of Lilly's plan to consummate the separation of its MDD
Division, Lilly is implementing the Transaction.
PRICE RANGE AND DIVIDENDS
Lilly Common Stock and Guidant Common Stock are listed on the NYSE and the
PSE. From August 15, 1994 to August 15, 1995, the high and low sale prices per
share of Lilly Common Stock as reported in
8
<PAGE>
the consolidated transactions reporting system on the NYSE were $79 3/8 and $52
1/2, respectively. Lilly has paid quarterly cash dividends of $0.625 per share
in 1994 and $0.645 per share beginning in the quarter ended March 31, 1995. The
declaration and payment of future dividends to holders of Lilly Common Stock
will be at the discretion of the Board of Directors of Lilly and will depend
upon many factors, including Lilly's competitive position, financial condition,
earnings and capital requirements.
From December 14, 1994 (the commencement of trading) to August 15, 1995, the
high and low sale prices per share of Guidant Common Stock as reported in the
consolidated transactions reporting system on the NYSE were $26 3/4 and $14
1/2, respectively.
On July 17, 1995, the Board of Directors of Guidant declared a cash dividend
of $0.025 per share payable on September 18, 1995 to shareholders of record on
August 18, 1995. This was the first dividend declared by Guidant since the
Offering. The declaration and payment of future dividends, if any, to holders
of Guidant Common Stock will be at the discretion of the Board of Directors of
Guidant and will depend upon many factors, including Guidant's competitive
position, financial condition, earnings and capital requirements. Accordingly,
there is no requirement or assurance that future dividends will be declared or
paid.
THE EXCHANGE OFFER
Terms of the Exchange
Offer...................... Lilly is offering, upon the terms and subject to
the conditions of the Exchange Offer, to exchange
3.49 shares of Guidant Common Stock for each
share of Lilly Common Stock up to an aggregate of
16,504,298 shares of Lilly Common Stock. A holder
of Lilly Common Stock has the right to tender
all, or a portion, of such holder's shares of
Lilly Common Stock. If fewer than 16,504,298
shares of Lilly Common Stock (but at least
8,252,149 shares) are validly tendered and not
properly withdrawn pursuant to the Exchange Offer
and the Exchange Offer is consummated, Lilly will
distribute the remaining shares of Guidant Common
Stock pro rata to remaining holders of Lilly Com-
mon Stock as soon as practicable after consumma-
tion of the Exchange Offer. See "The Spin-Off."
If more than 16,504,298 shares of Lilly Common
Stock are validly tendered and not properly with-
drawn, Lilly will accept all of such shares on a
pro rata basis (except with respect to odd lot
tenders) as described herein in exchange for the
shares of Guidant Common Stock. To be eligible to
receive Guidant Common Stock pursuant to the Ex-
change Offer, a holder of Lilly Common Stock must
validly tender and not withdraw Lilly Common
Stock on or prior to the Expiration Date. See
"The Exchange Offer--Terms of the Exchange
Offer."
Expiration Date............. 12:00 Midnight, New York City time, on Monday,
September 18, 1995, unless extended, in which
case the term "Expiration Date" shall mean the
last date and time to which the Exchange Offer is
extended. See "The Exchange Offer--Extension of
Tender Period; Termination; Amendment."
Conditions of the Exchange
Offer...................... The Exchange Offer is subject to certain condi-
tions including at least 8,252,149 shares of
Lilly Common Stock (approximately 2.8% of the
outstanding Lilly Common Stock and a sufficient
number
9
<PAGE>
of shares of Lilly Common Stock to result in at
least 50% of the Guidant Common Stock to be dis-
tributed being exchanged pursuant to the Exchange
Offer) being validly tendered and not withdrawn
prior to the Expiration Date. All of the condi-
tions to the Exchange Offer may be waived in the
good faith reasonable judgment of Lilly. See "The
Exchange Offer--Certain Conditions of the Ex-
change Offer."
Procedures for Tendering.... To be tendered properly, certificates for shares
of Lilly Common Stock, together with a properly
completed and duly executed Letter of Transmittal
(or manually signed facsimile thereof), or an
Agent's Message (as defined herein) in connection
with a book-entry transfer of shares and any
other documents required by the Letter of Trans-
mittal must be received by the Exchange Agent at
one of the addresses set forth on the back cover
of this Offering Circular - Prospectus prior to
12:00 Midnight, New York City time, on the Expi-
ration Date, or shareholders must comply with the
specific procedures for guaranteed delivery de-
scribed herein. Delivery of any of the aforemen-
tioned required documents to any address other
than as set forth herein will not constitute
valid delivery thereof. Certain financial insti-
tutions may also effect tenders by book-entry
transfer through a Book-Entry Transfer Facility
(as defined herein). Holders of Lilly Common
Stock having shares registered in the name of a
broker, dealer, commercial bank, trust company or
nominee are urged to contact such person promptly
if they wish to tender any shares of Lilly Common
Stock pursuant to the Exchange Offer. See "The
Exchange Offer--Procedures for Tendering Shares
of Lilly Common Stock."
Proration................... If more than 16,504,298 shares of Lilly Common
Stock have been validly tendered for exchange and
not withdrawn on or prior to the Expiration Date,
Lilly will accept such shares on a pro rata ba-
sis, except that any holder of shares of Lilly
Common Stock who beneficially owns fewer than 100
shares of Lilly Common Stock and who validly ten-
ders and does not withdraw all such shares of
Lilly Common Stock prior to the Expiration Date
will not be subject to proration if such holder
completes Section I.C. of the Letter of Transmit-
tal entitled "Odd Lot Shares," and, if applica-
ble, the box captioned "Odd Lots" on the Notice
of Guaranteed Delivery. See "The Exchange Offer--
Tenders for Exchange by Holders of Fewer than 100
Shares of Lilly Common Stock."
Withdrawal Rights........... Subject to the conditions set forth herein, ten-
ders of Lilly Common Stock may be withdrawn at
any time on or prior to the Expiration Date, and,
unless theretofore accepted for exchange, after
October 17, 1995. See "The Exchange Offer--With-
drawal Rights."
No Fractional Shares........ No fractional shares of Guidant Common Stock will
be distributed. Holders of Lilly Common Stock who
would otherwise be enti-
10
<PAGE>
tled to receive a fractional share of Guidant
Common Stock will be paid cash in lieu of such
fractional share. See "The Exchange Offer."
Delivery of Guidant Common
Stock...................... Lilly will deliver shares of Guidant Common Stock
and cash in lieu of fractional shares as soon as
practicable after acceptance of Lilly Common
Stock for exchange. See "The Exchange Offer--Ex-
change of Shares of Lilly Common Stock."
Exchange Agent.............. The First National Bank of Boston is serving as
the Exchange Agent in connection with the Ex-
change Offer. Its telephone number is (617) 575-
2700.
Information Agent........... D.F. King & Co., Inc. is serving as the Informa-
tion Agent in connection with the Exchange Offer.
Its telephone number is: in the United States,
(800) 207-3158; in Europe (44) 171-600-5005 (call
collect); and outside the United States and Eu-
rope, (212) 269-5550 (call collect).
Certain Federal Income Tax
Consequences of the
Transaction................ Lilly has received an advance private letter rul-
ing (the "Ruling Letter") from the Internal Reve-
nue Service (the "IRS") stating that the Transac-
tion will qualify as a distribution that is tax-
free to Lilly's shareholders (except with respect
to cash received in lieu of fractional shares)
and, in general, is tax-free to Lilly. For a more
complete discussion of the United States federal
income tax consequences of the Transaction to
holders of Lilly Common Stock, see "Certain Fed-
eral Income Tax Consequences."
Regulatory Approvals........ Except with respect to possible filings under the
Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act") under certain circumstances,
Lilly and Guidant do not believe that the receipt
of any material federal or state regulatory ap-
provals will be necessary in connection with the
Transaction. See "The Transaction--Regulatory Ap-
provals."
Appraisal Rights............ No appraisal rights are available to shareholders
of Lilly or Guidant in connection with the Trans-
action. See "The Transaction--Appraisal Rights."
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF GUIDANT
(IN MILLIONS, EXCEPT OTHER DATA AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ---------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------ ------ ------ ------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Vascular intervention.. $ 225.0 $ 229.3 $464.5 $451.6 $423.7 $376.9 $315.9
CRM.................... 209.5 172.4 378.6 336.5 329.9 304.3 246.7
MIS(1)................. 14.4 9.0 19.3 6.6 1.2 -- --
------- ------- ------ ------ ------ ------ ------
Total net sales....... 448.9 410.7 862.4 794.7 754.8 681.2 562.6
Cost of sales........... 144.4 132.9 270.9 236.2 211.8 168.9 135.0
Research and
development............ 67.8 65.2 130.9 129.1 117.9 100.4 87.6
Sales, marketing and
administrative......... 139.3 128.8 268.9 255.1 251.0 209.1 178.7
Restructuring and
special charges........ -- -- -- 81.5 32.9 -- --
Income from operations.. 97.4 83.8 191.7 92.8 141.2 202.8 161.3
Other expenses-net...... 25.8 11.3 35.8 5.8 20.1 13.5 28.8
Net income.............. 42.3 42.9 92.1 50.6 76.8 115.6 81.6
Earnings per share(2)... 0.59 -- -- -- -- -- --
Pro forma net income(2). -- 30.2 76.2 -- -- -- --
Pro forma earnings per
share(2)............... -- 0.42 1.06 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------------------
1995 1994 1993 1992 1991 1990
----------- -------- -------- -------- ------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ (308.5)(3) $ 116.8 $ 143.3 $ 136.9 $101.7 $ 58.5
Total assets............ 1,023.6 1,103.6 1,288.6 1,118.0 935.7 754.0
Short-term borrowings... 458.0(3) -- -- -- -- --
Long-term debt.......... -- 473.0(4) -- 2.1 2.4 2.8
Shareholders' equity.... 306.8(3) 264.4(5) 1,048.3 942.7 747.2 620.3
Borrowings as a
percentage of total
capitalization(6)...... 59.9% 64.1% -- 0.2% 0.3% 0.5%
Book value per share.... $ 4.27 $ 3.68 -- -- -- --
OTHER DATA:
Full-time employee
equivalents............ 5,164 5,055 5,462 4,864 4,316 3,791
</TABLE>
--------
(1) Sales of MIS products are attributed to the operations of Origin, which was
acquired in 1992.
(2) Guidant has reported 1994 earnings per share on a pro forma basis for 1995
comparisons. Pro forma adjustments give effect to the following
transactions as if they occurred on January 1, 1994: (i) borrowings under
the Credit Agreements, (ii) dividends to Lilly and (iii) receipt of
proceeds from the Offering. Historical earnings per share is not presented
since such data is not meaningful due to the changes in Guidant's capital
structure and other transactions in connection with the Offering.
(3) Borrowings under the Credit Agreements mature on January 8, 1996. As a
result, outstanding borrowings, which were $458.0 million on June 30, 1995,
are classified as a current liability and result in a working capital
deficit.
(4) Long-term debt at December 31, 1994 increased from December 31, 1993 as a
result of borrowings under the Credit Agreements.
(5) The decline in shareholders' equity from December 31, 1993 to December 31,
1994 was primarily attributable to dividends to Lilly.
(6) This percentage is computed by dividing the sum of short-term borrowings
and long-term debt by total capitalization. Total capitalization is
computed as the sum of short-term borrowings, long-term debt and
shareholders' equity.
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF LILLY
(IN MILLIONS, EXCEPT OTHER DATA AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------
PRO PRO
FORMA FORMA
1995(1) 1995 1994 1994(1) 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- -------- -------- --------
--------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $3,332.1 $3,332.1 $2,655.9 $5,890.3 $5,711.6 $5,198.5 $4,963.1 $4,533.4 $4,179.0
Income from continuing
operations before
income taxes and
cumulative effect of
changes in accounting
principles............. 964.5 964.5 893.3 1,431.6 1,698.6 662.8 1,193.5 1,626.3 1,418.1
Income from continuing
operations before
cumulative effect of
changes in accounting
principles............. 684.8 684.8 619.9 989.2 1,185.1 464.8 842.5 1,166.1 1,022.7
Discontinued operations,
net of tax............. -- 35.5 57.4 -- 101.0 26.3 (14.9) 148.6 104.6
Income before cumulative
effect of changes in
accounting principles.. -- 720.3 677.3 -- 1,286.1 491.1 827.6 1,314.7 1,127.3
Cumulative effect of
changes in accounting
principles, net of tax. -- -- -- -- -- (10.9) (118.9) -- --
Net income.............. -- 720.3 677.3 -- 1,286.1 480.2 708.7 1,314.7 1,127.3
PER SHARE DATA:
Income from continuing
operations............. $ 2.51 $ 2.37 $ 2.14 $ 3.63 $ 4.10 $ 1.58 $ 2.86 $ 3.99 $ 3.54
Income (loss) from
discontinued
operations............. -- .12 .20 -- .35 .09 (.05) .51 .36
Cumulative effect of
changes in accounting
principles............. -- -- -- -- -- (.04) (.40) -- --
Net income.............. -- 2.49 2.34 -- 4.45 1.63 2.41 4.50 3.90
Cash dividends declared. -- 1.29 1.25 -- 2.52 2.44 2.255 2.05 1.73
Ratio of earnings to
fixed charges(2)....... 7.0x 7.0x 19.6x 5.1x 14.0x 7.6x 11.7x 19.1x 15.7x
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------ ------------------------------------------------
PRO
FORMA
1995(1) 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (at
end of period):
Current assets.......... $3,929.5 $4,410.3 $3,962.3 $3,697.1 $3,006.0 $2,939.3 $2,501.3
Other assets............ 5,899.3 6,219.4 6,133.6 1,726.3 1,594.7 1,576.8 1,704.8
Property and equipment.. 4,139.4 4,467.6 4,411.5 4,200.2 4,072.1 3,782.5 2,936.7
Total assets............ 13,968.2 15,097.2 14,507.4 9,623.6 8,672.8 8,298.6 7,142.8
Short-term borrowings... 2,710.5 3,169.2 2,724.4 524.8 591.2 690.2 1,239.5
Other current
liabilities............ 2,303.4 2,484.0 2,945.1 2,403.2 1,807.4 1,581.8 1,578.1
Long-term debt.......... 2,101.7 2,102.1 2,125.8 835.2 582.3 395.5 277.0
Other noncurrent
liabilities............ 1,321.6 1,368.1 1,356.5 1,291.6 799.8 665.0 580.7
Shareholders' equity.... 5,531.0 5,973.8 5,355.6 4,568.8 4,892.1 4,966.1 3,467.5
Borrowings as a
percentage of total
capitalization(3)...... 46.5% 46.9% 47.5% 22.9% 19.3% 17.9% 30.4%
Book value per share.... $ 20.08 $ 20.47 $ 18.35 $ 15.61 $ 16.72 $ 16.97 $ 12.98
</TABLE>
--------
(1) Adjusted to give effect to the pro forma adjustments described under
"Unaudited Pro Forma Consolidated Financial Information of Lilly."
(2) The ratio of earnings to fixed charges is computed by dividing the sum of
income from continuing operations before income taxes and cumulative effect
of changes in accounting principles and fixed charges excluding capitalized
interest by fixed charges. Fixed charges represent interest on indebtedness
from continuing operations.
(3) This percentage is computed by dividing the sum of short-term borrowings
and long-term debt by total capitalization. Total capitalization is
computed as the sum of short-term borrowings, long-term debt and
shareholders' equity.
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RISK FACTORS
In considering whether or not to accept the Exchange Offer, holders of Lilly
Common Stock should carefully consider all information contained in this
Offering Circular - Prospectus, especially the matters described or referred to
in the following paragraphs, which Guidant believes represent all of the
material risks in an investment in the Guidant Common Stock offered hereby.
TENDERING AND NONTENDERING SHAREHOLDERS AFFECTED DIFFERENTLY BY THE TRANSACTION
Holders of shares of Lilly Common Stock will be affected by the Transaction
regardless of whether such holders tender some, all or none of their shares of
Lilly Common Stock for exchange pursuant to the Exchange Offer. Holders of
shares of Lilly Common Stock who tender all of their shares for exchange
pursuant to the Exchange Offer will no longer have an ownership interest in
Lilly unless more than 16,504,298 shares of Lilly Common Stock are tendered for
exchange and such holder's tendered shares are accordingly prorated (other than
shareholders holding less than 100 shares and tendering all such shares and
completing Section I.C. of the Letter of Transmittal entitled "Odd Lot Shares,"
and, if applicable, the box captioned "Odd Lots" on the Notice of Guaranteed
Delivery). Holders of shares of Lilly Common Stock who do not tender any of
their shares for exchange pursuant to the Exchange Offer will not receive
shares of Guidant Common Stock unless a spin-off is consummated, and will in
any event own fewer shares of Guidant Common Stock than if they had
participated in the Exchange Offer. Such holders will continue to have an
ownership interest in Lilly, which percentage interest will have been increased
as a result of the Exchange Offer. In addition, as a result of the Transaction,
Lilly will no longer own any interest in Guidant.
TAX TREATMENT OF THE TRANSACTION
In November 1994, Lilly received the Ruling Letter from the IRS stating that,
for United States federal income tax purposes, the Transaction will qualify
under Sections 355 and 368 of the Internal Revenue Code of 1986, as amended
(the "Code"), as a distribution that is tax-free to Lilly's shareholders
(except with respect to cash received in lieu of fractional shares) and, in
general, is tax-free to Lilly. Nevertheless, if Lilly consummates the
Transaction and the Transaction is held to be taxable, both Lilly and its
shareholders could be subject to tax on the Transaction, which tax could be
material. See "Certain Federal Income Tax Consequences."
The Tax Sharing Agreement (as defined herein) provides that if the
Transaction fails to qualify under Section 355 as a tax-free distribution as a
result of any event wholly or partially within the control of Guidant (or any
of its subsidiaries) involving either the stock or assets (or any combination
thereof) of Guidant (or any of its subsidiaries) within three years of the date
of the Transaction, then Guidant is obligated to indemnify and to hold Lilly
harmless from any tax liability imposed upon Lilly in connection with the
Transaction. Any such obligation of Guidant to indemnify Lilly would have a
material adverse effect on Guidant. See "Relationship Between Guidant and
Lilly--Tax Sharing Agreement."
MARKET UNCERTAINTIES WITH RESPECT TO GUIDANT COMMON STOCK AND LILLY COMMON
STOCK
The Transaction will increase the number of publicly held shares of Guidant
Common Stock and the number of shareholders of Guidant. If significant numbers
of holders of Lilly Common Stock who receive shares of Guidant Common Stock
pursuant to the Transaction attempt to sell such shares on the open market
shortly after the Transaction, the market price for Guidant Common Stock in the
short-term could be adversely affected.
The reduction in the number of shares of Lilly Common Stock outstanding will
increase the proportionate ownership interest in Lilly of shareholders of Lilly
who do not tender pursuant to the Exchange Offer.
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<PAGE>
STRINGENT GOVERNMENT REGULATION
Guidant's products are subject to extensive regulation by the federal Food
and Drug Administration ("FDA") and, in some jurisdictions, by state and
foreign governmental authorities. In particular, Guidant must obtain specific
clearance from the FDA before it can market products in the United States. The
process of obtaining such clearances can be time consuming and expensive, and
there can be no assurance that all clearances sought by Guidant will be granted
or that FDA review will not involve delays adversely affecting the marketing
and sale of Guidant's products. Current FDA enforcement policy prohibits the
promotion or labeling of approved medical devices for unapproved uses. Guidant
is also required to adhere to the manufacturing, testing, control, labeling,
documentation and product surveillance requirements of the FDA. These
regulations may have a material impact on Guidant's business. Recently, the FDA
has pursued a more rigorous enforcement program to ensure that regulated
businesses, like Guidant's, comply with applicable laws and regulations.
Medical device laws are also in effect in many of the foreign countries where
Guidant does business. Federal, state and foreign regulations regarding the
manufacture and sale of medical devices are subject to future changes. For
example, the FDA is currently considering major revisions to its Good
Manufacturing Practices ("GMP") regulations. Such revisions may have a material
impact on Guidant's business. If the FDA believes that a company is not in
compliance with applicable regulations, it can institute proceedings to detain
or seize products, issue a recall, impose operating restrictions, enjoin future
violations and assess civil and criminal penalties against the company, its
officers or its employees and can recommend criminal prosecution to the
Department of Justice. Other regulatory agencies may have similar powers. In
addition, product approvals could be withdrawn due to the failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial marketing. In addition, any adverse regulatory action, depending on its
magnitude, may have a material adverse effect on Guidant. See "Business of
Guidant--Government Regulation."
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
Guidant owns numerous United States and foreign patents and has numerous
patent applications pending. Guidant also has license rights to certain patents
held by third parties. Guidant is currently subject to claims of, and legal
actions alleging, infringement by Guidant of the patent rights of others. An
adverse outcome with respect to any one or more of these claims or actions or
any future claims or actions could have a material adverse effect on Guidant.
See "Business of Guidant--Legal Proceedings." In addition, there can be no
assurance that pending patent applications will result in issued patents, that
patents issued to or licensed by Guidant will not be challenged or circumvented
by competitors or that such patents will be found to be valid or sufficiently
broad to protect Guidant's technology or provide Guidant with any competitive
advantage. Third parties could also obtain patents that may require licensing
for the conduct of Guidant's business. See "Business of Guidant--Patents,
Trademarks, Proprietary Rights and Licenses."
RELIANCE ON TRADE SECRETS AND PROPRIETARY TECHNOLOGY
Guidant also relies on trade secrets and proprietary technology that it seeks
to protect, in part, through confidentiality agreements with certain employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that Guidant will have adequate remedies for any breach,
that others will not independently develop substantially equivalent proprietary
information or that third parties will not otherwise gain access to Guidant's
trade secrets.
SUBSTANTIAL PATENT LITIGATION
There has been substantial litigation regarding patent and other intellectual
property rights in the medical devices industry. Historically, litigation has
been necessary to enforce certain patent rights held by Guidant. Future
litigation by Guidant may be necessary to enforce its patent rights, to protect
its trade secrets or know-how or to defend it against claimed infringement of
the rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation could result in substantial cost to and
diversion of effort by Guidant. Adverse determinations in any such litigation
could subject Guidant to
15
<PAGE>
significant liabilities to third parties, could require Guidant to seek
licenses from third parties and could prevent Guidant from manufacturing,
selling or using certain of its products, any of which could have a material
adverse effect on Guidant. See "Business of Guidant--Patents, Trademarks,
Proprietary Rights and Licenses" and "Business of Guidant--Legal Proceedings."
SIGNIFICANT COMPETITION AND CONTINUAL TECHNOLOGICAL CHANGE
The medical devices market is highly competitive. Guidant competes with many
companies, some of which may have access to greater financial and other
resources than Guidant. Furthermore, the medical devices market is
characterized by rapid product development and technological change. The
present or future products of Guidant could be rendered obsolete or uneconomic
by technological advances by one or more of Guidant's current or future
competitors or by other therapies such as drugs. Guidant must continue to
develop new products and technology to remain competitive with other developers
of such medical devices and therapies. See "Business of Guidant--Competition."
Guidant's business strategy emphasizes the continued development and
commercialization of new products and the enhancement of existing products for
Guidant's markets. There can be no assurance that Guidant will be able to
develop new products and to enhance existing products, to manufacture these
products in a commercially viable manner, to obtain required regulatory
approvals or to gain satisfactory market acceptance for such products.
DEPENDENCE ON SOLE SOURCES OF SUPPLY
Guidant purchases certain of the materials and components used in
manufacturing its products. Certain of these supplies are custom-made for
Guidant. In addition, Guidant purchases certain supplies from single sources
due to quality considerations, costs or constraints resulting from regulatory
requirements. In the past, certain suppliers have announced that, in an effort
to reduce potential product liability exposure, such suppliers intend to limit
or terminate sales of certain supplies to the medical devices industry. In
addition, agreements with certain suppliers are terminable by either party upon
short notice. Guidant has agreed to indemnify certain suppliers for certain
potential product liability exposure. Lilly has guaranteed the performance by
Guidant of certain of the indemnification obligations. Lilly has agreed with
Guidant, pursuant to the Transfer Agreement (as defined herein), that Lilly
will not terminate its guarantee obligations for any such supply agreements to
which it is a party prior to December 1997, unless any such supplier has
consented to the termination or assignment of such obligation. The
establishment of additional or replacement suppliers for certain components or
materials cannot be accomplished quickly, largely due to the FDA approval
system and the complex nature of manufacturing processes employed by many
suppliers. The inability to develop satisfactory alternatives, if required, or
a reduction or interruption in supply or a significant increase in the price of
materials or components could have a material adverse effect on Guidant.
COST PRESSURES ON MEDICAL TECHNOLOGY
Guidant believes that the overall escalating cost of health care products and
services has led and will continue to lead to increased pressures upon the
health care industry to reduce the cost of products and services, which will
include those offered by Guidant.
POTENTIAL IMPACT OF PROPOSED HEALTH CARE REFORM
During the past several years, several comprehensive health care reform
proposals were introduced in the United States Congress. The intent of the
proposals was, generally, to expand health care coverage for the uninsured and
reduce total health care expenditures. Various provisions contained in these
proposals would have dramatically altered health care delivery and payment in
the United States.
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<PAGE>
It is expected that future health care reform will be proposed in more of a
"piecemeal" approach. Specific areas that may be addressed include insurance
market reforms, medical and product liability, fraud and abuse statutes and
administrative simplification.
Certain states have already made significant changes to their Medicaid
programs and have also adopted health care reform. Efforts by individual states
to expand coverage and/or reduce costs are expected to accelerate during 1995
and 1996. Features of such state proposals could include state single payer
plans, global budgets, technology assessment panels, the creation of large
purchasing pools or mandates on employers to provide coverage. The success of
many state initiatives may depend on overcoming regulations imposed by the
Employee Retirement Income Security Act ("ERISA"). Among other things, ERISA
regulates health insurance programs offered by multi-state employers who are
self insured. In order to enact certain reforms, states would be required to
seek modifications to ERISA itself.
Implementation of health care reform may limit the price of, or the level at
which reimbursement is provided for, Guidant's products. In addition, health
care reform may accelerate the growing trend toward involvement by hospital
administrators, purchasing managers and buying groups in purchasing decisions.
This trend may lead to increased emphasis on the cost-effectiveness of any
treatment regimen. Similar initiatives to limit the growth of health care
costs, including price regulation, are also underway in several other countries
in which Guidant does business. No assurance can be given that any such reforms
will not have a material adverse effect on the medical devices industry in
general, or Guidant in particular. See "Business of Guidant--Health Care
Reform; Third Party Reimbursement."
LIMITATIONS ON THIRD PARTY REIMBURSEMENT
Guidant's products are purchased principally by hospitals or physicians.
Hospitals typically bill various third party payors, such as governmental
programs (e.g., Medicare and Medicaid), private insurance plans and managed
care plans, for the health care services provided to their patients. Third
party payors are increasingly negotiating the prices charged for medical
products and services. If hospitals respond to such pressures by substituting
lower cost products or other therapies for Guidant's products, Guidant could be
adversely affected. Moreover, third party payors may deny reimbursement if it
is determined that a device was not used in accordance with cost-effective
treatment methods as determined by the payor, was experimental, or for other
reasons. See "Business of Guidant--Health Care Reform; Third Party
Reimbursement."
The ability of customers to obtain appropriate reimbursement for their
products and services from government and third party payors is critical to the
success of all medical device companies around the world. Several foreign
governments (most notably Germany and Spain) have attempted to reshape
reimbursement policies affecting medical devices. In the United States,
investigations by the Office of the Inspector General (the "OIG") of the United
States Department of Health and Human Services ("HHS") have had a negative
effect on reimbursement for products used as part of FDA approved clinical
trials. Further, Congress is currently considering legislation that would apply
certain health care fraud and abuse statutes to all payors. Restrictions on
reimbursement of Guidant's customers will likely have an impact on the products
purchased by customers and the prices they are willing to pay.
POTENTIAL IMPACT OF HHS INVESTIGATION REGARDING REIMBURSEMENT PROCEDURES
The OIG is currently conducting an investigation regarding the possible
submission by hospitals or other health care providers of false or improper
claims to the Medicare/Medicaid programs for reimbursement for procedures using
cardiovascular medical devices that were not approved for marketing by the FDA
at the time of use. Several medical devices companies, including CPI and DVI,
subsidiaries of Guidant, have received subpoenas from the OIG for records
relating to the distribution to hospitals of products under clinical study.
Beginning in June 1994, approximately 130 hospitals received subpoenas from HHS
seeking information specific to practices in seeking reimbursement from
Medicare/Medicaid for procedures using
17
<PAGE>
cardiovascular medical devices (including those manufactured by CPI, ACS and
DVI, subsidiaries of Guidant, as well as numerous other manufacturers) that
were not approved for marketing by the FDA at the time of use. The subpoenas
sent to hospitals also seek information regarding various types of
remuneration, including payments, gifts, stock and stock options, received by
the hospital or its employees from manufacturers of medical devices.
Significant sanctions may be imposed against any person, including a health
care provider or medical devices manufacturer, that makes, or causes to be
made, a false claim for Medicare or Medicaid payment. These sanctions may
include civil fines and penalties, criminal penalties, remedies under the
Program Fraud Remedies Act of 1986, the False Claims Act and the Medicare Fraud
and Abuse Act, state disciplinary proceedings and, in the case of providers,
exclusion from the Medicare and Medicaid programs. The OIG's investigation and
any related change in reimbursement practices could cause hospitals to decide
not to participate in clinical trials or to treat Medicare and Medicaid
patients only with medical devices that have been cleared for marketing by the
FDA. There can be no assurance that the OIG's investigation or any changes in
third party payors' reimbursement practices will not materially adversely
affect the medical devices industry in general, or Guidant in particular. See
"Business of Guidant--Health Care Reform; Third Party Reimbursement."
POTENTIAL PRODUCT LIABILITY; PRODUCT RECALLS
Guidant's business exposes it to potential product liability risks which are
inherent in the design, manufacture and marketing of medical devices. Guidant's
products are often used in intensive care settings with seriously ill patients.
In addition, many of the medical devices manufactured and sold by Guidant are
designed to be implanted in the human body for long periods of time. Component
failures, manufacturing flaws, design defects or inadequate disclosure of
product-related risks or product-related information with respect to these or
other products manufactured or sold by Guidant could result in an unsafe
condition or injury to, or death of, the patient. The occurrence of such a
problem could result in product liability claims and/or a recall of, or safety
alert relating to, one or more of Guidant's products which could ultimately
result, in certain cases, in the removal from the body of such products. There
can be no assurance that Guidant's current product liability insurance will be
adequate or that Guidant will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts. Product liability claims or product
recalls in the future, regardless of their ultimate outcome, could have a
material adverse effect on Guidant's business and reputation and on its ability
to attract and retain customers for its products. See "--Dependence on Sole
Sources of Supply" and "Business of Guidant--Product Liability and Insurance."
SUBSTANTIAL LEVERAGE; RESTRICTIONS IMPOSED ON GUIDANT BY THE CREDIT AGREEMENTS
As of June 30, 1995, Guidant had $458.0 million of aggregate borrowings
outstanding under credit agreements entered into by certain of Guidant's
subsidiaries with certain banks, dated as of June 8, 1994, as amended (the
"Credit Agreements"). Guidant's related debt as a percentage of its total
capitalization at June 30, 1995 was approximately 60% while Guidant's related
interest coverage ratio (which measures the relationship between income and
debt charges and is computed by dividing income before interest charges and
taxes by interest charges) as of the same date was 5.8. The degree to which
Guidant is leveraged may have important consequences to Guidant's operations,
including the following: (i) the ability of Guidant to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, or other purposes, should it need to do so, may be impaired; (ii)
Guidant may not have the ability to refinance its borrowings under the Credit
Agreements on terms acceptable to it; (iii) Guidant will be more highly
leveraged than other medical device companies, which may place it at a
competitive disadvantage; and (iv) Guidant's leverage may make it more
vulnerable to a downturn in its business. See "Description of the Guidant
Credit Agreements."
ANTI-TAKEOVER PROVISIONS
Certain provisions of Guidant's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and By-laws, including the
provisions in the Articles of Incorporation providing for (i) the issuance of
blank check preferred stock by the Board of Directors without shareholder
approval, (ii) higher shareholder voting requirements for certain transactions
such as business combinations, (iii) classification of the Board of Directors
into three classes, (iv) the removal of directors by a vote of 80% of Guidant's
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outstanding voting power and (v) exculpation of directors in certain
circumstances, and Guidant's shareholder rights plan may have the effect of
delaying, deferring or preventing a change of control of Guidant without
further action by the shareholders, may discourage bids for Guidant Common
Stock at a premium over the market price of Guidant Common Stock and may
adversely affect the market price of, and the voting and other rights of, the
holders of Guidant Common Stock. In addition, certain "anti-takeover"
provisions of the Indiana Business Corporation Law, including the Indiana
Control Share Act and the Indiana Business Combination Act, restrict the
ability of shareholders to effect a merger or business combination or obtain
control of Guidant, and may be considered disadvantageous by a shareholder. See
"Description of Guidant Capital Stock--Certain Articles of Incorporation and
By-Laws Provisions of Guidant and Indiana Anti-Takeover Provisions" and "--
Shareholder Rights Plan."
POTENTIAL TAX LIABILITY OF GUIDANT
In connection with the Transaction, Guidant has agreed to indemnify Lilly for
certain taxes resulting from the failure of the Exchange Offer and the Spin-Off
to qualify as tax-free distributions if such failure is attributable to certain
actions by or relating to Guidant, including certain change of control
transactions involving Guidant occurring within three years after the date of
the Transaction. See "Relationship Between Guidant and Lilly--Tax Sharing
Agreement."
PURPOSE AND EFFECTS OF THE TRANSACTION
Lilly announced in January 1994 that it had decided to separate its MDD
Division from its core pharmaceutical business. The decision was based on a
thorough strategic review by Lilly of its operations. The Transaction will,
among other things, (i) allow Guidant to implement more focused incentive
compensation programs (including an employee stock ownership plan) designed to
better attract, retain and motivate employees by offering employees the ability
to own equity in a medical device company, (ii) permit each company to focus
its managerial and financial resources on the growth of its business and (iii)
enhance the competitive positions of Lilly's core pharmaceutical business and
Guidant's medical device business. In addition, Lilly believes that the
Transaction will maximize shareholder value for both Lilly and Guidant.
In June 1994, Lilly announced that it intended to form Guidant to be the
parent of five of the nine businesses in the MDD Division of Lilly and its
subsidiaries. In December 1994, 19.8% of Guidant Common Stock was sold to the
public. Lilly currently owns 80.2% of the outstanding shares of Guidant Common
Stock. As part of Lilly's plan to consummate the separation of its MDD
Division, Lilly is implementing the Transaction.
The Transaction will reduce the number of outstanding shares of Lilly Common
Stock. This reduction will increase the proportionate ownership in Lilly of
shareholders who do not tender Lilly Common Stock pursuant to the Exchange
Offer. The Exchange Offer will also provide Lilly's shareholders with an
opportunity to adjust, in a tax-efficient manner, their investment between
Lilly's remaining life sciences business and Guidant's medical device business.
To the extent that a holder exchanges all of such holder's Lilly Common Stock
pursuant to the Exchange Offer, the holder will no longer participate in any
increase in the value of Lilly Common Stock. Furthermore, any Lilly shareholder
owning an aggregate of less than 100 shares of Lilly Common Stock whose shares
of Lilly Common Stock are accepted for exchange pursuant to the Exchange Offer
will avoid the applicable odd lot discounts payable on sales of odd lots on the
NYSE. The Exchange Offer will also result in a reduction of consolidated long-
term debt as reported on Lilly's balance sheet. In addition, upon consummation
of the Exchange Offer, there will be a reduction in the number of outstanding
shares of Lilly Common Stock, and a corresponding reduction in the aggregate
amount of dividends payable to Lilly shareholders. Amounts resulting from the
reduction in dividend expenditures will be available to Lilly to fund the
development of its pharmaceutical business and for other corporate purposes.
Holders of shares of Lilly Common Stock will be affected by the Transaction
regardless of whether such holders tender their shares of Lilly Common Stock
for exchange pursuant to the Exchange Offer. Holders of
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<PAGE>
shares of Lilly Common Stock who tender all of their shares for exchange
pursuant to the Exchange Offer will no longer have an ownership interest in
Lilly unless more than 16,504,298 shares of Lilly Common Stock are tendered for
exchange and such holder's tendered shares are accordingly prorated (other than
shareholders holding less than 100 shares and tendering all such shares and
completing Section I.C. of the Letter of Transmittal entitled "Odd Lot Shares,"
and, if applicable, the box captioned "Odd Lots" on the Notice of Guaranteed
Delivery). Holders of shares of Lilly Common Stock who do not tender any of
their shares for exchange pursuant to the Exchange Offer will not receive
shares of Guidant Common Stock as a result of the Exchange Offer, although such
shareholders will receive shares of Guidant Common Stock pursuant to the Spin-
Off if fewer than 16,504,298 shares of Lilly Common Stock are tendered pursuant
to the Exchange Offer and the Exchange Offer is consummated. Such holders will
continue to have an ownership interest in Lilly, which percentage interest will
have been increased as a result of the Exchange Offer.
Lilly Common Stock acquired by Lilly pursuant to the Exchange Offer will be
available for issuance by Lilly without further shareholder action (except as
required by applicable law or the rules of national securities exchanges on
which the Lilly Common Stock is listed) for general or other corporate
purposes, including stock splits or dividends, acquisitions, the raising of
additional capital for use in Lilly's business and pursuant to employee stock
plans and benefit plans.
THE TRANSACTION
GENERAL
Pursuant to the Exchange Offer, Lilly is offering, upon the terms and subject
to the conditions thereof, to exchange 3.49 shares of Guidant Common Stock for
each share of Lilly Common Stock tendered and exchanged up to an aggregate of
16,504,298 shares of Lilly Common Stock.
If more than 16,504,298 shares of Lilly Common Stock have been validly
tendered for exchange and not withdrawn on or prior to the Expiration Date,
except as provided herein, Lilly will accept such shares for exchange on a pro
rata basis. If fewer than 16,504,298 shares of Lilly Common Stock (but at least
8,252,149 shares) are tendered and exchanged for Guidant Common Stock pursuant
to the Exchange Offer and Lilly accordingly continues to own shares of Guidant
Common Stock after consummation of the Exchange Offer, Lilly will effect the
Spin-Off of the remaining shares of Guidant Common Stock owned by Lilly as a
pro rata distribution to holders of Lilly Common Stock remaining after
consummation of the Exchange Offer based on their percentage ownership of Lilly
Common Stock after the Exchange Offer.
Lilly currently holds 57,600,000 shares of Guidant Common Stock.
NEITHER THE BOARD OF DIRECTORS OF LILLY NOR LILLY MAKES ANY RECOMMENDATION TO
ANY SHAREHOLDER WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES OF LILLY
COMMON STOCK PURSUANT TO THE EXCHANGE OFFER. EACH SHAREHOLDER OF LILLY MUST
MAKE HIS OR HER OWN DECISION WHETHER TO TENDER SHARES OF LILLY COMMON STOCK
PURSUANT TO THE EXCHANGE OFFER AND, IF SO, HOW MANY SHARES TO TENDER, AFTER
READING THIS OFFERING CIRCULAR -PROSPECTUS AND CONSULTING WITH HIS OR HER
ADVISORS BASED ON HIS OR HER OWN FINANCIAL POSITION AND REQUIREMENTS.
REGULATORY APPROVALS
No filings under the HSR Act are required in connection with the Exchange
Offer generally. To the extent certain shareholders of Lilly decide to
participate in the Exchange Offer and to acquire a number of shares of Guidant
Common Stock that exceeds one of the thresholds stated in the regulations under
the HSR Act, and if an exemption under those regulations does not apply, such
shareholders and Lilly could be required to make filings under the HSR Act, and
the waiting period requirements under the HSR Act may have to be satisfied
before the exchanges by those particular shareholders could be carried out.
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Except as stated above, Lilly and Guidant do not believe that any material
federal or state regulatory approval will be necessary in connection with the
Transaction.
APPRAISAL RIGHTS
No appraisal rights are available to Lilly or Guidant shareholders in
connection with the Transaction.
ACCOUNTING TREATMENT OF THE TRANSACTION
The shares of Lilly Common Stock received pursuant to the Exchange Offer will
be recorded as an increase to treasury stock at the market value of the shares
of Guidant Common Stock distributed on the Expiration Date. The Exchange Offer
will result in a net gain to Lilly, after direct expenses of the disposition,
which will be netted with the gains and losses from the divestitures of Lilly's
other MDD companies and reported as a component of the anticipated gain on the
disposal of discontinued operations. The gain from the Exchange Offer will
result from the difference between the market value and the carrying value of
the shares of Guidant Common Stock distributed.
The remaining shares of Guidant Common Stock, if distributed through a spin-
off, will be accounted for as a dividend with a direct charge to retained
earnings. The amount of the dividend will be equal to Lilly's carrying value of
the shares of Guidant Common Stock distributed in such spin-off.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in the Exchange Offer,
Lilly hereby offers to exchange and will accept for exchange, 3.49 shares of
Guidant Common Stock for each share of Lilly Common Stock, up to a maximum of
16,504,298 shares of Lilly Common Stock, that is validly tendered by the
Expiration Date and not withdrawn as provided in "--Withdrawal Rights." A
holder of Lilly Common Stock has the right to tender all, none or a portion, of
such holder's shares of Lilly Common Stock. The term "Expiration Date" shall
mean 12:00 Midnight, New York City time, on Monday, September 18, 1995, unless
Lilly, in its sole discretion, shall have extended the period of time for which
the Exchange Offer is open, in which event the term "Expiration Date" shall
mean the latest time and date at which the Exchange Offer, as so extended by
Lilly, shall expire. The proration period will also expire on the Expiration
Date.
The exchange ratio of 3.49 shares of Guidant Common Stock for each share of
Lilly Common Stock exchanged was established by Lilly. The principal factors
considered by Lilly in determining the exchange ratio were (i) recent market
prices for Lilly Common Stock and Guidant Common Stock and (ii) advice from the
Dealer Manager with respect to the determination of the exchange ratio in order
to attract a sufficient number of Lilly shareholders to participate in the
Exchange Offer.
It is a condition to the Exchange Offer that at least 8,252,149 shares of
Lilly Common Stock (approximately 2.8% of the outstanding Lilly Common Stock as
of July 31, 1995, and a sufficient number of shares of Lilly Common Stock to
result in at least 50% of the Guidant Common Stock intended to be distributed
by Lilly being exchanged pursuant to the Exchange Offer) be validly tendered
and not withdrawn prior to the Expiration Date (the "Minimum Condition"). If
fewer than 16,504,298 shares of Lilly Common Stock are validly tendered
pursuant to the Exchange Offer and not withdrawn and the Minimum Condition is
satisfied, subject to the other conditions of the Exchange Offer, Lilly intends
to exchange all such tendered shares of Lilly Common Stock for shares of
Guidant Common Stock and to distribute the remaining shares of Guidant Common
Stock intended to be distributed by Lilly to the holders of Lilly Common Stock
remaining following consummation of the Exchange Offer pro rata based on their
respective holdings of Lilly Common Stock. See "The Spin-Off." Upon the terms
and subject to the conditions of the Exchange Offer, if
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more than 16,504,298 shares of Lilly Common Stock have been validly tendered
for exchange and not withdrawn prior to the Expiration Date, Lilly will
exchange shares of Guidant Common Stock for shares of Lilly Common Stock in the
following order of priority:
(a) all shares of Lilly Common Stock tendered for exchange and not
withdrawn prior to the Expiration Date by or on behalf of any shareholder
who beneficially owned an aggregate of fewer than 100 shares of Lilly
Common Stock as of the close of business on August 16, 1995 and who validly
tenders all such shares of Lilly Common Stock (partial tenders for exchange
will not qualify for this preference) and completes Section I.C. of the
Letter of Transmittal entitled "Odd Lot Shares," and, if applicable, the
box captioned "Odd Lots" on the Notice of Guaranteed Delivery; and
(b) after exchange of all of the foregoing shares of Lilly Common Stock,
all other shares of Lilly Common Stock validly tendered and not withdrawn
prior to the Expiration Date on a pro rata basis, if necessary (with
appropriate adjustments to avoid purchases of fractional shares of Lilly
Common Stock).
As a result of such order of priority, shares of Lilly Common Stock described
in clause (a) will not be subject to proration. Shares of Lilly Common Stock
not exchanged for shares of Guidant Common Stock because of proration will be
returned.
Lilly does not expect that it would be able to announce the final proration
factor or to commence delivery of any shares of Guidant Common Stock exchanged
pursuant to the Exchange Offer until approximately seven NYSE trading days
after the Expiration Date if proration of tendered shares of Lilly Common Stock
is required. This delay results from the difficulty in determining the number
of shares of Lilly Common Stock validly tendered for exchange (including shares
of Lilly Common Stock tendered for exchange pursuant to the guaranteed delivery
procedures described in "--Guaranteed Delivery Procedures") and not withdrawn
prior to the Expiration Date and as a result of the "odd lot" procedure
described herein. Preliminary results of proration will be announced by press
release as promptly as practicable after the Expiration Date. Holders of shares
of Lilly Common Stock may obtain such preliminary information from the
Information Agent or the Dealer Manager and may also be able to obtain such
information from their brokers.
No fractional shares of Guidant Common Stock will be distributed. The
Exchange Agent, acting as agent for Lilly shareholders otherwise entitled to
receive fractional shares, will aggregate all fractional shares and sell them
for the accounts of such shareholders. Proceeds from sales of fractional shares
will be paid by the Exchange Agent based upon the average gross selling price
per share of all such sales. Any such cash payments will be made through the
Exchange Agent if such shares of Lilly Common Stock are tendered to the
Exchange Agent, or if such shares of Lilly Common Stock are tendered through a
Book-Entry Transfer Facility (as defined herein), through such Book-Entry
Transfer Facility. The method for handling fractional share interests is
designed so that the amount of cash received by any one shareholder will be
less than the amount that is allocated to one whole share. In those instances
where Lilly knows that a shareholder holds Lilly Common Stock in multiple
accounts, that shareholder's various fractional share interests will be
combined so as to avoid distributing to the shareholder an amount of cash equal
to or greater than the value of one share. None of the Exchange Agent, Lilly,
Guidant, the Dealer Manager or any Soliciting Dealer will guarantee any minimum
sale price for the shares of Guidant Common Stock.
On July 18, 1988, Lilly's Board of Directors declared a dividend distribution
of one Preferred Stock Purchase Right (a "Purchase Right") for each share of
Lilly Common Stock outstanding on July 28, 1988. Shares of Lilly Common Stock
outstanding on, or issued subsequent to, July 28, 1988 automatically include
these Purchase Rights. The Purchase Rights expire on July 28, 1998 unless
redeemed earlier by Lilly. Each Purchase Right entitles its holder to purchase
from Lilly one one-hundredth of a share of Series A Junior Participating
Preferred Stock at a purchase price of $325 per unit, subject to adjustment.
The Purchase Rights are not currently exercisable and trade together with the
shares of Lilly Common Stock associated therewith. The Purchase Rights will not
become exercisable or separately tradeable as a result of the Exchange Offer.
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Absent circumstances causing the Purchase Rights to become exercisable or
separately tradeable prior to the Expiration Date, the tender of any shares of
Lilly Common Stock pursuant to the Exchange Offer will include the tender of
the associated Purchase Rights. No separate consideration will be paid for such
Purchase Rights. Upon the exchange of shares of Lilly Common Stock pursuant to
the Exchange Offer, the holders of the shares so exchanged will no longer own
the Purchase Rights associated with such shares.
The Exchange Offer is subject to certain conditions set forth in "--Certain
Conditions of the Exchange Offer," including the Minimum Condition. If any such
conditions are not satisfied, Lilly may (i) terminate the Exchange Offer and
return all tendered shares of Lilly Common Stock to tendering shareholders,
(ii) extend the Exchange Offer and, subject to withdrawal rights as set forth
in "--Withdrawal Rights," retain all such shares of Lilly Common Stock until
the expiration of the Exchange Offer as so extended, (iii) waive such condition
and, subject to any requirement to extend the period of time during which the
Exchange Offer is open, exchange all shares of Lilly Common Stock validly
tendered for exchange by the Expiration Date and not withdrawn or (iv) delay
acceptance for exchange of or exchange for any shares of Lilly Common Stock
until satisfaction or waiver of such conditions to the Exchange Offer. Lilly's
right to delay acceptance for exchange of, or exchange for, shares of Lilly
Common Stock tendered for exchange pursuant to the Exchange Offer is subject to
the provisions of applicable law, including, to the extent applicable, Rule
13e-4(f)(5) promulgated under the Exchange Act, which requires that Lilly pay
the consideration offered or return the shares of Lilly Common Stock deposited
by or on behalf of Lilly's shareholders promptly after the termination or
withdrawal of the Exchange Offer. For a description of Lilly's right to extend
the period of time during which the Exchange Offer is open and to amend, delay
or terminate the Exchange Offer, see "--Extension of Tender Period;
Termination; Amendment."
This Offering Circular - Prospectus and related Letter of Transmittal will be
mailed to record holders of shares of Lilly Common Stock at the close of
business on August 16, 1995, and will be furnished to brokers, banks and
similar persons whose names, or the names of whose nominees, appear on the
Lilly shareholder list or, if applicable, who are listed as participants in a
clearing agency's security position listing for subsequent transmittal to
beneficial owners of shares of Lilly Common Stock. As of July 31, 1995,
292,011,493 shares of Lilly Common Stock were outstanding.
TENDERS FOR EXCHANGE BY HOLDERS OF FEWER THAN 100 SHARES OF LILLY COMMON STOCK
All shares of Lilly Common Stock validly tendered for exchange and not
withdrawn by or on behalf of persons who beneficially own an aggregate of fewer
than 100 shares of Lilly Common Stock as of the close of business on August 16,
1995, and who validly tender for exchange all such shares of Lilly Common Stock
and do not withdraw any of such shares of Lilly Common Stock by the Expiration
Date, will be accepted for exchange before proration, if any, of the exchange
of other shares of Lilly Common Stock tendered for exchange. See "--Terms of
the Exchange Offer" and "--Exchange of Shares of Lilly Common Stock." Partial
tenders will not qualify for this preference, and it is not available to
beneficial holders of 100 or more shares of Lilly Common Stock, even if such
holders have separate stock certificates or accounts for fewer than 100 shares
of Lilly Common Stock. Any shareholder wishing to tender all of his or her
shares of Lilly Common Stock pursuant to this provision must complete Section
I.C. of the Letter of Transmittal entitled "Odd Lot Shares," and, if
applicable, the box captioned "Odd Lots" on the Notice of Guaranteed Delivery.
EXCHANGE OF SHARES OF LILLY COMMON STOCK
Upon the terms (including, without limitation, the proration provisions of
the Exchange Offer) and subject to the satisfaction or waiver of the conditions
of the Exchange Offer, Lilly will, as promptly as practicable after the
Expiration Date, (subject to the proration provisions of the Exchange Offer)
accept for exchange, and transfer shares of Guidant Common Stock in exchange
for, shares of Lilly Common Stock that have been validly tendered and not
withdrawn by the Expiration Date. In addition, Lilly reserves the right, in its
sole discretion (subject to Rule 13e-4(f)(5) under the Exchange Act), to delay
the acceptance for exchange or delay exchange of any shares of Lilly Common
Stock in order to comply in whole or in part
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with any applicable law. For a description of Lilly's right to terminate the
Exchange Offer and not accept for exchange of or exchange for any shares of
Lilly Common Stock or to delay acceptance for exchange of or exchange for any
shares of Lilly Common Stock, see "--Extension of Tender Period; Termination;
Amendment."
For purposes of the Exchange Offer, Lilly shall be deemed, subject to the
proration provisions of the Exchange Offer, to have accepted for exchange and
exchanged shares of Lilly Common Stock validly tendered for exchange when, as
and if Lilly gives oral or written notice to the Exchange Agent of its
acceptance of the tenders of such shares of Lilly Common Stock for exchange.
Exchange of shares of Lilly Common Stock accepted for exchange pursuant to the
Exchange Offer will be made by deposit of tendered shares of Lilly Common Stock
with the Exchange Agent, which will act as agent for the tendering shareholders
for the purpose of receiving shares of Guidant Common Stock from Lilly and
transmitting such shares of Guidant Common Stock to tendering shareholders. In
all cases, exchange for shares of Lilly Common Stock accepted for exchange
pursuant to the Exchange Offer will be made only after timely receipt by the
Exchange Agent of (i) certificates for such shares of Lilly Common Stock (or of
a confirmation of a book-entry transfer of such shares of Lilly Common Stock
into the Exchange Agent's account at one of the Book-Entry Transfer Facilities)
and (ii) a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) or an Agent's Message in connection with a
book-entry transfer of shares, together with any other documents required by
the Letter of Transmittal. For a description of the procedures for tendering
shares of Lilly Common Stock pursuant to the Exchange Offer, see "--Procedures
for Tendering Shares of Lilly Common Stock." Accordingly, exchanges of shares
of Guidant Common Stock for shares of Lilly Common Stock may be made to
tendering shareholders at different times if delivery of the shares of Lilly
Common Stock and other required documents occur at different times. Under no
circumstances will interest be paid by Lilly pursuant to the Exchange Offer,
regardless of any delay in making such exchange.
The exchange of shares of Guidant Common Stock for shares of Lilly Common
Stock may be delayed in the event of difficulty in determining the number of
shares of Lilly Common Stock validly tendered or if proration is required. See
"--Terms of the Exchange Offer." In addition, if certain events occur, Lilly
may not be obligated to exchange shares of Guidant Common Stock for shares of
Lilly Common Stock pursuant to the Exchange Offer. See "--Certain Conditions of
the Exchange Offer." As provided in Rules 13e-4(f)(4) and (8)(ii) under the
Exchange Act, Lilly will exchange the same number of shares of Guidant Common
Stock for each share of Lilly Common Stock accepted for exchange pursuant to
the Exchange Offer.
If any tendered shares of Lilly Common Stock are not exchanged pursuant to
the Exchange Offer for any reason, or if certificates are submitted for more
shares of Lilly Common Stock than are (i) tendered for exchange or (ii)
accepted for exchange due to the proration provisions, certificates for such
unexchanged or untendered shares of Lilly Common Stock will be returned (or, in
the case of shares of Lilly Common Stock tendered by book-entry transfer, such
shares of Lilly Common Stock will be credited to an account maintained at one
of the Book-Entry Transfer Facilities), without expense to the tendering
shareholder, as promptly as practicable following the expiration or termination
of the Exchange Offer.
Following termination of the Exchange Offer and Lilly's acceptance of any
tendered shares for exchange, Lilly will irrevocably deliver all of its Guidant
shares to the Exchange Agent (or an escrowee) who, as agent for the Lilly
shareholders entitled thereto, will hold and deliver those shares to such
shareholders in accordance with their respective interests pursuant to the
Exchange Offer and any related spin-off. If the exchange of shares as to any
holder is delayed because of the requirements of the HSR Act, during the delay
period such shares (together with any dividends thereon) will continue to be
held as described above and will be voted in the same proportions as other
outstanding Guidant shares are voted.
Lilly will pay all stock transfer taxes, if any, payable on the transfer to
it of shares of Lilly Common Stock and the transfer to tendering shareholders
of shares of Guidant Common Stock, pursuant to the Exchange Offer. If, however,
the exchange of shares is to be made to, or (in the circumstances permitted by
the Exchange Offer) if shares of Lilly Common Stock that are not accepted for
exchange are to be registered in the name of or shares of Lilly Common Stock
that are not tendered or are not accepted for exchange are
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to be delivered to any person other than the registered owner, or if tendered
certificates are registered in the name of any person other than the person
signing the Letter of Transmittal, the amount of all stock transfer taxes, if
any (whether imposed on the registered owner or such other person), payable on
account of the transfer to such person must be paid by the tendering
shareholder unless evidence satisfactory to Lilly of the payment of such taxes
or exemption therefrom is submitted.
PROCEDURES FOR TENDERING SHARES OF LILLY COMMON STOCK
To tender shares of Lilly Common Stock pursuant to the Exchange Offer, either
(a) a properly completed and duly executed Letter of Transmittal (or manually
signed facsimile thereof) or an Agent's Message in the case of a book-entry
transfer of shares, and any other documents required by the Letter of
Transmittal must be received by the Exchange Agent at one of its addresses set
forth on the back cover of this Offering Circular - Prospectus prior to 12:00
Midnight, New York City time, on the Expiration Date, and either (i)
certificates for the shares of Lilly Common Stock to be tendered must be
received by the Exchange Agent at one of such addresses prior to such time or
(ii) such shares of Lilly Common Stock must be delivered pursuant to the
procedures for book-entry transfer described below (and a confirmation of such
delivery received by the Exchange Agent), in each case by the Expiration Date,
or (b) the guaranteed delivery procedures described below must be complied
with. LETTERS OF TRANSMITTAL AND CERTIFICATES FOR SHARES OF LILLY COMMON STOCK
SHOULD NOT BE SENT TO LILLY, GUIDANT, THE INFORMATION AGENT, THE DEALER MANAGER
OR ANY SOLICITING DEALER. DELIVERY OF ANY OF THE AFOREMENTIONED REQUIRED
DOCUMENTS TO ANY ADDRESS OTHER THAN AS SET FORTH HEREIN WILL NOT CONSTITUTE
VALID DELIVERY THEREOF.
Any shareholder wishing to tender all of his or her shares of Lilly Common
Stock pursuant to the procedures described above under "--Tenders for Exchange
by Holders of Fewer Than 100 Shares of Lilly Common Stock" must complete
Section I.C. of the Letter of Transmittal entitled "Odd Lot Shares," and, if
applicable, the box captioned "Odd Lots" on the Notice of Guaranteed Delivery.
It is a violation of Rule 14e-4 promulgated under the Exchange Act for a
person to tender shares of Lilly Common Stock for such person's own account
unless the person so tendering (a) owns such shares of Lilly Common Stock or
(b) owns other securities convertible into or exchangeable for such shares of
Lilly Common Stock or owns an option, warrant or right to purchase such shares
of Lilly Common Stock and intends to acquire shares of Lilly Common Stock for
tender by conversion or exchange of such securities or by exercise of such
option, warrant or right. Rule 14e-4 provides a similar restriction applicable
to the tender or guarantee of a tender on behalf of another person.
A tender of shares of Lilly Common Stock made pursuant to any method of
delivery set forth herein will constitute a binding agreement between the
tendering shareholder and Lilly upon the terms and subject to the conditions of
the Exchange Offer, including the tendering shareholder's representation that
(i) such shareholder owns the shares of Lilly Common Stock being tendered
within the meaning of Rule 14e-4 promulgated under the Exchange Act and (ii)
the tender of such shares of Lilly Common Stock complies with Rule 14e-4.
The Exchange Agent will establish accounts with respect to the shares of
Lilly Common Stock at The Depository Trust Company ("DTC"), Midwest Securities
Trust Company ("MSTC") and Philadelphia Depository Trust Company ("PHILADEP,"
and together with DTC and MSTC, the "Book-Entry Transfer Facilities") for
purposes of the Exchange Offer within two business days after the date of this
Offering Circular - Prospectus, and any financial institution that is a
participant in the system of any Book-Entry Transfer Facility may make delivery
of shares of Lilly Common Stock by causing such Book-Entry Transfer Facility to
transfer such shares of Lilly Common Stock into the Exchange Agent's account in
accordance with the procedures of such Book-Entry Transfer Facility. Although
delivery of shares of Lilly Common Stock may be effected through book-entry
transfer to the Exchange Agent's account at DTC, MSTC or PHILADEP, a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) and any other required documents or an Agent's Message must, in any
case, be transmitted to and
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received or confirmed by the Exchange Agent at one of its addresses set forth
on the back cover of this Offering Circular - Prospectus by the Expiration
Date, or the guaranteed delivery procedures described below must be complied
with. "Agent's Message" means a message transmitted through electronic means by
a Book-Entry Transfer Facility to and received by the Exchange Agent and
forming a part of a book-entry confirmation, which states that such Book-Entry
Transfer Facility has received an express acknowledgement from the participant
in such Book-Entry Transfer Facility tendering the shares that such participant
has received and agrees to be bound by the Letter of Transmittal. DELIVERY OF
DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT AS REQUIRED HEREBY.
Signatures on a Letter of Transmittal must be guaranteed by an Eligible
Institution unless the shares of Lilly Common Stock tendered pursuant to the
Letter of Transmittal are tendered (i) by the registered holder of the shares
of Lilly Common Stock tendered therewith and such holder has not completed
Section III of the Letter of Transmittal entitled "Special Issuance
Instructions" or (ii) for the account of an Eligible Institution. An "Eligible
Institution" means a participant in the Security Transfer Agents Medallion
Program or the New York Stock Exchange Medallion Signature Guarantee Program or
the Stock Exchange Medallion Program. A verification by a notary public alone
is not acceptable. If a certificate representing shares of Lilly Common Stock
is registered in the name of a person other than the signer of a Letter of
Transmittal, the certificate must be endorsed or accompanied by an appropriate
stock power signed exactly as the name of the registered owner appears on the
certificate with the signature on the certificate or stock power guaranteed by
an Eligible Institution. If shares of Lilly Common Stock that are tendered but
not accepted for exchange are to be issued to a person other than the tendering
shareholder, the signature of the tendering shareholder must be guaranteed by
an Eligible Institution.
If the Letter of Transmittal or Notice of Guaranteed Delivery or any
certificates or stock powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing and, unless waived by Lilly, proper evidence satisfactory to Lilly of
their authority to so act must be submitted.
If any certificate representing shares of Lilly Common Stock has been
mutilated, lost, stolen or destroyed, such shareholder must (i) furnish to the
Exchange Agent evidence, satisfactory to it in its discretion, of the ownership
of and the mutilation, loss, theft or destruction of such certificate, (ii)
furnish to the Exchange Agent indemnity, satisfactory to it in its discretion,
and (iii) comply with such other reasonable regulations as the Exchange Agent
may prescribe.
PROCEDURES FOR TENDERING DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN SHARES
OF LILLY COMMON STOCK
Lilly shareholders who are participants in Lilly's Dividend Reinvestment and
Stock Purchase Plan ("DRP") and who wish to tender shares of Lilly Common Stock
held in their account under the DRP ("DRP Shares") pursuant to the Exchange
Offer, must so indicate by completing Section I.B. of the Letter of Transmittal
entitled "Dividend Reinvestment and Stock Purchase Plan Shares" and returning
to the Exchange Agent the properly completed and duly executed Letter of
Transmittal (or manually signed facsimile thereof) with any required signature
guarantees and any other documents required by the Letter of Transmittal. If
the participant authorizes the tender of his or her DRP Shares, but does not
indicate the number of shares to be tendered, the participant will be deemed to
have tendered all DRP Shares owned by such participant pursuant to the DRP. A
tender of all DRP Shares will include fractional shares and any shares that may
be credited to the participant's account after the date of tender and prior to
the Expiration Date. If a participant authorizes the tender of the
participant's DRP Shares and such DRP Shares are exchanged under the terms and
subject to the conditions of the Exchange Offer, Lilly, as administrator of the
DRP, will reduce the number of shares of Lilly Common Stock in the
participant's DRP account by the number of DRP Shares that are accepted for
exchange. Any DRP Shares tendered but not exchanged will be returned to the
participant's DRP account.
GUARANTEED DELIVERY PROCEDURES
If a shareholder desires to tender shares of Lilly Common Stock pursuant to
the Exchange Offer and cannot deliver such shares of Lilly Common Stock and all
other required documents to the Exchange Agent
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by the Expiration Date, such shares of Lilly Common Stock may nevertheless be
tendered if all of the following conditions are met:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed Delivery
substantially in the form provided by Lilly setting forth the name and
address of the holder and the number of shares of Lilly Common Stock
tendered, stating that the tender is being made thereby and guaranteeing
that, within three NYSE trading days after the date of the Notice of
Guaranteed Delivery, the certificate(s) representing the shares of Lilly
Common Stock accompanied by all other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, is received by the Exchange Agent (as provided below) by the
Expiration Date; and
(iii) the certificate(s) for such shares of Lilly Common Stock (or a
confirmation of a book-entry transfer of such shares of Lilly Common Stock
into the Exchange Agent's account at one of the Book-Entry Transfer
Facilities), together with a properly completed and duly executed Letter of
Transmittal (or manually signed facsimile thereof) and any required
signature guarantees, or an Agent's Message in connection with a book-entry
transfer, and any other documents required by the Letter of Transmittal,
are received by the Exchange Agent within three NYSE trading days after the
date of execution of the Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, facsimile
transmission or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such Notice.
THE METHOD OF DELIVERY OF SHARES OF LILLY COMMON STOCK AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER. IF
CERTIFICATES FOR SHARES OF LILLY COMMON STOCK ARE SENT BY MAIL, REGISTERED MAIL
WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED, AND SUFFICIENT
TIME TO ENSURE TIMELY RECEIPT SHOULD BE ALLOWED.
All questions as to the form of documents (including notices of withdrawal)
and the validity, form, eligibility (including time of receipt) and acceptance
for exchange of any tender of shares of Lilly Common Stock will be determined
by Lilly in its sole discretion, which determination will be final and binding
on all tendering shareholders. Lilly reserves the absolute right to reject any
or all tenders of shares of Lilly Common Stock determined by it not to be in
proper form or the acceptance for exchange of shares of Lilly Common Stock
which may, in the opinion of Lilly's counsel, be unlawful. Lilly also reserves
the absolute right to waive any defect or irregularity in any tender of shares
of Lilly Common Stock. None of Lilly, the Dealer Manager, the Exchange Agent,
the Information Agent or any other person will be under any duty to give
notification of any defect or irregularity in tenders or incur any liability
for failure to give any such notification.
WITHDRAWAL RIGHTS
Tenders of shares of Lilly Common Stock made pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date. Thereafter, such
tenders are irrevocable, except that they may be withdrawn after October 17,
1995 unless theretofore accepted for exchange as provided in this Offering
Circular - Prospectus. If Lilly extends the period of time during which the
Exchange Offer is open, tenders of shares of Lilly Common Stock may be
withdrawn at any time during the period of such extension. If Lilly is delayed
in its acceptance of shares of Lilly Common Stock for exchange or is unable to
accept shares of Lilly Common Stock for exchange pursuant to the Exchange Offer
for any reason, then, without prejudice to Lilly's rights under the Exchange
Offer, the Exchange Agent may, on behalf of Lilly, retain all shares of Lilly
Common Stock tendered, and such shares of Lilly Common Stock may not be
withdrawn except as otherwise provided herein, subject to Rule 13e-4(f)(5)
under the Exchange Act, which provides that the person making an issuer
exchange offer shall either pay the consideration offered or return tendered
securities, promptly after the termination or withdrawal of the offer. If a
holder of Lilly Common Stock tenders a sufficient number of shares of Lilly
Common Stock such that upon consummation of the Exchange Offer an HSR Act
filing is required because of the amount of Guidant Common Stock received, such
holder has withdrawal rights with respect to his or her tendered shares of
Lilly Common Stock after the Expiration Date. See "The Transaction--Regulatory
Approvals."
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To be effective, a written or facsimile transmission notice of withdrawal
must be timely received by the Exchange Agent at one of its addresses set
forth on the back cover of this Offering Circular - Prospectus and must
specify the name of the person who tendered the shares of Lilly Common Stock
to be withdrawn and the number of shares of Lilly Common Stock to be withdrawn
precisely as it appears on the Letter of Transmittal. If the shares of Lilly
Common Stock to be withdrawn have been delivered to the Exchange Agent, a
signed notice of withdrawal with signatures guaranteed by an Eligible
Institution must be submitted prior to the release of such shares of Lilly
Common Stock (except that such signature guarantee requirement is not
applicable in the case of shares of Lilly Common Stock tendered by an Eligible
Institution). In addition, such notice must specify, in the case of shares of
Lilly Common Stock tendered by delivery of certificates, the name of the
registered holder (if different from that of the tendering shareholder) and
the serial numbers shown on the particular certificates evidencing the shares
of Lilly Common Stock to be withdrawn or, in the case of shares of Lilly
Common Stock tendered by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility from which the shares were
transferred. Withdrawals may not be rescinded, and shares of Lilly Common
Stock withdrawn will thereafter be deemed not validly tendered for purposes of
the Exchange Offer. However, withdrawn shares of Lilly Common Stock may be
retendered by again following one of the procedures described in "--Procedures
for Tendering Shares of Lilly Common Stock" at any time prior to the
Expiration Date.
All questions as to the form and validity (including time of receipt) of any
notice of withdrawal will be determined by Lilly, in its sole discretion,
which determination shall be final and binding. None of Lilly, the Dealer
Manager, the Exchange Agent, the Information Agent or any other person will be
under any duty to give notification of any defect or irregularity in any
notice of withdrawal or incur any liability for failure to give any such
notification.
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT
Lilly expressly reserves the right, at any time or from time to time, in its
sole discretion and regardless of whether or not any of the conditions
specified in "--Certain Conditions of the Exchange Offer" shall have been
satisfied, (i) to extend the period of time during which the Exchange Offer is
open by giving oral or written notice of such extension to the Exchange Agent
and by making a public announcement of such extension or (ii) to amend the
Exchange Offer in any respect by making a public announcement of such
amendment. There can be no assurance that Lilly will exercise its right to
extend or amend the Exchange Offer.
If Lilly materially changes the terms of the Exchange Offer or the
information concerning the Exchange Offer, Lilly will extend the Exchange
Offer to the extent required by the Exchange Act. Certain rules promulgated
under the Exchange Act provide that the minimum period during which an offer
must remain open following material changes in the terms of the offer or
information concerning the offer (other than a change in price, change in the
dealer's soliciting fee or a change in percentage of securities sought) will
depend on the facts and circumstances, including the relative materiality of
such terms or information. The Commission has stated that, as a general rule,
it is of the view that an offer should remain open for a minimum of five
business days from the date that notice of such a material change is first
published, sent or given, and that if material changes are made with respect
to information that approaches the significance of price and share levels, a
minimum of ten business days may be required to allow adequate dissemination
and investor response. If (i) Lilly increases or decreases the number of
shares of Guidant Common Stock offered in exchange for shares of Lilly Common
Stock pursuant to the Exchange Offer or the number of shares of Lilly Common
Stock eligible for exchange and (ii) the Exchange Offer is scheduled to expire
at any time earlier than the expiration of a period ending on the tenth
business day from and including the date that notice of such increase or
decrease is first published, sent or given, the Exchange Offer will be
extended until the expiration of such period of ten business days. The term
"business day" shall mean any day other than Saturday, Sunday or a federal
holiday and shall consist of the time period from 12:01 a.m. through 12:00
Midnight, New York City time.
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Lilly also reserves the right, in its sole discretion, in the event any of
the conditions specified in "--Certain Conditions of the Exchange Offer" shall
not have been satisfied and so long as shares of Lilly Common Stock have not
theretofore been accepted for exchange, to delay (except as otherwise required
by applicable law) acceptance for exchange of or exchange for any shares of
Lilly Common Stock or to terminate the Exchange Offer and not accept for
exchange of or exchange for any shares of Lilly Common Stock.
If Lilly (i) extends the period of time during which the Exchange Offer is
open, (ii) is delayed in accepting for exchange of or exchange for any shares
of Lilly Common Stock or (iii) is unable to accept for exchange of or exchange
for any shares of Lilly Common Stock pursuant to the Exchange Offer for any
reason, then, without prejudice to Lilly's rights under the Exchange Offer,
the Exchange Agent may, on behalf of Lilly, retain all shares of Lilly Common
Stock tendered, and such shares of Lilly Common Stock may not be withdrawn
except as otherwise provided in "--Withdrawal Rights" above. The reservation
by Lilly of the right to delay acceptance for exchange of or exchange for any
shares of Lilly Common Stock is subject to applicable law, which requires that
Lilly pay the consideration offered or return the shares of Lilly Common Stock
deposited by or on behalf of shareholders promptly after the termination or
withdrawal of the Exchange Offer.
Any extension, termination or amendment of the Exchange Offer will be
followed as promptly as practicable by a public announcement thereof. Without
limiting the manner in which Lilly may choose to make any public announcement,
Lilly will have no obligation (except as otherwise required by applicable law)
to publish, advertise or otherwise communicate any such public announcement
other than by making a release to the Dow Jones News Service. In the case of
an extension of the Exchange Offer, Commission regulations require a public
announcement of such extension no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
CERTAIN CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer and without
prejudice to Lilly's other rights under the Exchange Offer, Lilly shall not be
required to accept for exchange of or, subject to any applicable rules and
regulations of the Commission, including Rule 14e-1(c) under the Exchange Act
relating to Lilly's obligation to exchange or return tendered shares of Lilly
Common Stock promptly after termination or withdrawal of the Exchange Offer,
exchange for any shares of Lilly Common Stock, and may terminate the Exchange
Offer as provided in "--Extension of Tender Period; Termination; Amendment,"
if prior to the acceptance for exchange of any shares of Lilly Common Stock
(i) at least 8,252,149 shares of Lilly Common Stock (approximately 2.8% of the
outstanding shares of Lilly Common Stock as of July 31, 1995 and a sufficient
number of shares of Lilly Common Stock to result in at least 50% of the
Guidant Common Stock intended to be distributed by Lilly being exchanged
pursuant to the Exchange Offer) shall not have been validly tendered and not
withdrawn or (ii) at any time on or after August 21, 1995, any of the
following conditions exists:
(a) there shall have occurred any material change (i) in the business,
financial condition, results of operations or prospects of Lilly or Guidant
or (ii) in the market price of the shares of Lilly Common Stock or Guidant
Common Stock;
(b) Lilly shall, in its good faith reasonable judgment, determine that it
is unable to rely on the Ruling Letter in connection with the consummation
of the Transaction;
(c) there shall be threatened, instituted or pending any action or
proceeding by any government or governmental authority or agency, domestic
or foreign, or by any other person, domestic or foreign, before any court
or governmental authority or agency, domestic or foreign, (i) challenging
or seeking to make illegal, to delay or otherwise directly or indirectly to
restrain or prohibit the making of the Transaction or the acceptance for
exchange of or exchange for some or all of the shares of Lilly Common Stock
by Lilly or seeking to obtain material damages or otherwise directly or
indirectly relating to the Transaction, (ii) seeking any material
diminution in the benefits expected to be derived by Lilly or any of its
subsidiaries or affiliates (including Guidant) as a result of the
Transaction, or (iii) that otherwise, in the good faith reasonable judgment
of Lilly, has or may have material adverse significance with respect to the
value of Lilly or any of its subsidiaries or affiliates (including
Guidant);
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<PAGE>
(d) there shall be any action taken, or any statute, rule, regulation,
injunction, order or decree proposed, enacted, enforced, promulgated,
issued or deemed applicable to the Transaction or any other element of the
Transaction by any court, government or governmental authority or agency,
domestic or foreign, that, in the good faith reasonable judgment of Lilly,
might, directly or indirectly, result in any of the consequences referred
to in clauses (i) through (iii) of paragraph (c) above;
(e) there shall have occurred (i) any general suspension of or limitation
on times for trading in, or limitation on prices for, securities on any
national securities exchange or in the over-the-counter market, (ii) the
declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, (iii) any material adverse change
(or development or threatened development involving a prospective material
adverse change) in United States or any other currency exchange rates or a
suspension of, or a limitation on, the markets therefor, (iv) the
commencement or material escalation of a war, armed hostilities or other
international or national calamity directly or indirectly involving the
United States, (v) any limitation (whether or not mandatory) by any
governmental authority or agency on, or any other event that, in the good
faith reasonable judgment of Lilly, might adversely affect, the extension
of credit by banks or other financial institutions or (vi) in the case of
any of the foregoing existing at the time of the commencement of the
Exchange Offer, a material acceleration or worsening thereof;
(f) a tender or exchange offer for some or all of the shares of Lilly
Common Stock or Guidant Common Stock shall have been publicly proposed to
be made or shall have been made by another person or it shall have been
publicly disclosed or Lilly or Guidant, as the case may be, shall have
otherwise learned that (i) other than Lilly Endowment, Inc. ("Lilly
Endowment"), any person or "group" (as defined in Section 13(d)(3) of the
Exchange Act) shall have acquired or proposed to acquire beneficial
ownership of more than 5% of any class or series of capital stock of Lilly
or Guidant (including the shares of Lilly Common Stock or Guidant Common
Stock), through the acquisition of stock, the formation of a group or
otherwise, or shall have been granted any option, right or warrant,
conditional or otherwise, to acquire beneficial ownership of more than 5%
of any class or series of capital stock of Lilly or Guidant (including the
shares of Lilly Common Stock or Guidant Common Stock), (ii) any person or
group shall have made a proposal with respect to a tender or exchange offer
or a merger, consolidation or other business combination with or involving
Lilly or Guidant or (iii) any person shall have filed a Notification and
Report Form under the HSR Act or made a public announcement reflecting an
intent to acquire Lilly or Guidant or any assets or securities of Lilly or
Guidant; or
(g) Lilly shall, in its good faith reasonable judgment, determine that a
holder of Lilly Common Stock has tendered a sufficient number of shares of
Lilly Common Stock such that upon consummation of the Exchange Offer, such
shareholder would receive a number of shares of Guidant Common Stock, which
when added to the shares of Guidant Common Stock beneficially owned by such
holder and affiliates of such holder, would constitute at least 10% of the
outstanding shares of Guidant Common Stock (a "10% Holder");
which, in the good faith reasonable judgment of Lilly, in any such case, and
regardless of the circumstances (including any action or omission by Lilly)
giving rise to any such condition, makes it inadvisable to proceed with (i)
such acceptance for exchange of or exchange for any shares of Lilly Common
Stock or (ii) any other element of the Transaction.
The foregoing conditions are for the sole benefit of Lilly and may be
asserted by Lilly regardless of the circumstances (including any action or
omission by Lilly) giving rise to any such conditions, or may be waived by
Lilly in whole at any time or in part from time to time. The failure by Lilly
at any time to exercise its rights under any of the foregoing conditions shall
not be deemed a waiver of any such right; the waiver of any such right with
respect to particular facts and circumstances shall not be deemed a waiver with
respect to any other facts and circumstances; and each such right shall be
deemed an ongoing right which may be asserted at any time or from time to time.
Any determination by Lilly concerning the events described above will be final
and binding upon all parties.
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As noted above, if Lilly determines in its good faith reasonable judgment
that the consummation of the Exchange Offer would result in a holder of Guidant
Common Stock becoming a 10% Holder, Lilly may decide not to consummate the
Exchange Offer. If the Exchange Offer is consummated and results in a holder of
Guidant Common Stock becoming a 10% Holder, Rights (as defined herein) will be
distributed to each holder of Guidant Common Stock unless the Board of
Directors of Guidant extends such date of distribution or redeems the Rights.
In the event that the Rights are not redeemed and certain events occur
following the Exchange Offer, each holder of a Right, other than a 10% Holder,
will have the right to purchase shares of Guidant Common Stock having a market
value of two times the exercise price of the Right. See "Description of Guidant
Capital Stock--Shareholder Rights Plan."
In addition, Lilly will not accept for exchange any shares of Lilly Common
Stock tendered, and no shares of Guidant Common Stock will be exchanged for any
shares of Lilly Common Stock, at any time at which there shall be a stop order
issued by the Commission which shall remain in effect with respect to the
Registration Statement.
FEES AND EXPENSES
Morgan Stanley & Co. Incorporated is acting as Dealer Manager in the United
States only in connection with the Exchange Offer. The Dealer Manager will,
among other things, coordinate all aspects of marketing of the Exchange Offer
through the conduct of informational meetings and the direct solicitation of
certain identified shareholders. Lilly has agreed to pay Morgan Stanley & Co.
Incorporated, as compensation for their services as Dealer Manager, a fee of
$1.5 million plus reasonable out of pocket expenses. Morgan Stanley & Co.
Incorporated from time to time has provided and continues to provide financial
advisory and financing services to Lilly and Guidant and has received customary
fees for the rendering of these services. In particular, Morgan Stanley & Co.
Incorporated has provided financial advisory services in connection with the
sale by Lilly of certain subsidiaries in its MDD Division, the formation of
Guidant, the Offering and the Transaction. Upon consummation of the
Transaction, Morgan Stanley & Co. Incorporated will receive its customary fee
for services rendered in connection with the transactions referred to herein in
addition to its fee as Dealer Manager. Lilly has agreed to indemnify the Dealer
Manager against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Dealer Manager may be
required to make in respect thereof.
Lilly will pay to a Soliciting Dealer a solicitation fee of $1.00 per share,
up to a maximum of 1,000 shares, for each share of Lilly Common Stock tendered
and accepted for exchange pursuant to the Exchange Offer if such Soliciting
Dealer has affirmatively solicited and obtained such tender, except that no
solicitation fee shall be payable (i) in connection with a tender of Lilly
Common Stock by a shareholder (x) tendering more than 10,000 shares of Lilly
Common Stock or (y) tendering from a country outside of the United States; or
(ii) to the Dealer Manager. "Soliciting Dealer" includes (i) any broker or
dealer in securities which is a member of any national securities exchange or
of the National Association of Securities Dealers, Inc. or (ii) any bank or
trust company. In order for a Soliciting Dealer to receive a solicitation fee
with respect to the tender of shares of Lilly Common Stock, the Exchange Agent
must have received a Letter of Transmittal with Section VI thereof entitled
"Notice of Solicited Tenders" properly completed and duly executed.
No solicitation fee shall be payable to a Soliciting Dealer if such
Soliciting Dealer is required for any reason to transfer the amount of such fee
to a tendering holder (other than itself). Soliciting Dealers are not entitled
to a solicitation fee with respect to shares of the Lilly Common Stock
beneficially owned by such Soliciting Dealer or with respect to any shares
which are registered in the name of a Soliciting Dealer unless such shares are
held by such Soliciting Dealer as nominee and are tendered for the benefit of
beneficial holders identified in the Letter of Transmittal. No broker, dealer,
bank, trust company or fiduciary shall be deemed to be the agent of Lilly,
Guidant, the Exchange Agent, the Dealer Manager or the Information Agent for
purposes of the Exchange Offer.
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<PAGE>
Lilly has retained D.F. King & Co., Inc. to act as the Information Agent and
The First National Bank of Boston to act as the Exchange Agent in connection
with the Exchange Offer. The Information Agent may contact holders of shares of
Lilly Common Stock by mail, telephone, facsimile transmission and personal
interviews and may request brokers, dealers and other nominee shareholders to
forward materials relating to the Exchange Offer to beneficial owners. The
Information Agent and the Exchange Agent each will receive reasonable and
customary compensation for their respective services, will be reimbursed for
certain reasonable out-of-pocket expenses and will be indemnified against
certain liabilities in connection therewith, including certain liabilities
under the federal securities laws. Neither of the Information Agent nor the
Exchange Agent has been retained to make solicitations or recommendations in
their respective roles as Information Agent and Exchange Agent and the fees to
be paid to them will not be based on the number of shares of Lilly Common Stock
tendered pursuant to the Exchange Offer. However, the Exchange Agent will be
compensated in part on the basis of the number of Letters of Transmittal
received and the number of stock certificates distributed pursuant to the
Exchange Offer.
Lilly will not pay any fees or commissions to any broker or dealer or any
other person (other than the Dealer Manager and the Soliciting Dealers) for
soliciting tenders of shares of Lilly Common Stock pursuant to the Exchange
Offer. Brokers, dealers, commercial banks and trust companies will, upon
request, be reimbursed by Lilly for reasonable and necessary costs and expenses
incurred by them in forwarding materials to their customers. Certain employees
of Lilly may solicit shares of Lilly Common Stock from shareholders, but such
employees will not receive any commissions or compensation for such services
other than their normal employment compensation.
MISCELLANEOUS
The Exchange Offer is not being made to (nor will tenders be accepted from or
on behalf of) holders of Lilly Common Stock in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. Lilly is not aware of any
jurisdiction where the making of the Exchange Offer or the acceptance thereof
would not be in compliance with applicable law. If Lilly becomes aware of any
jurisdiction where the making of the Exchange Offer or acceptance thereof would
not be in compliance with any valid applicable law, Lilly will make a good
faith effort to comply with such law. If, after such good faith effort, Lilly
cannot comply with such law, the Exchange Offer will not be made to, nor will
tenders be accepted from or on behalf of, holders of shares of Lilly Common
Stock in any such jurisdiction. Following the Expiration Date and Lilly's
acceptance of shares for exchange, Lilly may, at its election, but only if and
to the extent that it may lawfully do so under the Federal securities laws,
exclude from the Exchange Offer any tendered shares as to which a purchase by
Lilly would then be unlawful.
No person has been authorized to give any information or make any
representation on behalf of Lilly not contained in this Offering Circular -
Prospectus or in the Letter of Transmittal and, if given or made, such
information or representation must not be relied upon as having been
authorized.
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<PAGE>
THE SPIN-OFF
If fewer than 16,504,298 shares of Lilly Common Stock (but at least 8,252,149
shares) are validly tendered pursuant to the Exchange Offer and not withdrawn,
and the Exchange Offer is consummated, Lilly will distribute all remaining
shares of Guidant Common Stock owned by Lilly pro rata to remaining holders of
record of shares of Lilly Common Stock at the close of business on a record
date as soon as practicable after consummation of the Exchange Offer. Such
record date and the date of such distribution (which will be as soon as
practicable after such record date) will be publicly announced by Lilly when
they have been determined. If the Minimum Condition is not satisfied, Lilly
may, in its sole discretion, (i) decide not to consummate the Exchange Offer,
(ii) waive the Minimum Condition and consummate the Transaction, (iii) spin-off
all shares of Guidant Common Stock owned by it or (iv) review other
alternatives. See "The Exchange Offer--Certain Conditions of the Exchange
Offer." If at least 16,504,298 shares of Lilly Common Stock are exchanged
pursuant to the Exchange Offer, the Spin-Off will not be effected.
No fractional shares of Guidant Common Stock will be distributed pursuant to
the Spin-Off. The Exchange Agent, acting as agent for Lilly shareholders
otherwise entitled to receive fractional shares, will aggregate all fractional
shares and sell them for the accounts of such shareholders. Proceeds from sales
of fractional shares will be paid by the Exchange Agent based upon the average
gross selling price per share of all such sales. None of the Exchange Agent,
Lilly, Guidant, the Dealer Manager or any Soliciting Dealer will guarantee any
minimum sale price for the shares of Guidant Common Stock and no interest will
be paid on the proceeds.
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<PAGE>
PRICE RANGE OF LILLY COMMON STOCK AND DIVIDENDS
Lilly Common Stock is listed and traded on the NYSE and the PSE and the stock
exchanges of London, Tokyo, Zurich, Basel and Geneva. The following table sets
forth for the periods indicated the high and low sale prices per share of Lilly
Common Stock as reported in the consolidated transactions reporting system on
the NYSE and the cash dividends paid per share of Lilly Common Stock:
<TABLE>
<CAPTION>
CASH
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
1993
First Quarter.................................. $ 62 $45 1/8 $0.605
Second Quarter................................. 52 1/8 45 0.605
Third Quarter.................................. 50 5/8 43 5/8 0.605
Fourth Quarter................................. 60 3/4 49 3/4 0.605
1994
First Quarter.................................. $61 7/8 $48 1/2 $0.625
Second Quarter................................. 58 7/8 47 1/8 0.625
Third Quarter.................................. 59 1/4 47 1/4 0.625
Fourth Quarter................................. 66 1/4 57 3/8 0.625
1995
First Quarter.................................. $76 7/8 $62 1/2 $0.645
Second Quarter ................................ 79 3/8 69 1/4 0.645
Third Quarter (through August 18, 1995)........ 79 3/8 75 1/8 0.645(1)
</TABLE>
--------
(1) On July 17, 1995, the Board of Directors of Lilly declared a regular
quarterly dividend of $0.645 per share of Lilly Common Stock payable on
September 11, 1995 to shareholders of record on August 15, 1995.
On February 13, 1995, the last full day of trading prior to the announcement
of the Transaction, the last reported sale price per share of Lilly Common
Stock as reported in the consolidated transactions reporting system on the NYSE
was $64 7/8. On August 18, 1995, the last full day of trading prior to
commencement of the Exchange Offer, the last reported sale price per share of
Lilly Common Stock as reported in the consolidated transactions reporting
system on the NYSE was $76 3/8. Shareholders are urged to obtain current market
quotations for the shares of Lilly Common Stock.
The declaration and payment of future dividends to holders of Lilly Common
Stock will be at the discretion of the Board of Directors of Lilly and will
depend upon many factors, including Lilly's competitive position, financial
condition, earnings and capital requirements.
PRICE RANGE OF GUIDANT COMMON STOCK AND DIVIDENDS
Guidant Common Stock is listed and traded on the NYSE and the PSE. The
following table sets forth for the periods indicated the high and low sale
prices per share of Guidant Common Stock as reported in the consolidated
transactions reporting system on the NYSE:
<TABLE>
<CAPTION>
CASH
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
1994
Fourth Quarter (since commencement of trading
on December 14, 1994)......................... $16 1/8 $14 1/2 --
1995
First Quarter.................................. $19 7/8 $15 1/2 --
Second Quarter................................. 24 1/2 18 1/4 --
Third Quarter (through August 18, 1995)........ 26 3/4 22 5/8 $0.025(1)
</TABLE>
--------
(1) On July 17, 1995, the Board of Directors of Guidant declared a quarterly
dividend of $0.025 per share of Guidant Common Stock payable on September
18, 1995 to shareholders of record on August 18, 1995.
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<PAGE>
On February 13, 1995, the last full day of trading prior to the announcement
of the Transaction, the last reported sale price per share of Guidant Common
Stock as reported in the consolidated transactions reporting system on the
NYSE was $19. On August 18, 1995, the last full day of trading prior to
commencement of the Exchange Offer, the last reported sale price per share of
Guidant Common Stock as reported in the consolidated transactions reporting
system on the NYSE was $24 3/4. Shareholders are urged to obtain current
market quotations for the shares of Guidant Common Stock.
On July 17, 1995, the Board of Directors of Guidant declared a cash dividend
of $0.025 per share payable on September 18, 1995 to shareholders of record on
August 18, 1995. This was the first dividend declared by Guidant since the
Offering. The declaration and payment of future dividends, if any, to holders
of Guidant Common Stock will be at the discretion of the Board of Directors of
Guidant and will depend upon many factors, including Guidant's competitive
position, financial condition, earnings and capital requirements. Accordingly,
there is no requirement or assurance that future dividends will be declared or
paid.
BUSINESS OF LILLY
Lilly was incorporated in 1901 under the laws of Indiana to succeed to the
drug manufacturing business founded in Indianapolis, Indiana, in 1876 by
Colonel Eli Lilly. Lilly is engaged in the discovery, development,
manufacture, and sale of products and the provision of services in one
industry segment--Life Sciences. Lilly's principal products are human
pharmaceuticals and animal health products. Products are manufactured or
distributed through owned or leased facilities in the United States, Puerto
Rico, and 26 other countries, in 19 of which Lilly owns or has an interest in
manufacturing facilities. Its products are sold in approximately 117
countries. Through its PCS subsidiary, Lilly provides pharmacy benefit
management services in the United States.
Most of Lilly's products were discovered or developed through Lilly's
research and development activities, and the success of Lilly's business
depends to a great extent on the introduction of new products resulting from
these research and development activities. Research efforts are primarily
directed toward the discovery of products to diagnose and treat diseases in
human beings and animals and to increase the efficiency of animal food
production.
PRODUCTS AND SERVICES
PHARMACEUTICAL PRODUCTS
Pharmaceutical products include:
Central-nervous-system agents, including Prozac (R), indicated for the
treatment of depression and, in many countries, for bulimia and obsessive-
compulsive disorder; the analgesic Darvocet-N (R) 100; and Permax (R), a
treatment for Parkinson's disease;
Anti-infectives, including the oral cephalosporin antibiotics Ceclor (R),
Keflex (R), and Keftab (R); the oral carbacephem antibiotic Lorabid (TM); the
oral macrolide antibiotic Dynabac (R); the injectable cephalosporin
antibiotics Mandol (R), Tazidime (R), Kefurox (R), and Kefzol (R); Nebcin (R),
an injectable aminoglycoside antibiotic; Vancocin (R) HCl, an injectable
antibiotic used primarily to treat staphylococcal infections; and cefaclor, a
generic formulation of Ceclor;
Diabetic care products, including Iletin (R) (insulin) in its various
pharmaceutical forms; and Humulin (R), human insulin produced through
recombinant DNA technology;
An antiulcer agent, Axid (R), an H/2/ antagonist, indicated for the
treatment of active duodenal ulcer, for maintenance therapy for duodenal ulcer
patients after healing of an active duodenal ulcer, and for reflux
esophagitis;
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<PAGE>
Oncolytic agents, including Oncovin (R), indicated for treatment of acute
leukemia and, in combination therapy, for treatment of other advanced cancers;
Velban (R), used in a variety of malignant neoplastic conditions; and
Eldisine (R), indicated for treatment of acute childhood leukemia resistant to
other drugs; and
Additional pharmaceuticals, including cardiovascular therapy products,
principally Dobutrex (R); and hormones, including Humatrope (R), human growth
hormone produced by recombinant DNA technology.
ANIMAL HEALTH PRODUCTS
Animal health products include Tylan (R), an antibiotic used to control
certain diseases in cattle, swine, and poultry and to improve feed efficiency
and growth; Rumensin (R), a cattle feed additive that improves feed efficiency
and growth; Compudose (R), a controlled-release implant that improves feed
efficiency and growth in cattle; Coban (R), Monteban (R) and Maxiban (R),
anticoccidial agents for use in poultry; Apralan (R), an antibiotic used to
control enteric infections in calves and swine; Micotil (R), an antibiotic used
to treat bovine respiratory disease; and other products for livestock and
poultry.
PHARMACY BENEFIT MANAGEMENT SERVICES
PCS provides computer-based prescription drug claims processing and pharmacy
benefit design, administration and management services to health plan sponsors,
including insurance companies, third-party administrators, self-insured
employers, health maintenance organizations, and Blue Cross/Blue Shield
organizations that underwrite or administer prescription benefit plans. PCS
helps these customers manage prescription benefit costs by providing drug
utilization reviews, clinically-based formularies and generic substitution
programs. PCS also operates an on-line electronic network to transmit medical,
hospital, laboratory, clinical and billing information that links health care
providers (physicians, hospitals and clinics) with health plan sponsors.
RECAP (R), PCS's on-line prescription claims management system, is linked with
over 95% of retail pharmacies in the United States.
RESEARCH AND DEVELOPMENT
Lilly's research and development activities are responsible for the discovery
or development of most of the products offered by Lilly today. The growth in
research and development expenditures and personnel over the past several years
demonstrates both the continued vitality of Lilly's commitment to research and
development and the increasing costs and complexity of bringing new products to
the market. At the end of 1994, approximately 4,200 people were engaged in
pharmaceutical and animal health research and development activities.
Lilly's primary research effort is devoted to discovering and developing
human pharmaceutical products. Lilly now concentrates its pharmaceutical
research and development efforts in five therapeutic categories: central
nervous system and related diseases; endocrine diseases, including diabetes and
osteoporosis; infectious diseases; cancer; and cardiovascular diseases. Lilly
is engaged in biotechnology research programs involving recombinant DNA and
monoclonal antibodies. Extensive work is also conducted in animal health
research, including animal nutrition and physiology and veterinary medicine.
In addition to the research activities carried on in Lilly's own
laboratories, Lilly sponsors and underwrites the cost of research and
development by independent organizations, including educational institutions
and research-based human health care companies, and contracts with others for
the performance of research in their facilities. Lilly's business-development
groups actively seek out opportunities to invest in external research and
technologies that hold the promise to complement and strengthen Lilly's own
research efforts in the five chosen therapeutic categories. Such investments
can take many forms, including licensing arrangements, co-development and co-
marketing agreements, and outright acquisitions.
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<PAGE>
MARKETING
Most of Lilly's major products are marketed worldwide. Pharmacy benefit
management services are marketed primarily in the United States.
Lilly's pharmaceutical products are promoted in the United States under the
Lilly and Dista trade names by one hospital and three retail sales forces
employing salaried sales representatives. These sales representatives call upon
physicians, wholesalers, hospitals, managed-care organizations, retail
pharmacists, and other health care professionals. In 1994, Lilly created a new
sales force dedicated to diabetes care.
In the past few years, large purchasers of pharmaceuticals, such as managed-
care groups and government and long-term care institutions, have begun to
account for an increasing portion of total pharmaceutical purchases in the
United States. Lilly has created special sales groups to service government and
long-term care institutions, and expanded its managed-care sales organization.
In response to competitive pressures, Lilly has entered into arrangements with
a number of these organizations providing for discounts or rebates on one or
more Lilly products or other cost-sharing arrangements. During 1994, Lilly also
entered into agreements with a generic pharmaceutical company for the
promotion, distribution and/or supply of generic forms of certain brand name
products of both Lilly and other companies. In addition, in 1994 Lilly formed
Integrated Disease Management, Inc. ("IDM") and acquired Control Diabetes
Services, Inc. IDM will provide disease-management services, including
capitation and risk-sharing arrangements, to managed-care customers. Control
Diabetes provides education to diabetics to help them aggressively manage their
disease and thereby minimize their long-term risk of serious complications.
Outside the United States, pharmaceutical products are promoted by salaried
sales representatives. Distribution patterns vary from country to country. In
recent years, Lilly has significantly expanded its marketing efforts in a
number of overseas markets, including emerging markets in Central and Eastern
Europe, Latin America, and Asia.
PATENTS AND LICENSES
Lilly owns, has applications pending for, or is licensed under, a substantial
number of patents, both in the United States and in other countries, relating
to products, product uses, and manufacturing processes. There can be no
assurance that patents will result from Lilly's pending applications. Moreover,
patents relating to particular products, uses, or processes do not preclude
other manufacturers from employing alternative processes or from successfully
marketing substitute products to compete with the patented products or uses.
Patent protection of certain products, processes, and uses--particularly that
relating to Ceclor, Humulin, Prozac, Axid, and Lorabid--is considered to be
important to the operations of Lilly. The United States patent covering Humulin
expires in 2001, the Prozac patent expires in 2001, the Axid patent expires in
2002, and the Lorabid patent expires in 2004.
The United States product patent covering Ceclor, Lilly's second largest
selling product, expired in December 1992, and a United States patent on a key
intermediate material expired in December 1994. Lilly holds United States
process patents on certain methods of the manufacture of cefaclor that expire
in July 1996. In May 1995, two companies began marketing generic forms of
cefaclor capsules in the United States. Lilly filed suit against the companies
asserting infringement of its United States process patents. On August 4, 1995,
Lilly's motion for a preliminary injunction against the sale of the product
made by the infringed process was denied. There can be no assurance that Lilly
will be successful in this litigation. In October 1994, Lilly's subsidiary, STC
Pharmaceuticals, Inc., entered into an agreement with Mylan Pharmaceuticals,
Inc. to market and distribute a generic form of cefaclor in the United States.
To date, Lilly has experienced only limited competition from generic cefaclor
in markets outside the United States. Lilly anticipates that the combined
impact of the continued competition from other anti-infectives and the
introduction of generic cefaclor could have a material adverse effect on
Lilly's 1995 consolidated results of operations. However, Lilly
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<PAGE>
believes that the patent expirations and increased competition will not have a
material adverse effect on Lilly's near-term consolidated financial position.
The United States patent covering Dobutrex expired in October 1993. The
patent expiration has resulted in a significant decline in United States
Dobutrex sales.
COMPETITION
Lilly's pharmaceutical products compete with products manufactured by
numerous other companies in highly competitive markets in the United States and
throughout the world. Lilly's animal health products compete on a worldwide
basis with products of pharmaceutical, chemical, and other companies that
operate animal health divisions or subsidiaries. PCS faces strong competition
from other pharmacy benefit management companies and claims processors in the
United States. For certain accounts, PCS competes with some retail pharmacy
chains, mail order programs and organized groups of independent pharmacists.
Important competitive factors include price and demonstrated cost-
effectiveness, product characteristics and dependability, service, and research
and development of new products and processes. The introduction of new products
and the development of new processes by domestic and foreign companies can
result in progressive price reductions or decreased volume of sales of
competing products, or both. New products introduced with patent protection
usually must compete with other products already on the market at the time of
introduction or products developed by competitors after introduction. Lilly
believes its competitive position in these markets is dependent upon its
research and development endeavors in the discovery and development of new
cost-effective products, together with increased productivity resulting from
improved manufacturing methods, marketing efforts, and customer service. There
can be no assurance that products manufactured or processes used by Lilly will
not become outmoded from time to time as a result of products or processes
developed by its competitors.
GOVERNMENTAL REGULATION
Lilly's operations have for many years been subject to extensive regulation
by the federal government, to some extent by state governments, and in varying
degrees by foreign governments. The federal Food, Drug and Cosmetic Act, other
federal statutes and regulations, various state statutes and regulations, and
laws and regulations of foreign governments govern testing, approval,
production, labeling, distribution, post-market surveillance, advertising,
promotion, and in some instances, pricing, of most of Lilly's products. In
addition, Lilly's operations are subject to complex federal, state, local, and
foreign environmental laws and regulations. It is anticipated that compliance
with regulations affecting the manufacture and sale of current products and the
introduction of new products will continue to require substantial scientific
and technical effort, time, and expense and significant capital investment.
38
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF GUIDANT
(IN MILLIONS, EXCEPT OTHER DATA AND PER SHARE AMOUNTS)
The following selected consolidated financial data for the four years ended
December 31, 1994 are derived from consolidated financial statements of
Guidant which have been audited by Ernst & Young LLP, independent auditors.
The selected consolidated financial data for the year ended December 31, 1990
and for the six month periods ended June 30, 1995 and June 30, 1994 are
derived from unaudited consolidated financial statements. The consolidated
financial data for the six month periods ended June 30, 1995 and June 30, 1994
include all adjustments, consisting of normal recurring accruals, which
Guidant considers necessary for a fair presentation of the consolidated
financial position and the consolidated results of operations for these
periods. Operating results for the six months ended June 30, 1995 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1995. The following data should be read in conjunction
with Guidant's Consolidated Financial Statements, the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this Offering Circular -
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ---------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------ ------ ------ ------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Vascular intervention.. $ 225.0 $ 229.3 $464.5 $451.6 $423.7 $376.9 $315.9
CRM.................... 209.5 172.4 378.6 336.5 329.9 304.3 246.7
MIS(1)................. 14.4 9.0 19.3 6.6 1.2 -- --
------- ------- ------ ------ ------ ------ ------
Total net sales....... 448.9 410.7 862.4 794.7 754.8 681.2 562.6
Cost of sales........... 144.4 132.9 270.9 236.2 211.8 168.9 135.0
Research and
development............ 67.8 65.2 130.9 129.1 117.9 100.4 87.6
Sales, marketing and
administrative......... 139.3 128.8 268.9 255.1 251.0 209.1 178.7
Restructuring and
special charges........ -- -- -- 81.5 32.9 -- --
Income from operations.. 97.4 83.8 191.7 92.8 141.2 202.8 161.3
Other expenses--net..... 25.8 11.3 35.8 5.8 20.1 13.5 28.8
Net income.............. 42.3 42.9 92.1 50.6 76.8 115.6 81.6
Earnings per share(2)... 0.59 -- -- -- -- -- --
Pro forma net income(2). -- 30.2 76.2 -- -- -- --
Pro forma earnings per
share(2)............... -- 0.42 1.06 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------------------
1995 1994 1993 1992 1991 1990
----------- -------- -------- -------- ------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ (308.5)(3) $ 116.8 $ 143.3 $ 136.9 $101.7 $ 58.5
Total assets............ 1,023.6 1,103.6 1,288.6 1,118.0 935.7 754.0
Short-term borrowings... 458.0 (3) -- -- -- -- --
Long-term debt.......... -- 473.0(4) -- 2.1 2.4 2.8
Shareholders' equity.... 306.8 (3) 264.4(5) 1,048.3 942.7 747.2 620.3
Borrowings as a
percentage of total
capitalization(6)...... 59.9% 64.1% -- 0.2% 0.3% 0.5%
Book value per share.... $ 4.27 $ 3.68 -- -- -- --
OTHER DATA:
Full-time employee
equivalents............ 5,164 5,055 5,462 4,864 4,316 3,791
</TABLE>
--------
(1) Sales of MIS products are attributed to the operations of Origin, which
was acquired in 1992.
(2) Guidant has reported 1994 earnings per share on a pro forma basis for 1995
comparisons. Pro forma adjustments give effect to the following
transactions as if they occurred on January 1, 1994: (i) borrowings under
the Credit Agreements, (ii) dividends to Lilly and (iii) receipt of
proceeds from the Offering. Historical earnings per share is not presented
since such data is not meaningful due to the changes in Guidant's capital
structure and other transactions in connection with the Offering.
(3) Borrowings under the Credit Agreements mature on January 8, 1996. As a
result, outstanding borrowings, which were $458.0 million on June 30,
1995, are classified as a current liability and result in a working
capital deficit.
(4) Long-term debt at December 31, 1994 increased from December 31, 1993 as a
result of borrowings under the Credit Agreements.
(5) The decline in shareholders' equity from December 31, 1993 to December 31,
1994 was primarily attributable to dividends to Lilly.
(6) This percentage is computed by dividing the sum of short-term borrowings
and long-term debt by total capitalization.
39
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OF GUIDANT
The following unaudited pro forma consolidated financial information of
Guidant has been prepared to reflect adjustments to Guidant's historical
financial position and results of operations to give effect to certain
transactions, as if such transactions had been consummated at earlier dates, as
discussed herein.
The unaudited pro forma consolidated statements of income for the year ended
December 31, 1994 are based on Guidant's historical results of operations,
adjusted to give effect to: (i) the cost of borrowings under the Credit
Agreements, (ii) payments to Lilly for dividends, asset purchases and liability
repayments, (iii) noncash dividends to Lilly and (iv) the Offering and the
application of the net proceeds therefrom, each as if they had occurred on
January 1, 1994. All of these transactions, including the borrowings under the
Credit Agreements, occurred during 1994 in connection with the initial
formation of Guidant and the subsequent Offering.
The unaudited pro forma consolidated balance sheet at June 30, 1995 reflects
the impact of the formation of the Guidant Employee Savings and Stock Ownership
Plan (the "Guidant ESOP") and the issuance to it of shares of Guidant Common
Stock.
The unaudited pro forma consolidated financial information of Guidant is not
necessarily indicative of Guidant's consolidated financial position or
consolidated results of operations had the transactions reflected therein
actually been consummated at the assumed dates, nor is it necessarily
indicative of Guidant's consolidated financial position or consolidated results
of operations for any future period. The unaudited pro forma consolidated
financial information of Guidant should be read in conjunction with Guidant's
consolidated financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Guidant," which are included elsewhere in this Offering Circular - Prospectus.
40
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF GUIDANT
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<S> <C> <C> <C>
Net sales............................... $862.4 $ 862.4
Cost of sales........................... 270.9 270.9
Research and development................ 130.9 130.9
Sales, marketing and administrative..... 268.9 268.9
------ -----------
670.7 670.7
------ -----------
Income from operations.................. 191.7 191.7
Other income (expenses):
Interest, net......................... (7.6) $(26.9)(1) (34.5)
Royalties, net........................ 1.5 1.5
Amortization of goodwill and other
intangibles.......................... (20.4) (20.4)
Other, net............................ (9.3) (9.3)
------ ------ -----------
(35.8) (26.9) (62.7)
------ ------ -----------
Income before income taxes.............. 155.9 (26.9) 129.0
Income taxes............................ 63.8 (11.0)(2) 52.8
------ ------ -----------
Net income.............................. $ 92.1 $(15.9) $ 76.2
====== ====== ===========
Common shares outstanding............... 71,860,000
Earnings per share...................... $ 1.06(3)
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information of Guidant.
41
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF GUIDANT
(IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, 1995
----------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................. $ 43.4 $ 43.4
Accounts receivable, net of allowances of
$5.4...................................... 154.0 154.0
Other receivables.......................... 12.9 12.9
Inventories................................ 119.1 119.1
Deferred income taxes...................... 40.2 40.2
Prepaid expenses........................... 15.6 15.6
-------- ------ --------
Total current assets..................... 385.2 -- 385.2
OTHER ASSETS
Goodwill, net of allowances of $75.4....... 261.2 261.2
Other intangible assets, net of allowances
of $16.4.................................. 34.5 34.5
Deferred income taxes...................... 11.5 11.5
Sundry..................................... 29.8 29.8
-------- ------ --------
337.0 -- 337.0
Property and equipment..................... 301.4 301.4
-------- ------ --------
$1,023.6 $ -- $1,023.6
======== ====== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Loans payable to affiliated companies...... $ 23.2 $ 23.2
Accounts payable........................... 23.2 23.2
Payables to affiliated companies........... 17.2 17.2
Employee compensation...................... 38.8 38.8
Restructuring liabilities.................. 55.6 55.6
Other liabilities.......................... 64.2 64.2
Income taxes payable to Lilly.............. 13.5 13.5
Current portion of long-term debt.......... 458.0 458.0
-------- ------ --------
Total current liabilities................ 693.7 -- 693.7
NONCURRENT LIABILITIES
Long-term debt............................. -- --
Other...................................... 23.1 23.1
-------- ------ --------
23.1 -- 23.1
SHAREHOLDERS' EQUITY
Common stock--no par value................. 192.5 60.0(3) 252.5
Additional paid-in capital................. 64.5 64.5
Retained earnings.......................... 48.2 48.2
Deferred costs--ESOP....................... -- (60.0)(3) (60.0)
Currency translation adjustment............ 1.6 1.6
-------- ------ --------
Total shareholders' equity............... 306.8 -- 306.8
-------- ------ --------
$1,023.6 $ -- $1,023.6
======== ====== ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information of Guidant.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OF GUIDANT
(1) Adjusts net interest for the impact of two transactions, as follows:
(i) reflects interest expense for the year ended December 31, 1994 on
projected outstanding debt of $513.0 million, assuming no Lilly
guarantee of the debt, using an assumed interest rate of 6.5% as if
such debt had been outstanding at the beginning of the period. See
"Description of the Guidant Credit Agreements." This resulted in
additional interest expense of $22.2 million for the year ended
December 31, 1994; and
(ii) reflects interest income earned as if a book dividend (declared on May
26 and November 30, 1994) of amounts resulting from Guidant's
participation in Lilly's central cash management system took place at
the beginning of the period presented, in an amount equal to all cash
generated and invested relating to prior periods. Therefore, interest
income, using an interest rate of 5%, was earned only on cash
generated during the period presented. This resulted in a reduction of
interest income of $4.7 million for the year ended December 31, 1994.
See "Relationship Between Guidant and Lilly."
(2) Income tax benefit is computed at a combined effective tax rate of 40.9%.
(3) Assumes 71,860,000 shares of Guidant Common Stock, without par value, were
issued and outstanding (approximately 19.8% (14,260,000 shares) owned by
the public and approximately 80.2% (57,600,000 shares ) owned by Lilly)
during the entire year. Guidant will also form the Guidant ESOP prior to
the Transaction and issue to it shares of Guidant Common Stock with a value
totalling approximately $60.0 million (2.5 million shares based on a June
30, 1995 market price of $24.00 per share) after the Transaction. These
shares will be allocated to eligible participant accounts over a period of
time in connection with related retirement and saving plans. Shares in the
Guidant ESOP are excluded from common shares outstanding for purposes of
calculating pro forma net income per share.
43
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF LILLY
(IN MILLIONS, EXCEPT OTHER DATA AND PER SHARE AMOUNTS)
The following selected consolidated financial data for the five years ended
December 31, 1994 are derived from consolidated financial statements of Lilly
which have been audited by Ernst & Young LLP, independent auditors. The
financial data for the six months ended June 30, 1995 and June 30, 1994 are
derived from unaudited consolidated financial statements. The consolidated
financial data for the six month periods ended June 30, 1995 and June 30, 1994
include all adjustments, consisting of normal recurring accruals, which Lilly
considers necessary for a fair presentation of the consolidated financial
position and consolidated results of operations for these periods. Operating
results for the six months ended June 30, 1995 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1995. The following data should be read in conjunction with the information
concerning Lilly incorporated by reference in this Offering Circular -
Prospectus as well as the Unaudited Pro Forma Consolidated Financial
Information of Lilly presented elsewhere in this Offering Circular -
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $3,332.1 $2,655.9 $5,711.6 $5,198.5 $4,963.1 $4,533.4 $4,179.0
Income from continuing
operations before
income taxes and
cumulative effect of
changes in accounting
principles............. 964.5 893.3 1,698.6 662.8 1,193.5 1,626.3 1,418.1
Income from continuing
operations before
cumulative effect of
changes in accounting
principles............. 684.8 619.9 1,185.1 464.8 842.5 1,166.1 1,022.7
Discontinued operations,
net of tax............. 35.5 57.4 101.0 26.3 (14.9) 148.6 104.6
Income before cumulative
effect of changes in
accounting principles.. 720.3 677.3 1,286.1 491.1 827.6 1,314.7 1,127.3
Cumulative effect of
changes in accounting
principles, net of tax. -- -- -- (10.9) (118.9) -- --
Net income.............. 720.3 677.3 1,286.1 480.2 708.7 1,314.7 1,127.3
PER-SHARE DATA:
Income from continuing
operations............. $ 2.37 $ 2.14 $ 4.10 $ 1.58 $ 2.86 $ 3.99 $ 3.54
Income (loss) from
discontinued
operations............. .12 .20 .35 .09 (.05) .51 .36
Cumulative effect of
changes in accounting
principle.............. -- -- -- (.04) (.40) -- --
Net income.............. 2.49 2.34 4.45 1.63 2.41 4.50 3.90
Cash dividends declared. 1.29 1.25 2.52 2.44 2.255 2.05 1.73
Ratio of earnings to
fixed charges(1)....... 7.0x 19.6x 14.0x 7.6x 11.7x 19.1x 15.7x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------------------------
1995 1994 1993 1992 1991 1990
----------- --------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......... $ 4,410.3 $ 3,962.3 $3,697.1 $3,006.0 $2,939.3 $2,501.3
Other assets............ 6,219.4 6,133.6 1,726.3 1,594.7 1,576.8 1,704.8
Property and equipment.. 4,467.6 4,411.5 4,200.2 4,072.1 3,782.5 2,936.7
Total assets............ 15,097.2 14,507.4 9,623.6 8,672.8 8,298.6 7,142.8
Short-term borrowings... 3,169.2 2,724.4 524.8 591.2 690.2 1,239.5
Other current
liabilities............ 2,484.0 2,945.1 2,403.2 1,807.4 1,581.8 1,578.1
Long-term debt.......... 2,102.1 2,125.8 835.2 582.3 395.5 277.0
Other noncurrent
liabilities............ 1,368.1 1,356.5 1,291.6 799.8 665.0 580.7
Shareholders' equity.... 5,973.8 5,355.6 4,568.8 4,892.1 4,966.1 3,467.5
Borrowings as a
percentage of total
capitalization(2)...... 46.9% 47.5% 22.9% 19.3% 17.9% 30.4%
Book value per share.... $ 20.47 $ 18.35 $ 15.61 $ 16.72 $ 16.97 $ 12.98
</TABLE>
--------
(1) The ratio of earnings to fixed charges is computed by dividing the sum of
income from continuing operations before income taxes and cumulative effect
of changes in accounting principles and fixed charges excluding capitalized
interest by fixed charges. Fixed charges represent interest on indebtedness
from continuing operations.
(2) This percentage is computed by dividing the sum of short-term borrowings
and long-term debt by total capitalization.
44
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF LILLY
The following unaudited pro forma consolidated financial information of Lilly
has been prepared to reflect the Transaction and the acquisition of PCS as if
these transactions had been consummated at earlier dates as discussed herein.
The unaudited pro forma consolidated statements of income and related
earnings per share data for the year ended December 31, 1994 and for the six
months ended June 30, 1995 are based on Lilly's historical results from
continuing operations adjusted to reflect the impact of the Transaction as if
it had occurred on January 1, 1994 and January 1, 1995, respectively. The
Transaction will reduce the number of shares of Lilly Common Stock outstanding
and the weighted average number of shares of Lilly Common Stock outstanding
used in the earnings per share calculations. In addition, the unaudited pro
forma consolidated statement of income for the year ended December 31, 1994
assumes that the acquisition of PCS was consummated on January 1, 1994.
The unaudited pro forma consolidated balance sheet at June 30, 1995 reflects
the impact of (i) exclusion of the respective Guidant balances including
elimination of the minority interest in Guidant; (ii) the effect of the tender
of shares of Lilly Common Stock from the Exchange Offer on treasury stock; and
(iii) recognition of the estimated net gain from the disposition of
discontinued operations.
The unaudited pro forma consolidated financial information is not necessarily
indicative of Lilly's consolidated financial position or consolidated results
of operations had the Transaction or acquisition of PCS reflected therein
actually been consummated at the assumed dates, nor is it necessarily
indicative of Lilly's consolidated financial position or consolidated results
of operations for any future period. The unaudited pro forma consolidated
financial information should be read in conjunction with Lilly's consolidated
financial statements and notes thereto incorporated by reference in this
Offering Circular - Prospectus.
45
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF LILLY
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995
--------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales.................................... $3,332.1 $3,332.1
Cost of sales................................ 971.9 971.9
Research and development..................... 497.2 497.2
Marketing and administrative................. 843.5 843.5
Interest expense............................. 138.5 138.5
Other income--net............................ (83.5) (83.5)
-------- --------
2,367.5 2,367.5
-------- --------
Income from continuing operations before
income taxes................................ 964.5 964.5
Income taxes................................. 279.7 279.7
-------- --------
Income from continuing operations............ $ 684.8 $ 684.8
======== ========
Earnings per share from continuing
operations.................................. $ 2.37
Pro forma earnings per share from continuing
operations based on level of participation
in the Exchange Offer(1):
100% (16.5 million shares tendered)........ $ 2.51
75% (12.4 million shares tendered)........ 2.47
50% (8.3 million shares tendered)......... 2.44
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information of Lilly.
46
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF LILLY
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales.................................. $5,711.6 $ 178.7 (2) $5,890.3
Cost of sales.............................. 1,679.7 94.7 (2) 1,774.4
Research and development................... 838.7 838.7
Acquired research.......................... 58.4 58.4
Marketing and administrative............... 1,398.3 47.9 (2) 1,446.2
Special charges............................ 66.0 66.0
Other (income)/expense--net................ (28.1) 303.1 (2) 275.0
-------- ------- --------
4,013.0 445.7 4,458.7
-------- ------- --------
Income from continuing operations before
income taxes.............................. 1,698.6 (267.0) 1,431.6
Income taxes............................... 513.5 (71.1)(2) 442.4
-------- ------- --------
Income from continuing operations.......... $1,185.1 $(195.9) $ 989.2
======== ======= ========
Earnings per share from continuing
operations................................ $ 4.10
Pro forma earnings per share from
continuing operations based on level of
participation in the Exchange Offer(1):
100% (16.5 million shares tendered)...... $ 3.63
75% (12.4 million shares tendered)...... 3.57
50% ( 8.3 million shares tendered)...... 3.52
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information of Lilly.
47
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF LILLY
(IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------------
HISTORICAL ADJUSTMENTS(3) PRO FORMA
---------- -------------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash..................................... $ 989.7 $ (67.3) $ 922.4
Short-term investments................... 208.6 -- 208.6
Accounts receivable, net of allowance.... 1,549.2 (169.4) 1,379.8
Other receivables........................ 307.2 (38.1) 269.1
Inventories.............................. 903.4 (129.4) 774.0
Deferred income taxes.................... 172.0 (50.6) 121.4
Prepaid expenses......................... 280.2 (26.0) 254.2
--------- --------- ---------
Total current assets................... 4,410.3 (480.8) 3,929.5
OTHER ASSETS
Prepaid retirement....................... 417.2 (.7) 416.5
Investments.............................. 513.2 (13.0) 500.2
Goodwill and other intangibles--net...... 4,352.6 (317.1) 4,035.5
Sundry................................... 936.3 10.8 947.1
Property and equipment................... 4,467.6 (328.2) 4,139.4
--------- --------- ---------
$15,097.2 $(1,129.0) $13,968.2
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings.................... $ 3,169.2 $ (458.7) $ 2,710.5
Accounts payable......................... 874.1 (24.3) 849.8
Employee compensation.................... 271.0 (43.6) 227.4
Other liabilities........................ 892.9 (59.7) 833.2
Income taxes payable..................... 446.0 (53.0) 393.0
--------- --------- ---------
Total current liabilities.............. 5,653.2 (639.3) 5,013.9
NONCURRENT LIABILITIES
Long-term debt........................... 2,102.1 (.4) 2,101.7
Deferred income taxes.................... 226.4 44.0 270.4
Retiree medical benefit obligation....... 166.6 -- 166.6
Other noncurrent liabilities............. 975.1 (90.5) 884.6
SHAREHOLDERS' EQUITY
Common stock--no par value............... 183.0 -- 183.0
Additional paid-in-capital............... 406.6 -- 406.6
Retained earnings........................ 5,614.3 975.6(4) 6,589.9
Deferred costs--ESOP..................... (210.7) -- (210.7)
Currency translation adjustment.......... 46.7 -- 46.7
--------- --------- ---------
6,039.9 975.6 7,015.5
Less cost of common stock in treasury...... 66.1 1,418.4(5) 1,484.5
--------- --------- ---------
Total shareholders' equity............. 5,973.8 (442.8) 5,531.0
--------- --------- ---------
$15,097.2 $(1,129.0) $13,968.2
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information of Lilly.
48
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OF LILLY
(1) Reflects the impact of the Transaction anticipated herein as if it had
occurred at the beginning of the period presented. Unaudited pro forma
earnings per share from continuing operations is calculated assuming
various levels of participation in the Exchange Offer and assuming any
Guidant shares held by Lilly after the Exchange Offer are distributed to
the remaining Lilly shareholders on a pro rata basis. The Transaction
effectively reduces the weighted average number of shares outstanding by
the number of shares of Lilly Common Stock exchanged for shares of Guidant
Common Stock. This reduction in outstanding shares results in an increase
in earnings per share from continuing operations. Also, earnings per share
from continuing operations for the year ended December 31, 1994 (assuming
100% participation level) have been reduced by $.72 to reflect Lilly's
acquisition of PCS as if it had occurred as of January 1, 1994. (See note 2
hereto.)
(2) Represents the adjustments to reflect the impact of the PCS operations for
the pre-acquisition period beginning January 1, 1994 to November 21, 1994,
the acquisition date. These adjustments include the amortization of the
excess purchase price over the book value of the PCS net assets (goodwill),
assumed additional interest expense related to the issuance of debt for the
purchase of PCS and the related tax effect of these adjustments based on
the statutory tax rates in effect during the period. The goodwill
amortization and interest expense adjustments, included in other income,
amounted to $87.2 million and $216.2 million, respectively.
(3) Reflects adjustments to remove Guidant's historical consolidated balance
sheet amounts, include intercompany balances between Lilly and Guidant as
third party balances and eliminate the minority interest ownership of
Guidant Common Stock, unless otherwise noted.
(4) Retained earnings are adjusted by the anticipated net gain (net of tax)
resulting from Lilly's disposal of all its MDD subsidiaries (including its
remaining shares of Guidant Common Stock). The gain is calculated as the
net of Lilly's investment in the discontinued operations and the
consideration received. In the case of Guidant Common Stock, the
consideration received is measured by the assumed market value of the
shares of Guidant Common Stock exchanged on the Expiration Date (assumes
100% of the shares of Guidant Common Stock offered hereby are exchanged at
a share price of $24.625). If 75% or 50% of the shares of Guidant Common
Stock offered hereby are assumed exchanged, the consideration received for
those shares would be $1,063.8 million or $709.2 million, respectively, and
retained earnings would be reduced $354.6 million or $709.2 million,
respectively, as a result of a lower gain on the Exchange Offer and a spin-
off of the remaining shares of Guidant Common Stock owned by Lilly after
the Exchange Offer.
(5) The increase in treasury stock assumes 100% of the shares of Guidant Common
Stock offered hereby are exchanged at Guidant's assumed market value
($24.625) on the Expiration Date. If 75% or 50% of the shares of Guidant
Common Stock offered hereby are assumed exchanged, the increase in treasury
stock would be $1,063.8 million or $709.2 million, respectively.
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF GUIDANT
Guidant designs, develops, manufactures and markets a broad range of products
for use in: (i) vascular intervention, primarily the treatment of CAD, (ii) CRM
and (iii) MIS. Vascular intervention includes the operations of ACS and DVI,
CRM includes the operations of CPI and HRT, and MIS refers to the operations of
Origin.
The following tables are summaries of Guidant's net sales and major costs and
expenses:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ ----------------------
1995 1994 1994 1993 1992
-------- -------- ------ ------ ------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales:
Vascular intervention............ $ 225.0 $ 229.3 $464.5 $451.6 $423.7
CRM.............................. 209.5 172.4 378.6 336.5 329.9
MIS.............................. 14.4 9.0 19.3 6.6 1.2
-------- -------- ------ ------ ------
Total net sales.............. 448.9 410.7 862.4 794.7 754.8
Cost of sales...................... 144.4 132.9 270.9 236.2 211.8
Research and development........... 67.8 65.2 130.9 129.1 117.9
Sales, marketing and
administrative.................... 139.3 128.8 268.9 255.1 251.0
-------- -------- ------ ------ ------
97.4 83.8 191.7 174.3 174.1
Restructuring and special charges.. -- -- -- 81.5 32.9
-------- -------- ------ ------ ------
Income from operations............. $ 97.4 $ 83.8 $191.7 $ 92.8 $141.2
======== ======== ====== ====== ======
<CAPTION>
AS PERCENT OF NET SALES
------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ ----------------------
1995 1994 1994 1993 1992
-------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales:
Vascular intervention............ 50.1% 55.8% 53.9% 56.9% 56.1%
CRM.............................. 46.7 42.0 43.9 42.3 43.7
MIS.............................. 3.2 2.2 2.2 0.8 0.2
-------- -------- ------ ------ ------
Total net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ====== ====== ======
Cost of sales...................... 32.2% 32.4% 31.4% 29.7% 28.1%
Research and development........... 15.1 15.9 15.2 16.2 15.6
Sales, marketing and
administrative.................... 31.0 31.3 31.2 32.1 33.2
-------- -------- ------ ------ ------
21.7 20.4 22.2 22.0 23.1
Restructuring and special charges.. -- -- -- 10.2 4.4
-------- -------- ------ ------ ------
Income from operations............. 21.7% 20.4% 22.2% 11.8% 18.7%
======== ======== ====== ====== ======
</TABLE>
OPERATING RESULTS--SIX MONTHS ENDED JUNE 30, 1995 VERSUS SIX MONTHS ENDED JUNE
30, 1994
Guidant had worldwide net sales of $224.1 million for the three months ended
June 30, 1995, reflecting an increase of $17.5 million or 8% over the same
period in 1994. Growth in unit volume of 6% and fluctuations in foreign
currency exchange rates of 3% increased worldwide net sales, while sales prices
decreased net sales 1%.
50
<PAGE>
Guidant had worldwide net sales of $448.9 million for the six months ended
June 30, 1995, an increase of $38.2 million or 9.3% over the comparable period
in 1994. This growth in worldwide net sales was due to unit volume growth of
6.1% and foreign currency exchange rate changes of 3.2%. Sales prices had a
negligible impact on net sales during this period.
Net sales of CRM products grew $17.8 million or 20.3% for the three months
ended June 30, 1995 as compared to the same period in 1994. CRM product net
sales grew $37.1 million or 21.5% for the six months ended June 30, 1995 as
compared to the same period in 1994. This growth was primarily due to continued
European sales growth led by VENTAK PRx III, VENTAK P3, and ENDOTAK DSP which
were released to the European market in October 1994, and the United States
introductions of the VENTAK PRx III tiered-therapy defibrillator in May 1995,
VENTAK P2 multi-therapy defibrillator in March 1995 and the ENDOTAK 70
endocardial lead system in August 1994. Guidant's pacemaker products also
contributed to this growth with continued strong sales performance by the VIGOR
product family in Europe, the VIGOR DDD introduction in the United States in
October 1994 and, to a lesser degree, the United States releases in late June
of the VIGOR DR and VIGOR SR.
Net sales of vascular intervention products for the three months ended June
30, 1995 decreased $2.8 million or 2.5% over the same period in 1994. For the
six months ended June 30, 1995, net sales of vascular intervention products
decreased $4.3 million or 1.9% over the same period in 1994. Sales growth in
angioplasty products, due primarily to increased unit volume from Guidant's
worldwide introduction of the technologically advanced ACS RX LIFESTREAM (rapid
exchange catheter with perfusion) in March 1995, guidewires, and ACS RX
FLOWTRACK 40 (rapid exchange catheter with perfusion), was offset by volume
declines in atherectomy and over-the-wire catheters, and lower average selling
prices of most angioplasty products. Guidant believes that angioplasty products
may continue to experience pricing pressures. Sales price declines on
angioplasty products were more than offset by unit volume growth. Atherectomy
sales declines were primarily due to the stent, a competing alternative
therapy. In addition, on May 17, 1995, DVI voluntarily stopped shipment of the
AtheroCath GTO atherectomy catheter in the United States as a result of a
meeting initiated by DVI with the FDA, where certain modifications to the
product and other regulatory issues were discussed. DVI received FDA approval
of these modifications in June 1995 and resumed shipment of the AtheroCath GTO
on June 21, 1995. Guidant believes that atherectomy products will continue to
experience volume declines during 1995 in comparison to the prior year. In
response, Guidant is accelerating the previously announced consolidation of
certain vascular intervention manufacturing and administrative operations. This
consolidation is expected to be completed by November 1995 and will result in
reduced employee headcount and manufacturing capacity in Guidant's atherectomy
business. Guidant does not expect that these actions will result in additional
charges to the 1995 income statement, as the related expenses were included as
part of the 1993 restructuring charges.
Net sales of MIS products for the three months ended June 30, 1995 were $7.5
million, an increase of $2.5 million over the same period in the previous year,
as Guidant expanded the marketing of its innovative laparoscopic technologies
used in hernia repair, bladder neck suspension, and cholecystectomy. MIS
product sales for the six months ended June 30, 1995 were $14.4 million, an
increase of 60% over the comparable period in 1994. Sales growth, primarily
international, was driven by products such as the PDBS Preperitoneal Distention
Balloon Systems and the ACUCLIP Endoscopic Multiple Clip Applier.
Guidant experienced sales growth both in the United States and international
markets. Net sales in the United States increased 2.8% to $147.2 million and
international net sales increased 21.3% to $76.9 million for the three months
ended June 30, 1995 as compared to the same period in 1994. For the six months
ended June 30, 1995, United States net sales increased 5% to $297.6 million and
international net sales increased 19% to $151.3 million compared to the same
period in the previous year. United States net sales growth was primarily due
to CRM sales of the VENTAK PRx III, VENTAK P2, and ENDOTAK 70 and vascular
intervention sales of ACS RX LIFESTREAM and guidewires. International net sales
growth was primarily driven by European and Japanese sales of the VIGOR family
of pacemakers introduced in May 1993 and August 1994, respectively, as well as
continued strong sales of the VENTAK PRx III, VENTAK P3, and
51
<PAGE>
ENDOTAK DSP in Europe. The VIGOR family of pacemakers, which includes
conventional and adaptive-rate pacemaker products, represents a majority of
Guidant's bradycardia revenues in Europe. Perfusion catheter and guidewire
sales in Europe and Japan also contributed to the international growth.
Cost of sales increased 6.2% for the three months ended June 30, 1995, a rate
less than the growth in net sales. Cost of sales as a percentage of net sales
for the three months ended June 30, 1995 was 32.8% compared to 33.5% for the
same period in the previous year. Cost of sales increased 8.7% for the six
months ended June 30, 1995, a rate slightly less than the growth in net sales.
Inventory obsolescence charges of $4.9 million on certain CRM products due to
recent United States introductions of newer generation products such as VENTAK
PRx III, VIGOR DR and VIGOR SR, lower average selling prices for vascular
intervention products, and reduced sales of atherectomy products were more than
offset by unit manufacturing cost reductions for vascular intervention products
resulting from increased manufacturing efficiencies.
Research and development expenses, which increased $2.9 million or 9% for the
three months ended June 30, 1995 compared to the same period in 1994,
represented 15.4% and 15.2% of net sales, respectively, for these periods. For
the six months ended June 30, 1995, research and development expenses increased
$2.6 million or 4% and decreased as a percentage of net sales to 15.1% from
15.9% for the same period last year. Investments in vascular intervention
programs such as the ACS MULTI-LINK stent and CRM new product development,
including the MINI products, and spending on CRM software development accounted
for the majority of the expense increase.
Sales, marketing and administrative expenses grew 6.1% for the three months
ended June 30, 1995 compared to the same period in 1994. These expenses
represented 31.1% of net sales in the second quarter of 1995 and 31.8% in the
second quarter of 1994. For the six months ended June 30, 1995, sales,
marketing and administrative expenses increased 8.2% in comparison to the same
period in the prior year. Sales and marketing expenses increased due to
variable selling expenses such as CRM commissions, vascular intervention
clinical marketing study expenses, and product launch expenses associated with
the recent United States market releases of VIGOR DR, VIGOR SR, VENTAK PRx III
and ACS RX LIFESTREAM. Administrative expenses, however, grew at a rate less
than net sales. Increased expenses due to fluctuations in foreign currency
exchange rates were more than offset by reduced administrative spending.
Total operating expenses, which comprises research and development and sales,
marketing and administrative, increased 7.1% for the three months ended June
30, 1995 and decreased to 46.5% of net sales compared to 47.0% for the same
period in 1994. Increased net sales combined with controlled growth in
operating expenses resulted in increases in income from operations of 15.7% and
16.3% for the three and six months ended June 30, 1995, respectively, compared
to the same periods in 1994.
For the three months ended June 30, 1995, Guidant had net other expenses of
$10.5 million compared to $6.3 million for the same period in the prior year.
Guidant had net other expenses of $25.8 million and $11.3 million for the six
months ended June 30, 1995 and 1994, respectively. The increase in net other
expenses was primarily a result of interest expense incurred by Guidant on its
credit agreements which was partially offset by increased net royalty income.
Net royalty income for the three months ended June 30, 1995 of $2.8 million
represented a $3.1 million increase from the same period in 1994 and a $4.5
million increase from the three months ended March 31, 1995. This increase was
due to royalties received on certain vascular intervention technology patents.
Management believes that growth in net royalty income will not continue to the
same degree as demonstrated in the three months ended June 30, 1995.
Guidant's effective income tax rate was 40.9% for the three and six months
ended June 30, 1995 compared to 40.8% for the same periods in 1994. Reduced
state income taxes net of the federal benefit were offset by lower amounts of
available research tax credits and reduced benefits from Guidant's operations
in Puerto Rico.
52
<PAGE>
Net income for the three months ended June 30, 1995 was $21.2 million, an
increase of $1.2 million or 6% from the three months ended June 30, 1994. Net
income for the six months ended June 30, 1995 was $42.3 million, a decrease of
$0.6 million or 1.4% from the comparable period in 1994. Operating income
growth of 15.7% and 16.3% for the three and six months ended June 30, 1995,
respectively, was offset by net other expenses as discussed above.
Net income and earnings per share of $0.30 for the three months ended June
30, 1995 increased over 50% in comparison to pro forma net income and pro forma
earnings per share for the three months ended June 30, 1994. This increase was
primarily due to operating income growth and increased royalty income discussed
above and reduced net interest expense for the three months ended June 30, 1995
in comparison to pro forma net interest expense on long-term debt for the same
period in 1994. Average outstanding borrowings during the three months ended
June 30, 1995 were $458.0 million while pro forma average outstanding
borrowings for the three months ended June 30, 1994 were $513.0 million.
Guidant has reported 1994 earnings per share on a pro forma basis for 1995
comparisons. The pro forma amounts are based on historical results of
operations adjusted to give effect to the following transactions as if they
occurred on January 1, 1994: (i) borrowings under Guidant's credit facilities,
(ii) dividends to Lilly, and (iii) receipt of proceeds from Guidant's initial
public offering.
OPERATING RESULTS--YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31,
1993
Guidant had worldwide net sales of $862.4 million in 1994, reflecting an
increase of $67.7 million or 9% over 1993. Growth in unit volume of 8% and
fluctuations in foreign currency exchange rates of 2% increased worldwide net
sales, while sales prices decreased net sales 1%.
Net sales of vascular intervention products for 1994 increased $12.9 million
or 3% over 1993 primarily due to the introduction of the AtheroCath GTO
(atherectomy) in 1994, sales of Guidant's technologically advanced ACS RX
FLOWTRACK 40 (perfusion) and ACS RX ELIPSE (rapid exchange) catheters, which
were introduced in March 1993 and October 1993, respectively, and increased
sales of guidewires. Vascular intervention net sales growth was partially
offset by volume declines in OTW catheter products and lower average selling
prices of angioplasty catheters. Guidant believes that angioplasty products may
continue to experience pricing pressure. International volume declines in
Guidant's atherectomy catheter products also negatively impacted overall sales
growth. An initial stocking of product by its distributor in Japan, where
Guidant commenced selling atherectomy products in 1993, as well as unusually
high distributor purchase volume in the second half of 1993 resulting from an
anticipated price increase, contributed to the international atherectomy
catheter volume decline in 1994.
Net sales of CRM products grew $42.1 million or 13% in 1994 as compared to
1993 primarily due to the United States introduction of the VENTAK PRx tiered-
therapy defibrillator in June 1994, sales of the ENDOTAK 70 endocardial
defibrillation lead system introduced in the United States in August 1994,
continued European sales growth led by the VENTAK PRx II which was commercially
released in September 1993, and the European market releases of the VENTAK PRx
III, VENTAK P3 and ENDOTAK DSP in October 1994. Guidant's pacemaker products
also contributed to this growth with strong sales performance by the VIGOR
product family in Europe, and with the United States market release of the
VIGOR DDD in October 1994.
Net sales for MIS products for 1994 increased $12.7 million to $19.3 million
as Guidant expanded the marketing of its innovative laparoscopic technologies
including the ACUCLIP Endoscopic Multiple Clip Applier, PDBS Preperitoneal
Distention Balloon Systems and the BLUNT-TIP TROCAR.
Guidant experienced sales growth both in the United States and international
markets. Sales in the United States increased 4% to $593.1 million and
international sales increased 20% to $269.3 million for 1994 as compared to
1993. United States net sales growth was primarily due to CRM sales of the
VENTAK PRx and ENDOTAK 70, and vascular intervention sales of the AtheroCath
GTO, the ACS RX
53
<PAGE>
FLOWTRACK 40 and ACS RX ELIPSE. International net sales growth was primarily
driven by CRM product sales due to the European and Japanese introduction of
the VIGOR family of pacemakers in May 1993 and August 1994, respectively, as
well as the continued strong sales of the VENTAK PRx II, introduced in the
second half of 1993, and the European market releases of the VENTAK PRx III,
VENTAK P3 and ENDOTAK DSP in October 1994. The VIGOR family of pacemakers,
which includes conventional and adaptive-rate pacemaker products, has grown to
represent a majority of Guidant's bradycardia revenues in Europe and Japan.
Angioplasty sales in Germany and Japan also contributed to this international
growth. In August 1993, Guidant acquired an interest in its distributor,
Danimed GmbH und Co. KG ("Danimed") and began selling directly to its
customers. As of December 31, 1994, Guidant had an 80% interest in this
distributor.
Cost of sales, which increased 15% in 1994, represented 31% of net sales
compared to 30% in 1993. This rise in costs of sales was largely attributable
to: (i) increased distribution and warehousing expenses associated with
changing from third-party distributors to direct sales in Germany, the United
Kingdom, and Canada, (ii) conversion and utilization of certain facilities from
development to manufacturing, and (iii) start-up costs related to a shift in
mix to products with greater manufacturing complexity, such as the AtheroCath
GTO, VENTAK PRx, and the VIGOR family of pacemakers. Lower average selling
prices for certain vascular intervention products were largely offset by unit
manufacturing cost reductions.
Guidant invests significant resources in research and development in order to
remain competitive and develop new products which serve its global customers.
Research and development expenses, which increased $1.8 million or 1% during
1994, represented 15% of net sales compared to 16% for 1993. Investments in CRM
new product development, which included the VENTAK PRx III, VENTAK P3, and
VENTAK MINI products, increased spending on regulatory compliance, and software
design and validation were offset by a reduction in vascular intervention
spending due to improved efficiency and streamlining initiatives. Guidant
believes that its dedicated team approach to new product development will
continue to result in efficient utilization of its research and development
resources.
Sales, marketing and administrative expenses grew 5% for the year ended
December 31, 1994 compared to 1993. These expenses represented 31% of net sales
for 1994 compared to 32% for 1993. Sales and marketing expenses increased
modestly in comparison to 1993, and less than the growth rate in net sales due,
in large part, to the reorganization of Guidant's United States vascular
intervention sales force in early 1994. Administrative expenses, however, grew
at a rate greater than net sales primarily as a result of additional corporate
expenses, one-time CRM software validation costs and increased expenses
associated with the transition from the use of independent distributors to
direct sales in Germany, the United Kingdom and Canada.
Total operating expenses, without the prior year effect of restructuring and
special charges, increased 4% in 1994 and decreased to 46% of net sales
compared to 48% in 1993.
Income from operations for 1994 of $191.7 million more than doubled from the
previous year due primarily to restructuring and special charges in 1993.
Income from operations, without considering the effect of restructuring and
special charges, increased $17.4 million or 10% from 1993, a growth rate
slightly greater than net sales.
For 1994, Guidant had net other expenses of $35.8 million as compared to $5.8
million for 1993. This increase was primarily a result of interest expense
incurred by Guidant on long-term debt and reduced royalty income. Royalties
included net royalty payments to Guidant of $4.5 million for 1994 and $18.3
million for 1993 related to licenses granted pursuant to settlements of patent
lawsuits and the termination of a patent license. Excluding these royalty
payments to Guidant, Guidant had net royalty expenses of $3.0 million in 1994
compared to $7.2 million in 1993. This decrease in net royalty expenses is due
to growth in net royalty income excluding the aforementioned royalty payments.
54
<PAGE>
Guidant's effective income tax rate for 1994 was 40.9%, compared to 39.8% in
1993. The increase for 1994 resulted from reduced benefits from Guidant's
operations in Puerto Rico and lower amounts of available research tax credits.
Guidant's net income for 1994 was $92.1 million, an increase of approximately
$41.5 million or 82% from 1993. This significant increase was caused by
restructuring and special charges taken in 1993. Net income, without
considering the effect of restructuring and special charges, would have
decreased $7.6 million or 8% in 1994. Operating income growth of 10% was offset
by net other expenses as discussed above.
In 1995, the full year impact of interest expense associated with long-term
debt will have a negative impact on net income.
Guidant has reported 1994 earnings per share on a pro forma basis for 1995
comparisons. The pro forma amounts are based on historical results of
operations adjusted to give effect to the following transactions as if they
occurred on January 1, 1994: (i) borrowings under the Credit Agreements, (ii)
dividends to Lilly and (iii) receipt of proceeds from the Offering. Pro forma
net income and earnings per share were $76.2 million and $1.06 per share,
respectively, for the year ended December 31, 1994. Historical earnings per
share are not presented since such data is not meaningful because of the change
in Guidant's capital structure and other transactions leading up to the
Offering.
OPERATING RESULTS--YEAR ENDED DECEMBER 31, 1993 VERSUS YEAR ENDED DECEMBER 31,
1992
Guidant had worldwide sales of $794.7 million in 1993 reflecting an increase
of 5% over 1992. Growth in unit volume and sales prices of 3% and 4%,
respectively, increased worldwide sales, while exchange rates decreased sales
by 2%.
Net sales of vascular intervention products in 1993 increased $27.9 million
or 7% over 1992 primarily due to (i) the introduction of ACS RX FLOWTRACK 40 in
March 1993, ACS EDGE in August 1993 and ACS RX ELIPSE in October 1993, (ii) a
full year of sales of SCA-EX atherectomy catheters introduced in the third
quarter of 1992, (iii) increased sales of guidewires and (iv) atherectomy
product introductions in Japan in the first quarter of 1993. Vascular
intervention net sales growth was partially offset by decreases in OTW
catheters due to increased competition and pricing pressure, and decreased
sales in fixed-wire catheters as customers continued switching to the
technological improvements and flexibility available in other catheter
categories. Worldwide vascular intervention products experienced increased unit
volume sales which were slightly offset by the decrease in the OTW catheter
unit sales.
Net sales in CRM products in 1993 increased $6.6 million or 2% over 1992
primarily due to the introduction of the ENDOTAK 60 endocardial defibrillation
lead system in the United States in the third quarter of 1993. Increases in CRM
net sales were partially offset by decreases in sales of Guidant's conventional
pacemaker products due to the increased availability of competing dual chamber
adaptive-rate products.
Net sales for MIS products in 1993 increased $5.4 million to $6.6 million due
to Guidant's marketing of recently introduced products.
Sales in the United States increased 2% to $570.4 million in 1993 and
international sales increased 14% to $224.3 million in 1993. International
sales were primarily driven by increased vascular intervention product sales in
Germany as Guidant acquired an interest in its distributor, Danimed, in 1993,
and introduction of atherectomy products in Japan. CRM product sales also
contributed to this increase due to continued growth of the VENTAK P2 following
its European introduction in November 1992 and the launch of the VENTAK PRx II
in Europe in the third quarter of 1993.
Cost of sales, which increased 12% in 1993, represented 30% of net sales
compared to 28% in 1992. The rise in cost was largely driven by (i) increased
start-up expenses associated with new product launches
55
<PAGE>
including the ACS RX FLOWTRACK 40, ACS EDGE and ACS RX ELIPSE catheters, (ii)
increased costs associated with responding to regulatory initiatives, including
expanded process validation and GMP training and (iii) expanded manufacturing
capacity.
Research and development expenses increased $11.2 million or 9% over 1992.
The increase was primarily attributable to investments in CRM new product
development, reflecting expanding activities in ablation systems, including the
full year impact of these expenses.
Sales, marketing and administrative expenses increased 2% in 1993. These
expenses represented 32% of net sales for 1993 compared to 33% for 1992. A 7%
decline in administrative expenses resulting from expense controls and reduced
litigation costs was offset by an 8% increase in sales and marketing expenses.
The increase in sales and marketing expenses was primarily the result of early
stage marketing for MIS products, sales force additions, costs associated with
new product introductions such as the ACS RX FLOWTRACK 40, ACS EDGE, ACS RX
ELIPSE and SCA-EX catheters as well as the 1993 acquisition of Danimed.
In 1993, Guidant's results reflected restructuring and special charges of
$81.5 million, before tax. These charges were taken as part of Lilly's global
restructuring and relate to various strategic actions taken by Guidant to
enhance competitiveness in the rapidly changing health care market and to
reduce costs and improve efficiencies. The expenses are principally related to
strategic decisions to: (i) make a significant change in the manner of
distributing Guidant's products in overseas markets, and (ii) consolidate and
relocate certain manufacturing and administrative operations within the United
States. The cash impact of these charges in 1993 was minimal. Substantially all
the charges will result in cash outlays, principally in 1994 and 1995. While
Guidant expects the restructuring actions to result in improved operating
income, the amount and timing of such actions cannot be estimated at this time.
In 1993, Guidant had net other expenses of $5.8 million as compared to $20.1
million in 1992. Royalties included net royalty payments to Guidant of $18.3
million in 1993 and $13.6 million in 1992 relating to licenses granted pursuant
to settlements of patent lawsuits and the termination of a patent license.
Excluding these royalty payments to Guidant, net royalty expense decreased to
$7.2 million in 1993 from $9.3 million in 1992. Patent amortization declined by
approximately $9.0 million, due largely to the 1992 restructuring, which
included the writedown of certain CRM patents. This decline in amortization was
partially offset by increased goodwill amortization of $3.0 million in 1993.
Guidant's effective tax rate for 1993 was 39.8%, compared to 36.6% in 1992.
The increase for 1993 reflected the impact of numerous factors including larger
amounts of non-deductible goodwill amortization, reduced amounts of available
research tax credits and the increased statutory corporate tax rate under the
Omnibus Budget Reconciliation Act of 1993. These increases in the effective tax
rate were partially offset by increased tax benefits from Guidant's operations
in Puerto Rico.
Guidant's net income for 1993 was $50.6 million, a decline of approximately
$26.2 million or 34% from 1992. The primary factors generating the decline were
the restructuring and special charges. Net income would have decreased
approximately $1.3 million or 1% from 1992 without considering the effect of
restructuring and special charges in either year. This slight decline from 1992
was primarily due to increases in cost of sales, research and development
expenses and the effective income tax rate.
56
<PAGE>
QUARTERLY INFORMATION
The following table summarizes Guidant's operating results by quarter for
1994 and the three months ended March 31, and June 30, 1995:
<TABLE>
<CAPTION>
1995 1994
------------- ---------------------------
SECOND FIRST FOURTH THIRD SECOND FIRST
------ ------ ------ ------ ------ ------
(IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Vascular intervention............... $111.0 $114.0 $122.0 $113.2 $113.8 $115.5
CRM................................. 105.6 103.9 106.9 99.3 87.8 84.6
MIS................................. 7.5 6.9 5.4 4.9 5.0 4.0
------ ------ ------ ------ ------ ------
Total net sales................... 224.1 224.8 234.3 217.4 206.6 204.1
Cost of sales......................... 73.6 70.8 71.6 66.4 69.3 63.6
Research and development.............. 34.4 33.4 35.1 30.6 31.5 33.7
Sales, marketing and administrative... 69.7 69.6 74.9 65.2 65.7 63.1
------ ------ ------ ------ ------ ------
Income from operations................ 46.4 51.0 52.7 55.2 40.1 43.7
Other expenses--net................... 10.5 15.3 13.0 11.5 6.3 5.0
------ ------ ------ ------ ------ ------
Income before income taxes............ 35.9 35.7 39.7 43.7 33.8 38.7
Income taxes.......................... 14.7 14.6 16.4 17.8 13.8 15.8
------ ------ ------ ------ ------ ------
Net income............................ $ 21.2 $ 21.1 $ 23.3 $ 25.9 $ 20.0 $ 22.9
====== ====== ====== ====== ====== ======
</TABLE>
LIQUIDITY AND FINANCIAL CONDITION
Guidant generated cash flows which were more than sufficient to fund
operations. For the six months ended June 30, 1995, cash provided by operating
activities was $36.2 million compared to $12.5 million for the same period in
1994. This increase in cash provided by operating activities of $23.7 million
is primarily due to the timing of various payments between Guidant and Lilly.
For the year ended December 31, 1994, cash provided from operating activities
was $175.9 million compared with $156.3 million in 1993 and $152.1 million in
1992.
Net cash used for investing activities totaled $36.1 million for the six
months ended June 30, 1995, compared to $16.3 million for the same period in
1994. The most significant use of cash for investing activities related to net
additions of property and equipment of $28.2 million. Net additions of property
and equipment for the same period in the prior year were $13.2 million. This
increase in additions of property and equipment was primarily due to the
introduction of a new generation of CRM programmers. Guidant also paid
approximately $9.4 million to complete the acquisitions of two European
distributors during the period. Net cash used for investing activities totaled
$71.7 million for the year ended December 31, 1994, compared to $44.4 million
in 1993. The most significant use of cash for investing activities related to
net additions of property and equipment of $51.1 million in 1994 compared to
$43.5 million in 1993.
Net cash used for financing activities totaled $69.3 million for the six
months ended June 30, 1995. Payments of its loans payable to affiliated
companies of $54.3 million was Guidant's most significant use of cash for
financing activities.
In June 1994, three subsidiaries of Guidant obtained separate credit
facilities aggregating $700.0 million which permit borrowings through January
8, 1996. Borrowings under the Credit Agreements carry a variable interest rate.
At June 30, 1995, the average interest rate was 6.44%. To lower the interest
rate, Lilly has guaranteed the debt, but it is expected that this guarantee
will be withdrawn in September 1995. The interest rate differential is not
material. In 1994, Guidant incurred $648.0 million of debt under these
facilities and used the proceeds to pay dividends to Lilly of $494.1 million,
purchase certain United States assets from Lilly aggregating $102.5 million,
and repay certain borrowings to Lilly of $46.4 million. In addition, Guidant
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borrowed $57.0 million for the purchase of certain international assets from
Lilly and $18.7 million to acquire an interest in Danimed under separate short-
term agreements with an affiliate of Lilly.
Guidant consummated the Offering at a price of $14.50 per share in December
1994. Net proceeds from the Offering of $192.5 million were used to reduce
long-term debt by $135.0 million and in early 1995 to repay indebtedness
incurred for the purchase of certain international assets of $57.0 million.
Guidant repaid an additional $40.0 million principal amount of its long-term
debt in December 1994 using cash flow generated by operations. In addition,
Guidant repaid $15.0 million principal amount on these borrowings in March 1995
using cash flow primarily generated by operations. At June 30, 1995, Guidant's
outstanding borrowings under the Credit Agreements were $458.0 million. These
borrowings, due January 8, 1996, are classified as a current liability. As a
result, current liabilities exceed current assets by $308.5 million as of June
30, 1995. Working capital decreased $26.5 million to $116.8 million at December
31, 1994 from $143.3 million at December 31, 1993. The decrease in working
capital was primarily due to increases in loans and other payables to
affiliated companies.
Guidant expects its cash from operations combined with access to funding
sources will be adequate to meet its obligations under the Credit Agreements
and meet other anticipated needs including capital expenditures which are
expected to be $60.0 million in 1995. Anticipated capital expenditures have
increased from the first quarter of 1995 due primarily to the introduction of a
new generation of CRM programmers. Guidant believes it will have the ability to
obtain additional debt financing to refinance any borrowings which remain
outstanding on January 8, 1996.
As a participant in Lilly's central cash management system, cash generated by
Guidant since October 18, 1994 has been transferred to Lilly and the resulting
receivable balance is classified as a cash equivalent at December 31, 1994.
Effective February 1, 1995, Guidant commenced operation of its own cash
management system and discontinued participation in Lilly's central cash
management system. Prior to October 31, 1994, cash generated by Guidant was
transferred to Lilly's central cash management system and classified as long-
term advance to affiliated companies. During 1994, Guidant declared non-cash
dividends to Lilly aggregating $444.5 million which were recorded as reductions
of the long-term advances to affiliated companies.
Guidant has recognized net deferred tax assets aggregating $51.7 million at
June 30, 1995 and $57.4 million at December 31, 1994, principally as a result
of the 1993 and 1992 restructurings. In view of the extraordinary nature of the
restructurings and the consistent profitability of Guidant's past operations,
Guidant believes that substantially all these assets will be recovered and that
no significant valuation allowance is necessary.
Lilly has routinely entered into foreign currency exchange contracts on
behalf of Guidant to reduce exposure to foreign currency exchange rate changes.
All contracts are entered into for purposes "other than trading" as defined by
SFAS No. 119. Realized and unrealized foreign currency gains and losses are
recognized in the same period as the transactions occur. Lilly's hedging
program on behalf of Guidant historically has had an immaterial effect on
Guidant's results of operations and liquidity. Following the consummation of
the Transaction, Guidant intends to manage its hedging program consistent with
the past practices of Lilly.
REGULATORY AND LEGAL MATTERS
Guidant's products are subject to extensive regulation by the FDA and, in
some jurisdictions, by state and foreign governmental authorities. In
particular, Guidant must obtain specific clearance from the FDA before it can
market products in the United States. The process of obtaining such clearances
can be time consuming and expensive, and there can be no assurance that all
clearances sought by Guidant will be granted or that FDA review will not
involve delays adversely affecting the marketing and sale of Guidant's
products.
Recent developments such as the enactment of the Safe Medical Devices Act of
1990 and increased enforcement actions reflect a trend toward more stringent
product regulation by the FDA. One result is that
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the number of medical devices approved by the FDA for commercial release by all
companies has decreased significantly in the past few years. In addition,
rigorous enforcement action may be taken in response to deficiencies noted in
inspections or to any product performance problems. The risks in the United
States of lengthened introduction times for new products and additional expense
have increased substantially. Furthermore, the new requirements for post-market
surveillance and device tracking under the Safe Medical Devices Act will
increase the expense of the regulatory process.
The operations of Guidant, like those of other medical device companies,
involve the use of substances regulated under environmental laws, primarily in
manufacturing and sterilization processes. While it is difficult to quantify,
the potential impact of compliance will not, in the view of Guidant's
management, have a material impact on Guidant's financial position.
Guidant operates in an industry susceptible to product liability claims.
Product liability claims may be asserted against Guidant in the future related
to events not known at the present time. Guidant has insurance coverage which
it believes is adequate to protect against any material product liability
losses. See "Risk Factors--Stringent Government Regulation," "--Cost Pressures
on Medical Technology," "--Limitations on Third Party Reimbursement,"
"--Potential Impact of HHS Investigation Regarding Reimbursement Procedures,"
"--Potential Product Liability, Product Recalls" and "Business of
Guidant--Product Liability and Insurance."
HEALTH CARE REFORM
Fundamental changes continue to reshape the traditional patterns of global
health care delivery. Further changes are expected during the next several
years. Price regulation and initiatives to reduce health care costs are in
effect in many countries in which Guidant does business. In the United States,
certain customers are exerting increasing pricing pressures on the medical
device industry. A number of different comprehensive health care reform bills
were introduced in Congress during 1994. With the failure of any of these bills
to pass during 1994, efforts at the state level are gaining momentum. Many of
these plans encourage an expanded role of managed care systems, technology
assessment, and insurance purchasing pools. Potential ERISA changes will be
required for states to implement many of these proposed plans. Because of the
uncertainty as to any proposed changes, Guidant cannot predict the impact any
such changes may have on future operating results. See "Business of
Guidant--Health Care Reform; Third Party Reimbursement."
BUSINESS OF GUIDANT
Guidant was incorporated in Indiana on September 9, 1994 to be the parent of
five of the nine businesses in the MDD Division of Lilly. Prior to the
consummation of the Offering, Guidant was a wholly owned subsidiary of Lilly.
Pursuant to the Offering, approximately 19.8% of Guidant Common Stock was
issued to the public. Guidant is currently comprised of the following five
businesses, each of which is a wholly owned subsidiary of Guidant: ACS, DVI,
CPI, HRT and Origin. Guidant also conducts its business outside the United
States through its various international subsidiaries.
Guidant designs, develops, manufactures and markets a broad range of products
for use in vascular intervention primarily for the treatment of CAD, and CRM
and MIS. Guidant is the worldwide leader, based on revenues, in PTCA and
atherectomy, which are minimally invasive procedures used for opening blocked
coronary arteries. In addition, Guidant has developed proprietary positions in
atherectomy catheters, guidewires and perfusion catheters. Guidant is also the
worldwide leader, based on revenues, in ICD systems. Guidant also designs,
manufactures and markets a full line of implantable pacemaker systems used in
the treatment of slow or irregular arrhythmias. In addition, Guidant develops,
manufactures and markets products for use in MIS procedures with products for
access, vision, dissection and retraction, focusing on laparoscopic market
opportunities in cardiovascular, general, thoracic and urologic surgeries.
Guidant's net sales for the year ended December 31, 1994 were $862.4 million.
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HEALTH CARE TRENDS
Guidant considers its sales growth to have been a function of both innovative
product development and marketing in an era of an evolving health care delivery
environment. The health care industry is currently going through a period
characterized by increasing cost consciousness and consolidation among
hospitals and other health care providers. Guidant expects that these trends
will lead to increasing centralization of purchasing decisions among providers
and will increase the emphasis on the potential clinical benefits and cost-
effectiveness of therapeutic products. Guidant believes that these changes will
continue to increase demand in the health care industry for new approaches and
alternatives to traditional invasive surgical techniques and the delivery of
more cost-effective medical procedures.
Guidant believes that its therapeutic products and less invasive approaches
reduce the overall cost of health care while providing important patient
benefits. Less invasive procedures are generally associated with reduced risk
and trauma, can often be performed at earlier stages in the disease process and
generally result in less costly therapy. In addition, less invasive procedures
are generally more cost-effective and involve shorter hospital stays, result in
a quicker recuperation period and require fewer hospital support services.
In response to cost containment pressures and health care reform, Guidant
believes a broad product offering in a particular treatment area will be
important to offer customers single-source and innovative purchasing
alternatives.
BUSINESS STRATEGY
Guidant's business strategy is to design, develop, manufacture and market
innovative, high quality therapeutic products principally for use in treating
cardiovascular disease and performing minimally invasive surgical procedures,
resulting in improved quality of patient care and reduced treatment costs. Key
elements of this strategy are:
Focus on Cardiovascular Therapeutic Markets. Cardiovascular disease is the
leading cause of death in the United States. More than six million Americans
have been diagnosed with CAD, which is the formation of blood flow restrictions
(atherosclerotic lesions) within the coronary arteries. CAD interventions are
the largest subset of the vascular intervention market. Guidant currently
estimates that in 1994 the total number of catheter-based cardiovascular
interventions performed in the United States was approximately 460,000 and
worldwide was approximately 785,000. Guidant believes there is significant
opportunity to provide cost-effective therapeutic treatments to improve
outcomes and save lives. Such treatments generally result in significantly
lower costs through shorter hospital stays, lower procedure costs and reduced
patient mortality, complications and discomfort. Approximately one million
people in the United States suffer every year from a significant
tachyarrhythmia, which is an abnormally fast heart rate, with over 400,000
people experiencing a sudden cardiac death event. Guidant estimates that
approximately 18,000 ICD systems were implanted in the United States during
1994, with approximately 22,200 implanted worldwide, to treat patients
suffering from potentially fatal fast heart rhythms. Additionally,
approximately 376,000 pacemaker systems were implanted worldwide in 1994 to
treat patients suffering from abnormally slow, or irregular, heart rhythms.
Broad Product Offering. Guidant offers one of the most comprehensive product
lines in the vascular intervention and CRM areas. Guidant believes that a broad
product offering provides several benefits including the ability to (i) take
advantage of its research and development expertise across product lines,
(ii) improve manufacturing and administrative efficiency and expertise and
(iii) offer innovative purchasing programs, particularly as customer purchasing
decisions become more centralized.
Technology. Guidant intends to maintain a technological leadership position
in the vascular intervention and CRM segments of the medical devices market,
which are driven by technological innovation and new product development.
Guidant has introduced several significant technological advances in the
treatment of cardiovascular disease, including the first implantable
defibrillator, the first catheter with perfusion capability to be marketed in
the United States, the first atherectomy catheter and the first endocardial
defibrillation system. As a result of these and other technological
innovations, Guidant has a
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leading position in RX catheters, perfusion catheters, atherectomy catheters,
guidewires, ICDs, endocardial defibrillator leads and gasless laparoscopy
systems. Continuing its focus on technology and new product development,
Guidant has introduced several significant new products and product
enhancements since the beginning of 1995 including the VENTAK P2, VIGOR SSI,
ACS RX LIFESTREAM, ENDOTAK SQ LEAD ARRAY, VENTAK PRx II/PRx III AICD and 2950
programmer, ENDOTAK 115 (70cm LEAD) and AIRLIFT BALLOON, HERNIA MESH and PIXY
INSTRUMENTS. Guidant intends to invest significantly in new product development
and apply its existing technology and intellectual property base in order to
enhance new product development. In addition, Guidant's strong relationships
with its customers allow it to target unmet needs in new product development.
Cost Structure. Guidant expects to further enhance the utilization of its
research, product development and manufacturing assets and resources and share
technology and regulatory experience among its previously independently managed
operations. Guidant has initiated the process of identifying and implementing
several cost savings opportunities across its operations. In manufacturing, ACS
continues to reduce its use of temporary and contract employees. DVI has
announced a plan to move to Guidant facilities currently occupied by ACS to
improve capacity utilization and productivity. This initiative should lead to
cost savings beginning in 1996. Similarly, CPI has announced a reorganization
of its manufacturing processes between Puerto Rico and St. Paul, Minnesota
which is expected to be fully implemented in 1995 and is expected to result in
productivity improvements.
Guidant has restructured its sales and marketing organizations to move to
geographic-based organizations throughout the world. Guidant believes that this
organizational structure should increase the responsiveness to customer
demands, increase the ability to leverage Guidant's sales across product lines
and increase operational efficiencies in sales and marketing over time. Guidant
believes it can achieve cost savings by reducing corporate expenses,
streamlining information reporting systems and eliminating duplicative finance
and administrative activities across Guidant.
International Presence. Guidant's marketing strategy is to attain a
significant worldwide presence in all the markets in which it serves, with the
geographic-based sales organizations supporting this strategy. The markets for
vascular intervention, CRM and MIS products are growing faster internationally
than in the United States. As a result, Guidant believes that there is
significant potential for growth in many areas outside the United States where
vascular intervention, CRM and MIS procedures are not as widely performed by
physicians. In addition, by broadening the markets where Guidant sells its
products, Guidant will be able to serve more customers without increasing
certain of its costs, such as research and development. Guidant often launches
products in international markets first to generate revenue and to benefit from
early clinical information which can assist Guidant in accelerating the
commercialization of its products.
VASCULAR INTERVENTION
Guidant offers its customers a broad range of vascular intervention products,
including dilatation catheters, atherectomy catheters, guidewires, guiding
catheters and accessories. Vascular intervention procedures are primarily
performed in cardiac catheterization labs in approximately 950 hospitals in the
United States and approximately 1,600 hospitals outside the United States.
There are over 3,500 practicing interventional cardiologists in the United
States. Sales of Guidant's vascular intervention products, as a percentage of
Guidant's total revenues for the years ended December 31, 1994, 1993 and 1992,
were 54%, 57% and 56%, respectively.
Background
More than six million Americans have been diagnosed with CAD, which is the
formation of blood flow restrictions (atherosclerotic lesions) within the
coronary arteries. Atherosclerotic lesions can occur anywhere within the
complex network of arteries that provide blood to the heart muscle and the
composition of the lesions vary from extremely hard calcified lesions to soft
fatty deposits. Lesions range from donut-shaped
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concentric constrictions to highly eccentric blockages adhering to one side of
the blood vessel. If untreated, CAD can lead to heart attack, or cause chest
pain that may interfere with normal activities.
Over 1.7 million Americans underwent a diagnostic procedure in 1994 for the
detection of coronary blockages, as compared to 1.1 million Americans in 1989.
Of these 1.7 million patients, approximately 750,000 underwent either CABG or
minimally invasive CAD interventions (angioplasty, atherectomy, ablation or
stenting) and the remaining portion received non-invasive medical therapy or no
further therapy. CAD interventions comprised approximately 60% and CABG
comprised approximately 40% of these procedures performed in the United States
in 1994.
CAD is a progressive disease and no drug treatment has been discovered to
reverse blockages once they have formed. Guidant believes that patients
currently on medical therapy may later require CABG or a CAD intervention.
Further, due to the progressive nature of CAD, many recipients of
interventional therapy may require future additional interventional procedures.
Prior to the 1980's, CABG was the only therapy for those patients undergoing
interventional procedures. CABG is a highly invasive surgical procedure
performed under general anesthesia. The surgeon gains access to the heart by
sawing through the sternum and then grafts a blood vessel from the leg or chest
of the patient, bypassing the site of the blockage. During this procedure, a
cardiopulmonary heart/lung machine provides life support to the disabled heart
and lungs. Due to the highly invasive nature of CABG, the patient generally
remains in the hospital for one to two weeks and has a several week
recuperation period after discharge. CABG is expensive, averaging approximately
$33,000 per procedure in the United States, including the cost of personnel,
hospitalization and supplies. The number of blood vessels suitable for grafting
limits the number of times a CABG can be performed.
Guidant believes that the number of CABG procedures performed in the United
States has grown to approximately 290,000 in 1994. The annual growth rate of
CABG procedures in the United States over the last five years averaged
approximately 4%. The number of CABG procedures performed worldwide in 1994 was
approximately 540,000, and the annual worldwide growth rate over the last five
years averaged approximately 5%.
Since its clinical introduction in 1978, PTCA ("angioplasty") has emerged as
the principal less invasive alternative to CABG. In a PTCA procedure, a local
anesthetic is administered and a small incision is made in the groin area to
gain access to the femoral ("groin") artery. The physician inserts a guiding
catheter through the femoral artery into the entrance of the coronary blood
vessel and then advances a small guidewire through the inside of the guiding
catheter, into the blood vessel and across the site of the blockage. Then a
dilatation catheter is delivered over the guidewire through the inside of the
guiding catheter into the blood vessel and across the site of the blockage. The
balloon is then inflated to push against the blockage on the walls of the
artery, thereby enlarging the opening of the vessel, increasing blood flow to
the heart muscle. At the end of the PTCA procedure, all the equipment is
withdrawn. The patient is usually discharged from the hospital within four to
five days.
A major technological advance in PTCA intervention has been the development
of perfusion capability in dilatation catheters. Perfusion catheters have holes
in the catheter shaft on either side of the balloon, thereby allowing
uninterrupted blood flow to the heart muscle during the time the balloon is
inflated to dilate the blockage, significantly reducing patient chest pain
during the procedure and allowing longer balloon inflations.
The less invasive nature of PTCA is associated with a lower cost of
treatment, less trauma to the patient and generally improved patient outcomes.
The cost of the PTCA procedure averages approximately $13,000 in the United
States, including the cost of personnel, hospitalization and supplies. PTCA
products represent approximately 10% to 15% of the cost of the procedure.
Guidant currently estimates that the number of PTCA procedures in the United
States has grown from approximately 250,000 in 1989 to approximately 435,000 in
1994, an annual growth rate over the last five years of approximately 12%.
Guidant currently
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estimates that the number of PTCA procedures performed worldwide in 1994 was
approximately 735,000. PTCA therapy has become widely accepted due to its high
clinical success rate, low complication rate and greater cost-effectiveness
compared to CABG.
The major clinical challenge to PTCA is clinical restenosis, the renarrowing
of the blood vessel at the site of the initial treatment requiring another
intervention within six months of the initial procedure. Clinical restenosis
occurs in approximately 20% to 30% of patients undergoing PTCA procedures.
Secondary clinical challenges of PTCA include abrupt closure, where the blood
vessel becomes totally blocked during a PTCA procedure, and highly calcified
lesions, which are difficult to treat with PTCA. A number of other technologies
have evolved to treat these conditions, often in combination with a PTCA
catheter. The major other technologies which have evolved are atherectomy,
mechanical or laser ablation and stenting.
Atherectomy is the excision and removal of blockages by catheters with
miniature cutting systems. Ablation is the mechanical or laser reduction of
blockages without the removal of the tissue. Stents are typically implantable
metal devices that are delivered on a dilatation catheter and permanently
deployed at the blockage to "scaffold" the artery. Each of these technologies
has been found to be useful in treating certain limitations of angioplasty or
in treating patients who otherwise would be referred to CABG. Guidant estimates
that a majority of these procedures also use dilatation catheters. Like PTCA
catheters, atherectomy catheters, ablation catheters and stents are delivered
through a guiding catheter and over a guidewire. The cost of these other
procedures is significantly lower than CABG.
While atherectomy and stents are capable of achieving similar acute results,
atherectomy is perceived to be a more difficult technique, while stents are
generally associated with longer hospital stays and higher cost. Since the
introduction of the Palmaz-Schatz stent (which is manufactured by a competitor,
Johnson & Johnson) in the United States in August 1994, physicians have been
eager to use and gain experience with the product, which has reduced the usage
of atherectomy. This has had an adverse effect on Guidant's sales of
atherectomy products. In addition, the one year follow-up results from the
Coronary Angioplasty Versus Excisional Atherectomy Trial (CAVEAT) have recently
been published and have become the subject of press coverage. Coverage focused
on unfavorable results for atherectomy which demonstrated a higher death rate
from all causes at one year. Guidant believes that this coverage has also had
an adverse effect on Guidant's sales of atherectomy products.
Combining atherectomy, ablation and stent procedures with PTCA, Guidant
currently estimates the total number of CAD interventions performed in 1994 in
the United States was approximately 460,000 and worldwide was approximately
785,000. Since 1989, the number of CAD interventions has grown at a rate of
approximately 15% per year. Guidant believes that this growth will continue but
at a reduced rate given the current widespread acceptance of CAD interventional
procedures. Guidant believes growth will continue due to: (i) the aging
population; (ii) the less invasive and more cost-effective nature of CAD
intervention compared to CABG; (iii) the improving medical infrastructure in
many emerging countries; (iv) better treatment of existing applications due to
improved technology; and (v) new applications of CAD interventions, including
the treatment of patients undergoing acute myocardial infarcts ("AMI" or heart
attacks). Certain recent vascular interventional studies suggest that AMI
patients treated with a CAD intervention have a better outcome than those
treated with medical therapy.
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Products
Guidant offers its customers a broad range of vascular intervention products,
including dilatation catheters, atherectomy catheters, guidewires, guiding
catheters and accessories. Guidant's key vascular intervention products
include:
<TABLE>
<CAPTION>
DATE OF U.S.
COMMERCIAL
CATEGORY DESCRIPTION PRODUCT NAME RELEASE
-------- ----------- ------------ ------------
<S> <C> <C> <C>
Perfusion Perfusion dilatation ACS RX LIFESTREAM Mar. 1995
catheters allow continuous ACS RX FLOWTRACK Mar. 1993
blood flow during the PTCA ACS RX PERFUSION Dec. 1990
procedure, offering STACK 40-S Aug. 1991
flexibility in inflation STACK PERFUSION Nov. 1988
times. Perfusion catheters
are available in RX and OTW
configurations.
Rapid Exchange ("RX") RX dilatation catheters ACS RX ELIPSE Oct. 1993
allow for easy exchange of ACS RX PASSPORT (1)
the catheter without ACS RX STREAK Jan. 1992
removing the original
guidewire.
Over-the-Wire ("OTW") OTW dilatation catheters are ACS SOLEIL (2)
delivered over a separate ACS AVANT EDGE (2)
guidewire to position the ACS EDGE Aug. 1993
balloon across the lesion. ACS OMEGA Mar. 1992
ACS PRISM Oct. 1991
PINKERTON .018 Sept. 1989
Fixed-Wire Fixed-wire catheters permit SLALOM PLUS Jan. 1991
access through tortuous and
very small vessels.
Atherectomy products Catheters which allow for AtheroCath GTO(3) Sept. 1994
the excision and removal of AtheroCath SCA-EX Sept. 1992
atherosclerotic plaque. AtheroCath SCA-I Sept. 1990
Guidewires Individual guidewires are HI-TORQUE BALANCE Oct. 1994
inserted through coronary ACS HI-TORQUE EXTRA Sept. 1994
and peripheral vessels S'PORT
before the dilatation HI-TORQUE APPROACH Apr. 1992
catheter, facilitating the HI-TORQUE EXTRA SUPPORT Feb. 1992
placement of the dilatation HI-TORQUE TRAVERSE Nov. 1991
catheter or atherectomy DOC Feb. 1988
catheter. HI-TORQUE FLOPPY II June 1986
</TABLE>
--------
(1) This product is specifically designed for the European market.
(2) This product is released in select international markets.
(3) Guidant voluntarily stopped shipment of this product in the United States
on May 17, 1995 and resumed shipment of this product on June 21, 1995.
PTCA Catheters
Since the type, shape and composition of lesions vary greatly, the
cardiologist requires a high degree of flexibility when performing angioplasty.
There are four basic types of catheters that have evolved to perform PTCA
procedures: perfusion, RX, OTW and fixed-wire. Perfusion catheters are
available in both OTW and RX configurations. Currently, Guidant is the only
company with perfusion catheters approved for commercial marketing in the
United States. Due to ongoing improvements, catheters with perfusion capability
have evolved from a secondary to primary treatment and have become Guidant's
fastest growing PTCA catheter segment.
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Perfusion Catheters. Perfusion catheters are designed to allow blood to
continuously flow to the heart during the balloon inflation. The perfusion
feature also allows the physician flexibility in balloon inflation since the
heart still receives blood flow regardless of the length of time the balloon is
left in place. Perfusion catheters are available in either RX or OTW
configurations and offer either 40cc or 60cc of blood flow per minute during
inflation of the catheter.
. The ACS RX LIFESTREAM is the first high performance, low profile
perfusion catheter with extended pressure capability.
. The ACS RX FLOWTRACK is designed to improve lesion accessibility. It
offers 40cc of blood flow per minute.
. The ACS RX PERFUSION offers 60cc of blood flow per minute for larger
arteries or other coronary anatomy where more blood flow is desired.
. The STACK 40-S is an OTW catheter that offers 40cc of blood flow per
minute with lower profiles than the STACK PERFUSION catheter.
. The STACK PERFUSION was the first perfusion catheter in the United States
which allows blood to flow continuously through the artery during
dilatation. It is an OTW catheter that offers 60cc of blood flow per
minute.
Rapid exchange catheters. RX dilatation catheters, also known as the monorail
or rail segment, allow for easier exchange of the dilatation catheter during a
procedure. PTCA procedures in the United States require an average of
approximately 1.5 dilatation catheters. The RX catheter simplifies procedures
for which multiple balloons are necessary and eliminates the need for an
additional operator to maintain the guidewire's position. Other product
advantages include increased operator control and convenience, reduction of the
cost and time associated with exchanging dilatation catheters and less exposure
to x-rays.
Guidant pioneered the development of RX technology and its product line
includes the following features:
. The ACS RX ELIPSE, a unique elliptically shaped catheter, provides a
clinician with force of delivery and maneuverability needed to reach and
dilate most lesions.
. The ACS RX PASSPORT is a catheter specifically designed to meet European
customer preference for an easy-to-handle shaft design.
. The ACS RX STREAK catheter provides for ease of use during dilatations at
multiple sites.
Over-the-wire catheters. OTW dilatation catheters are delivered over a
separate guidewire to position the balloon across the lesion. These catheters
are available in a variety of balloon diameters and lengths, and are known for
their ability to follow the guidewire through coronary arteries, a
characteristic called trackability. Approximately 50% of all PTCA procedures
use OTW dilatation catheters. The advantages of the OTW catheter are that, in
contrast to the fixed-wire catheter, the guidewire can be easily removed and
reinserted or replaced, if necessary, during the procedure and the guidewire
can be independently steered in the artery. Guidant's OTW product line includes
the following features:
. The ACS SOLEIL is designed to improve the ability to cross lesions
through enhanced catheter and tip characteristics.
. The ACS AVANT EDGE has a modified tip configuration to enhance crossing
potential.
. The ACS EDGE catheter has enhanced maneuverability which provides for
easier access to the lesion site.
. The ACS OMEGA is Guidant's smallest OTW catheter, allowing access to
small and/or curved arteries. This further expands the lesion locations
reachable by the clinician during PTCA.
. The ACS PRISM provides the clinician with a catheter which can be used
multiple times within the same patient due to enhanced balloon
performance characteristics.
. The PINKERTON .018 provides for clinician flexibility on the choice of
guidewire diameters available for use.
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Fixed-wire catheters. Fixed-wire catheters are dilatation catheters with a
wire fixed to the tip of the catheter so that the wire is unable to be advanced
independent of the balloon and cannot be exchanged. These systems are used
where vessels are tortuous or very small. Fixed-wire products have experienced
a decline in sales due to customer preference for the technological
improvements and superior flexibility available in the other categories.
. The SLALOM Coronary Dilatation Catheter with TRACKING SHEATH Hemostat
Device is Guidant's smallest-sized catheter, allowing access to small
vessels and those in the farthest parts of the coronary arteries.
Atherectomy Catheters
Atherectomy products excise and remove atherosclerotic plaque blocking the
coronary artery, frequently leaving less residual blockage and a larger opening
in the artery than PTCA procedures. Approximately 50% of the atherectomy
procedures performed in the United States in 1994 used a dilatation catheter to
further minimize residual blockage following initial atherectomy treatments.
Atherectomy products enable physicians to treat certain lesions not treatable
by PTCA that were previously referred to CABG. Certain clinical studies have
shown a trend toward lower restenosis for atherectomy as compared to PTCA.
AtheroCath Catheters. The primary component of Guidant's atherectomy system
is the AtheroCath catheter. This is an OTW catheter with a mechanical, rotating
cutting system located in a tubular metal housing containing a side-directed
window. The design of the AtheroCath catheter allows a physician to direct the
window toward the obstructive tissue. A hollow nosecone at the end of the
housing captures and allows removal of the tissue. A low pressure balloon is
attached to the housing directly opposite the window and serves to hold the
housing stable in the vessel during each cut. Tissue can be removed either
selectively or around the full circumference of the vessel. The cutting system
is activated by turning on a battery powered, disposable, motor drive unit.
Guidant introduced the first atherectomy products and is the worldwide market
leader in this segment. Its atherectomy products include:
. AtheroCath GTO catheters retain the improvements of Guidant's earlier
catheters while adding a stronger and more precisely controlled shaft
system. The improved shaft provides the physician with greater control
for easier, more precise plaque removal.
. SCA-EX catheters allow easier crossing of more narrowed lesions in the
artery due to a smaller diameter than the SCA-I catheter, and provides
greater flexibility and less trauma to the vessel wall due to their
softer nosecone. The SCA-EX is available in a variety of sizes with a 9
mm (standard) housing window or a 5 mm window (SCA-EX ShortCutter). The
SCA-EX ShortCutter allows the catheter to navigate through more tortuous
vessels.
. The SCA-I was the first atherectomy catheter.
DVI voluntarily stopped shipment of the AtheroCath GTO catheter in the United
States on May 17, 1995 as a result of a meeting initiated by DVI with the FDA,
where certain modifications to the product and other regulatory issues were
discussed. DVI voluntarily informed the FDA of the modifications to the
AtheroCath GTO catheter in order to obtain the agency's interpretation of the
requirements. As a result, DVI submitted to the FDA a Pre-Market Approval
("PMA") supplement in May 1995 covering the modifications for the FDA's review.
DVI received FDA approval of these modifications in June 1995 and resumed
shipment of the AtheroCath GTO on June 21, 1995. DVI anticipates having ongoing
discussions with the FDA regarding the regulatory issues raised by DVI, and
expects to work closely with the FDA to meet all applicable regulatory
obligations.
Guidewires
Guidant is the worldwide leader in guidewire design and sales. Guidant
believes that its guidewires are used in over two-thirds of all CAD
intervention procedures performed worldwide. Guidant manufactures
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guidewires in a variety of sizes and degrees of stiffness such that the
physician can select the appropriate guidewire for the patient's anatomy. For
example, Guidant produces a specialty guidewire ACS HI-TORQUE EXTRA S'PORT, for
use with atherectomy catheters, stents and other procedures where extra support
is desired in a guidewire. Following dilatation catheters, guidewires are the
largest source of vascular interventional product revenue for Guidant.
Guiding Catheters
Guidant manufactures and markets the POWERBASE line of guiding catheters for
use with dilatation catheters, as well as a family of specialty guiding
catheters for use with atherectomy and other technologies. Guidant has a
leadership position in specialty guiding catheters which are priced at a
significant premium to PTCA guiding catheters.
Accessories
Guidant manufactures and markets balloon inflation devices for use with PTCA
and atherectomy catheters. It also manufactures and markets specialty valves
attached to the guiding catheter. These accessories can be used with Guidant's
products as well as those manufactured by others. Guidant also manufactures
battery powered, disposable, motor drive units which activate the cutting
system of Guidant's atherectomy catheters.
New Products
Guidant will continue to introduce enhancements and new platforms in each of
its major product segments. These product enhancements are directed at five
major areas: (i) increasing product application to current clinical challenges;
(ii) increasing the ease of use of Guidant's products; (iii) decreasing
manufacturing costs; (iv) expanding Guidant's product portfolio; and (v)
expanding product applications to new indications such as AMI.
In addition to continuing design enhancements to its existing product
segments, Guidant is developing several technologies targeted towards clinical
challenges in CAD interventions, including restenosis. Metal stents have been
found to lower restenosis. However, this reduction in restenosis with the use
of stents is accompanied by higher procedural cost and other complications due
to the need to aggressively diminish the patient's blood clotting caused by the
implant as the body recognizes the stent as a foreign material. There are
currently efforts underway in the industry to design stents that have fewer
complications and reduce the procedural cost.
Guidant has a significant development effort underway in the area of coronary
stenting. The stent program leverages Guidant's competencies in balloon systems
(for stent deployment), metallurgy and knowledge of treating vessel narrowings.
Guidant's metal stent is in clinical trials in Europe and Japan. Guidant's
first human implant of a stent occurred in Europe in late 1994. Guidant also
has an early development project underway combining the application of stenting
with the ability to deliver drug therapy directly to the site of the blockage.
Such drug delivery in combination with stenting may provide a further
pharmaceutical benefit in reducing restenosis.
As a result of Guidant's pioneer role in the development of PTCA and
atherectomy products, Guidant has developed a strong relationship with
clinicians performing vascular interventions. This relationship, combined with
Guidant's history of product innovation to meet clinical and customer needs,
has enabled Guidant to establish and maintain a leading position in vascular
intervention.
CARDIAC RHYTHM MANAGEMENT
Guidant is a significant competitor in the implantable CRM market. In this
market, implantable device systems are used to detect and treat abnormally fast
and abnormally slow or irregular heart rhythms.
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Guidant's CRM product line is organized into two major product categories. The
Tachy (as defined herein) product category includes ICDs, endocardial
defibrillation leads, programmers and accessories used primarily in the
treatment of fast arrhythmias. The Brady (as defined herein) product category
includes pacemaker pulse generators, endocardial pacing leads, programmers and
accessories used primarily in the treatment of slow or irregular arrhythmias.
Customers for Brady and Tachy products include electrophysiologists, implanting
cardiologists and cardiovascular surgeons. Domestically, these customers
represent approximately 2,800 hospitals; however, the majority of devices are
implanted in 1,000 hospitals. CRM products, as a percentage of Guidant's total
revenues for the years ended December 31, 1994, 1993 and 1992, were 44%, 42%
and 44%, respectively.
TACHYCARDIA ("TACHY")
Background
ICD systems, or Tachy products, are used to detect and treat potentially
fatal, abnormally fast heart rhythms by delivering electrical energy to the
heart and in so doing, restoring the heart's normal rhythm. In the United
States, approximately one million patients experience clinically significant
tachyarrhythmias. Prior to the introduction of implantable defibrillator
systems, the treatment options available for tachyarrhythmias were
antiarrhythmic drug therapy, which is associated with significant side effects,
occasionally posing life threatening toxicity and requiring lifetime treatment,
or antiarrhythmic surgery, which is highly invasive, requiring an open chest
procedure, and associated with substantial patient discomfort and mortality.
Tachyarrhythmias often result from the presence of abnormal cardiac tissues.
These tissues interfere with the normal electrical activity of the heart. ICDs
are most commonly implanted in individuals who fit one of the following three
indications: patients who have survived at least one episode of cardiac arrest
presumably due to ventricular tachyarrhythmias ("VTs"); patients with poorly
tolerated, sustained VTs and/or ventricular fibrillation ("VF") that occurs
spontaneously; and patients in whom antiarrhythmic drug therapy is not
effective or produces undesirable side effects.
Traditional ICD implantation techniques required open chest surgery in order
to attach defibrillation electrodes to the surface of the heart. Endocardial
lead systems, first introduced in the United States in 1993, represent a
revolutionary development in the Tachy market, as they allow for less invasive
implantation. Guidant is the pioneer, and holds the leading worldwide position
in, endocardial defibrillation lead systems. Endocardial leads allow the
defibrillation electrodes to be inserted through a vein, eliminating the need
to open the chest, and thereby reducing the mortality rate for the implantation
from approximately 5% to less than 1%. Endocardial defibrillation leads also
generally reduce the post-operative hospital stay from approximately 7 to 3
days, which substantially increases post-operative patient comfort and mobility
while reducing procedure costs.
Tachy products range from shock-only devices to more complex devices and
systems, including tiered-therapy devices offering multiple therapeutic
options. Tiered-therapy devices were commercially introduced in Europe in 1991
and in the United States in 1993. Tiered-therapy devices use a staged process
for treating multiple arrhythmias by first providing lower intensity pacing
pulses, or antitachycardia pacing, to the patient in an attempt to correct the
abnormal rhythm. If antitachycardia pacing is unsuccessful or if the arrhythmia
requires more aggressive therapy, then the device can progress to low or high
energy shocks.
Another important technological differentiation within the ICD segment is the
electrical waveform used to deliver high energy shocks to the patient, which
can be delivered in either a monophasic or biphasic pattern. Biphasic systems
facilitate the implantation of endocardial lead systems in certain patients by
lowering the energy required to successfully terminate an arrhythmia. The
ability to store intracardiac electrograms is another distinguishing feature
among ICDs. Storage of intracardiac electrograms along with advanced
diagnostics is considered important as the combination of the two provides data
on the stability of a patient's heart rhythm over time and allows physicians to
program the ICD optimally. Finally, product
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size and weight provide for differentiation among ICDs. ICD size and weight
will become increasingly important over time as size and weight reductions
result in improved patient comfort and reduced complications and reduced length
of hospital stays. In addition, size and weight reductions are also becoming
increasingly important as they allow ICDs to be implanted in the pectoral, as
opposed to the abdominal, region.
The Tachy market has experienced solid growth since the introduction of the
first implantable defibrillation system approved by the FDA for commercial
market release in the United States in 1985 to an estimated $485 million
worldwide market in 1994. Approximately 22,200 ICDs were implanted worldwide
during 1994. This compares to an estimated $365 million worldwide market level
in 1993 with approximately 17,000 device implants during that year. The Tachy
market is one in which companies compete primarily on the basis of technology-
driven product features.
Products
Guidant offers a broad array of Tachy products ranging from shock-only
devices to more complex devices and systems offering multiple therapeutic
options as set forth in the following chart. Guidant's key Tachy products
include:
<TABLE>
<CAPTION>
DATE OF
CATEGORY DESCRIPTION PRODUCT NAMES COMMERCIAL RELEASE
-------- ----------- ------------- ------------------
FIRST
INTERNATIONAL
U.S. RELEASE
---- -------------
<S> <C> <C> <C> <C>
Shock-Only ICDs that provide low and VENTAK P3 Submitted, Oct. 1994
high energy shock therapy Nov. 1994(1)
but do not provide
antitachycardia pacing. VENTAK P2 March 1995 Nov. 1992
Devices may or may not
provide Brady pacing. VENTAK P May 1991 Oct. 1990
Tiered-Therapy ICDs that provide low and VENTAK PRx III May 1995 Oct. 1994
high energy shock therapy,
Brady pacing and VENTAK PRx II May 1995 Sept. 1993
antitachycardia pacing.
VENTAK PRx June 1994 Dec. 1991
Endocardial Insulated wires, inserted ENDOTAK DSP Submitted, Oct. 1994
Defibrillation Leads through a vein into the April 1995(1)
heart, which allow energy to
be transmitted to and from ENDOTAK 70 Series Aug. 1994 Nov. 1992
the implanted ICD, allowing
arrhythmias to be detected ENDOTAK 60 Series Aug. 1993 Dec. 1991
and treated.
</TABLE>
--------
(1) These products are not currently commercially available in the United
States and there can be no assurance that these products will obtain the
regulatory approval necessary for commercial marketing in the United
States.
Implantable Tachy products. Guidant's most advanced market released tiered-
therapy device is the VENTAK PRx III. The VENTAK PRx III was market released in
the United States in May 1995 and in Europe in October 1994. The VENTAK PRx III
is approximately 30% smaller than the VENTAK PRx II, which was market released
in the United States in May 1995 and in Europe in September 1993, and offers an
equivalent set of features including a biphasic waveform, expanded diagnostics
(including stored intracardiac electrograms) and advanced arrhythmia
discrimination algorithms. Both the VENTAK PRx III and VENTAK PRx II can store
data for over 65 patient episodes, providing the physician with diagnostic
quality electrograms used to produce detailed therapy history reports and a
quick and simple method for implanting and following the ICD. Both the VENTAK
PRx III and VENTAK PRx II are programmed with Guidant's new Model 2950 PRM. The
PRM provides the physician with an easy to use programmer and an enhanced
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graphical user interface, along with implant support and follow-up features,
which reduce the implant, testing and follow-up time required. The VENTAK PRx
II complements Guidant's broad product line and allows Guidant to compete in
price sensitive and replacement ICD segments.
In March 1995, Guidant received FDA approval for commercial market release in
the United States for the VENTAK P2 system, comprised of the VENTAK P2 pulse
generator and the Model 2035 programmer. The VENTAK P2 is a two zone device
designed to treat patients whose arrhythmias can be converted with low energy
or high energy shocks. This device offers both monophasic and biphasic
defibrillation waveforms, standard bradycardia pacing and post-shock pacing,
and storage of 2 1/2 minutes of diagnostic quality electrograms to enhance a
physician's ability to determine episode cause and the course of follow-up
therapy. The Model 2035 hand held programmer offers the physician a simple user
interface for patient follow-up examinations.
In June 1994, Guidant received FDA approval for commercial market release for
the VENTAK PRx system, Guidant's first tiered-therapy ICD system approved for
use in the United States. The VENTAK PRx system is composed of the VENTAK PRx
pulse generator and the PRESCRIPTOR programmer. The VENTAK PRx incorporates
advanced arrhythmia discrimination algorithms, prescription flexibility and
comprehensive patient and device diagnostics. These features enable the VENTAK
PRx to be used in patients with multiple or complex arrhythmias, and allow the
physician to fine-tune device therapy to a patient's individual needs. In
August 1994, the FDA approved the VENTAK PRx system for use with the ENDOTAK 70
series endocardial defibrillation lead, making the combination the first single
lead tiered-therapy transvenous ICD system approved for use in the United
States.
In May 1991, Guidant released the VENTAK P in the United States, a cost-
effective ICD which has programmable first shock delay, first shock energy and
low energy shock therapy. The VENTAK P provides an easy to use ICD for patients
who do not require tiered-therapy.
In 1990, Guidant began clinical evaluation of its first endocardial lead
system for its Tachy products. Endocardial defibrillation leads provide a
significant advance over traditional implantation techniques by eliminating the
need for an open-chest procedure. Guidant's first endocardial lead, the ENDOTAK
60 series, was market released in Europe in December 1991, and received United
States FDA approval in August 1993 for use with the VENTAK P and VENTAK 1555.
Since its introduction, the ENDOTAK lead system has emerged as the endocardial
lead of choice, which Guidant believes was chosen in over 70% of all initial
ICD implants worldwide in 1994. In November 1992, Guidant market released an
enhanced version of its endocardial lead, the ENDOTAK 70 series, into the
European market. The ENDOTAK 70 series offers increased defibrillation
electrode surface area as well as optimized electrode positioning. The ENDOTAK
70 series was approved by the FDA for commercial market release in the United
States in August 1994.
New Products. Guidant began European clinical evaluation of its next
generation endocardial defibrillation lead, the ENDOTAK DSP, in June 1994 and
market released the ENDOTAK DSP in Europe in October 1994 for use with all of
Guidant's ICD devices. The ENDOTAK DSP is approximately 20% smaller in diameter
than the ENDOTAK 60 and 70 series leads. This size reduction substantially
enhances lead handling and maneuverability, making implantation more like that
of a standard Brady pacing lead. This improvement should reduce implantation
time, complications and cost. The ENDOTAK DSP is currently undergoing FDA
clinical evaluation in the United States. A PMA supplement requesting FDA
approval for United States commercial market release for the ENDOTAK DSP was
submitted in April 1995.
Guidant also has several Tachy products in development. Tachy products
currently under development include the VENTAK MINI and VENTAK AV projects. The
VENTAK MINI product family will include both a shock-only and tiered-therapy
model, and will be approximately 30% smaller and lighter than the VENTAK P3 and
VENTAK PRx III products. A PMA Supplement requesting FDA approval for United
States commercial market release for the VENTAK MINI was submitted in June
1995. The first human
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implant of the VENTAK MINI is expected to occur in the third or fourth quarter
of 1995. The VENTAK AV product family will be an advanced device platform that
includes dual chamber pacing, advanced tachyarrhythmia therapy options, and
enhanced diagnostics, electrophysiology testing and reporting capabilities.
Guidant is also developing electrophysiology ("EP") catheters and systems
used to diagnose and treat cardiac arrhythmias using minimally invasive
procedures. Guidant believes that these systems, which include EP catheters,
energy systems and related products, will be able to cure certain types of
tachyarrhythmias by locating and destroying the tissue that causes the
arrhythmia. This type of arrhythmia ablation is designed to lower the risk of
complications, decrease hospital length of stay and reduce the cost of
treatment when compared to conventional surgery, drug treatment or ICD therapy.
However, there can be no assurance that Guidant will obtain the regulatory
approvals necessary for commercial marketing of these products, or that these
products will successfully cure certain types of tachyarrhythmias.
BRADYCARDIA ("BRADY")
Background
Cardiac pacemaker systems, or Brady pacing products, are generally used to
manage a slow or irregular heartbeat caused by disorders that disrupt the
heart's normal electrical conduction system. This often results in a heart rate
insufficient to provide adequate blood flow through the body, creating symptoms
including fatigue, dizziness and fainting. Brady products range from
conventional single chamber devices to more sophisticated adaptive-rate dual
chamber devices.
The Brady worldwide market is the largest implantable device market, based on
revenues, estimated by Guidant to be approximately $1.83 billion in 1994 with
approximately 376,000 pacemakers implanted worldwide. It is estimated that in
1994, dual chamber pacing devices accounted for approximately 60% of pacing
unit sales in the United States, and approximately 35% of unit sales
internationally. Adaptive-rate pacemakers represented approximately 70% of the
units sold in the United States in 1994 and approximately 30% of the
international market. An ongoing trend toward the use of dual chamber
pacemakers is expected to continue for at least the next several years. In the
Brady market, companies compete primarily on the basis of product features,
customer support, field service and cost-effectiveness.
Brady products are used to treat patients whose natural pacemaker, the sinus
node, is malfunctioning or patients suffering from a disruption in the
electrical conduction system. Normally, the sinus node, located in the upper
atrial portion of the heart, sends electrical signals to the atrioventricular
("AV") node, which in turn sends signals down to the lower (ventricular)
chambers of the heart. The patient population needing pacemakers can be divided
roughly in half: those with malfunctioning sinus nodes, or Sick Sinus Syndrome,
and those suffering from malfunctioning AV nodes, or AV Block.
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Products
Guidant offers an array of Brady products ranging from conventional single
chamber devices to more sophisticated adaptive-rate, dual chamber devices as
set forth in the following chart. Guidant's key Brady products include:
<TABLE>
<CAPTION>
PRODUCT DATE OF
CATEGORY DESCRIPTION NAMES COMMERCIAL RELEASE
-------- ----------- ------- ------------------
FIRST
INTERNATIONAL
U.S. RELEASE
---- -------------
<S> <C> <C> <C> <C>
Single Chamber (SSI) Pacemakers that pace one VIGOR SSI March 1995 May 1993
chamber of the heart,
typically the ventricle, at VISTA VVI Apr. 1988 Dec. 1987
a programmed rate.
Single Chamber Pacemakers that pace one VIGOR SR June 1995 May 1993
Adaptive-Rate (SSIR) chamber of the heart, and
incorporate a sensor that
modifies the pacing rate in TRIUMPH VR Dec. 1991 --
response to physical
activity.
Dual Chamber (DDD) Pacemakers that pace both VIGOR DDD Oct. 1994 May 1993
chambers of the heart,
thereby improving heart VISTA DDD June 1990 Oct. 1989
synchronization and cardiac
output.
Dual Chamber Pacemakers that pace both VIGOR DR June 1995 May 1993
Adaptive-Rate (DDDR) chambers of the heart, and
incorporate a sensor that
modifies the pacing rate in PRELUDE DR July 1992 --
response to physical
activity.
</TABLE>
Implantable Brady products. In May 1993, Guidant market released the VIGOR
pacemaker family in Europe. The VIGOR family, which includes product offerings
in all four product segments (single and dual chamber conventional and single
and dual chamber adaptive-rate) provides advanced pacing algorithms along with
an enhanced range and resolution of programming options and extensive
diagnostics. Since its release in Europe in May 1993, the VIGOR family has
grown to more than 55% of Guidant's European Brady unit sales.
Guidant received FDA approval for commercial market release in the United
States for the VIGOR DDD in October 1994, and the VIGOR SSI in March 1995.
These two products combine their small size and programming flexibility with a
unique set of features not found in other pacemakers. Most notable is the
combination of mode switching, which is the ability of a dual chamber pacemaker
to automatically change pacing modes in the presence of an atrial arrhythmia,
with dynamic AV delay and rate smoothing in the VIGOR DDD. This combination of
features positions the VIGOR DDD as one of the most advanced dual chamber
conventional pacemakers in the market.
Both the VIGOR SR, a single chamber adaptive-rate pacemaker, and the VIGOR
DR, a dual chamber adaptive-rate pacemaker, were market released in the United
States in June 1995. The VIGOR adaptive-rate pacemakers utilize an advanced
sensor technology, called an accelerometer, to adjust the pacing rate in
response to physical activity. An accelerometer offers many clinical advantages
over sensor technology used in most competing pacemakers, including a more
predictable and linear response to exercise and easier programming.
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The VISTA, offered in both single and dual chamber conventional versions,
provides the physician with a small, easy to use, reliable pacemaker. In 1994,
the VISTA family represented approximately 34% of Guidant's Brady revenues. In
addition to the VISTA family, Guidant markets both the TRIUMPH VR, a single
chamber adaptive-rate pacemaker, and the PRELUDE DR, a dual chamber adaptive-
rate pacemaker, in the United States under an original equipment manufacturer
("OEM") agreement with an unaffiliated third party. The TRIUMPH and PRELUDE
product families offer proven sensor technology for the adaptive-rate product
segments and compete favorably on the basis of device longevity, programmable
product features and cost-effectiveness.
In addition to its pacemaker products, Guidant currently sells Brady pacing
leads that are recognized for their clinical performance and reliability. In
1994, Brady leads represented approximately 18% of Guidant's Brady revenues. In
August 1993, Guidant began United States clinical evaluation of the SELUTE
steroid eluting ventricular pacing lead. The SELUTE lead is designed to lower
both acute and chronic pacing thresholds, thereby improving the longevity of
the attached pacemaker. The SELUTE lead was market released in Europe in May of
1993 and a PMA was filed with the FDA in January 1995. While there can be no
assurance that this product will ever receive FDA approval, Guidant expects FDA
approval of the SELUTE lead for commercial market release in the United States
in late 1995 or early 1996.
New Products. Brady products under development include the ABD NxT project.
Guidant believes that the result of this project will be a single Brady product
platform capable of delivering several innovative and differentiated pacemaker
models to the market. These pacemakers include conventional as well as single
and dual sensor adaptive-rate models with advanced system diagnostics, follow-
up and reporting capabilities. The ABD NxT products will be approximately 15%
smaller than the VIGOR family, while providing significantly more functionality
and longevity at a substantially reduced production cost.
MINIMALLY INVASIVE SURGERY
Guidant is involved in the development and marketing of innovative, cost-
effective surgical devices and systems which alter the surgeon's approach to
operating procedures and may provide improved clinical benefit, reduced
operative time and better patient outcomes. The primary customers for Guidant's
MIS products are surgeons who specialize in general, gynecologic, thoracic,
urologic and vascular surgery. MIS as a percentage of Guidant's total revenues
for the years ended December 31, 1994 was less than 3%. However, revenues
generated from the sales of these products increased 192% in 1994 to $19.3
million. Certain of these devices were developed for and manufactured under OEM
distribution arrangements.
Background
MIS uses small incisions to gain access to the surgical site. Minimally
invasive surgical techniques significantly decrease the patient's post-
operative pain, hospital stay and recovery period by limiting the size of
incisions required to gain access to the primary surgical site as well as
reducing the resulting trauma caused by more invasive procedures. Guidant
focuses on laparoscopy, which is a minimally invasive surgical market that has
undergone rapid growth and change. Guidant estimates that in 1994 the worldwide
market for laparoscopic procedures was over $1.0 billion. Guidant's strategy is
to focus on certain niches in this market.
Laparoscopy is the technique of inserting a viewing endoscope and small
diameter surgical instruments into the abdominal cavity through multiple small
incisions to perform procedures which previously required large abdominal
incisions. The abdominal wall is lifted away from the underlying bowel and
other vital abdominal organs to create a working space. This has traditionally
been done by expanding the abdominal wall using carbon dioxide gas
insufflation. Trocars, instruments with a sharp point and a detachable sleeve,
are used to make incisions in the abdominal wall. The sleeve is positioned in
the incisions for use in passing surgical instruments and laparoscopes into the
abdomen and employs a valve that serves to maintain gas insufflation by
preventing gas from escaping from the abdominal cavity during surgery.
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Products
Set forth below is a description of several of Guidant's MIS products:
GASLESS laparoscopy system. Guidant pioneered GASLESS laparoscopy with its
introduction of the first powered mechanical lifting system to displace the
abdominal wall and allow laparoscopic surgery to be performed without gas
insufflation. Guidant's LAPAROLIFT and disposable LAPAROFAN are used to lift
the abdominal wall and create a working space between the abdominal wall and
vital organs. Conventional open surgical instruments may be inserted through
small incisions to perform laparoscopic surgery sometimes without the use of
trocars, since gas sealing trocar sleeves are not required. The GASLESS system
has enabled certain laparoscopic procedures to be performed under local
anesthesia in selected patients using conventional open surgical instruments,
further reducing the procedure cost and the potential anesthetic risk while
increasing surgeon control.
PD BALLOON system. Guidant developed and is marketing an innovative PD
BALLOON system, which is used to form a working extraperitoneal space (outside
the abdominal cavity) for performing hernia repair, bladder incontinence
surgery, lymph node dissection and kidney surgery. The extraperitoneal approach
has a number of potential clinical benefits compared to the conventional
transabdominal laparoscopic approach, including the potential use of regional
anesthesia instead of general anesthesia and reduction in postoperative
complications and morbidity.
PIXIE fiberoptic scope and ENVIEW camera system. Guidant markets a small
diameter, 1.7mm fiberoptic PIXIE scope, which may be introduced through a small
diameter needle. Guidant believes this innovation is an important advance in
surgical miniaturization. A needle-sized scope system creates the potential for
incision-less surgery through multiple needles, instead of through larger 5mm
and 10mm trocar incisions.
Trocars and accessories. Guidant markets a broad line of trocars and
accessories, including the CLASSIC TIP trocars for secondary incisions, blunt
tip balloon trocars, thoracic trocars, safety trocars, gasless trocars and the
ACUCLIP clip applier.
SALES AND MARKETING
Guidant has a broad product line which requires a sales and marketing
strategy that is tailored to its customers in order to deliver high quality,
cost-effective products and services to all of its customer segments worldwide.
Because of the diverse needs of the global market that Guidant serves,
Guidant's distribution system includes direct sales forces and independent
distributors. Guidant utilizes separate sales forces to sell its broad line of
vascular intervention and CRM products in order to take advantage of its highly
educated sales personnel who have specific clinical and technical expertise
with respect to the products it sells. In many cases, members of the sales
forces are present during procedures in order to provide technical consultation
to the physician in the use of Guidant's products. Guidant is not dependent on
any single customer and no single customer accounted for more than 4% of
Guidant's net sales in 1994.
UNITED STATES
Guidant sells its products in the United States substantially through its
direct sales forces. The different uses of Guidant's product lines and the
different physicians performing these procedures necessitate focused sales
organizations that can utilize their specific clinical and technical knowledge.
In 1994, 69% of Guidant's net sales were derived from sales in the United
States, and at June 30, 1995, Guidant employed 285 sales representatives and 48
sales managers in the United States.
In February 1995, Guidant announced the restructuring of its United States
sales operations. This restructuring included the formation of three
geographical areas within the United States, reporting under a single
management structure, to which all sales and distribution operations report.
This geographic
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organizational structure provides the opportunity to leverage Guidant's
resources across the individual business unit sales organizations and retain
its customer clinical focus, and facilitates rapid decision making and the
development of sales and marketing strategies at the customer level.
In the currently evolving health care environment in the United States, there
is a growing trend towards participation in the purchasing decisions by
hospital administrators, purchasing managers and buying groups. Guidant's
breadth and depth of product offerings in the vascular intervention and CRM
markets allows Guidant to be innovative in designing purchasing programs for
its customers. The new worldwide geographic-based sales organization will
enable Guidant to better leverage the broad product line. Additionally, it will
increase local responsiveness by moving the decision-making closer to the
customer.
INTERNATIONAL
In 1994, 31% of Guidant's net sales were derived from its international
markets through its direct sales forces and independent distributors. At June
30, 1995, the international sales force was comprised of 181 employees. Guidant
sells its products in 67 countries. Major international markets for Guidant's
products include: Germany, Japan, France, Spain, Italy, Belgium, Holland, the
United Kingdom and Canada. The sales and marketing approach to these markets
varies depending on market size and stage of development, and the new
geographic-based sales organization will give Guidant greater flexibility to
respond in each of these markets. Guidant recently expanded its direct sales
organization in Germany (through the acquisition of its distributor, Danimed
GmbH und Co. KG), the United Kingdom, Italy, Canada and Japan. Guidant
continues to evaluate opportunities to sell directly in additional markets
outside the United States.
TRAINING, CUSTOMER SERVICE AND MARKETING
All of Guidant's sales personnel are trained in the use, applications and
advantages of the products they sell. This training is conducted at the
commencement of their employment and continues on an ongoing basis at regular
intervals. For example, within the CRM product segment, a sales representative
must pass a series of examinations prior to reaching the mandatory
certification level required to provide technical consultation on a specific
product. In the vascular intervention area, field personnel participate in a
training process ranging from courses on the cardiovascular anatomy, technical
training on angiography and product design and use. CRM field representatives
participate in formal training classes, followed by extensive field training
before assuming responsibility for accounts. Ongoing training includes training
on the latest practices in interventional cardiology and CRM, consultative
selling skills and management training on administrative issues. Guidant also
provides education, training and consulting services to the sales personnel of
its distributors.
Sales personnel work closely with the primary decision makers who purchase
their products, whether physicians, materials managers, biomedical staff,
hospital administrators or purchasing managers. Additionally, the sales forces
actively pursue approval as qualified vendors for hospital group purchasing
organizations that negotiate contracts with suppliers of medical products.
Guidant already has contracts with a number of national buying groups and is
working with a growing number of regional buying groups that are emerging in
response to cost containment pressures and health care reform. In addition,
Guidant has contracted with a number of hospitals to provide interventional
cardiology products under a predictable procedural cost program. This type of
contract, made possible by the breadth and depth of Guidant's product line, is
an innovative risk sharing partnership between the hospital and Guidant in
response to cost containment trends and health care reform.
Guidant's marketing staff works closely with sales personnel and distributors
to collect and analyze customer responses to new and existing products. These
customer responses, along with market research and analysis, serve as input
into new product planning and research and development project prioritization.
In addition, the marketing staff supports Guidant's selling efforts with
various pricing, promotional and technical support programs. These programs
include the preparation and distribution of periodic newsletters
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and other sales literature, the production of instructional slides and videos,
the sponsorship of educational and hands-on training programs for physicians,
the production of follow-up and support materials for patient management and
patient education, and active participation at exhibit booths at medical
meetings, conventions and trade shows. Further, the marketing staff works
closely with members of the research and development staff in prioritizing new
products.
The sales organization compensation and incentive package includes a mix of
base salary, commissions and a bonus plan that is based upon specific targets
and/or corporate goals and is tailored to meet local market needs and business
practices.
RESEARCH AND DEVELOPMENT
Guidant is engaged in ongoing research and development to introduce
clinically advanced new products, to enhance the effectiveness, ease of use,
safety and reliability of its existing products and to expand the applications
for which the use of its products is appropriate. Guidant is dedicated to
developing novel technologies that will furnish health care providers with a
more complete line of products to treat medical conditions through minimally
invasive procedures. Guidant's various operations intend to continue to
capitalize on the research and development efforts of the other operating units
of Guidant.
Guidant's research and development activities are carried out in facilities
located in Santa Clara, Menlo Park, Redwood City and Temecula, California; St.
Paul, Minnesota; and Basingstoke, England. As of June 30, 1995, Guidant had an
in-house research and development staff of 773 engineers, technicians and
scientists. Guidant's research and development staff is focused on product
design and development, quality, clinical research and regulatory compliance.
Guidant's research and development efforts use a clinically driven process to
identify and prioritize projects. This process, called product mapping, uses
input from several sources to make decisions about future products. Key sources
of input include physician advisory councils made up of an international group
of physicians. The research and development programs also utilize feedback from
Guidant's field sales organization, clinical research findings, customer
feedback and internal experts to determine clinical and product opportunities
for Guidant. In addition, Guidant prepares analyses of business and market
opportunities, competition and technologies accessible to Guidant to identify
future projects and current priorities. The portfolio of projects and
priorities are reviewed regularly by the management staff.
New products are generally developed by a project team. A typical project
team consists of a project manager, engineers and technicians and marketing,
clinical research, quality and regulatory and manufacturing personnel. Team
members generally stay with the project from inception through design, process
development and tooling, until the product is successfully transferred to
production and achieves quality goals such as clinical performance, production
yield and line production volume. As a result of this team approach, there has
been a reduction in the time Guidant takes to submit certain new products for
regulatory approval.
To pursue primary research efforts, Guidant has developed alliances with
several leading research institutions and universities. Currently, Guidant
supports the efforts of several such institutions for fundamental research in
the areas of arrhythmia detection and prevention, arrhythmia mapping and
ablation, targeted drug delivery treatment and vascular intervention. While
most of this basic research occurs on a contracted basis, the coordinated
efforts with the scientists at Guidant foster a culture focused on product
development and innovation. This culture has yielded a number of inventions
which have led to patents and patent applications.
Guidant is also involved in working with clinicians around the world in the
conduct of scientific studies on Guidant's products. Certain of these studies
include clinical trials which provide data for use in regulatory submissions,
and other studies consist of post-market approval studies involving
applications of Guidant's
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products. As an example, Guidant is a sponsor of several large studies
investigating the use of CAD intervention in AMI patients, and the use of Tachy
products for new indications.
Guidant evaluates developing technologies in areas where it may have
technological or marketing expertise for possible investment or acquisition.
Guidant has invested in several start-up ventures in the areas of vascular
intervention and MIS. In return for funding and technology, Guidant has
received equity interests in these ventures.
MANUFACTURING
Guidant's manufacturing strategy has four primary goals: to provide global
customers with high quality products and services; to enhance the performance
of products over time through design and manufacturing innovation; to
continuously optimize manufacturing efficiency and lower costs; and to improve
product quality. Guidant's production operations are supported by engineering
groups that provide direct line support, develop cost, quality and efficiency
improvements, support rapid product technology transfers and provide for the
rapid, efficient transfer of new products from pilot production to full scale,
high volume production. In addition, manufacturing personnel have direct
influence over the product design process to provide cost-effective, high
quality manufacturable products.
Guidant's manufacturing operations are carried out in facilities in Menlo
Park, Redwood City, Santa Clara and Temecula, California; St. Paul, Minnesota;
Dorado, Puerto Rico; and Basingstoke, England.
In general, Guidant's production activities occur in a controlled environment
setting or "cleanroom." Such a manufacturing environment helps ensure that
products meet all cleanliness standards and requirements. Guidant automates
many of its production activities for efficiency and quality. In fact, certain
operations can be conducted without an operator in attendance. Throughout its
operations, Guidant uses state-of-the-art manufacturing systems to manage and
control production operations. These systems include Statistical Process
Controls ("SPC"), Manufacturing Resource Planning II ("MRPII") and Total
Quality Management ("TQM") principles. Where appropriate, Guidant utilizes
Just-In-Time ("JIT") manufacturing, work teams and other manufacturing systems.
As a result of these manufacturing systems and other efforts, Guidant is able
to maintain a high service level. Guidant uses high technology equipment and
processes in the fabrication, testing and sterilization of its products. Many
of Guidant's production processes are computer controlled to provide high
quality and rapid and repeatable production. Products and production operations
are tested at various points during and after production to confirm that the
product meets all specifications.
Manufacturing employees are trained in the necessary production operations
and in GMP requirements applicable to the production process. Often, production
operators must obtain an appropriate certification prior to commencing
operations. Such certification requires completion of designated training
programs and demonstration of the ability to perform the necessary operations.
Many employees are trained in multiple operations to provide manufacturing
flexibility and efficiency. Guidant uses various production and quality
performance measures to attempt to provide high manufacturing quality and
efficiency.
Guidant vertically integrates its operations where such integration provides
cost, supply or quality benefits. In some areas, Guidant is highly vertically
integrated. For example, Guidant fabricates nearly all of the components for
its PTCA products. In other cases, Guidant will purchase components such as
batteries. In all cases, Guidant attempts to work closely with its suppliers to
ensure the cost-effective delivery of high quality materials and components.
The major factors used in the selection and retention of suppliers are supplier
technology, quality, reliability, consistent on-time deliveries, value-added
services and cost. Guidant tries to select and build long-term relationships
with suppliers who have demonstrated a commitment to these factors. To date,
Guidant has been able to obtain all required components and materials for all
market released products and for all products under development.
Guidant believes that there are significant operating efficiencies among the
manufacturing operations of Guidant's subsidiaries that will allow Guidant to
improve the quality and efficiency of its product processes. For example,
Guidant's subsidiaries have exchanged information and expertise on
sterilization operations and
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on the laser welding of CRM leads and PTCA catheters. Additional collaborations
are in process and such efforts are expected to continue and expand. ACS has
initiated a program to reduce its use of temporary and contract employees.
Guidant is analyzing additional cost savings initiatives in its manufacturing
operations, which include better capacity utilization in certain facilities,
streamlined manufacturing of similar accessories, external sourcing of several
items and cross-application of scientific knowledge. ACS and DVI are
consolidating their manufacturing facilities to improve capacity utilization
and productivity. This initiative should lead to cost savings beginning in
1996. Similarly, CPI has announced a reorganization of its manufacturing
processes between Puerto Rico and St. Paul which is expected to be fully
implemented in 1995 and is expected to result in productivity improvements.
QUALITY CONTROL SYSTEMS
Guidant is committed to providing high quality products to its customers. To
meet this commitment, Guidant has implemented modern quality systems and
concepts throughout the organization. Guidant's quality system starts with the
initial product specification and continues through the design of the product,
component specification process and the manufacturing, sales and servicing of
the product. The quality system is designed to build in quality and to utilize
continuous improvement concepts throughout the product life. The program
utilizes, as appropriate, quality tools such as SPC, Quality Assurance audits,
work teams, JIT manufacturing and system engineering concepts.
Certain of Guidant's operations are certified under ISO 9001 and 9002. ISO
9001 and 9002 are quality systems that include a quality system audit and
certification program. ISO 9001 and 9002 require, among other items, an
implemented quality system that applies to component quality, supplier control
and manufacturing operations. In addition, ISO 9001 requires an implemented
quality system that applies to product design. Such certification can be
obtained only after a complete audit of a company's quality system by an
independent outside auditor. Guidant's CRM facilities have already been audited
by British Standards Institute and have obtained and continue to maintain ISO
9001 and 9002 certification. This certification requires that these facilities
undergo periodic reexamination. Guidant's PTCA facilities in California and
England have been audited and approved for ISO 9001 certification.
Employee training and involvement is a key part of Guidant's quality system.
Employees are trained in the relevant portions of Guidant's quality system, TQM
principles, problem solving skills and continuous improvement systems. In
addition, Guidant sponsors various employee incentive programs and suggestion
programs that encourage and reward quality and productivity improvements.
Guidant also sponsors "quality awareness" programs which include interaction
with panels of patients and quality activities.
Guidant extends its quality program to its suppliers. Guidant encourages and
supports supplier quality programs and ISO certification. Supplier performance
is regularly reviewed to ensure that the components or materials being supplied
meet all product specifications and quality standards.
COMPETITION
The medical devices market is highly competitive. Guidant competes with many
companies, some of which may have access to greater financial and other
resources than Guidant. Furthermore, the medical devices market is
characterized by rapid product development and technological change. The
present or future products of Guidant could be rendered obsolete or uneconomic
by technological advances by one or more of Guidant's present or future
competitors or by other therapies such as drugs. Guidant's future success will
depend upon its ability to remain competitive with other developers of such
medical devices and therapies.
Guidant faces substantial competition from a number of other companies in the
markets for its products. Guidant's primary competitors in vascular
intervention are SciMed Life Systems, Inc. (Boston Scientific), Cordis
Corporation, Schneider (Pfizer), USCI (C.R. Bard, Inc.) Medtronic, Inc.,
Johnson & Johnson Interventional Systems and Heart Technology, Inc. In the
Brady pacemaker market, Guidant's main
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competitors are Medtronic, Inc., Pacesetter, Inc. (St. Jude Medical, Inc.),
Intermedics, Inc. (Sulzer Brothers Ltd.) and Telectronics Pacing Systems
(Pacific Dunlop Ltd.). In the Tachy field, Guidant competes primarily with
Medtronic, Inc. in the production of endocardial defibrillation lead systems
and implantable defibrillators. Ventritex, Inc. markets competing
defibrillation products. With respect to MIS devices, the principal competitors
of Guidant are United States Surgical Corporation and Ethicon Endo-Surgery,
Inc., a unit of Johnson & Johnson. Guidant believes that it competes primarily
on the basis of product differentiation, product quality, customer support,
field services and cost-effectiveness.
PATENTS, TRADEMARKS, PROPRIETARY RIGHTS AND LICENSES
Guidant believes that patents and other proprietary rights are important to
its business. Guidant also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. Guidant reviews third party patents and patent
applications in an effort to develop an effective patent strategy, to identify
licensing opportunities and to monitor the patent claims of others.
Guidant owns numerous patents in the United States and in certain foreign
countries which relate to aspects of the technology used in many of Guidant's
products and has numerous patent applications pending. In addition, Guidant is
a party to several license agreements with unrelated third parties pursuant to
which it has obtained, for varying terms, the exclusive or non-exclusive rights
to certain patents held by such third parties in consideration for cross-
licensing rights or royalty payments. Guidant has also granted rights in its
own patents to others under license agreements.
As of June 30, 1995, Guidant owned 288 United States patents and had 257
United States patent applications pending. Guidant's policy is to generally
file patent applications in foreign countries where rights are available and
Guidant believes it is commercially advantageous to do so.
From time to time, Guidant is subject to claims of, and legal actions
alleging, infringement by Guidant of the patent rights of others. Guidant
believes that it has been vigilant in reviewing its patents and licensed patent
rights for infringement. Guidant actively monitors the products of its
competitors for possible infringement of Guidant's owned and/or licensed
patents and plans to continue to defend and prosecute its rights with respect
to such patents. There can be no assurance, however, that Guidant's efforts in
this regard will be successful. An adverse outcome with respect to any one or
more of these claims or actions could have a material adverse effect on
Guidant.
Guidant also relies upon trade secrets and proprietary technology for
protection of its confidential and proprietary information. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information or techniques or that third parties will not otherwise
gain access to Guidant's trade secrets.
It is Guidant's policy to require certain of its employees, consultants and
other parties to execute confidentiality agreements upon the commencement of
employment or consulting relationships with Guidant. These agreements provide
that all confidential information developed or made known to the individual
during the course of the individual's relationship with Guidant is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees and consultants, the agreements
generally provide that all confidential technology and information relating to
Guidant's business, whether conceived or prepared by the individual or
otherwise coming into his or her possession while rendering services to
Guidant, shall be the exclusive property of Guidant. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for Guidant's trade secrets in the event of unauthorized use or
disclosure of such information.
Guidant has trademarks in the following names and products that are referred
to herein: ACS, ACS RX STREAK, ACS EDGE, ACS OMEGA, ACS PRISM, ACS RX ELIPSE,
ACS RX PASSPORT, ACUCLIP, AtheroCath, CPI, DOC, DVI, ENDOTAK, HI-TORQUE
APPROACH, HI-TORQUE FLOPPY II, JOYSTICK, LAPAROLIFT, ORIGIN, PIXIE, POWERGUIDE,
PRELUDE, PRESCRIPTOR, PRx,
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SELUTE, SLALOM, STACK PERFUSION, SWEET TIP, TRIUMPH, ULTRAX, VENTAK, VIGOR and
VISTA. The following are pending trademark registrations of Guidant: ACS RX
FLOWTRACK, ACS RX FLOWTRACK LONG, ACS RX LIFESTREAM, ACS RX PERFUSION, ACS HI-
TORQUE EXTRA S'PORT, AtheroCath GTO, AtheroCath SCA-I, ENDOTAK DSP, ENDUCTOR,
ENVIEW, GASLESS, GET THE RIGHT ANGLE, GUIDANT, HI-TORQUE TRAVERSE, HI-TORQUE
BALANCE, LAPAROFAN, NEEDLE ENDOSCOPY, NO STITCH, PDB, PINKERTON .018,
ShortCutter, STACK 40-S, VENTAK MINI, THE KINDER CUT, TRACKING SHEATH and VLIS.
GOVERNMENTAL REGULATION
As a manufacturer of medical devices, Guidant is subject to extensive
regulation by the FDA and, in some jurisdictions, by state and foreign
governmental authorities. These regulations govern the introduction of new
medical devices, the observance of certain standards with respect to the
manufacture, testing and labeling of such devices, the maintenance of certain
records, the ability to track devices and the reporting of potential product
defects and other matters. These regulations may have a material impact on
Guidant. Recent developments such as the enactment of the Safe Medical Devices
Act of 1990 reflect a trend toward more stringent product regulation by the
FDA. Recently, the FDA has pursued a more rigorous enforcement program to
ensure that regulated businesses, like Guidant's, comply with applicable laws
and regulations. Guidant believes that it is in substantial compliance with
such governmental regulations.
All of Guidant's medical devices introduced in the United States market since
1976, which includes substantially all of Guidant's products, are required by
the FDA, as a condition of marketing, to secure either a premarket notification
clearance pursuant to Section 510(k) of the federal Food, Drug and Cosmetic
Act, an approved PMA application or a supplemental PMA. Obtaining a PMA or even
a supplemental PMA can take up to several years and can involve preclinical
studies and clinical testing. In contrast, the process of obtaining a 510(k)
premarket notification clearance requires the submission of substantially less
data and generally involves a shorter review period. A 510(k) premarket
notification clearance indicates that the FDA agrees with an applicant's
determination that the product for which clearance has been sought is
substantially equivalent to another medical device that has been previously
marketed. An approved PMA application indicates that the FDA has approved a
product for marketing. In addition to requiring clearance for new products, FDA
rules may require a filing and FDA approval, usually through a PMA supplement,
prior to marketing products that are modifications of existing products.
Guidant's existing products have obtained FDA marketing clearances in the
United States through either the 510(k) process, the PMA process or PMA
supplement clearance. No assurance can be given that marketing clearances for
Guidant's future products will be obtained on a timely basis, if at all.
Moreover, after clearance is given, the FDA or foreign regulatory agencies have
the power to withdraw the clearance or require Guidant to change the device or
its manufacturing process or labeling, to supply additional proof of its safety
and effectiveness or to recall, repair, replace or refund the cost of the
medical device, if it is shown to be hazardous or defective. Any of the
foregoing could have a material adverse impact on Guidant.
There can be no assurance that all the necessary approvals, including
approval for product improvements and new products, will be granted on a timely
basis or at all. Delays in receipt of or failure to receive such approvals
could have a material adverse effect on Guidant's business.
Guidant is also required to register with the FDA as a device manufacturer.
As such, Guidant is subject to periodic inspection by the FDA for compliance
with the FDA's GMP and other regulations. These regulations require that
Guidant manufacture its products and maintain its documents in a prescribed
manner with respect to manufacturing, testing and control activities. Further,
Guidant is required to comply with various FDA requirements for labeling. The
Medical Device Reporting regulation requires that Guidant provide information
to the FDA whenever there is evidence to reasonably suggest that one of its
devices may have caused or contributed to a death or serious injury, or a
device malfunction would be likely to cause or contribute to a death or serious
injury if the malfunction were to recur. In addition, the FDA prohibits
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Guidant from marketing approved devices for unapproved indications. If the FDA
believes that a company is not in compliance with applicable regulations, it
can institute proceedings to detain or seize products, issue a recall, impose
operating restrictions, enjoin future violations and assess civil and criminal
penalties against the company, its officers or its employees and can recommend
criminal prosecution to the Department of Justice. Other regulatory agencies
may have similar powers. Failure to comply with regulatory requirements could
have a material adverse effect on Guidant's business.
From time to time, Guidant has received notifications, including warning
letters, from the FDA of alleged deficiencies in Guidant's compliance with FDA
requirements. To date, Guidant has been able to address or correct such
deficiencies to the satisfaction of the FDA and, to the extent deficiencies
arise in the future, Guidant expects to be able to so correct them, but there
can be no assurance that this will be the case. In addition, from time to time
Guidant has recalled, or issued safety alerts on, certain of its products. To
date, no such recall or safety alert has had a material adverse effect on
Guidant, but there can be no assurance that a future recall or safety alert
would not have such an effect.
Medical device laws are also in effect in many of the countries in which
Guidant does business outside the United States. These range from comprehensive
device approval requirements for some or all of Guidant's medical device
products to simpler requests for product data or certifications. The number and
scope of these requirements are increasing. In addition, international sales of
medical devices manufactured in the United States but not approved by the FDA
for distribution in the United States are subject to FDA export requirements,
which require Guidant to obtain documentation from the medical device
regulatory authority of the destination country stating that the sale of the
device is not in violation of that country's medical device laws. This
documentation is then submitted to the FDA with a request for a permit for
export to that country.
In addition, federal, state and foreign regulations regarding the manufacture
and sale of medical devices are subject to future changes. For example, the FDA
is currently considering significant changes to its GMP regulations. Guidant
cannot predict what impact, if any, such changes might have on its business.
However, such changes could have a material impact on Guidant's business.
In February 1993, CPI entered into a consent decree with the FDA and paid
$500,000 to reimburse the FDA for the cost of its investigation. The
investigation focused upon certain manufacturing activities that took place at
CPI in the late 1980s and very early 1990s. Under the terms of the consent
decree, CPI agreed to revise certain procedures relating to product failure
investigation and reporting and agreed to have these revised procedures
reviewed by the FDA. These steps were completed in mid-1993. CPI has an ongoing
duty under the consent decree to follow these revised procedures. CPI may
petition the court after February 19, 1996 to terminate the consent decree.
HEALTH CARE REFORM; THIRD PARTY REIMBURSEMENT
During the past several years, the major third party payors of hospital
services (Medicare, Medicaid, private health care insurance and managed care
plans) have substantially revised their policies, methodologies and formulae to
contain health care costs. The introduction of various Medicare cost
containment incentives, combined with closer scrutiny of health care
expenditures by both private health insurers and employers, has resulted in
increased contractual adjustments and discounts in hospital charges for
services performed and in the shifting of services from inpatient to outpatient
settings. If hospitals respond to such pressures by substituting lower cost
products or therapies for Guidant's products, Guidant could be adversely
affected. Moreover, third party payors may deny reimbursement if they determine
that a device was not used in accordance with cost-effective treatment methods
as determined by the payor, was experimental, or for other reasons.
During the past year, several comprehensive health care reform proposals were
introduced in the United States Congress. The intent of the proposals was,
generally, to expand health care coverage for the uninsured and reduce total
health care expenditures. Various provisions contained in these proposals would
have
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dramatically altered health care delivery and payment in the United States.
None of the proposals were brought to a floor vote before the 103rd Congress
adjourned.
It is expected that future health care reform will be proposed in more of a
"piecemeal" approach brought together during the budget reconciliation process.
Specific areas that may be addressed include insurance market reforms, medical
and product liability, fraud and abuse statutes and administrative
simplification.
Certain states have already made significant changes to their Medicaid
programs and have also adopted health care reform. Efforts by individual states
to expand coverage and/or reduce costs are expected to accelerate during 1995
and 1996. Features of such state proposals could include state single payer
plans, global budgets, technology assessment panels, creation of large
purchasing pools or mandates on employers to provide coverage. The success of
many state initiatives will rest on overcoming regulations imposed by ERISA.
Among other things, ERISA regulates health insurance programs offered by multi-
state employers who are self insured. In order to enact certain reforms, states
would be required to seek modifications to ERISA itself. A few other states
have reform proposals under consideration. Similar initiatives to limit the
growth of health care costs, including price regulation, are also underway in
several other countries in which Guidant does business.
Implementation of health care reform may limit the price of, or the level at
which reimbursement is provided for, Guidant's products. In addition, health
care reform may accelerate the growing trend toward involvement by hospital
administrators, purchasing managers and buying groups in purchasing decisions.
This trend would likely include increased emphasis on the cost-effectiveness of
any treatment regimen. These changes may also cause the marketplace in general
to place increased emphasis on the utilization of minimally invasive surgical
procedures and the delivery of more cost-effective medical therapies.
Regardless of which additional reform proposals, if any, are ultimately
adopted, the trend toward cost controls and the requirement of more efficient
utilization of medical therapies and procedures will continue and accelerate.
Guidant is unable at this time to predict whether any such additional health
care initiatives will be enacted, the final form such reforms will take or when
such reforms would be implemented.
The ability of customers to obtain appropriate reimbursement for their
products and services from government and third party payors is critical to the
success of all medical device companies around the world. Several foreign
governments (most notably Germany and Spain) have attempted to reshape
reimbursement policies affecting medical devices. In the United States, recent
investigations by the OIG have had a negative effect on reimbursement for
products used as part of FDA approved clinical trials. Further, Congress is
currently considering legislation that would apply certain health care fraud
and abuse statutes to all payors. Restrictions on reimbursement of Guidant's
customers will likely have an impact on the products purchased by customers and
the prices they are willing to pay.
The OIG is currently conducting an investigation regarding the possible
submission of false or improper claims to the Medicare/Medicaid programs for
reimbursement for procedures using cardiovascular medical devices that were not
approved for marketing by the FDA at the time of use. Several medical devices
companies, including CPI and DVI, have received subpoenas from the OIG for
records relating to the distribution to hospitals of products under clinical
study. Beginning in June 1994, approximately 130 hospitals received subpoenas
from HHS seeking information specific to practices in seeking reimbursement
from Medicare/Medicaid for procedures using cardiovascular medical devices
(including those manufactured by CPI, ACS and DVI, as well as numerous other
manufacturers) that were not approved for marketing by the FDA at the time of
use. The subpoenas sent to hospitals also seek information regarding various
types of remuneration, including payments, gifts, stock and stock options,
received by the hospital or its employees from manufacturers of medical
devices. Significant sanctions may be imposed against any person, including a
health care provider or medical devices manufacturer, that makes or causes to
be made, a false claim for Medicare or Medicaid payment. These sanctions may
include civil fines and penalties, criminal penalties, remedies under the
Program Fraud Remedies Act of 1986, the False Claims Act and the Medicare Fraud
and Abuse Act, state disciplinary proceedings and, in the case of providers,
exclusion from the Medicare and Medicaid programs. The OIG's investigation and
any related change in reimbursement practices could cause
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hospitals to decide not to participate in clinical trials or to treat Medicare
and Medicaid patients only with medical devices that have been cleared for
marketing by the FDA. This action would likely limit the scope of clinical
trials in the United States, force more clinical research to be conducted in
non-United States markets and increase the cost and time required to complete
clinical evaluations in the United States for all companies in the medical
devices industry. Guidant believes that it is too early for it to be able to
predict the potential outcome of this matter or when it will be resolved. There
can be no assurance that the OIG's investigation or any changes in third party
payors' reimbursement practices will not materially adversely affect the
medical devices industry in general, or Guidant in particular.
PRODUCT LIABILITY AND INSURANCE
The design, manufacture and marketing of medical devices of the types
produced by Guidant entail an inherent risk of product liability. Guidant's
products are often used in intensive care settings with seriously ill patients.
While the amount of product liability insurance maintained by Guidant has been
adequate in relation to claims made against Guidant in the past, there can be
no assurance that the amount of such insurance will be adequate to satisfy
claims made against Guidant in the future or that Guidant will be able to
obtain insurance in the future at satisfactory rates or in adequate amounts.
Product liability insurance in the past was obtained through Lilly and will be
replaced by Guidant's insurance policies in 1995. Product liability claims or
product recalls could have a material adverse effect on the business and
financial condition of Guidant.
ENVIRONMENTAL COMPLIANCE
Guidant is subject to various federal, state and local laws and regulations
relating to the protection of the environment. In the course of its business,
Guidant is involved in the handling, storing and disposal of certain chemicals.
Guidant is also in the process of eliminating the chlorofluorocarbons used in
its manufacturing and sterilization operations. While Guidant continues to make
capital and operational expenditures for protection of the environment, it does
not anticipate that those expenditures will have a material adverse effect on
its business.
PROPERTIES
As of June 30, 1995, Guidant owned or leased the following facilities:
<TABLE>
<CAPTION>
APPROXIMATE LEASED
LOCATION TYPE OF FACILITY SQUARE FEET OR OWNED
-------- ---------------- ----------- --------
<S> <C> <C> <C>
Temecula, CA............ ACS manufacturing; HRT manufacturing, 500,000 Owned
research and development and administration
Santa Clara, CA......... ACS research and development, 370,000 Owned
administration, sales and marketing and
manufacturing
Basingstoke, UK......... Administrative and ACS product development 24,000 Leased
Temecula, CA............ DVI manufacturing 60,000 Leased
Redwood City, CA........ DVI research and development, 56,000 Leased
administration, sales and marketing and
manufacturing
St. Paul, MN............ CPI manufacturing, research and 308,000 Owned
development, administration and sales and
marketing
St. Paul, MN............ CPI receiving, assembly and administration 94,000 Leased
St. Paul, MN............ CPI packaging, shipping and warehouse 25,000 Leased
Dorado, PR.............. CPI manufacturing, research and 54,000 Owned
administration
Menlo Park, CA.......... Origin research and development, 63,000 Leased
administration, sales and marketing and
warehouse
Indianapolis, IN........ Administrative 18,000 Leased
</TABLE>
83
<PAGE>
Guidant maintains its executive offices at 111 Monument Circle, 29th Floor,
Indianapolis, Indiana. Guidant believes that its facilities are adequate to
meet its present and reasonably foreseeable needs.
Guidant believes that none of its properties is subject to any encumbrance,
easement or other restriction that would detract materially from its value or
impair its use in the operation of the business of Guidant. The buildings owned
by Guidant are of varying ages and in good condition.
EMPLOYEES
As of June 30, 1995, Guidant had 4,494 full-time employees. Of these
employees, 2,414 were engaged in manufacturing and quality assurance, 873 were
engaged in sales, marketing and customer service, 773 were engaged in research
and development, and 434 were engaged in finance, systems, administration and
office clerical and support positions. Guidant maintains compensation, benefit,
equity participation and work environment policies intended to assist in
attracting and retaining qualified personnel. Guidant believes that the success
of its business will depend, in significant part, on its ability to attract and
retain such personnel. Guidant contracted the services of an average of 517
individuals on a monthly basis in 1994. The contract labor provides management
with flexibility in dealing with fluctuations in volume during periods of high
sales growth and through new product transfers to manufacturing.
None of Guidant's employees are represented by a labor union. Guidant has
never experienced an organized work stoppage or strike and considers its
relations with its employees to be excellent.
LEGAL PROCEEDINGS
On May 3, 1994, SciMed Life Systems, Inc. ("SciMed") filed suit against ACS
in the Northern District of California, San Francisco Division, alleging that
the ACS RX FLOWTRACK 40 and ACS RX ELIPSE catheters infringed certain SciMed
patents and seeking injunctive relief and unspecified monetary damages. ACS
contended that SciMed's claims were subject to an arbitration provision under a
prior settlement agreement between ACS and SciMed. The court has postponed the
suit at the request of ACS, and ACS has commenced an arbitration proceeding
against SciMed. Guidant believes that it has meritorious defenses against the
claims of patent infringement. However, there can be no assurance that Guidant
will prevail in this proceeding. An adverse outcome could have a material
adverse effect on Guidant.
On May 15, 1995, Intermedics, Inc., a division of Sulzermedica USA, Inc.
("Intermedics"), filed suit against CPI in the United States District Court for
the Southern District of Texas, Galveston Division. The complaint alleges
infringement of certain Intermedics patents by CPI products, including
unspecified defibrillator models bearing the VENTAK and/or PRx trademark(s);
unspecified pacemaker models bearing the VIGOR trademark; and unspecified
pacemaker models bearing the EXCEL trademark (which models are not currently
manufactured by CPI). Intermedics is seeking injunctive and monetary relief of
an unspecified amount. All of the Intermedics patents asserted against CPI
defibrillators are the subject of pending litigation by Intermedics against
Medtronic, Inc. and Ventritex, Inc. CPI may or may not benefit from rulings, if
any, in those litigations which are adverse to Intermedics and address the
validity or enforceability of any of the defibrillator patents. Independent of
any other litigation, Guidant believes that it has substantial and meritorious
defenses against all claims brought by Intermedics. Guidant has answered the
complaint accordingly and will continue to defend its position vigorously.
However, there can be no assurance that Guidant will prevail in this
proceeding. An adverse outcome could have a material adverse effect upon
Guidant.
Guidant is a party to certain other legal actions arising in the ordinary
course of its business. Guidant believes that the ultimate outcome of these
other actions will not result in any liability that would have a material
adverse effect on Guidant.
84
<PAGE>
MANAGEMENT OF GUIDANT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Guidant and their ages and positions
are:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
James M. Cornelius(2)... Chairman of the Board and Director 51
Ronald W. Dollens(3).... President, Chief Executive Officer and Director 48
J.B. King(1)............ Vice President, General Counsel, Secretary and
Director 65
Keith E. Brauer......... Vice President, Finance and Chief Financial
Officer 47
A. Jay Graf............. Vice President and President, CPI 48
William A. Hawkins III.. Vice President and President, DVI 41
Ginger L. Howard........ Vice President and President, ACS 39
F. Thomas Watkins III... Vice President and President, Origin and HRT 43
Richard M. van Oostrom.. Vice President and President, European 50
Operations
James R. Baumgardt...... Vice President, Corporate Resources 47
Cynthia L. Lucchese..... Treasurer 35
Roger Marchetti......... Chief Accounting Officer 37
Steven C. Beering,
M.D.(3)................ Director 62
Maurice A. Cox, Jr.(3).. Director 45
James W. Cozad(1)....... Director 68
Karen N. Horn, Ph.D.(2). Director 51
Mark Novitch, M.D.(2)... Director 63
Eugene L. Step(2)....... Director 66
Randall L. Tobias(1).... Director 53
Alva O. Way(3).......... Director 66
</TABLE>
--------
(1) Term expires in 1996.
(2) Term expires in 1997.
(3) Term expires in 1998.
MANAGEMENT BIOGRAPHIES
JAMES M. CORNELIUS Mr. Cornelius is Chairman of the Board of Directors and a
Director of Guidant. He is also Vice President, Finance and Chief Financial
Officer of Lilly, a position he has held since 1983. Mr. Cornelius has
indicated that he will retire from Lilly as an employee and director effective
October 1, 1995. Mr. Cornelius joined Lilly in 1967 and has served as Treasurer
of Lilly and as President of IVAC Corporation ("IVAC"), a former Lilly medical
device subsidiary. Mr. Cornelius is a director of Lilly and The National Bank
of Indianapolis. Mr. Cornelius also serves on the Advisory Board of The Walker
Group and as a trustee of the University of Indianapolis.
RONALD W. DOLLENS Mr. Dollens is President, Chief Executive Officer and a
Director of Guidant. He has served as President of Lilly's MDD Division since
1991. He previously served as Vice President of the MDD Division and Chairman
of ACS since 1990. From 1988 to 1990, he held the position of President and
Chief Executive Officer of ACS. Mr. Dollens joined Lilly in 1972. Mr. Dollens
is a director of the Children's Museum of Indianapolis and the Health Industry
Manufacturers Association.
J.B. KING Mr. King is Vice President, General Counsel, Secretary and a
Director of Guidant. Mr. King also acts as counsel to the law firm of Baker &
Daniels, which provides legal services to Guidant. He previously was Vice
President and General Counsel for Lilly, a position he held from 1987 until he
retired in 1995. Before joining Lilly, Mr. King was a partner and chairman of
the management committee of Baker & Daniels. Mr. King is a director of Bank
One, Indianapolis, N.A.; the Indiana Legal Foundation; the Indianapolis Water
Company; and Riley Hospital Memorial Association.
85
<PAGE>
KEITH E. BRAUER Mr. Brauer is Vice President, Finance and Chief Financial
Officer for Guidant. He served as executive director of finance and Chief
Accounting Officer of Lilly from 1992 to 1994. Mr. Brauer was executive
director of international finance of Lilly from 1988 to 1992 and director of
corporate affairs of Lilly from 1986 to 1988. Additionally, he held the
position of Vice President of finance and Treasurer for Physio-Control
Corporation, a former Lilly subsidiary. Mr. Brauer joined Lilly in 1974. Mr.
Brauer is a director of the Indiana Chamber of Commerce. Mr. Brauer also serves
on the University of Michigan Business School Corporate Advisory Board and the
Washington Township Schools Foundation.
A. JAY GRAF Mr. Graf is a Vice President of Guidant and President of CPI. He
has been President and Chief Executive Officer of CPI since 1991. He joined CPI
as Executive Vice President and Chief Operating Officer in 1990. Prior to that,
he held the position of Senior Vice President of operations at Physio-Control
Corporation, a former Lilly subsidiary. Additionally, Mr. Graf held the
positions of Vice President of sales and technical services, and Vice President
of marketing and communications at Physio-Control Corporation. Mr. Graf joined
Lilly in 1976. Mr. Graf is a director of the St. Paul Area United Way.
WILLIAM A. HAWKINS III Mr. Hawkins is a Vice President of Guidant and
President of DVI. He has been a Vice President of Guidant since February 1995
and has held the position of President of DVI since January 1995. Prior to
that, he was President and Chief Executive Officer of IVAC Corporation, a
former Lilly subsidiary, from 1991 to 1994. Additionally, Mr. Hawkins was
Senior Vice President of Operations for Physio-Control Corporation from 1990 to
1991, and was Director of Marketing for Lilly's MDD Division in Europe from
1986 to 1990. He joined Lilly's MDD Division in 1982. Mr. Hawkins is Vice
President of the Biomedical Industry Council in San Diego and a member of the
California Governor's Council on Biotechnology.
GINGER L. HOWARD Ms. Howard is a Vice President of Guidant and President of
ACS. She has been President of ACS since 1993. She served as director of
pharmaceutical sales for Lilly in 1992 and was director of corporate
pharmaceutical strategic planning from 1989 to 1991. Ms. Howard joined Lilly in
1979. Ms. Howard is a director of the California Healthcare Institute. Ms.
Howard also serves on the advisory board for the California Institute for
Federal Policy Research and is a member of the Committee of 200.
F. THOMAS WATKINS III Mr. Watkins is a Vice President of Guidant and
President of Origin and HRT, positions he has held since May 1995. He has
previously served as Executive Vice President and Chief Operating Officer of
Origin. Mr. Watkins joined Origin in 1989. Previously he has served in
management positions in several start-up companies, including Microgenics
Corporation, and was a consultant with the international consulting firm of
McKinsey & Company, Inc.
RICHARD M. VAN OOSTROM Mr. van Oostrom is a Vice President of Guidant and
President of European Operations for Guidant. He served as Vice President of
European operations for Lilly's MDD Division from 1984 to 1994. Mr. van Oostrom
was an executive director of marketing from 1981 to 1984 and President and
general manager of Eli Lilly Canada Inc. from 1980 to 1981. He joined Lilly in
1971. Mr. van Oostrom is a board member of the European trade association for
medical prosthesis manufacturers.
JAMES R. BAUMGARDT Mr. Baumgardt is Vice President, Corporate Resources for
Guidant. He served as executive director of human resources and business
development for Lilly's MDD Division since 1994 and executive director of
business development of Lilly since 1992. Mr. Baumgardt was director of
personnel from 1990 to 1992 and director of sales for Lilly's select product
division from 1988 to 1990. He joined Lilly in 1970. Mr. Baumgardt is a
director of the Rose-Hulman Institute of Technology.
CYNTHIA L. LUCCHESE Ms. Lucchese is Treasurer of Guidant, a position she has
held since February 1995. She served as Worldwide Treasury Manager for Lilly
from 1992 to 1994. She served as Administrative Audit Manager from 1990 to
1992. Ms. Lucchese joined Lilly in 1987. Prior to joining Lilly, she was a
senior auditor for Ernst & Young LLP from 1982 to 1986. Ms. Lucchese is a
Certified Public Accountant.
86
<PAGE>
ROGER MARCHETTI Mr. Marchetti is director of corporate accounting and Chief
Accounting Officer of Guidant. He served as manager of finance for Lilly's
Indianapolis pharmaceutical manufacturing operations from 1992 to 1994, and
manufacturing controller for ACS from 1990 to 1992. Mr. Marchetti joined ACS in
November 1988 as general accounting manager. Prior to joining Lilly, Mr.
Marchetti was on the audit staff of Touche Ross & Co. (currently Deloitte &
Touche LLP) from 1980 to 1986. Mr. Marchetti is a Certified Public Accountant.
STEVEN C. BEERING, M.D. Dr. Beering has served as President of Purdue
University since 1983. He served as Dean of the Indiana School of Medicine and
Director of the Indiana University Medical Center from 1974 until 1983. Dr.
Beering is a fellow of the American College of Physicians and the Royal Society
of Medicine and a member of the National Academy of Sciences Institute of
Medicine. He is a director of American United Life Insurance Company; Arvin
Industries, Inc.; Lilly; and NIPSCO Industries, Inc. Dr. Beering is also a
director of the Indiana Business Modernization and Technical Corporation; the
Corporation of Innovative Development; and the Indiana State Chamber of
Commerce.
MAURICE A. COX, JR. Mr. Cox has served as President and Chief Executive
Officer of Dispatch Venture Capital (a subsidiary of Dispatch Printing Company)
since July 1995. Previously, he served as President and Chief Executive Officer
of CompuServe Incorporated (an information services company) from 1990 to June
1995. Mr. Cox joined CompuServe in 1979 and has served as Vice President,
Product Management and as Executive Vice President of CompuServe's Information
Services Division. He is also a director of Huntington National Bank.
JAMES W. COZAD Mr. Cozad served as Chairman of the Board and Chief Executive
Officer of Whitman Corporation, a diversified manufacturing corporation, from
1990 until his retirement in 1992. Prior to assuming that position, he served
as Vice Chairman of the Board and as a Vice President of Amoco Corporation. Mr.
Cozad is a director of GATX Corporation; Inland Steel Industries, Inc.; Lilly;
Sears Roebuck & Co.; and Whitman Corporation. He is also a director of the
Chicago Medical School and the Indiana University Foundation. Mr. Cozad is a
trustee of the Northern Funds.
KAREN N. HORN, PH.D. Mrs. Horn has served as Chairman of the Board and Chief
Executive Officer of Bank One, Cleveland, N.A. since 1987. Prior to joining
Bank One, she served as President of the Federal Reserve Bank of Cleveland,
Treasurer of Bell of Pennsylvania and Vice President of The First National Bank
of Boston. Mrs. Horn is a director of Lilly; Rubbermaid Incorporated; The
British Petroleum Company p.l.c.; and TRW, Inc. She also serves as Vice
Chairman of the Board of Trustees of Case Western Reserve University and as a
trustee of the Rockefeller Foundation and the Cleveland Clinic Foundation.
MARK NOVITCH, M.D. Dr. Novitch has been Professor of Health Care Sciences at
George Washington University Medical Center since 1994. Prior to that, he
retired as Vice Chairman of the Board and Chief Compliance Officer of The
Upjohn Company in December 1993. Prior to joining Upjohn in 1985, Dr. Novitch
was Deputy Commissioner of the FDA from 1981 until 1985. He served as Acting
Commissioner from 1983 to 1984. Dr. Novitch is currently serving a five-year
term as Trustee and Past President of the U.S. Pharmacopeial Convention. He is
also a member of the Biomedical Services Board of the American Red Cross. Dr.
Novitch is a director of Osiris Therapeutics, Inc., Neurogen Corporation and
Alteon, Inc.
EUGENE L. STEP Mr. Step served as a Director and Executive Vice President of
Lilly until his retirement in 1992. He joined Lilly in 1956 and has served as
President of Lilly's Pharmaceutical Division and as a member of Lilly's
Executive Committee. Mr. Step is a director of Scios-Nova, Inc.; Cell Genesys,
Inc.; Medco Research, Inc.; Pathogenesis, Inc.; and GMIS, Inc.
RANDALL L. TOBIAS Mr. Tobias has served as Chairman of the Board and Chief
Executive Officer of Lilly since 1993. Prior to assuming this position, he
served as Vice Chairman of the Board of American Telephone and Telegraph
Company ("AT&T") from 1986 until 1993. In addition, Mr. Tobias served as
Chairman and Chief Executive Officer of AT&T International (an AT&T subsidiary)
from 1991 to 1993. Mr. Tobias is a director of DowElanco; Kimberly-Clark
Corporation; Knight-Ridder, Inc.; Lilly; and Phillips Petroleum Company. He
also serves as Vice Chairman of the Board of Trustees of Duke University; a
trustee of the Colonial Williamsburg Foundation; and a director of the Indiana
University Foundation.
87
<PAGE>
ALVA O. WAY Mr. Way became Chairman of the Board of IBJ Schroder Bank & Trust
Company in 1986. He also serves as a director of and consultant to Schroder
plc, London, and related companies. Mr. Way previously served as President of
both The Travelers Corporation and American Express Company and served in
executive positions at General Electric Company. He is a director of Gould,
Inc.; Lilly; McGraw-Hill, Inc.; Ryder System, Inc.; and Schroder plc. Mr. Way
also serves as a member of the Board of Trustees and as Chancellor of Brown
University.
OWNERSHIP OF GUIDANT COMMON STOCK BY DIRECTORS AND OFFICERS OF GUIDANT
The following table sets forth the number of shares of Guidant Common Stock
beneficially owned by the directors of Guidant, and the chief executive officer
and the next four most highly compensated officers of Guidant for the year
ended December 31, 1994 (the "Named Executive Officers"), and all directors and
executive officers of Guidant as a group, as of July 31, 1995.
<TABLE>
<CAPTION>
SHARES OWNED
NAME OF INDIVIDUALS OR IDENTITY OF GROUP BENEFICIALLY(1)
---------------------------------------- ---------------
<S> <C>
Steven C. Beering, M.D.................................... 0
James M. Cornelius........................................ 50,000
Maurice A. Cox, Jr........................................ 5,000
James W. Cozad............................................ 0
Ronald W. Dollens......................................... 1,000
A. Jay Graf............................................... 1,000
Karen N. Horn, Ph.D....................................... 0
J.B. King................................................. 2,000(2)
Mark Novitch, M.D......................................... 2,000
Eugene L. Step............................................ 1,000
Randall L. Tobias......................................... 2,000
Richard M. van Oostrom.................................... 1,000
Alva O. Way............................................... 0
All directors and executive officers as a group (20 per-
sons).................................................... 69,300
</TABLE>
--------
(1) Unless otherwise indicated in a footnote, each person listed in the table
possesses sole voting and sole investment power with respect to the shares
shown in the table to be owned by that person. No person listed in the
table owns more than .070% of the outstanding shares of Guidant Common
Stock. All directors and executive officers of Guidant as a group own .096%
of the outstanding shares of Guidant Common Stock.
(2) Mr. King's wife owns 1,000 shares of those shown in the table, and he
disclaims any beneficial ownership therein.
88
<PAGE>
OWNERSHIP OF LILLY COMMON STOCK BY DIRECTORS AND OFFICERS OF GUIDANT
The following table sets forth the number of shares of Lilly Common Stock
beneficially owned by the directors of Guidant and the Named Executive Officers
and all directors and executive officers of Guidant as a group, as of July 31,
1995.
<TABLE>
<CAPTION>
SHARES OWNED
NAME OF INDIVIDUALS OR IDENTITY OF GROUP BENEFICIALLY(1)
---------------------------------------- ---------------
<S> <C>
Steven C. Beering, M.D.................................... 2,773
James M. Cornelius........................................ 85,433(2)
Maurice A. Cox, Jr........................................ 0
James W. Cozad............................................ 2,600
Ronald W. Dollens......................................... 19,159(3)
A. Jay Graf .............................................. 5,401(4)
Karen N. Horn, Ph.D....................................... 2,500
J.B. King................................................. 34,446(5)
Mark Novitch, M.D......................................... 0
Eugene L. Step............................................ 184,542(6)
Randall L. Tobias......................................... 61,123(7)
Richard M. van Oostrom.................................... 30,905(8)
Alva O. Way............................................... 3,180(9)
All directors and executive officers as a group (20 per-
sons).................................................... 456,739
</TABLE>
--------
(1) Unless otherwise indicated in a footnote, each person listed in the table
possesses sole voting and sole investment power with respect to the shares
shown in the table to be owned by that person. The shares shown do not
include the following shares that may be purchased pursuant to stock
options that are exercisable within 60 days of July 31, 1995: Mr.
Cornelius, 64,800 shares; Mr. Dollens, 11,800 shares; Mr. Graf, 4,800
shares; Mr. King, 88,840 shares; Mr. Step, 124,142 shares; Mr. van Oostrom,
8,800 shares; and all directors and executive officers as a group, 335,382
shares. The shares shown include shares credited to the accounts of certain
of those persons listed in the table under The Lilly Employee Savings Plan
(the "Savings Plan"). No person listed in the table owns more than .063% of
the outstanding shares of Lilly Common Stock. All directors and executive
officers of Guidant as a group own .16% of the outstanding shares of Lilly
Common Stock.
(2) Mr. Cornelius' wife owns 8,028 shares of those shown in the table, and he
disclaims any beneficial interest therein. The shares shown for Mr.
Cornelius include 6,429 shares credited to his account under the Savings
Plan.
(3) The shares shown for Mr. Dollens include 3,864 shares credited to his
account under the Savings Plan.
(4) The shares shown for Mr. Graf include 2,907 shares credited to his account
under the Savings Plan.
(5) The shares shown for Mr. King include 1,110 shares credited to his account
under the Savings Plan.
(6) Mr. Step's wife owns 10,588 shares of those shown in the table, and he
disclaims any beneficial ownership therein.
(7) Mr. Tobias has shared voting power and shared investment power with respect
to 15,000 shares that are included in the table and are owned by a family
foundation of which he is a director. Mr. Tobias disclaims beneficial
ownership of 8,400 shares included in the table, including 7,600 shares
held by his wife in a revocable trust and 800 shares in family trusts as to
which his wife is a co-trustee. The shares shown for Mr. Tobias include 223
shares credited to his account under the Savings Plan.
(8) The shares shown for Mr. van Oostrom include 3,353 shares credited to his
account under the Savings Plan.
(9) Mr. Way's wife owns 180 shares of those shown in the table, and he
disclaims any beneficial interest therein.
TERMS OF DIRECTORS AND OFFICERS
Guidant's Articles of Incorporation provide for Guidant's Board of Directors
to consist of between 7 and 19 persons, as fixed by the Board (currently there
are eleven), and to be divided into three classes, with each class to be as
nearly equal in number of directors as possible. The term of office of the
directors in each of the three classes expires at the annual meetings of
shareholders in 1996 through 1998, respectively. At each annual meeting, the
successors to the class of directors whose term expires at that time are to be
elected
89
<PAGE>
to hold office for a term of three years, and until their respective successors
are elected and qualified, so that the term of one class of directors expires
at each such annual meeting. In the case of any vacancy on the Board of
Directors, including a vacancy created by an increase in the number of
directors, the vacancy will be filled by election of the Board of Directors,
with the director so elected to serve for the remainder of the term of the
director being replaced; any newly-created directorships or decreases in
directorships are to be assigned by the Board so as to make all classes as
nearly equal in number as possible. Directors may be removed with or without
cause and only upon the affirmative vote of 80% of the outstanding voting power
of Guidant. See "Description of Guidant Capital Stock--Certain Articles of
Incorporation and By-laws Provisions and Indiana Anti-Takeover Provisions."
Officers are elected annually and serve at the discretion of the Board of
Directors.
TRANSITIONAL BOARD
Dr. Beering, Mr. Cozad, Mrs. Horn, Mr. Tobias and Mr. Way, each of whom are
also directors of Lilly, were appointed to the Guidant Board of Directors in
connection with the Offering as part of a transitional Board. As contemplated,
Dr. Beering, Mr. Cozad, Mrs. Horn, Mr. Tobias and Mr. Way will resign from the
Guidant Board of Directors effective as of the consummation of the Transaction.
In addition, the Board of Directors of Guidant has appointed Mr. Enrique C.
Falla, Mr. J. Kevin Moore and Dr. Ruedi E. Wager to the Board, effective as of
October 1, 1995.
Mr. Falla is Executive Vice President and Chief Financial Officer for The Dow
Chemical Company, positions he has held since 1991 and 1987, respectively. He
joined The Dow Chemical Company in 1967 and is the chairman of its Finance
Committee and a member of the Investment Policy, Operating and Executive
Committees. Mr. Falla is a director of The Dow Chemical Company, Dow Corning
Corporation and Kmart Corporation, and is a member of the Board of Trustees of
the University of Miami.
Mr. Moore is Associate Chief Operating Officer for Duke University Medical
Center, a position he has held since March 1994. Prior to assuming this
position, he served as Assistant Director, Surgical Private Diagnostic Clinics,
and Adjunct Associate Professor, Graduate School of Health Administration, from
April 1989 to March 1994. Mr. Moore served as Assistant Director for Duke
Hospital from May 1988 to April 1989 and served as Director of Management
Services, Medical Center Administration, and Adjunct Assistant Professor,
Graduate School of Health Administration, from May 1984 to April 1988. Mr.
Moore is a director of the American Red Cross Regional Chapter and a member of
the Board of Trustees for Duke University.
Dr. Wager is President and Chief Executive Officer of ZLB Central Laboratory
Blood Transfusion Service SRC (a plasma fractionation business in Switzerland),
a position he has held since February 1994. Prior to assuming this position, he
served as Senior Vice-President at Sandoz Pharma Ltd. (a multinational
pharmaceutical company) from March 1989 to January 1994. From January 1993 to
January 1994, Dr. Wager served as Head of Corporate Project Management and
member of the Executive Committee at Sandoz Pharma Ltd., and from March 1989 to
December 1993, he served as Head of Worldwide Marketing and member of the
Executive Committee at Sandoz Pharma Ltd. Dr. Wager joined Sandoz Ltd. in 1973.
Dr. Wager is a director of Portescap SA and Portescap International SA.
COMMITTEES OF THE BOARD
Guidant's Board of Directors currently has four committees, the principal
functions of which are described below.
The Audit Committee annually recommends independent auditors for appointment
by the Board of Directors, reviews the services to be performed by the
independent auditors and receives and reviews the reports submitted by them. It
also determines the duties and responsibilities of the internal auditors,
reviews the internal audit program and receives and reviews reports submitted
by the internal auditing staff. The members of the Audit Committee are Mr. Way,
who acts as Chairman of the Committee, and Dr. Beering, Mr. Cozad, Mrs. Horn
and Mr. Step.
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<PAGE>
The Compensation Committee fixes the compensation of executive officers and
administers the Guidant Corporation 1994 Stock Plan. The members of the
Compensation Committee are Mr. Cozad, who acts as Chairman of the Committee,
and Dr. Beering, Mrs. Horn and Mr. Way.
The Corporate Governance Committee recommends to the Board of Directors the
size and composition of the Board and proposes candidates for director to be
recommended by the Board to the shareholders of Guidant and oversees matters of
corporate governance. The members of the Corporate Governance Committee are
Mrs. Horn, who acts as Chairman of the Committee, and Dr. Beering, Mr. Cox, Mr.
Cozad and Mr. Way.
The Compliance Committee oversees adherence to regulatory policy and
procedures for the design, manufacture, registration and clinical testing of
Guidant's products. The members of the Compliance Committee are Dr. Beering,
who acts as Chairman of the Committee, and Mr. Cozad, Mrs. Horn, Dr. Novitch
and Mr. Way.
COMPENSATION OF DIRECTORS
Guidant's directors who are not officers or employees of Guidant or Lilly
will receive a quarterly retainer fee of $5,000 for board membership and a fee
of $1,500 for attendance at each Board meeting and each committee meeting which
is not held on the same date as a Board meeting. Directors are reimbursed for
reasonable expenses incurred in connection with attending Board and Committee
meetings.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following Summary Compensation Table shows the annual compensation paid
by Guidant and Lilly to Mr. Dollens, who served as Chief Executive Officer of
Guidant for 1994, and each of the four most highly compensated executive
officers other than Mr. Dollens, who were serving as executive officers as of
December 31, 1994 (the "Named Executive Officers"). Guidant is currently an
80.2% owned subsidiary of Lilly, and was a wholly owned subsidiary of Lilly
prior to the consummation of the Offering on December 20, 1994. Accordingly,
the compensation of Guidant's executive officers was determined in accordance
with policies established by Lilly. The compensation of the Named Executive
Officers is reported for each of the last two years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-
TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS(1) PAYOUTS(2)
--------------------------------------- ---------- ----------
NUMBER OF
SECURITIES LONG-TERM
UNDERLYING INCENTIVE
NAME AND PRINCIPAL OTHER ANNUAL OPTIONS PLAN ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION GRANTED PAYOUT COMPENSATION
------------------ ---- -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald W. Dollens 1994 $290,040 $152,399(3) $ 247 80,000(4) $274,161 $17,402(5)
Chief Executive Officer 1993 260,040 144,043(3) 0 20,000(6) 0 22,484
and President
James M. Cornelius(7) 1994 555,900 339,771(3) 10,271 25,000(6) 442,622 33,354(8)
Chairman of the Board 1993 537,900 321,140(3) 386 35,000(6) 0 57,198
J.B. King 1994 438,600 222,065(3) 17,374 40,000(4) 340,224 26,316(9)
Vice President, 1993 423,600 209,888(3) 251 30,000(6) 0 37,202
GeneralCounsel and
Secretary
A. Jay Graf 1994 227,040 30,600(10) 22,994(11) 40,000(4) 112,307 13,260(12)
Vice President and 1993 215,040 19,008(10) 28,189(11) 6,000(6) 0 9,216
President, CPI
Richard M. van Oostrom 1994 182,118 39,316(10) 0 40,000(4) 148,642 13,795(13)
Vice President and 1993 198,598 54,561(10) 36,520(11) 6,000(6) 0 14,733
President European
Operations
</TABLE>
--------
(1) During the years indicated, restricted stock was not awarded and stock
appreciation rights were not granted. Mr. King held 6,000 shares of
restricted stock of Lilly valued at $393,750 as of December 31, 1994.
(2) Amounts paid in Lilly Common Stock (except for amounts paid in cash to
satisfy federal income tax withholding requirements) in February 1995
under the Lilly performance award program for the period January 1, 1993
through December 31, 1994.
(3) Includes amounts awarded in cash under Lilly's Senior Executive Bonus
Plan.
(4) Options to acquire Guidant Common Stock.
(5) Contribution by Lilly to Mr. Dollens' account in the Savings Plan.
(6) Options to acquire Lilly Common Stock.
(7) Lilly currently pays Mr. Cornelius' salary and will continue to pay his
salary until he retires from Lilly effective October 1, 1995.
(8) Contribution by Lilly to Mr. Cornelius' account in the Savings Plan.
(9) Contribution by Lilly to Mr. King's account in the Savings Plan.
(10) Includes cash payments under other bonus programs.
(11) Relocation allowances.
(12) Contribution by Lilly to Mr. Graf's account in the Savings Plan.
(13) Contribution by Lilly to Mr. van Oostrom's account in the Savings Plan.
92
<PAGE>
Stock Option Grants
The following table provides information on options to purchase Guidant
Common Stock granted in 1994 to the Named Executive Officers pursuant to the
1994 Plan, except for Mr. Cornelius, who received an option to purchase Lilly
Common Stock granted by Lilly pursuant to the 1994 Lilly Stock Plan. No Guidant
stock options were exercised during 1994.
OPTION SHARES GRANTED IN LAST FISCAL YEAR(1)
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL OPTION
SECURITIES SHARES GRANTED EXERCISE OR GRANT DATE
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED IN FISCAL YEAR(2) PER SHARE DATE VALUE(3)
---- --------------- ----------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Ronald W. Dollens....... 80,000 9.51 $14.50(4) 12/13/04 $652,000
James M. Cornelius
(Lilly Shares)......... 25,000 1.04 58.63(5) 10/15/04 389,500
J.B. King............... 40,000 4.75 14.50(4) 12/13/04 326,000
A. Jay Graf............. 40,000 4.75 14.50(4) 12/13/04 326,000
Richard M. van Oostrom.. 40,000 4.75 14.50(4) 12/13/04 326,000
</TABLE>
--------
(1) Stock appreciation rights were not granted during 1994.
(2) Percent of total Guidant option shares or Lilly option shares, as
applicable.
(3) These values were established using the Black-Scholes stock option
valuation model that was modified to include dividends. Assumptions used to
calculate the Grant Date Present Value of option shares granted during 1994
were:
GUIDANT OPTION SHARES
(a) Expected Volatility--The average variance in the percent change in
daily stock prices of eight companies in the medical device industry
during the six-month period immediately preceding the grant, which was
31.66%. The price of Guidant Common Stock was not used because the
stock was not publicly traded prior to the grant of the option.
(b) Risk Free Rate of Return--The average monthly rate for 10-year U.S.
Treasury obligations during the month of grant as published in the
Federal Reserve Statistical Release, which was 7.81%.
(c) Dividend Yield--The yield calculated by dividing the anticipated
annualized dividend rate of Guidant Common Stock in the amount of $.10
per share by the fair market value of the stock on the date of grant,
which resulted in an assumed dividend yield of .69%.
(d) Time of Exercise--The maximum exercise period for each grant at the
time of the grant, which was 10 years.
LILLY OPTION SHARES
(a) Expected Volatility--The variance in the percent change in daily stock
price during the six-month period immediately preceding each grant,
which was 23.24%.
(b) Risk Free Rate of Return--The average monthly rate for 10-year U.S.
Treasury obligations during the month of grant as published in the
Federal Reserve Statistical Release, which was 7.74%.
(c) Dividend Yield--The yield calculated by dividing the annualized
dividend rate of Lilly Common Stock in the amount of $2.50 per share by
the fair market value of the stock on the date of grant, which resulted
in an assumed dividend yield of 4.26%.
(d) Time of Exercise--The maximum exercise period for each grant at the
time of the grant, which was 10 years.
The valuation model was not adjusted for non-transferability, risk of
forfeiture or the vesting restrictions of the options. Guidant does not
believe that the Black-Scholes model, whether modified or not modified, or
any other valuation model, is a reliable method of computing the present
value of Guidant's or Lilly's employee stock options. The value ultimately
realized, if any, will depend on the amount that the market price of the
stock exceeds the exercise price on the date of exercise.
(4) Initial public offering price of Guidant Common Stock. These options will
become exercisable on December 15, 1997.
(5) This option will become exercisable on October 17, 1997.
93
<PAGE>
Stock Option Exercises and Option Values
The following table contains information concerning Guidant stock options
unexercised at the end of 1994 with respect to the Named Executive Officers. No
Guidant stock options were exercisable during 1994.
AGGREGATED OPTION SHARES FISCAL YEAR END VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF
UNEXERCISABLE OPTIONS UNEXERCISABLE OPTIONS
NAME AT FISCAL YEAR END AT FISCAL YEAR END(2)
---- --------------------- ---------------------
<S> <C> <C>
Ronald W. Dollens................... 80,000 $120,000
James M. Cornelius.................. 0 0
J.B. King........................... 40,000 60,000
A. Jay Graf......................... 40,000 60,000
Richard M. van Oostrom.............. 40,000 60,000
</TABLE>
--------
(1) No stock appreciation rights were outstanding during 1994.
(2) Represents the amount by which the market price of Guidant Common Stock
exceeded the exercise prices of unexercised options on December 31, 1994.
The following table contains information concerning Lilly stock options
exercised during 1994 and Lilly stock options unexercised at the end of 1994
with respect to the Named Executive Officers.
AGGREGATED OPTION SHARES EXERCISED IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
NUMBER OF UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
SHARES FISCAL YEAR END OPTIONS AT FISCAL YEAR END(2)
ACQUIRED ON VALUE ----------------------------------- ------------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- --------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Ronald W. Dollens....... -- $ -- 12,400 25,000 $ 278,046 $ 373,800
James M. Cornelius...... 6,200 96,535 46,800 78,000 365,618 832,150
J.B. King............... 2,836 46,440 51,164 42,000 801,622 560,700
A. Jay Graf............. -- -- 8,200 7,800 129,600 112,140
Richard M. van Oostrom.. 3,000 62,340 6,800 8,000 67,122 112,140
</TABLE>
--------
(1) Lilly stock appreciation rights were not exercised during 1994 and no Lilly
stock appreciation rights were outstanding on December 31, 1994.
(2) Represents the amount by which the market price of Lilly Common Stock
exceeded the exercise prices of unexercised options on December 31, 1994.
Long-Term Incentive Awards
The following table provides information on long-term performance awards
granted in 1994 to the Named Executive Officers pursuant to the 1994 Lilly
Stock Plan.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYMENT UNDER
NON-STOCK PRICE BASED PLANS(1)
------------------------------------
NUMBER OF PERFORMANCE
SHARES PERIOD UNTIL THRESHOLD TARGET MAXIMUM
NAME AWARDED PAYOUT # SHARES # SHARES # SHARES
---- --------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Ronald W. Dollens....... 1,550(2) 2 years 1,100 1,550 5,575
James M. Cornelius...... 3,100(2) 2 years 2,150 3,100 8,700
3,100(3) 2 years 2,150 3,100 8,700
J.B. King............... 2,075(2) 2 years 1,350 2,075 7,000
A. Jay Graf............. 575(2) 2 years 425 575 2,340
Richard M. van Oostrom.. 750(2) 2 years 550 750 3,125
</TABLE>
94
<PAGE>
--------
(1) Payouts are denominated in shares of Lilly Common Stock and are determined
by the aggregate earnings per share ("EPS") level of Lilly for the award
period. The target amount will be paid for each award period in which 100%
of the targeted EPS is achieved; the threshold amount will be paid for the
1994-1995 award period if at least 96% of the targeted EPS is achieved and
for the 1995-1996 award period if at least 95% of the targeted EPS is
achieved; and the maximum amount will be paid for the 1994-1995 award
period if 112% or more of the targeted EPS is achieved and for the 1995-
1996 award period if 114% or more of the targeted EPS is achieved. No
payment will be made for the 1994-1995 award period unless at least 96% of
the targeted EPS level is achieved and no payment will be made for the
1995-1996 award period unless at least 95% of the targeted EPS is achieved.
(2) Represents the targeted award amount payable in February 1996 if earned for
the fiscal years 1994-1995 award period.
(3) Represents the targeted award amount payable in February 1997 if earned for
the fiscal years 1995-1996 award period.
Retirement Plan
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE ANNUAL YEARS OF SERVICE
EARNINGS (HIGHEST -----------------------------------------------------
5 OF LAST 10 YEARS) 5 10 15 20 25 30
------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 375,000........... $ 25,410 $ 50,820 $ 76,230 $101,640 $127,050 $152,460
525,000........... 35,945 71,885 107,830 143,770 179,715 215,655
675,000........... 46,475 92,950 139,425 185,900 232,375 278,850
825,000........... 57,010 114,015 171,025 228,030 285,040 342,045
975,000........... 67,540 135,080 202,620 270,160 337,700 405,240
1,125,000........... 78,075 156,145 234,220 312,290 390,365 468,435
1,275,000........... 88,605 177,210 265,815 354,420 443,025 531,630
1,425,000........... 99,140 198,275 297,415 396,550 495,690 594,825
1,575,000........... 109,670 219,340 329,010 438,680 548,350 658,020
1,725,000........... 120,205 240,405 360,610 480,810 601,015 721,215
</TABLE>
Messrs. Dollens, Cornelius, King and van Oostrom are entitled to receive
retirement benefits under Lilly pension plans. The Pension Plan Table sets
forth a range of annual retirement benefits for graduated levels of average
annual earnings (consisting of Salary, Bonus and Long-Term Incentive Plan
Payouts as set forth in the Summary Compensation Table) and years of service
for the life of a retired employee of Lilly, assuming retirement at age 65 with
a 50% survivor income benefit. The amounts shown in the table are not subject
to deduction for social security benefits.
The years of service credited to the Named Executive Officers are Mr.
Dollens, 23 years; Mr. Cornelius, 28 years; Mr. King, 7 years; and Mr. van
Oostrom, 24 years.
Pursuant to the Cardiac Pacemakers, Inc. Retirement Plan (the "CPI Retirement
Plan") and its associated excess plan, upon Mr. Graf's normal retirement at the
age of 65, based upon Mr. Graf's current annual salary and bonus, Mr. Graf
would be entitled to an annual pension benefit of $162,635.
Section 415 of the Code generally places a limit of $120,000 on the amount of
annual pension benefits that may be paid at age 65 from plans such as Lilly's
and CPI's Retirement Plans. The Code also places a $9,240 limit, subject to
adjustment by the IRS, on annual contributions by an employee to Lilly's or
Guidant's Savings Plan and, in addition, imposes a combined limitation when an
employee is covered by both types of plans. Under an unfunded plan adopted in
1975, however, Lilly will make payments as permitted by the Code to any
employee who is a participant in the Lilly Retirement Plan or the Lilly Savings
Plan in an amount equal to the difference, if any, between the benefits that
would have been payable under such plans without regard to the limitations
imposed by the Code and the actual benefits payable under such plans as so
limited.
95
<PAGE>
Change in Control Severance Pay Plan
Guidant has adopted a change-in-control severance pay program ("Program")
covering most employees of Guidant and its subsidiaries, including Guidant's
executive officers. In general, the Program would provide severance payments
and benefits to eligible employees and executive officers in the event of their
termination of employment under certain circumstances within fixed periods of
time following a change-in-control. A "change-in-control" would occur if 20% or
more of Guidant's voting stock were acquired by an entity other than Guidant, a
subsidiary, an employee benefit plan of Guidant or Lilly Endowment. There are
additional conditions that could result in a change-in-control event. The
Transaction will not constitute a change-in-control for purposes of the
Program. The Program would not be subject to amendment by the Board, whether
prior to or following a change-in-control, in any manner adverse to a
participant without his or her prior written consent.
Under the portion of the Program covering the Named Executive Officers, each
would be entitled to severance payments and benefits in the event that his or
her employment is terminated following a change-in-control (i) without "cause"
by Guidant; (ii) for "good reason" by the executive officer, each as defined in
the Program; or (iii) for a limited period of time, for any reason by the
executive officer. In such case, the executive officer would be entitled to a
severance payment equal to three times his or her current annual cash
compensation and bonuses, including performance awards. Additional benefits
would include a pension supplement and full and immediate vesting of all stock
options and other equity incentives. In the event that any payments made in
connection with the change-in-control would be subject to the excise tax
imposed under Section 4999 of the Code as a result of the aggregate
compensation payments and benefits made to the individual, under the Program or
otherwise, in connection with a change-in-control, Guidant is obligated to make
whole the individual with respect to such excise tax.
PRINCIPAL SHAREHOLDER OF GUIDANT COMMON STOCK
Prior to the Transaction, the only person who beneficially owned more than 5%
of any class of Guidant voting stock was Lilly. As of the date of this Offering
Circular - Prospectus, Lilly owns beneficially and of record 57,600,000 shares
of Guidant Common Stock, representing 80.2% of the outstanding Guidant Common
Stock. Lilly has sole voting and sole investment power with respect to these
shares. Lilly is deemed to be a parent of Guidant as that term is defined for
purposes of the Securities Act. After the consummation of the Transaction,
Lilly will no longer own any interest in Guidant.
PRINCIPAL SHAREHOLDERS OF LILLY COMMON STOCK
To the best of Lilly's knowledge, and except as set out below, Lilly
Endowment is the only beneficial owner of more than 5% of the outstanding
shares of Lilly Common Stock. The following table sets forth information
regarding this ownership as of July 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OWNED OF CLASS
---------------- ------------------ --------
<S> <C> <C>
Lilly Endowment, Inc. ........................... 46,847,342 16.043
2801 North Meridian Street
Indianapolis, Indiana 46208
</TABLE>
Lilly Endowment has sole voting and sole investment power with respect to
these shares. Lilly Endowment may be deemed to be a parent of Lilly as that
term is defined for purposes of the Securities Act. The Board of Directors of
Lilly Endowment is composed of Mr. Thomas H. Lake, Honorary Chairman; Mr.
Thomas M. Lofton, Chairman; Otis R. Bowen, M.D.; Drs. William G. Enright, Earl
B. Herr, Jr. and Herman B. Wells; and Messrs. Byron P. Hollett, Eli Lilly II
and Eugene F. Ratliff. Drs. Bowen and Herr and Messrs. Hollett, Lake, Lilly,
Lofton and Ratliff are shareholders of Lilly. Lilly Endowment and Guidant have
entered into a Registration Rights Agreement that provides Lilly Endowment with
certain registration rights with respect to shares of Guidant Common Stock it
may acquire pursuant to the Transaction.
96
<PAGE>
As of July 31, 1995, National City Bank, Indiana ("NCBI"), held 19,723,033
shares of Lilly Common Stock (6.754% of the outstanding shares) in various
fiduciary capacities. Over half of the shares are held by it as trustee under
The Lilly Employee Savings Plan (the "Savings Plan"), savings plans of
affiliated companies and the employee stock ownership plan. In addition, NCBI
holds such shares for various parties in personal trusts, agency and custodial
accounts, pension accounts, estates and guardianships. NCBI has sole voting
power with respect to 7,588,329 shares, shared voting power with respect to
1,000 shares, sole investment power with respect to 1,222,325 shares, shared
investment power with respect to 3,314,649 shares and the right to vote an
additional 9,114,234 shares in the savings plans to the extent it is not
instructed on how to vote such shares by plan participants.
DESCRIPTION OF GUIDANT CAPITAL STOCK
The authorized capital stock of Guidant consists of 250,000,000 shares of
Guidant Common Stock, without par value, 71,860,000 shares of which are
outstanding and 50,000,000 shares of preferred stock, without par value (the
"Preferred Stock"), no shares of which are outstanding. All outstanding shares
of Guidant Common Stock are duly authorized, validly issued, fully paid and
non-assessable. The following summary description of the capital stock of
Guidant is qualified in its entirety by reference to the Articles of
Incorporation, the material provisions of which are set forth herein and a copy
of which is filed as an exhibit to the Registration Statement.
COMMON STOCK
The holders of shares of Guidant Common Stock are entitled to one vote per
share on all matters to be voted on by shareholders. The holders of shares of
Guidant Common Stock are not entitled to cumulate their votes in the election
of directors, which means that holders of more than half the outstanding shares
of Guidant Common Stock can elect all the directors of Guidant. The holders of
shares of Guidant Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors, in its discretion, from
any assets legally available therefor.
The holders of Guidant Common Stock are not entitled to preemptive,
subscription or conversion rights, and there are no redemption or sinking fund
provisions applicable to Guidant Common Stock. The holders of Guidant Common
Stock are not subject to further calls or assessments by Guidant. Upon
liquidation of Guidant, after payment or provision for payment of all of
Guidant's obligations and any liquidation preference of any outstanding
preferred stock, the holders of Guidant Common Stock are entitled to share
ratably in the remaining assets of Guidant.
PREFERRED STOCK
Guidant currently has no shares of Preferred Stock outstanding. Guidant's
Board of Directors, without further approval of the shareholders, is vested
with broad authority with respect to the Preferred Stock to establish and
designate series, fix the number of shares to be included in each series,
provide for a sinking fund for the purchase or redemption of shares or a
purchase fund for the purchase of shares of such series, and to determine the
relative rights, preferences and limitations of each series, including but not
limited to the dividend and voting rights of such Preferred Stock and the
preferential amounts payable to the holders of Preferred Stock on liquidation.
The Board of Directors will also determine whether such Preferred Stock will be
convertible into other securities of Guidant, including Guidant Common Stock.
Accordingly, the issuance of Preferred Stock, while promoting flexibility in
connection with possible acquisitions and other corporate purposes, could
adversely affect the voting rights of the holders of, or the market price of,
Guidant Common Stock and, under certain circumstances, make it more difficult
for a third party to gain control of Guidant. The holders of Preferred Stock
also have the right to vote separately as a class on any proposal involving
fundamental changes in the rights of holders of Preferred Stock pursuant to the
Indiana Business Corporation Law.
97
<PAGE>
In connection with Guidant's Shareholder Rights Plan (the "Rights
Agreement"), the Board of Directors has authorized the issuance of up to
1,500,000 shares of Series A Participating Preferred Stock ("Series A Preferred
Stock") upon exercise of rights issued under the Rights Agreement. See
"--Shareholder Rights Plan" for a description of the rights of Series A
Preferred Stock.
CERTAIN ARTICLES OF INCORPORATION AND BY-LAWS PROVISIONS AND INDIANA ANTI-
TAKEOVER PROVISIONS
Under the Indiana Business Corporation Law, directors are required to
discharge their duties (i) in good faith; (ii) with the care an ordinarily
prudent person in a like position would exercise under similar circumstances;
and (iii) in a manner the directors reasonably believe to be in the best
interests of the company. However, the Indiana Business Corporation Law
exonerates directors from liability for breach of these standards of conduct
unless the breach constitutes willful misconduct or recklessness. This
exoneration from liability may not affect the availability of equitable relief,
including injunctions. Furthermore, the exoneration from liability under
Indiana law does not affect the liability of directors for violations of the
federal securities laws.
Article 6 of the Articles of Incorporation provides for higher shareholder
voting requirements for certain transactions (such as business combinations)
with or otherwise involving a Related Person (as defined below).
Instead of a majority vote requirement (or the absence of any vote
requirement), transactions covered by Article 6 require the approval of the
holders of 80% of Guidant's outstanding voting power, unless the transaction is
approved by a majority of a Board and a majority of the Continuing Directors
(as defined below), in which case the requirements of Indiana law otherwise
applicable govern.
Transactions covered by Article 6 include mergers of Guidant with a Related
Person, sales of all or any substantial part of the assets of Guidant to a
Related Person, the issuance or delivery of Voting Stock to a Related Person,
any voluntary dissolution or liquidation of Guidant (if a Related Person exists
at the time of such dissolution or liquidation), a reclassification of
securities or recapitalization of Guidant (if such reclassification or
recapitalization results in the Related Person increasing its proportionate
share of any class of Guidant's stock) or any agreement, contract, or other
arrangement to do any of the foregoing. Article 6 does not alter the additional
requirements regarding class votes available to holders of Preferred Stock, if
any, which arise under Indiana law and the Articles of Incorporation.
Article 6 also prohibits a Related Person from acquiring any newly-issued or
treasury shares of capital stock from Guidant, or from receiving the benefit of
any loan, advance or guarantee, pledge or other financial assistance or tax
credit provided by Guidant, and requires that the Related Person ensure that
the Board of Directors includes representation by Continuing Directors at least
proportionate to the voting power of Guidant's shareholders other than the
Related Person. In addition, in connection with a transaction with a Related
Person, Guidant must send shareholders a proxy statement prepared in accordance
with the Exchange Act. These requirements are inapplicable if the approval of a
majority of the Continuing Directors is obtained.
Article 6 also requires that the Board of Directors, when deciding whether or
not to approve certain transactions with Related Persons, consider all relevant
factors, including, without limitation, the effects on shareholders, employees,
suppliers and customers of Guidant, and communities in which offices or other
facilities of Guidant are located, and any other factors a director considers
pertinent.
A "Related Person" is defined as any other corporation, person, or entity
which beneficially owns or controls, directly or indirectly, 5% or more of the
voting stock of Guidant, and any affiliate or associate of a Related Person.
Specifically excluded from the definition of Related Person are (i) Guidant and
any of its subsidiaries, (ii) any profit-sharing, employee stock ownership or
other employee benefit plan of Guidant, or trustees for such plans, when acting
as such, (iii) Lilly Endowment and (iv) Lilly. In addition, the definition
provides that a corporation, person, or entity is not to be deemed to be a
Related Person solely by reason of being an Affiliate or Associate of Lilly.
98
<PAGE>
A "Continuing Director" is defined as a director who is not an Affiliate or
Associate or representative of a Related Person, and who was a member of the
Board of Directors prior to the time that any Related Person involved in the
transactions being considered became a Related Person, or a director who is not
an Affiliate or Associate or representative of a Related Person and who was
nominated by a majority of the remaining Continuing Directors.
Article 6 may not be altered, amended, or repealed except by the affirmative
vote of the holders of 80% of Guidant's outstanding voting power.
The provisions of Guidant's Articles of Incorporation providing for the
classification of the Board of Directors into three classes and providing that
directors may be removed by vote of 80% of Guidant's outstanding voting power,
the provisions of the Articles of Incorporation authorizing the board to issue
Preferred Stock without shareholder approval and the other provisions of the
Articles of Incorporation described above could have the effect of delaying,
deferring or preventing a change in control of Guidant or the removal of
existing management. See "Management--Terms of Directors and Officers."
Additionally, the provisions in the Indiana Business Corporation Law relating
to exculpation of directors may discourage shareholders from bringing a lawsuit
against directors for breach of their fiduciary duty and may also have the
effect of reducing the likelihood of derived litigation against directors and
officers, even though such an action, if successful, might otherwise have
benefited Guidant and its shareholders. A shareholder's investment in Guidant
may be adversely affected to the extent that litigation costs and damage awards
against Guidant's directors and officers are paid by Guidant pursuant to the
indemnification provisions described above.
Indiana Code (S) 23-1-42 (the "Control Share Act"), provides that any person
or group of persons that acquires the power to vote more than one-fifth of
Guidant's shares shall not have the right to vote such shares unless granted
voting rights by the holders of a majority of the outstanding shares of Guidant
and by the holders of a majority of the outstanding shares excluding
"Interested Shares." Interested Shares are those shares held by the acquiring
person, officers of Guidant and employees of Guidant who are also directors of
Guidant. If the approval of voting power for the shares is obtained, additional
shareholder approvals are required when a shareholder acquires the power to
vote one-third or more and a majority or more of the voting power of Guidant's
shares. In the absence of such approval, the additional shares acquired by the
shareholder may not be voted.
The Control Share Act also provides that if the shareholders grant voting
rights to the shares after a shareholder has acquired a majority or more of the
voting power, all shareholders of Guidant are entitled to exercise statutory
dissenters' rights and to demand the value of the shares in cash from Guidant.
If voting rights are not accorded to the shares, Guidant may have the right to
redeem them. The provisions of the Control Share Act do not apply to
acquisitions of voting power pursuant to a merger or share exchange agreement
to which Guidant is a party.
Pursuant to Indiana law, Guidant is subject to the Indiana Control Share Act.
Pursuant to the Indiana Control Share Act, Guidant can elect to not be subject
to such act by adopting a By-law provision to that effect. Such By-law
provision may be amended by the Board of Directors without a shareholder vote.
Indiana Code (S) 23-1-43 (the "Business Combination Act") prohibits a person
who acquires beneficial ownership of 10% or more of Guidant's shares (an
"Interested Shareholder"), or any affiliate or associate of an Interested
Shareholder, from effecting a merger or other business combination with Guidant
for a period of five years from the date on which the person became an
Interested Shareholder, unless the transactions in which the person became an
Interested Shareholder was approved in advance by Guidant's Board of Directors.
Following the five-year period, a merger or other business combination may be
effected with an Interested Shareholder only if (i) the business combination is
approved by Guidant's shareholders excluding the Interested Shareholder and any
of its affiliates or associates, or (ii) the consideration to be received by
shareholders in the business combination is at least equal to the highest price
paid by the Interested Shareholder in acquiring its interest in Guidant, with
certain adjustments, and certain other requirements
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are met. The Business Combination Act broadly defines the term "business
combination" to include mergers, sales or leases of assets, transfers of shares
of Guidant, proposals for liquidation and the receipt by an Interested
Shareholder of any financial assistance or tax advantage from Guidant, except
proportionately as a shareholder of Guidant.
The overall effect of the above provisions may be to render more difficult or
to discourage a merger, a tender offer, a proxy contest, or the assumption of
control of Guidant by a holder of a large block of Guidant's stock or other
person, or the removal of incumbent management, even if such actions may be
beneficial to Guidant's shareholders generally.
SHAREHOLDER RIGHTS PLAN
On October 17, 1994, the Board of Directors of Guidant declared a dividend
distribution of one Preferred Stock purchase right (a "Right") for each
outstanding share of Guidant Common Stock and, in addition, authorized the
issuance of one Right with respect to each share of Guidant Common Stock that
becomes outstanding thereafter, and until the earlier of the Distribution Date,
Rights Expiration Date (as defined below) or the date on which Rights may be
redeemed. When exercisable, each Right entitles the registered holder to
purchase from Guidant one one-hundredth of a share of a series of Guidant's
Series A Preferred Stock at a price of $43.50 per one-hundredth of a share (the
"Purchase Price"), subject to adjustment. The terms of the Rights are set forth
in a Rights Agreement between Guidant and Bank One, Indianapolis, N.A., as
Rights Agent (the "Rights Agent").
Up to and including the Distribution Date, the Rights will be evidenced by
Guidant Common Stock certificates, and the Rights will be transferred with and
only with Guidant Common Stock. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of Guidant Common Stock as
of the close of business on the Distribution Date and such separate Right
Certificates alone will evidence the Rights.
Under the Rights Agreement, the Distribution Date is defined as the earlier
of the tenth business day after (i) the commencement of a tender or exchange
offer by any person (other than Guidant, any subsidiary of Guidant, Lilly,
Lilly Endowment or any employee benefit plan or employee stock plan of Guidant
or of any subsidiary of Guidant) for a number of the outstanding shares of
Guidant's stock having in the aggregate 30% or more of the general voting power
of Guidant or (ii) the date of a public announcement by Guidant or an Acquiring
Person that an Acquiring Person has become such (the "Stock Acquisition Date")
unless, in either case, the Board extends such date to a later date. In
general, an Acquiring Person is a person or group of affiliated or associated
persons (other than Guidant, Lilly, Lilly Endowment, any subsidiary of Guidant,
any employee benefit plan or employee stock plan of Guidant or of any
subsidiary of Guidant or any person who acquires shares of Guidant's stock
having in the aggregate 10% or more of the general voting power of Guidant in
connection with a transaction or series of transactions approved in advance by
the Board) who has acquired or obtained the right to acquire beneficial
ownership of a number of the outstanding shares of Guidant's stock having in
the aggregate 10% or more of the general voting power of Guidant (or which
would have such voting power but for the application of the Indiana Control
Share Act).
The Rights are not exercisable until after the date on which Guidant's right
to redeem has expired. The Rights will expire on October 17, 2004 (the "Rights
Expiration Date"), unless earlier redeemed by Guidant as described below.
The Series A Preferred Stock will be non-redeemable and will rank on a parity
in respect of the preference as to dividends and the distribution of assets
with all other classes or series of Guidant's preferred stock, unless the terms
of another class or series shall provide otherwise. The Series A Preferred
Stock may not be issued except upon exercise of the Rights. Each share of
Series A Preferred Stock will have a minimum preferential quarterly dividend
rate of $0.05 per share but will be entitled to an aggregate of 100 times the
cash and non-cash (payable in kind) dividends and distributions (other than
dividends and distributions
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payable in Guidant Common Stock) declared on Guidant Common Stock. In the event
of liquidation, the holders of Series A Preferred Stock will be entitled to
receive a liquidation payment in an amount equal to the greater of $100 per
share or 100 times the payment made per share of Guidant Common Stock, plus an
amount equal to accrued and unpaid dividends and distributions thereon. Shares
of Series A Preferred Stock will have voting rights only in the event of
certain arrearages in dividends, and as required by applicable law. In the
event of any merger, consolidation or other transactions in which shares of
Guidant Common Stock are exchanged, each share of Series A Preferred Stock will
be entitled to receive 100 times the amount received per share of Guidant
Common Stock. The rights of the Series A Preferred Stock as to dividends and
liquidation and voting are protected by antidilution provisions.
The Purchase Price payable, and number of shares of Series A Preferred Stock
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on Guidant Common Stock, or a subdivision, combination or
reclassification of Guidant Common Stock or Series A Preferred Stock, (ii) upon
the grant to holders of Guidant Common Stock of certain rights or warrants to
subscribe for Guidant Common Stock or convertible securities at less than the
current market price of Guidant Common Stock, or (iii) upon the distribution to
holders of Guidant Common Stock of evidences of indebtedness or assets
(excluding regular periodic cash dividends out of earnings or retained earnings
at a rate not in excess of 130% of the rate of the last cash dividend
theretofore paid or dividends payable in Guidant Common Stock) or of
subscription rights or warrants earlier than those referred to above.
In the event that, on or at any time after a Stock Acquisition Date, Guidant
is acquired in a merger or other business combination transactions (in which
any shares of Guidant Common Stock are changed or exchanged for other
securities or assets) or 50% or more of the assets or earning power of Guidant
and its subsidiaries (taken as a whole) are sold, proper provision will be made
so that each holder of a Right (except as noted below) will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transactions would have a market value (determined as
provided in the Rights Agreement) of two times the Purchase Price.
In the event that, on or at any time after a Stock Acquisition Date, (i)
Guidant is the surviving corporation in a merger or other business combination
and Guidant Common Stock remains outstanding and unchanged, (ii) an Acquiring
Person engages in one or more self-dealing transactions specified in the Rights
Agreement, (iii) a person (other than Guidant, Lilly, Lilly Endowment, any
subsidiary of Guidant, any employee benefit plan or employee stock plan of
Guidant or of any subsidiary of Guidant, or a person who acquires 10% or more
of the general voting power of Guidant in connection with a transaction or
series of transactions approved prior to such transaction or transactions by
the Board of Directors of Guidant) alone, or together with his, her or its
affiliates or associates, becomes the beneficial owner of a number of the
outstanding shares of Guidant's stock having in the aggregate 15% or more of
the general voting power of Guidant or (iv) during such time as there is an
Acquiring Person, any of certain events specified in the Rights Agreement
occurs which results in such Acquiring Person's ownership interest being
increased by more than 1%, then, and in each such case, proper provision will
be made so that each holder of a Right (except as noted below) will thereafter
have the right to receive, upon payment of the Purchase Price, that number of
shares of Guidant Common Stock having a market value (determined as provided in
the Rights Agreement) as of the date of occurrence of any such event of two
times the Purchase Price.
The holder of any Rights that are, or were, beneficially owned by an
Acquiring Person or an affiliate or associate thereof or certain transferees
thereof which engaged in, or realized the benefit of, an event or transaction
or transactions described in either of the preceding two paragraphs, will not
be entitled to the benefit of the adjustment with respect to the number of
shares described in either of the preceding two paragraphs. Rights are not
exercisable until such time as the Rights are no longer redeemable by Guidant
as described below.
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Up to and including the tenth business day after a Stock Acquisition Date or
such later date as may be determined by the Board of Directors, Guidant may
redeem the rights in whole, but not in part, at a price of $0.01 per Right,
which amount may be adjusted as provided in the Rights Agreement (the
"Redemption Price"). Under certain circumstances set forth in the Rights
Agreement, the decision to redeem or extend the redemption period shall require
the concurrence of a majority of the Continuing Directors.
The term "Continuing Directors" means any member of the Board of Directors of
Guidant who was a member of the Board immediately prior to the time that any
person became an Acquiring Person, or any member of the Board of Directors who
becomes a member of the Board subsequent to the time that any person shall
become an Acquiring Person if such person is recommended or approved by a
majority of the Continuing Directors then in office, but shall not include an
Acquiring Person or any representative of such Acquiring Person.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
Board of Directors of Guidant prior to the Distribution Date. From and after
the Distribution Date, the provisions of the Rights Agreement may be amended by
the Board in order to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights, or to shorten or lengthen
any time period under the Rights Agreement; provided, however, that the Rights
Expiration Date may not be changed, and the time period for redemption may not
be lengthened when the Rights are not redeemable.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a shareholder of Guidant with respect to a Right held, including, without
limitation, the right to vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Guidant on
terms not approved by Guidant's Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the Board
since the Rights may be redeemed by Guidant at any time up to and including the
tenth business day (subject to extension in the discretion of the Board of
Directors) after a Stock Acquisition Date.
LISTING
Guidant Common Stock is listed on the NYSE and the PSE under the symbol,
"GDT."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Guidant Common Stock is The First
National Bank of Boston. Its address for such purposes is 160 Federal Street,
Boston, Massachusetts 02106-2016.
SHARES ELIGIBLE FOR FUTURE SALE
Shares of Guidant Common Stock distributed to Lilly shareholders will be
freely transferable, except for shares received by persons who may be deemed to
be "affiliates" of Guidant under the Securities Act. Persons who may be deemed
to be affiliates of Guidant after the expiration of the Exchange Offer
generally include individuals or entities that control, are controlled by, or
are under common control with, Guidant, and will include the directors and
principal executive officers of Guidant as well as any principal shareholder of
Guidant. Persons who are affiliates of Guidant will be permitted to sell their
shares of Guidant Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemption afforded by Rule 144
under the Securities Act. As of July 31, 1995, Lilly Endowment owned 46,847,342
shares (approximately 16.043%) of Lilly Common Stock. If Lilly Endowment
receives shares of Guidant Common Stock in connection with the Transaction,
Lilly Endowment will have certain rights to register such shares for possible
resale under federal and state securities laws.
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DESCRIPTION OF THE GUIDANT CREDIT AGREEMENTS
Certain of Guidant's subsidiaries have entered into Credit Agreements with
certain banks (the "Banks") and Morgan Guaranty Trust Company of New York, as
agent, dated as of June 8, 1994, as amended, pursuant to which the Banks have
committed to make loans to such subsidiaries of up to $700.0 million. At June
30, 1995, $458.0 million of aggregate borrowings were outstanding under the
Credit Agreements. The information set forth below relating to the Credit
Agreements and the Affiliate Guaranties and the Lilly Guaranty (each as defined
herein) is qualified in its entirety by reference to the complete text of such
documents, the material features of which are set forth herein and copies of
which are filed as exhibits to the Registration Statement. Each subsidiary that
has entered into a Credit Agreement is referred to below as a "Borrower."
Each loan under a Credit Agreement bears interest at a variable rate equal
to, at the Borrower's option, (i) a base rate (generally defined as the greater
of the prime rate or the federal funds rate), (ii) a certificate of deposit
rate or (iii) a London interbank offered rate ("LIBOR"), plus in each case an
interest rate margin that varies depending upon the type of loan selected, the
rating of Guidant's senior unsecured long-term debt (or, if none exists, its
ratio of cash flow to outstanding debt), and whether the loan is guaranteed by
Lilly. Each Borrower may also request the Banks to offer to make money market
loans to the Borrower at either a fixed interest rate or a rate based on LIBOR.
Each of the Borrowers has entered into a Guaranty Agreement (the "Affiliate
Guaranties") with the Banks guaranteeing the full and punctual payment of all
amounts payable by the other Borrowers under their respective Credit
Agreements. In addition, Lilly has guaranteed the existing borrowings under the
Credit Agreements and may, but is not obligated to, guarantee any future
borrowings (the "Lilly Guaranty"). Borrowings that are guaranteed by Lilly bear
interest at a slightly lower rate than borrowings that are not guaranteed by
Lilly, which interest rate differential is not material. The Credit Agreements
were amended in August 1995 to provide for a guarantee by Guidant of the
borrowings under the Credit Agreements. The amendment also allows for certain
financial information to be provided to the Banks based on consolidated
financial information of Guidant and for certain covenants and representations
to be based on Guidant's consolidated financial information. It is expected
that Lilly will withdraw its guarantee in September 1995.
Each of the Credit Agreements contains financial, affirmative and negative
covenants that are customary in similar financings. Among other things, the
Borrowers are required to maintain certain ratios of (i) adjusted cash flow to
consolidated debt, (ii) consolidated current assets to consolidated current
liabilities and (iii) consolidated net income plus consolidated interest
expense and consolidated income taxes to consolidated interest expense. The
Credit Agreements also contain customary events of defaults including (i) a
default in the payment of principal or interest on the loans under the Credit
Agreements, (ii) the failure to comply with the covenants in the Credit
Agreements, subject in certain instances to grace periods, (iii) the failure of
any representation or warranty made by a Borrower or Lilly in connection with
the Credit Agreements or related documents to be true and correct in any
material respect when made, (iv) a default in the payment of certain other
financial obligations of a Borrower or subsidiary thereof in excess of $5
million, (v) the occurrence of any event or condition which results in an
acceleration of the maturity of indebtedness of a Borrower or subsidiary
thereof in excess of $5 million or which enables the holder of such
indebtedness to accelerate the maturity thereof, (vi) certain events of
liquidation, reorganization, bankruptcy or insolvency, (vii) failure to satisfy
any judgment in excess of $25 million and (viii) certain events resulting in a
change in control of a Borrower or its parent.
Each individual loan under a Credit Agreement is generally payable in full by
the Borrower within one, two, three or six months (depending on the interest
option selected by the Borrower) after the date the loan was originally
incurred. The final maturity date of all unpaid Credit Agreement borrowings is
January 8, 1996. There are no scheduled reductions of availability under the
Credit Agreements prior to such date. Subject to the satisfaction of certain
conditions (including the absence of any events of default under the
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relevant Credit Agreement and the requirement that certain representations and
warranties of the Borrower contained in the Credit Agreement be true and
correct on the date a loan is incurred), a Borrower may borrow or reborrow
under the relevant Credit Agreement at any time prior to such final maturity
date. If, as expected, Lilly elects to terminate its Guaranty with respect to a
particular Borrower, that Borrower will be required to additionally represent
at the time of the borrowing that there has been no material adverse change in
the Borrower's business since December 31, 1993 and that there is no new
litigation pending that could have a material adverse effect on the Borrower.
COMPARISON OF RIGHTS OF
SHAREHOLDERS OF LILLY AND GUIDANT
Both Lilly and Guidant are incorporated under the laws of the state of
Indiana. The articles of incorporation and by-laws of Guidant are substantially
similar to those of Lilly. In addition, both Lilly and Guidant have adopted
shareholder rights plans with substantially similar terms. As a result, there
are no material differences between the rights of holders of Lilly Common Stock
and the rights of holders of Guidant Common Stock.
RELATIONSHIP BETWEEN GUIDANT AND LILLY
Transactions
On May 25, 1994, ACS, CPI and DVI declared dividends to Lilly equal to the
portion of their noncurrent receivables from Lilly arising from their
participation in Lilly's central cash management system. This non-cash
transaction aggregated approximately $415.5 million. On June 16, 1994, ACS, CPI
and DVI declared cash dividends totalling $318.0 million to Lilly. These
subsidiaries entered into the Credit Agreements in order to fund this
distribution.
On October 18, 1994, (i) Lilly sold certain patent rights to CPI for $37.7
million, (ii) ACS purchased certain real estate from Lilly for approximately
$1.1 million and (iii) ACS was granted an option to purchase additional real
estate from Lilly. These items were funded through additional borrowings under
the Credit Agreements. During the third and fourth quarters of 1994, Guidant
cancelled net receivables from Lilly of $31.4 million representing reversal of
earlier billings by Lilly to Guidant for Guidant's participation in Lilly's
foreign sales corporation.
On October 31, 1994, ACS purchased from Lilly all of the capital stock of
Origin and HRT for $63.6 million and Guidant repaid certain advances from Lilly
of $46.4 million.
On November 30, 1994, Guidant paid cash dividends of $176.1 million to Lilly
which were funded by borrowings under the Credit Agreements. In addition,
Guidant cancelled certain advances to Lilly in an aggregate amount of $38.0
million, which includes a dividend of $25.8 million declared on October 18,
1994 related to Guidant's participation in Lilly's central cash management
system. This noncash transaction resulted in a reduction in shareholders'
equity for Guidant.
In November 1994, Guidant purchased certain assets used in Guidant's
international businesses for $57.0 million. The purchase of the international
assets was funded by borrowings from Lilly. These borrowings were repaid by
Guidant in March 1995 from proceeds received in connection with the Offering.
In August 1995, Guidant expects to complete the acquisition of Danimed, its
distributor in Germany. The final step in the acquisition includes the purchase
of the remaining 20% ownership interest in the distributorship, distribution of
earnings to the prior partners and the possible purchase of certain related
real estate. This transaction will include payments of up to approximately
$49.8 million, of which $26.0 million will be funded by a capital contribution
to Guidant by Lilly.
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Guarantees by Lilly
CPI has entered into agreements with certain suppliers of materials and
components used in its business pursuant to which it has agreed to indemnify
such suppliers against potential product liability exposure. Lilly has
guaranteed the performance by CPI of certain of these indemnification
obligations. Lilly has agreed with Guidant, pursuant to the Transfer Agreement
described below, that Lilly will not terminate its guarantee obligations for
any such supply agreements to which it is a party prior to December 1997,
unless the suppliers have consented to the termination or assignment of such
obligations.
In addition, Lilly has guaranteed the existing borrowings under the Credit
Agreements and may, but is not obligated to, guarantee any future borrowings
under the Credit Agreements. It is expected that Lilly will withdraw its
guarantee in September 1995.
Lilly has guaranteed the payment obligations of Guidant Japan K.K. in
connection with a (Yen)300.0 million line of credit from The Mitsubishi Bank,
Limited. This guarantee will be withdrawn upon the consummation of the Exchange
Offer.
Agreements
Set forth below are descriptions of certain agreements between Guidant and
Lilly which are currently in place. Guidant has adopted a policy that all
future agreements between Guidant and Lilly and its affiliates will be on terms
that Guidant believes are no less favorable to Guidant than terms Guidant
believes would be available from unaffiliated parties.
Transfer Agreement. Guidant and Lilly entered into a Transfer Agreement (the
"Transfer Agreement") pursuant to which Lilly has transferred all of the
outstanding capital stock of ACS, CPI and DVI to Guidant in exchange for
57,599,900 shares of Guidant Common Stock. In addition, Guidant agreed to
indemnify Lilly for any losses arising out of or otherwise related to the
ownership or operation at any time of the business conducted by Guidant,
whether occurring prior to, or after, the consummation of the Offering. Lilly
has agreed to indemnify Guidant for any losses arising out of the
pharmaceutical or other businesses of Lilly which are not being transferred to
Guidant. Guidant has agreed to indemnify Lilly for any losses arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in, or the omission or alleged omission of a material fact from, the
prospectus delivered in connection with the Offering. The Transfer Agreement
also provides Lilly with certain demand and incidental registration rights with
respect to its ownership of Guidant Common Stock.
Tax Sharing Agreement. Through the date of consummation of the Offering (the
"Closing Date"), the results of the operations of Guidant and its subsidiaries
(the "Company Group") were included in Lilly's consolidated United States
federal income tax returns ("Lilly Consolidated Federal Returns"). In
connection with the Offering, Lilly and Guidant entered into a Tax Sharing
Agreement which provides, among other things, for the allocation between Lilly
and Guidant of federal, state, local and foreign tax liabilities for all
periods through the Closing Date and thereafter so long as Lilly is required to
include the Company Group in the Lilly Consolidated Federal Return or any Lilly
State Combined Return (defined below). In general, the Tax Sharing Agreement
provides that Guidant will pay Lilly with respect to federal income taxes for
each period that the Company Group is included in Lilly's Consolidated Federal
Return an amount in lieu of such taxes computed in a manner that is consistent
with the methodology used by Lilly to allocate such taxes in prior years.
Similarly, with respect to state corporate franchise or income taxes for those
states where Lilly files a combined or consolidated state return that includes
any member of the Company Group (a "State Combined Return"), Guidant has agreed
to pay Lilly an amount in lieu of such taxes computed in a manner that is
consistent with the methodology used by Lilly to allocate such taxes in prior
years. Generally, with respect to Lilly's Consolidated Federal Returns and
State Combined Returns, Lilly or Guidant, as the case may be, will be
responsible for the portion of any deficiencies attributable to its respective
businesses that are assessed with respect to such returns subsequent to their
being filed, except that Lilly will be responsible for any federal tax
deficiencies attributable to Guidant's business for periods prior to and
including the date as of
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which the Transaction is consummated (the "Transaction Date") that result in a
permanent increase in Guidant's tax. Similarly, Lilly or Guidant, as the case
may be, will be entitled to any portion of any refunds attributable to its
respective businesses paid with respect to such returns except that Lilly will
be entitled to any refunds of federal tax with respect to adjustments for
periods prior to and including the Transaction Date that result in a permanent
reduction in Guidant's tax. Guidant will also be responsible for all other
taxes, including assessments, if any, for prior years, payable by Guidant or
any of its subsidiaries. Furthermore, the Tax Sharing Agreement provides that
should Lilly distribute its shares of Guidant Common Stock to its shareholders
in a distribution intended to qualify under section 355 of the Code (the "355
Distribution"), and the 355 Distribution subsequently fails to qualify under
section 355 as a result of any event wholly or partially within the control of
any member of the Company Group involving either the stock or assets (or any
combination thereof) of any member of the Company Group within three years of
the date of the 355 Distribution, then Guidant is obligated to indemnify and to
hold Lilly harmless from any tax liability imposed upon it in connection with
the 355 Distribution, which liability would be material. The Tax Sharing
Agreement also provides that Lilly and Guidant will indemnify and hold each
other harmless for any tax liability of Guidant or Lilly, respectively, arising
under Treasury Regulation Section 1.1502-6 or any similar provision under state
or local law. In addition, the Tax Sharing Agreement provides that Guidant will
pay to Lilly an amount equal to the tax benefits, if any, received by the
Company Group that are attributable to transactions under the 1989 Lilly Stock
Plan, the 1994 Lilly Stock Plan and the GlobalShares Stock Plan. Though valid
as between Guidant and Lilly, the Tax Sharing Agreement is not binding on the
IRS or any other taxing authority and does not affect the several liability of
Guidant, Lilly and their respective subsidiaries to the IRS for all federal
income taxes with respect to Lilly's Consolidated Federal Returns that include
the Company Group.
Services Agreements. Guidant and Lilly have entered into Services Agreements
(the "Services Agreements") relating to the provision of certain services by
Lilly to Guidant which generally expire in mid 1996, unless otherwise
terminated by Guidant. The services covered by the Services Agreements include:
facilities, information systems, payroll and benefits administration, legal
services, financial services, insurance, trademark services, treasury services,
financial accounting and collection of accounts receivables. Management of
Guidant believes that upon expiration of the Services Agreements, Guidant will
be able to obtain such services on terms comparable to those contained in the
Services Agreements or perform comparable services internally.
Non-Compete with Physio Control Holding Corp. Guidant has agreed with Physio
Control Holding Corp., as part of a sale of a former subsidiary of Lilly to an
unaffiliated buyer in 1994, that through July 29, 1996, CPI will not engage in
the management and/or operation of any entity that engages in any business of
manufacturing, selling and servicing of external defibrillators, disposable
electrodes used in connection with such defibrillators and other related
products and accessories. The parties have agreed that CPI is not currently in
such businesses. In addition, Guidant has, with certain exceptions, agreed not
to solicit employees of Physio Control Holding Corp. until July 29, 1999.
Non-Solicitation with Respect to IVAC Corporation. Guidant has agreed with
the purchasers of IVAC (the "IVAC Purchasers"), a former subsidiary of Lilly
which was sold in November 1994, that through November 21, 1996, Guidant will
not, with certain exceptions, (i) induce, or attempt to induce, any employee of
IVAC to terminate his or her employment with IVAC, (ii) hire any person who, to
Guidant's knowledge, was designated above a certain employment level "manager"
by IVAC within sixty days prior to the time such person was hired by such party
or (iii) induce, or attempt to induce, any customer, supplier, licensee or
other business relation of IVAC to cease doing business with IVAC. The IVAC
Purchasers have agreed to similar restrictions with respect to Guidant and its
employees. IVAC manufactures and sells infusion therapy and vital signs
measurement devices, a business in which Guidant does not currently operate.
Upon the consummation of the Transaction, these restrictions will no longer be
binding.
Lilly and ACS ReoPro (TM) Alliance. ACS and Lilly entered into an agreement
relating to Lilly's cardiovascular drug ReoPro (TM) (abciximab). Under the
terms of the agreement, ACS will provide certain services and information with
respect to ReoPro (TM), such as customer education, to interventional
cardiology customers in the United States.
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OTHER
Neither Lilly, nor any subsidiary of Lilly, nor, to Lilly's knowledge, any of
Lilly's executive officers or directors or associates of any of the foregoing,
has engaged in any transaction involving shares of Lilly Common Stock during
the period of forty business days prior to the date hereof, except for the
following transactions by certain executive officers of Lilly:
<TABLE>
<CAPTION>
TYPE OF
NAME TRANSACTION DATE
---- ----------- ----
<C> <S> <C>
James M. Cornelius disposed of 100 shares by gift August 9, 1995
Michael L. Eagle sold 120 shares on behalf of minor July 20, 1995
daughter at $77.875 per share
Brendan P. Fox sold 2,000 shares at $78.50 per June 23, 1995
share
Pedro P. Granadillo acquired 1,310 shares upon exercise June 29, 1995
of employee stock option at $20.9525
per share
Michael E. Hanson disposed of 25 shares by gift June 29, 1995
James A. Harper disposed of 30 shares by gift July 10, 1995
acquired 3,200 shares upon exercise July 11, 1995
of employee stock option at $20.9525
per share
</TABLE>
Non-employee directors of Lilly are prohibited by the short-swing profit
rules under the Exchange Act from tendering shares of Lilly Common Stock
pursuant to the Exchange Offer because of their participation in The Lilly Non-
Employee Directors' Deferred Stock Plan.
As of July 31, 1995, directors, executive officers and affiliates of Lilly
owned 47,393,854 shares of Lilly Common Stock (16.23% of the outstanding shares
of Lilly Common Stock). Certain of such persons have indicated to Lilly that
they intend to tender an aggregate of approximately 30,295 shares of Lilly
Common Stock (0.01% of the outstanding shares of Lilly Common Stock) pursuant
to the Exchange Offer as follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
NAME SHARES
---- -----------
<S> <C>
James M. Cornelius............................................ 15,000
Ronald W. Dollens............................................. 15,295
------
Total.................................................... 30,295
======
</TABLE>
As of August 1, 1995, 11,683,042 shares of Lilly Common Stock were owned
beneficially by The Lilly Employee Savings Plan. Under the terms of The Lilly
Employee Savings Plan, the Trustee is prohibited from tendering any such shares
in connection with the Exchange Offer. In addition, under the terms of the
DowElanco Employee Savings Plan, The Hybritech Incorporated Employee Savings
Plan and The Savings Plan For Eli Lilly Affiliate Employees In Puerto Rico,
which, as of August 1, 1995, beneficially owned an aggregate of 622,977 shares
of Lilly Common Stock, the respective Trustees will be prohibited from
tendering the shares of Lilly Common Stock in connection with the Exchange
Offer.
As of August 1, 1995, 441,065 shares of Lilly Common Stock were owned
beneficially by the Guidant ESOP, and it is expected that prior to the
expiration of the Exchange Offer approximately 24,000 additional shares of
Lilly Common Stock will be transferred from The Lilly Employee Savings Plan to
the Guidant ESOP. The Trustee of the Guidant ESOP is required under the terms
of the Guidant ESOP to tender all of its shares of Lilly Common Stock in
connection with the Exchange Offer. The Employees' 401(k) Plan of Devices for
Vascular Intervention, Inc. will also tender all of its shares of Lilly Common
Stock in connection with the Exchange Offer.
107
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences relating to the Transaction. The discussion contained in this
Offering Circular - Prospectus is based on the law in effect as of the date of
this Offering Circular - Prospectus. Lilly shareholders are urged to consult
their own tax advisors as to the particular tax consequences to them of the
Transaction.
IRS Ruling Letter and Federal Income Tax Consequences. The IRS issued the
Ruling Letter to Lilly stating that, for federal income tax purposes, the
Transaction will qualify under Sections 355 and 368 of the Code as a
distribution that is tax-free to Lilly's shareholders (except with respect to
cash received in lieu of fractional shares) and, in general, is tax-free to
Lilly. The Ruling Letter, while generally binding on the IRS, is subject to
certain factual representations and assumptions. If any such factual
representations or assumptions are incorrect or untrue in any material respect,
Lilly may not be able to rely on the Ruling Letter. Lilly is not aware of any
facts or circumstances which would cause any such representations or
assumptions to be incorrect or untrue in any material respect. Nevertheless, if
Lilly consummates the Transaction and the Transaction is held to be taxable,
both Lilly and its shareholders could be subject to tax on the Transaction,
which tax could be material.
The Ruling Letter provides that (i) no gain or loss will be recognized to
(and no amount will be included in the income of) the Lilly shareholders upon
their receipt of shares of Guidant Common Stock pursuant to the Transaction
(including any fractional share interests to which they may be entitled); (ii)
for those Lilly shareholders that surrender all of their Lilly Common Stock in
the Exchange Offer, the aggregate tax basis of the shares of Guidant Common
Stock held by the Lilly shareholders after the Exchange Offer (including any
fractional share interests) will be the same as the aggregate tax basis of the
shares of Lilly Common Stock exchanged pursuant to the Exchange Offer; (iii)
for those Lilly shareholders that do not surrender all of their Lilly Common
Stock in the Exchange Offer, each such shareholder's aggregate tax basis in the
Lilly Common Stock held before the consummation of the Exchange Offer will be
allocated between the Lilly Common Stock and the Guidant Common Stock
(including any fractional share interests) held by such shareholder after the
Transaction in proportion to their relative fair market values, pursuant to
Treasury Regulation section 1.358-2; (iv) the holding period of the shares of
Guidant Common Stock received by the Lilly shareholders pursuant to the
Transaction (including any fractional share interests) will include the holding
period of the shares of Lilly Common Stock with respect to which the shares of
Guidant Common Stock were received, provided that the shares of Lilly Common
Stock are held as a capital asset on the date of the Transaction; and (v) the
payment of cash in lieu of fractional share interests in Guidant Common Stock
will be treated for federal income tax purposes as having been received in full
payment for such fractional shares.
The Ruling Letter does not specifically address tax basis issues with respect
to holders of Lilly Common Stock who have blocks of Lilly Common Stock with
different per share tax bases. Such holders are encouraged to consult their own
tax advisors regarding the possible tax basis consequences of the Transaction.
If any person (or group of persons subject to the aggregation or attribution
rules of Section 355(d)(7), (8) or (9) of the Code) who holds a 50% or greater
interest in either Lilly Common Stock or Guidant Common Stock that is (i)
acquired by purchase (within the meaning of Section 355(d) of the Code) after
the later of five years prior to the date of the Transaction or October 9, 1990
or (ii) received in the Transaction in respect of Lilly Common Stock acquired
by purchase after the later of five years prior to the date of the Transaction
or October 9, 1990, Lilly would be subject to tax on the Transaction, which tax
could be material. If, however, Guidant took any action to facilitate such
ownership (e.g., by waiving its rights under the Rights Agreement), Guidant
would generally be required to reimburse Lilly for such tax liability pursuant
to the terms of the Tax Sharing Agreement, which obligation would have a
material adverse effect on Guidant.
THE SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS
BASED ON THE CODE, THE REGULATIONS PROMULGATED THEREUNDER BY THE UNITED STATES
TREASURY DEPARTMENT AND THE INTERPRETATIONS OF THE
108
<PAGE>
CODE AND REGULATIONS BY THE COURTS AND THE IRS, ALL AS THEY EXIST AS OF THE
DATE OF THIS OFFERING CIRCULAR - PROSPECTUS. THIS SUMMARY IS FOR GENERAL
INFORMATION ONLY AND DOES NOT DISCUSS ALL TAX CONSIDERATIONS THAT MAY BE
RELEVANT TO LILLY SHAREHOLDERS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, NOR
DOES IT ADDRESS THE CONSEQUENCES TO CERTAIN LILLY SHAREHOLDERS SUBJECT TO
SPECIAL TREATMENT UNDER THE UNITED STATES FEDERAL INCOME TAX LAWS (SUCH AS TAX-
EXEMPT ENTITIES, NON-RESIDENT ALIEN INDIVIDUALS AND FOREIGN CORPORATIONS). IN
ADDITION, THIS SUMMARY DOES NOT ADDRESS THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES TO LILLY SHAREHOLDERS WHO DO NOT HOLD THEIR LILLY COMMON STOCK AS
A CAPITAL ASSET. THIS SUMMARY DOES NOT ADDRESS ANY STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES.
LILLY SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE EXCHANGE OFFER, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS AND ANY CHANGES IN FEDERAL TAX
LAWS THAT OCCUR AFTER THE DATE OF THIS OFFERING CIRCULAR-PROSPECTUS.
ACCOUNTING TREATMENT OF THE TRANSACTION
The shares of Lilly Common Stock received pursuant to the Exchange Offer will
be recorded as an increase to treasury stock at the market value of the shares
of Guidant Common Stock distributed on the Expiration Date. The Exchange Offer
will result in a net gain to Lilly, after direct expenses of the disposition,
which will be netted with the gains and losses from the divestitures of Lilly's
other MDD companies and reported as a component of the anticipated gain on the
disposal of discontinued operations. The gain from the Exchange Offer will
result from the difference between the market value and the carrying value of
the shares of Guidant Common Stock distributed.
The remaining shares of Guidant Common Stock, if distributed through a spin-
off, will be accounted for as a dividend with a direct charge to retained
earnings. The amount of the dividend will be equal to Lilly's carrying value of
the shares of Guidant Common Stock distributed in such spin-off.
LEGAL MATTERS
Certain legal matters relating to Guidant Common Stock being offered hereby
will be passed upon for Guidant by Dewey Ballantine, 1301 Avenue of the
Americas, New York, New York 10019-6092. As to matters of Indiana law, Dewey
Ballantine may rely upon the opinion of Baker & Daniels, Indianapolis, Indiana.
Mr. King, Vice President, General Counsel, Secretary and a Director of Guidant,
also currently acts as counsel to Baker & Daniels.
EXPERTS
The financial statements and schedules included or incorporated by reference
in this Offering Circular - Prospectus and elsewhere in the Registration
Statement, to the extent and for the periods indicated in their reports, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
109
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Statements of Income for the Years Ended December 31, 1994,
1993 and 1992............................................................ F-3
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1993. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1994 and 1993............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Consolidated Statements of Income for the Six-Month Periods Ended June 30,
1995 and 1994 (Unaudited)................................................ F-18
Consolidated Balance Sheets as of June 30, 1995 (Unaudited) and December
31, 1994................................................................. F-19
Consolidated Statements of Shareholders' Equity for the Six-Month Periods
Ended June 30, 1995 and 1994 (Unaudited)................................. F-20
Consolidated Statements of Cash Flows for the Six-Month Periods Ended June
30, 1995 and 1994 (Unaudited)............................................ F-21
Notes to Consolidated Financial Statements (Unaudited).................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Guidant Corporation
We have audited the accompanying consolidated balance sheets of Guidant
Corporation (a majority owned subsidiary of Eli Lilly and Company) and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of Guidant'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 Guidant
Corporation and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Indianapolis, Indiana
February 23, 1995
F-2
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net sales........................................... $862.4 $794.7 $754.8
Cost of sales....................................... 270.9 236.2 211.8
Research and development............................ 130.9 129.1 117.9
Sales, marketing and administrative................. 268.9 255.1 251.0
Restructuring and special charges................... -- 81.5 32.9
------- ------- -------
670.7 701.9 613.6
------- ------- -------
Income from operations.............................. 191.7 92.8 141.2
Other income (expenses):
Interest--net..................................... (7.6) 8.4 7.6
Royalties--net.................................... 1.5 11.1 4.3
Amortization of goodwill and other intangibles.... (20.4) (21.7) (28.0)
Other--net........................................ (9.3) (3.6) (4.0)
------- ------- -------
(35.8) (5.8) (20.1)
------- ------- -------
Income before income taxes and cumulative effect of
change in accounting principle..................... 155.9 87.0 121.1
Income taxes........................................ 63.8 34.6 44.3
------- ------- -------
Income before cumulative effect of change in
accounting principle............................... 92.1 52.4 76.8
Cumulative effect of change in accounting principle
(net of tax)....................................... -- (1.8) --
------- ------- -------
Net income.......................................... $ 92.1 $ 50.6 $ 76.8
======= ======= =======
Unaudited pro forma earnings per share information:
Net income--as reported............................. $ 92.1
Pro forma adjustments:
Additional interest expense--net.................. 26.9
Tax effect of interest expense.................... (11.0)
-------
Pro forma net income................................ $ 76.2
=======
Pro forma earnings per share........................ $ 1.06
=======
Pro forma weighted average shares outstanding....... 71.86
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................. $ 113.0 $ 25.0
Accounts receivable, net of allowance, of $5.4 (1994) and
$4.8 (1993)............................................... 155.7 128.9
Other receivables.......................................... 12.4 16.5
Inventories................................................ 120.0 115.9
Deferred income taxes...................................... 42.1 47.3
Income taxes recoverable from Lilly........................ -- 13.5
Prepaid expenses........................................... 14.6 8.4
-------- --------
Total Current Assets..................................... 457.8 355.5
Other Assets
Goodwill, net of allowances of $67.1 (1994) and $51.2
(1993).................................................... 268.7 268.4
Other intangible assets, net of allowances of $14.2 (1994)
and $9.5 (1993)........................................... 34.8 33.1
Advances to affiliated companies........................... -- 316.7
Deferred income taxes...................................... 15.3 7.4
Sundry..................................................... 32.2 21.0
-------- --------
351.0 646.6
Property and Equipment....................................... 294.8 286.5
-------- --------
$1,103.6 $1,288.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Loans payable to affiliated companies...................... $ 78.0 $ --
Accounts payable........................................... 36.7 31.3
Payables to affiliated companies........................... 39.5 13.0
Employee compensation...................................... 46.3 36.0
Restructuring liabilities.................................. 61.6 67.1
Other liabilities.......................................... 66.2 64.8
Income taxes payable to Lilly.............................. 12.7 --
-------- --------
Total Current Liabilities................................ 341.0 212.2
Noncurrent Liabilities
Long-term debt............................................. 473.0 --
Other...................................................... 25.2 28.1
-------- --------
498.2 28.1
Commitments and Contingencies................................ -- --
Shareholders' Equity
Common stock--no par value;
Authorized shares: 250,000,000
Issues shares:--1994--71,860,000
--1993-- 0....................................... 192.5 --
Additional paid-in capital................................. 64.5 --
Retained earnings.......................................... 5.9 --
Currency translation adjustment............................ 1.5 --
Shareholders' net investment............................... -- 1,048.3
-------- --------
264.4 1,048.3
-------- --------
$1,103.6 $1,288.6
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SHAREHOLDERS' COMMON STOCK ADDITIONAL CURRENCY
NET ----------------- PAID-IN RETAINED TRANSLATION
INVESTMENT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS TOTAL
------------- ---------- ------ ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1992................... $ 747.2 $ 747.2
Net income.............. 76.8 76.8
Contribution of Lilly
investment in Origin
and HRT................ 75.1 75.1
Shareholder capital
contributions.......... 46.1 46.1
Currency translation
adjustment............. (2.5) (2.5)
--------- ---------- ------ ----- ---- ---- ---------
Balance at December 31,
1992................... 942.7 942.7
Net income.............. 50.6 50.6
Shareholder capital
contributions.......... 53.4 53.4
Currency translation
adjustment............. 1.6 1.6
--------- ---------- ------ ----- ---- ---- ---------
Balance at December 31,
1993................... 1,048.3 1,048.3
Net income.............. 86.2 86.2
Dividends to
shareholder............ (1,097.0) (1,097.0)
Shareholder capital
contributions.......... 54.7 54.7
Cancellation of net
receivable from
shareholder............ (31.4) (31.4)
Currency translation
adjustment............. 3.7 3.7
--------- ---------- ------ ----- ---- ---- ---------
Balance at December 14,
1994................... 64.5 64.5
Impact of offering:
Reclassification of
shareholders' net
investment............ (64.5) 57,600,000 $64.5 --
Net proceeds........... 14,260,000 $192.5 192.5
Net income.............. $5.9 5.9
Currency translation
adjustment............. $1.5 1.5
--------- ---------- ------ ----- ---- ---- ---------
Balance at December 31,
1994................... $ -- 71,860,000 $192.5 $64.5 $5.9 $1.5 $ 264.4
========= ========== ====== ===== ==== ==== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Cash Provided by Operating Activities:
Net Income....................................... $ 92.1 $ 50.6 $ 76.8
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation................................... 44.0 39.7 32.6
Amortization of goodwill and other intangibles. 20.7 21.7 28.0
Operating expenses funded by shareholder, net.. 15.9 31.4 28.9
Restructuring and special charges.............. -- 81.5 32.9
Deferred income taxes.......................... 8.6 (28.3) (16.3)
Other noncash expenses......................... 6.0 10.3 20.3
Cumulative effect of change in accounting
principle--pretax............................. -- 2.9 --
-------- -------- -------
187.3 209.8 203.2
Changes in Operating Assets and Liabilities:
Receivables from affiliated companies--
(increase) decrease........................... (7.9) 16.4 (32.3)
Receivables--increase.......................... (23.1) (1.0) (3.4)
Inventories--increase.......................... (10.8) (17.5) (26.0)
Prepaid expenses--(increase) decrease.......... (6.2) (2.0) 2.9
Accounts payable and accrued liabilities--
increase (decrease)........................... 15.7 8.6 (1.3)
Income taxes payable to/receivable from Lilly--
increase (decrease) .......................... 29.4 (51.7) 2.8
Other liabilities--(decrease) increase......... (8.5) (6.3) 6.2
-------- -------- -------
Net Cash Provided by Operating Activities....... 175.9 156.3 152.1
Used for Investing Activities:
Net additions to property and equipment.......... (51.1) (43.5) (72.1)
(Additions) reductions to intangible and sundry
assets, net..................................... (11.8) 8.7 (1.8)
Acquisitions..................................... (8.8) (9.6) --
-------- -------- -------
Net Cash Used for Investing Activities.......... (71.7) (44.4) (73.9)
Used for Financing Activities:
Increase (decrease) in short-term borrowings..... 78.0 (0.3) --
Proceeds from long-term borrowings............... 648.0 -- --
Reductions of long-term borrowings............... (175.0) (2.1) (0.4)
Capital contribution from shareholder............ -- 5.0 2.5
Advances to affiliated companies, net............ (111.7) (104.4) (69.6)
Dividends........................................ (652.4) -- --
Proceeds from stock offering..................... 192.5 -- --
-------- -------- -------
Net Cash Used for Financing Activities.......... (20.6) (101.8) (67.5)
Effect of Exchange Rate Changes on Cash........... 4.4 1.6 (2.5)
-------- -------- -------
Net Increase in Cash and Cash Equivalents......... 88.0 11.7 8.2
Cash and Cash Equivalents at Beginning of Year.... 25.0 13.3 5.1
-------- -------- -------
Cash and Cash Equivalents at End of Year.......... $ 113.0 $ 25.0 $ 13.3
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 1--GENERAL INFORMATION
On June 20, 1994, the Board of Directors of Eli Lilly and Company ("Lilly")
approved a plan to form a new subsidiary, Guidant Corporation ("Guidant").
Under the plan, Lilly transferred to Guidant its ownership interests in five of
the nine businesses in its Medical Devices and Diagnostics Division. The five
transferred companies include the operations of Advanced Cardiovascular
Systems, Inc. ("ACS"), Cardiac Pacemakers, Inc. ("CPI"), Devices for Vascular
Intervention, Inc. ("DVI"), Heart Rhythm Technologies Incorporated ("HRT") and
Origin Medsystems, Inc. ("Origin").
Guidant, which was incorporated on September 9, 1994, consummated an initial
public offering of 14,260,000 shares (approximately 20%) of its common stock at
a price of $14.50 per share in December 1994. Lilly beneficially owns
approximately 80% of Guidant's common stock and presently plans to dispose of
its remaining ownership in Guidant in the latter half of 1995 by means of a
split-off. A split-off is an exchange offer whereby Lilly shareholders would be
given the opportunity to exchange some or all of their Lilly shares for a
certain number of Guidant shares.
Guidant designs, develops, manufactures and markets a broad range of products
for use in: (i) vascular intervention, primarily the treatment of coronary
artery disease, (ii) cardiac rhythm management, and (iii) minimally invasive
surgery.
NOTE 2--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements have been
prepared using Lilly's historical basis in the assets and liabilities of the
various companies that now comprise Guidant, including goodwill and other
intangible assets recognized by Lilly in the original acquisition of those
companies. All significant intercompany accounts within Guidant have been
eliminated.
The consolidated financial statements reflect the results of operations,
financial condition and cash flows of Guidant as a component of Lilly through
December 14, 1994, the effective date of Guidant's initial public offering, and
as an independent enterprise from the aforementioned date through December 31,
1994, and may not be indicative of actual results under other ownership.
Management believes that the consolidated income statements include a
reasonable allocation of administrative costs incurred by Lilly which benefit
Guidant. These allocations of corporate expenses were $14.2 million, $14.5
million and $17.5 million in 1994, 1993 and 1992, respectively.
In addition to the allocation of corporate expenses, the consolidated
financial statements reflect certain other direct expenses relating to the
Guidant business planning group, international marketing support and research
and development which are incurred by Lilly on behalf of Guidant. These
expenses were $18.7 million, $17.1 million and $15.6 million in 1994, 1993 and
1992, respectively.
These costs, including the allocated corporate expenses, have been reflected
in the consolidated income statements as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Research and development................................ $ 1.6 $ 3.5 $ 3.6
Sales, marketing and administrative..................... 31.3 28.1 29.5
----- ----- -----
$32.9 $31.6 $33.1
===== ===== =====
</TABLE>
F-7
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Lilly does not require Guidant to pay these allocated expenses. Accordingly,
the cancellation of this liability has been reflected each year by Guidant as a
contribution to capital.
Lilly and Guidant executed a services agreement under which Lilly will
continue, in the near term, to provide administrative support to Guidant at
fees determined on an arm's-length basis. These costs will be paid by Guidant
to Lilly commencing in 1995. Guidant management anticipates that the costs of
services after expiration of the services agreement will approximate current
levels.
The consolidated financial statements include no allocation of Lilly debt or
interest expense.
Revenue Recognition: Revenue is primarily recognized revenue at the time
product is shipped to customers.
Foreign Currency Translation: Sales and expenses denominated in foreign
currencies are translated at average exchange rates in effect during the
period. Foreign currency transaction gains and losses are included in other
income (expenses). The assets and liabilities of foreign operations are
translated into U.S. dollars using the current exchange rate. Translation gains
and losses are accumulated as a separate component of equity.
Cash and Cash Equivalents: All highly liquid investments, generally with
original maturities of three months or less, are considered to be cash
equivalents. The cost of these investments approximates fair value.
Guidant participates in Lilly's central cash management system. Cash balances
can be withdrawn by Guidant upon demand and earn interest based upon the 90-day
commercial paper rate. At December 31, 1994, $82.2 million was on account with
Lilly (see Note 7).
Inventories: Inventories are stated at the lower of cost, determined by the
first-in, first-out ("FIFO") method, or market.
Inventories at December 31 consisted of the following:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Finished products........................................... $ 63.4 $ 59.3
Work in process............................................. 31.5 31.7
Raw materials and supplies.................................. 25.1 24.9
------ ------
$120.0 $115.9
====== ======
</TABLE>
Goodwill and Other Intangible Assets: Goodwill and other intangible assets
arising from acquisitions and research alliances are amortized over their
estimated useful lives, ranging from 5 to 40 years, using the straight-line
method. Management periodically reviews the carrying amount of goodwill and
other intangible assets to assess their continued recoverability. The
determination includes evaluation of factors such as current market value,
future asset utilization, business climate and future cash flows expected to
result from the use of the related assets. Guidant's policy is to record an
impairment loss in the period when it is determined that the carrying amount of
the asset may not be recoverable.
F-8
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Property and Equipment: Property and equipment is stated on the basis of
cost. Depreciation of buildings and equipment is computed generally by the
straight-line method at rates based on their estimated useful lives. At
December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Land........................................................ $ 26.3 $ 25.1
Buildings................................................... 187.1 161.6
Equipment................................................... 256.2 232.0
Construction in process..................................... 23.6 35.9
------ ------
493.2 454.6
Less allowances for depreciation............................ 198.4 168.1
------ ------
$294.8 $286.5
====== ======
</TABLE>
Income Taxes: Certain of Guidant's operations have historically been included
in the consolidated income tax returns filed by Lilly. Guidant has also entered
into a tax sharing agreement with Lilly for the period of time during which
Guidant will be included in Lilly's consolidated tax returns. Income tax
expense in the accompanying financial statements has been computed assuming
Guidant filed separate income tax returns worldwide. Annual differences between
income taxes payable and amounts reported in the consolidated financial
statements have been reflected as a reduction of additional paid-in capital.
Deferred taxes result primarily from the use of accelerated depreciation for
tax purposes and from the timing of deductions for expenses under certain
employee benefit plans, restructuring provisions, and other accrued expenses.
Pro Forma Earnings Per Share (unaudited): Pro forma earnings per share is
computed by dividing pro forma net income by the weighted average shares
outstanding during the year. Pro forma net income and earnings per share have
been determined assuming the current capital structure was in place January 1,
1994.
The pro forma adjustment gives effect to an increase in net interest expense,
net of tax. 71.86 million shares are assumed to have been outstanding for the
entire year. Historical earnings per share are not meaningful due to the change
in the capital structure during the year.
NOTE 3--RESTRUCTURING AND SPECIAL CHARGES
In both 1993 and 1992, Guidant and Lilly took actions designed to enhance
Guidant's competitiveness in the changing health care markets, reduce expenses
and improve efficiencies. As a result of these actions, Guidant recognized
restructuring and special charges amounting to $81.5 million and $32.9 million
in 1993 and 1992, respectively. Restructuring costs include those amounts
resulting from management's commitment to revised strategic actions. Special
charges represent unusual, general nonrecurring expense items. All such actions
are underway and are expected to be completed by December 31, 1996.
Significant components of these charges and their status at December 31, 1993
and 1994, are summarized as follows:
<TABLE>
<CAPTION>
ORIGINAL
1993 CHARGES 1993 1994
---- -------- ----- -----
<S> <C> <C> <C>
Revised distribution strategy........................... $60.6 $60.6 $58.4
Consolidation and relocation of operations.............. 17.0 17.0 10.4
Other................................................... 3.9 3.9 1.8
----- ----- -----
$81.5 $81.5 $70.6
===== ===== =====
</TABLE>
F-9
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--RESTRUCTURING AND SPECIAL CHARGES--(CONTINUED)
<TABLE>
<CAPTION>
ORIGINAL
1992 CHARGES 1993 1994
---- -------- ---- ----
<S> <C> <C> <C>
Product quality and compliance costs associated with
regulatory initiatives.................................. $17.0 $-- $--
Consolidation of operations.............................. 4.9 4.6 2.0
Intangibles write downs.................................. 11.0 -- --
----- ---- ----
$32.9 $4.6 $2.0
===== ==== ====
</TABLE>
The 1993 restructuring actions relate principally to significantly changing
the manner of distributing Guidant's products in overseas markets, and
consolidating and relocating certain manufacturing and administrative
operations within the United States. Management believes that the remaining
accruals will be paid in cash during 1995 and 1996. The 1992 restructuring
charge also represents decisions to consolidate certain operations. In
addition, Guidant took special charges in 1992, to recognize the estimated
costs of responding to intensified regulatory initiatives (principally product
recalls) and to write down certain intangible assets due to the introduction of
competitive products.
NOTE 4--STOCK PLANS
1994 Stock Plan: On October 17, 1994, Guidant adopted a stock plan pursuant
to which Guidant's Board of Directors may grant incentive stock options,
nonqualified stock options, performance awards, and restricted stock grants
(collectively, "Grants") to key employees of Guidant. Guidant has 7,000,000
shares available for awards under the Stock Plan.
Stock options have been granted to officers, other executives and key
employees. Stock options are granted at 100 percent of the fair market value at
the date of grant. (The price of unexercised options at December 31, 1994 was
$14.50 per share.) At December 31, 1994, grants of up to 6,158,500 shares could
still be made.
Stock option activity during 1994 is summarized below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Unexercised at January 1......................................... N/A
Granted.......................................................... 841,500
Exercised........................................................ 0
Terminated....................................................... 0
Unexercised at December 31....................................... 841,500
Exercisable at December 31....................................... 0
</TABLE>
Shareholder Rights Plan: On October 17, 1994, Guidant adopted a shareholder
rights plan. Under the terms of the plan, all shareholders of common stock
received for each share owned a preferred stock purchase right entitling them
to purchase from Guidant one one-hundredth of a share of Series A Preferred
Stock at an exercise price of $43.50. The rights are not exercisable until
after the date on which Guidant's right to redeem has expired. Guidant may
redeem the rights for $0.01 per right up to and including the tenth business
day after the date of a public announcement that a person (the "Acquiring
Person") has acquired ownership of stock having 10% or more of Guidant's
general voting power (the "Stock Acquisition Date").
The plan provides that, if Guidant is acquired in a business combination
transaction at any time after a Stock Acquisition Date, generally each holder
of a right will be entitled to purchase at the exercise
F-10
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--STOCK PLANS--(CONTINUED)
price a number of the acquiring Guidant's shares having a market value of twice
the exercise price. The plan also provides that in the event of certain other
business combinations, certain self-dealing transactions, or the acquisition by
a person of stock having 15% or more of Guidant's general voting power,
generally each holder of a right will be entitled to purchase at the exercise
price a number of shares of Guidant's common stock having a market value of
twice the exercise price. Any rights beneficially owned by an Acquiring Person
shall not be entitled to the benefit of the adjustments with respect to the
number of shares described above. The rights will expire on October 17, 2004,
unless redeemed earlier by Guidant.
NOTE 5--BORROWINGS
In June 1994, three subsidiaries of Guidant obtained separate credit
facilities aggregating $700.0 million which permit borrowings through January
8, 1996. Borrowings under the facilities carry a variable interest rate, 6.37%
at December 31, 1994. To lower the interest rate on the facilities, Lilly has
guaranteed the debt, but this guarantee can be withdrawn at any time prior to
maturity. The interest rate differential is not material. Borrowings under the
agreements at December 31, 1994 aggregated $473.0 million. Restrictive
covenants in the borrowing agreements include limitations on additional
borrowings, and the amount of expenditures for technologies or other
acquisitions and maintenance of certain financial performance levels or ratios
by each of the borrowing subsidiaries. Compensating balances and commitment
fees are not material.
At December 31, 1994, short-term borrowings included a $57.0 million advance
to an affiliate of Lilly. This advance was obtained on November 1, 1994 for the
purpose of funding the purchase of certain international assets from Lilly.
This facility will be repaid in the first quarter of 1995. Short-term
borrowings also include an $18.7 million facility from another affiliate of
Lilly pursuant to Guidant's acquisition of an ownership interest in its German
distributor, Danimed GmbH und Co. KG ("Danimed"). This credit facility will be
repaid in the latter half of 1995 with funds provided by operations. The
weighted average interest rate on short-term borrowings outstanding as of
December 31, 1994 was 5.42%.
Interest expense was $18.8 million, $3.0 million, and $3.4 million in 1994,
1993, and 1992, respectively. Cash payments of interest approximated interest
expense.
NOTE 6--ACQUISITIONS
In August 1993, Guidant began an acquisition of Danimed which will be
completed in several steps. This acquisition will be completed in August 1995
for a total purchase price of approximately $25.0 million. The final U.S.
dollar price will be determined based upon the operating results of Danimed
during the two year period ending August 31, 1995. The goodwill associated with
this acquisition is being amortized using the straight line method over 7
years.
In 1992, Guidant acquired Origin, a company specializing in devices for
minimally invasive surgery. The purchase price, including subsequent contingent
payments earned through December 31, 1993, totaled $66.0 million. The initial
acquisition agreement included provisions for subsequent contingent payments,
depending on the annual performance of Origin over the period ending December
31, 1997, to former holders of Origin common stock ("Former Shareholders"). In
January 1994, a contingent payment of $7.5 million was paid under the
agreement. This payment has been accounted for as goodwill. Goodwill recognized
in the acquisition is being amortized over 15 years.
On November 14, 1994, Origin entered into an agreement with Lilly and the
Former Shareholders which terminates the rights of the Former Shareholders to
any subsequent contingent payments. The agreement also releases Guidant from
any further liability or obligation with respect to the acquisition agreement.
F-11
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--TRANSACTIONS WITH AFFILIATED COMPANIES
Advances to affiliated companies are the result of various transactions
between Guidant and Lilly. Prior to December 14, 1994, Guidant's participation
in Lilly's central cash management program was included as a component of
advances to affiliated companies. Subsequent to December 14, 1994 these amounts
are considered a cash equivalent (See Note 2).
During 1994, Guidant declared dividends to Lilly of $1,097.0 million,
including $444.6 million which was recorded as a reduction of the long-term
advances to affiliated companies, $158.3 million as payment for certain assets
which have historically been recorded on Guidant's books and $494.1 million in
cash dividends.
The amounts payable to affiliated companies relate primarily to costs and
expenses (other than the expense allocations discussed in Note 2) initially
incurred by Lilly on behalf of Guidant and subsequently charged to Guidant. An
analysis of significant expense items follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Personnel and benefits................................. $14.8 $16.6 $17.1
Information systems.................................... 3.0 3.4 3.5
Insurance.............................................. 6.5 6.5 6.2
Interest income (net).................................. (3.2) (9.1) (8.1)
Royalties.............................................. 6.5 5.7 5.4
Miscellaneous.......................................... 1.9 2.3 2.8
----- ----- -----
$29.5 $25.4 $26.9
===== ===== =====
</TABLE>
NOTE 8--LEASES
Total rental expense for all leases, including contingent rentals (not
material), amounted to approximately $13.5 million for 1994, $5.6 million for
1993, and $6.0 million for 1992.
The future minimum rental commitments as of December 31, 1994 for all
noncancellable leases amounted to $8.9 million.
NOTE 9--INCOME TAXES
All income amounts reflect the use of the liability method, as prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Following is the composition of income taxes:
<TABLE>
<CAPTION>
1994 1993 1992
----- ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $49.9 $ 48.5 $ 46.2
Foreign................................................ 3.8 1.8 1.9
State.................................................. 11.9 12.6 12.5
----- ------ ------
65.6 62.9 60.6
Deferred:
Federal................................................ 0.2 (23.5) (13.3)
State.................................................. (2.0) (4.8) (3.0)
----- ------ ------
(1.8) (28.3) (16.3)
----- ------ ------
Income tax expense....................................... $63.8 $ 34.6 $ 44.3
===== ====== ======
</TABLE>
F-12
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES--(CONTINUED)
Income taxes paid totaled $41.1 million, $110.0 million, and $56.0 million in
1994, 1993, and 1992, respectively.
Significant components of deferred tax assets and liabilities as of December
31 are as follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Deferred tax assets:
Restructuring and special charges............................... $34.8 $42.6
Inventory and product related reserves.......................... 9.7 9.1
Litigation...................................................... 3.6 1.9
State income taxes.............................................. 1.2 2.9
Net operating loss carry forward................................ 4.3 4.3
Acquisition of intangible assets................................ 10.4 --
Other........................................................... 5.4 7.2
----- -----
69.4 68.0
Valuation allowances.............................................. (4.3) (4.3)
----- -----
Total deferred tax assets..................................... 65.1 63.7
Deferred tax liabilities:
Property and equipment.......................................... (4.2) (4.7)
Preferred employee benefits..................................... (3.5) (2.8)
Other........................................................... -- (1.5)
----- -----
Total deferred tax liabilities................................ (7.7) (9.0)
----- -----
Deferred tax assets--net.......................................... $57.4 $54.7
===== =====
</TABLE>
Following is a reconciliation of the effective income tax rate:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
United States federal statutory income tax rate............... 35.0% 35.0% 34.0%
Add (deduct):
State taxes, net of federal tax benefit..................... 4.1 5.5 5.0
Tax savings from operations in Puerto Rico.................. (1.0) (4.1) (2.5)
Research tax credit......................................... (0.2) (2.5) (3.3)
Effect of international operations.......................... 0.8 2.9 2.1
Nondeductible impact of goodwill............................ 4.0 4.7 2.6
Sundry...................................................... (1.8) (1.7) (1.3)
---- ---- ----
Effective income tax rate................................... 40.9% 39.8% 36.6%
==== ==== ====
</TABLE>
NOTE 10--BENEFITS
Guidant has noncontributory defined benefit retirement plans that cover
substantially all United States employees of ACS and CPI. Covered employees
represent approximately 77% of total Guidant employees. Benefits under the
domestic plans are calculated by using one of several formulas. These formulas
are based on a combination of the following: (i) years of service, (ii) final
average earnings, (iii) primary social security benefit, and (iv) age.
Guidant's funding policy for all plans is consistent with governmental and tax
funding regulations. Generally, pension costs accrued are funded. Plan assets,
which are maintained in a trust
F-13
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--BENEFITS--(CONTINUED)
with Lilly and other affiliates' plans, consist primarily of equity and fixed
income instruments. Guidant has announced its intent to freeze benefits under
these plans at the date of the split-off. The impact of these actions is
expected to result in a gain to Guidant which will be recognized at the date of
the split-off.
Net pension expense for Guidant's U.S. retirement plans includes the
following components:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Service cost--benefits earned during the year........... $ 5.3 $ 3.5 $ 3.0
Interest cost on projected benefit obligations.......... 2.7 2.0 1.5
Actual return on assets--(gain)......................... (0.4) (3.2) (1.7)
Net amortization and deferral........................... (1.9) 1.3 0.7
----- ----- -----
Net annual pension cost................................. $ 5.7 $ 3.6 $ 3.5
===== ===== =====
</TABLE>
The funded status and amounts recognized in the consolidated balance sheets
for Guidant's U.S. defined benefit retirement plans at December 31 were as
follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Plan assets at fair value.................................... $ 28.2 $ 24.8
Actuarial present value of benefit obligations
Vested benefits............................................ (12.9) (12.4)
Nonvested benefits......................................... (5.5) (6.3)
------ ------
Accumulated benefit obligation............................... (18.4) (18.7)
Effect of projected future salary increases.................. (14.7) (16.5)
------ ------
Projected benefit obligation................................. (33.1) (35.2)
------ ------
Funded status................................................ (4.9) (10.4)
Unrecognized net (gain) loss................................. (0.4) 6.2
Unrecognized prior service cost.............................. 8.1 8.8
------ ------
Prepaid pension cost......................................... $ 2.8 $ 4.6
====== ======
</TABLE>
The assumptions used to develop net periodic pension expense and the
actuarial present value of projected benefit obligations are shown below:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(PERCENT)
<S> <C> <C> <C>
Discount rate........................................ 8.5 7.5 8.5
Rate of increase in future compensation levels....... 4.5-8.0 4.5-8.0 4.5-8.0
Expected long-term rate of return on plan assets..... 11.0 11.0 11.0
</TABLE>
The increase in the discount rate at December 31, 1994 decreased the
projected benefit obligation approximately $10.1 million. The increase in the
1994 net annual pension cost was due primarily to the decrease in the discount
rate at December 31, 1993.
In addition to employees covered by the above U.S. defined benefit retirement
plans, certain employees outside the U.S. are also covered by retirement plans
maintained by Lilly. Expenses for the employees participating in these plans
have not been included in the above information. However, expenses attributable
to the employees at these locations are included in the results of operations.
Lilly has defined contribution savings plans that cover eligible employees
worldwide. Certain of Guidant's employees are eligible to participate in these
plans. The purpose of these plans is generally to
F-14
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--BENEFITS--(CONTINUED)
provide additional financial security during retirement by providing employees
with an incentive to make regular savings. Contributions to the plans are
predicted by Lilly based on employee contributions and the level of Lilly's
match. Guidant's expense under the plans totaled $6.2 million, $4.9 million,
and $4.1 million for 1994, 1993, and 1992, respectively.
Management intends to adopt a separate defined contribution savings plan
which will be similar to the Lilly plan and be effective as of January 1, 1996.
Effective January 1, 1993, Guidant adopted SFAS No. 112, "Employers'
Accounting for Post-Employment Benefits." This statement requires employers to
recognize currently the obligation to provide post-employment benefits to
former or inactive employees and others. Guidant's adoption of SFAS No. 112
resulted in a pretax charge in 1993 of $2.9 million relating primarily to
disability benefits. Prior to 1993, Guidant expensed these obligations when
paid. Expenses under these plans are not material.
NOTE 11--GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net sales:
United States:
Sales to unaffiliated customers............. $ 694.5 $ 682.1 $ 667.6
Transfers to other geographic areas......... 92.9 94.0 62.2
-------- -------- --------
787.4 776.1 729.8
Other:
Sales to unaffiliated customers............. 167.9 112.6 87.2
Transfers to other geographic areas......... -- -- (0.1)
-------- -------- --------
167.9 112.6 87.1
Eliminations--transfers between geographic
areas...................................... (92.9) (94.0) (62.1)
-------- -------- --------
$ 862.4 $ 794.7 $ 754.8
======== ======== ========
Income (loss) before income taxes and cumulative
effect of change in accounting principle:
United States................................. $ 165.4 $ 100.1 $ 124.0
Other......................................... (10.0) (4.2) (3.3)
Eliminations and adjustments.................. 0.5 (8.9) 0.4
-------- -------- --------
$ 155.9 $ 87.0 $ 121.1
======== ======== ========
Total assets:
United States................................. $ 996.1 $1,227.5 $1,081.7
Other......................................... 132.7 63.5 37.3
Eliminations and adjustments.................. (25.2) (2.4) (1.0)
-------- -------- --------
$1,103.6 $1,288.6 $1,118.0
======== ======== ========
</TABLE>
Transfers between geographic areas are made at prices that, in general, are
calculated to reflect a profit attributable to manufacturing operations.
Remittances to the United States are subject to various regulations to the
respective governments as well as to fluctuations in exchange rates. United
States sales to unaffiliated customers include approximately $101.0 million,
$112.0 million, and $109.0 million in export sales for 1994, 1993 and 1992,
respectively.
F-15
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--FINANCIAL INSTRUMENTS
In the normal course of business, operations of Guidant are exposed to
continuing fluctuations in currency values and interest rates. These
fluctuations can vary the costs of financing, investing, and operating. Guidant
addresses these risks through a controlled program of risk management that
includes the use of derivative financial instruments managed by Lilly.
Guidant's derivative activities, all of which are for purposes other than
trading, are initiated within the guidelines of documented corporate risk-
management policies.
The notional amounts of derivatives summarized in the following paragraph do
not represent amounts exchanged by the parties and thus are not a measure of
the exposure of Guidant through its use of derivatives. Guidant is exposed to
credit-related losses in the event of nonperformance by counterparties to
financial instruments, but management does not expect any counterparties to
fail to meet their obligations given their high credit ratings.
Foreign Exchange Risk Management: Lilly, on behalf of Guidant, enters into
foreign currency forward exchange contracts to reduce the effects of
fluctuating currency exchange rates (principally European currencies) on its
foreign currency exposures. These contracts are used to hedge anticipated
foreign currency transactions, primarily intercompany purchases, expected to
occur within the next year. These transactions represent firm commitments.
Realized and unrealized gains and losses on these contracts that qualify as
hedges are deferred and recognized in cost of sales in the same period as the
transactions occur. At December 31, 1994, the stated, or notional, amounts of
these outstanding forward exchange contracts totaled $70.2 million. The
difference between the fair values and carrying amounts of these instruments
were not material at December 31, 1994.
Concentrations of Credit Risk: Financial instruments that potentially subject
Guidant to credit risk consist principally of trade receivables and interest-
bearing investments. Hospitals account for a substantial portion of the trade
receivables; collateral for these receivables is generally not required. The
risk associated with this concentration is limited due to the large number of
accounts and their geographic dispersion. Guidant places all its short-term
interest-bearing investments with Lilly at a market rate. Lilly then invests
all or a portion of the funds with major financial institutions in accordance
with its documented corporate policies.
The fair values of financial instruments, including noncurrent investments
and short-term and long-term debt, approximate their carrying values at
December 31, 1994 and 1993.
NOTE 13--CONTINGENCIES
Guidant is a party to various legal actions which have occurred in the normal
course of business. Guidant has accrued the anticipated cost of resolving these
claims. Accruals for litigation claims were based upon historical and industry
data.
While it is not possible to predict or determine the outcome of the legal
actions brought against Guidant, Guidant believes the costs associated with
such matters will not have a material adverse effect on its consolidated
financial position or liquidity but could possibly be material to the
consolidated results of operations in any one accounting period.
F-16
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--SELECTED QUARTERLY INFORMATION (UNAUDITED)
The following table summarizes Guidant's operating results by quarter for 1994
and 1993:
<TABLE>
<CAPTION>
1994 1993
------------------------------ -----------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Vascular intervention.. $122.0 $113.2 $113.8 $115.5 $121.4 $112.0 $111.2 $107.0
CRM.................... 106.9 99.3 87.8 84.6 90.8 85.6 80.6 79.5
MIS.................... 5.4 4.9 5.0 4.0 2.5 1.8 1.4 0.9
------ ------ ------ ------ ------ ------ ------ ------
Total net sales...... 234.3 217.4 206.6 204.1 214.7 199.4 193.2 187.4
Cost of sales........... 71.6 66.4 69.3 63.6 61.1 60.3 58.5 56.3
Research and develop-
ment................... 35.1 30.6 31.5 33.7 34.6 33.3 32.1 29.1
Sales, marketing and
administrative......... 74.9 65.2 65.7 63.1 74.1 60.5 59.4 61.1
Restructuring and spe-
cial charges........... -- -- -- -- 81.5 -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. 52.7 55.2 40.1 43.7 (36.6) 45.3 43.2 40.9
Other (expenses) income. (13.0) (11.5) (6.3) (5.0) (0.2) 3.7 (3.7) (5.6)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before in-
come taxes............. 39.7 43.7 33.8 38.7 (36.8) 49.0 39.5 35.3
Income taxes............ 16.4 17.8 13.8 15.8 (13.2) 18.6 15.7 13.5
------ ------ ------ ------ ------ ------ ------ ------
Cumulative effect of
accounting change...... -- -- -- -- -- -- -- 1.8
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 23.3 $ 25.9 $ 20.0 $ 22.9 ($23.6) $ 30.4 $ 23.8 $ 20.0
====== ====== ====== ====== ====== ====== ====== ======
Pro forma earnings per
share:
Net income as reported.. $ 23.3 $ 25.9 $ 20.0 $ 22.9
Additional net interest-
after tax.............. (0.8) (2.4) (6.0) (6.7)
------ ------ ------ ------
Pro forma net income.... $ 22.5 $ 23.5 $ 14.0 $ 16.2
====== ====== ====== ======
Pro forma earnings per
share.................. $ 0.31 $ 0.33 $ 0.19 $ 0.23
====== ====== ====== ======
Common stock prices:
High................... $16.13
Low.................... $14.50
</TABLE>
F-17
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1995 1994
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $ 448.9 $ 410.7
Cost of sales............................................... 144.4 132.9
Research and development.................................... 67.8 65.2
Sales, marketing and administrative......................... 139.3 128.8
-------- --------
351.5 326.9
-------- --------
Income from operations...................................... 97.4 83.8
Other income (expenses):
Interest--net............................................. (14.9) 4.1
Royalties--net............................................ 1.1 (1.5)
Amortization of goodwill and other intangibles............ (11.0) (10.3)
Other--net................................................ (1.0) (3.6)
-------- --------
(25.8) (11.3)
-------- --------
Income before income taxes.................................. 71.6 72.5
Income taxes................................................ 29.3 29.6
-------- --------
Net income.................................................. $ 42.3 $ 42.9
======== ========
Earnings per share.......................................... $ 0.59
========
Pro forma earnings per share information:
Net income--as reported..................................... $ 42.9
Additional net interest expense, after tax................ (12.7)
--------
Pro forma net income........................................ $ 30.2
========
Pro forma earnings per share................................ $ 0.42
========
Pro forma weighted average shares outstanding............... 71.86
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................... $ 43.4 $ 113.0
Accounts receivable, net of allowances of $5.4 (1995
and 1994).......................................... 154.0 155.7
Other receivables................................... 12.9 12.4
Inventories......................................... 119.1 120.0
Deferred income taxes............................... 40.2 42.1
Prepaid expenses.................................... 15.6 14.6
-------- --------
Total Current Assets.............................. 385.2 457.8
Other Assets
Goodwill, net of allowances of $75.4 (1995) and
$67.1 (1994)....................................... 261.2 268.7
Other intangible assets, net of allowances of $16.4
(1995) and $14.2 (1994)............................ 34.5 34.8
Deferred income taxes............................... 11.5 15.3
Sundry.............................................. 29.8 32.2
-------- --------
337.0 351.0
Property and Equipment................................ 301.4 294.8
-------- --------
$1,023.6 $1,103.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Loans payable to affiliated companies............... $ 23.2 $ 78.0
Accounts payable.................................... 23.2 36.7
Payables to affiliated companies.................... 17.2 39.5
Employee compensation............................... 38.8 46.3
Restructuring liabilities........................... 55.6 61.6
Other liabilities................................... 64.2 66.2
Income taxes payable to Lilly....................... 13.5 12.7
Current portion of long-term debt................... 458.0 --
-------- --------
Total Current Liabilities......................... 693.7 341.0
Noncurrent Liabilities
Long-term debt...................................... -- 473.0
Other............................................... 23.1 25.2
-------- --------
23.1 498.2
Commitments and Contingencies......................... -- --
Shareholders' Equity
Common stock--no par value;
Authorized shares: 250,000,000
Issued shares: 71,860,000......................... 192.5 192.5
Additional paid-in capital.......................... 64.5 64.5
Retained earnings................................... 48.2 5.9
Currency translation adjustments.................... 1.6 1.5
-------- --------
306.8 264.4
-------- --------
$1,023.6 $1,103.6
======== ========
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
1995 1994
------ --------
(UNAUDITED)
<S> <C> <C>
Balance at January 1........................................... $264.4 $1,048.3
Net income..................................................... 42.3 42.9
Shareholder capital contributions.............................. -- 14.5
Dividends to shareholder....................................... -- (733.5)
Currency translation adjustments............................... 0.1 4.4
------ --------
Balance at June 30............................................. $306.8 $ 376.6
====== ========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1995 1994
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash Provided by Operating Activities:
Net income................................................ $ 42.3 $ 42.9
Adjustments to Reconcile Net Income to Cash Provided by
Operating Activities:
Depreciation............................................ 21.5 18.8
Amortization of goodwill and other intangibles.......... 11.0 10.4
Operating expenses funded by shareholder, net........... -- 7.0
Change in deferred income taxes......................... 5.7 (5.0)
Other noncash expenses.................................. 5.4 4.2
-------- --------
85.9 78.3
Changes in Operating Assets and Liabilities:
Payables to affiliated companies--decrease.............. (22.3) (61.0)
Receivables, net--decrease.............................. 2.5 16.3
Inventories, net--increase.............................. (4.0) (15.4)
Prepaid expenses--(increase) decrease................... (1.0) 2.5
Accounts payable and accrued liabilities--decrease...... (21.0) (17.7)
Income taxes payable to/recoverable from Lilly--
increase............................................... 0.8 11.7
Other liabilities--decrease............................. (4.7) (2.2)
-------- --------
Net Cash Provided by Operating Activities................ 36.2 12.5
(Used for) Provided by Investing Activities:
Additions of property and equipment, net.................. (28.2) (13.2)
Acquisitions.............................................. (9.4) --
Reductions (additions) to intangible and sundry assets,
net...................................................... 1.5 (3.1)
-------- --------
Net Cash Used for Investing Activities................... (36.1) (16.3)
(Used for) Provided by Financing Activities:
Payments of short-term borrowings......................... (54.3) --
(Reductions) additions of long-term borrowings............ (15.0) 318.0
Dividend to shareholder................................... -- (318.0)
-------- --------
Net Cash (Used for) Provided by Financing Activities..... (69.3) --
Effect of Exchange Rate Changes on Cash.................... (0.4) 4.4
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents....... (69.6) 0.6
Cash and Cash Equivalents at Beginning of Period........... 113.0 25.0
-------- --------
Cash and Cash Equivalents at End of Period................. $ 43.4 $ 25.6
======== ========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Securities and Exchange Commission requirements for
interim financial statements and accordingly do not include all of the
information and footnotes necessary for a fair presentation of financial
position, results of operations, shareholders' equity and cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended December 31, 1994 included elsewhere herein.
NOTE 2--INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
<S> <C> <C>
Finished products................................... $ 49.2 $ 63.4
Work in process..................................... 35.6 31.5
Raw materials and supplies.......................... 34.3 25.1
------ ------
$119.1 $120.0
====== ======
</TABLE>
NOTE 3--CONTINGENCIES
Guidant is a party to various legal actions which have arisen in the normal
course of business. Guidant has accrued for the anticipated cost of resolving
these claims. Accruals for litigation claims were based upon historical and
industry data.
While it is not possible to predict or determine the outcome of the legal
actions brought against it, Guidant believes the costs associated with such
matters will not have a material adverse effect on its consolidated financial
position or liquidity but could possibly be material to the consolidated
results of operations in any one accounting period.
NOTE 4--EARNINGS PER SHARE
Earnings per share for the six months ended June 30, 1995 are calculated by
dividing net income by the weighted average number of common shares outstanding
(71.86 million). Pro forma earnings per share is computed by dividing pro forma
net income by the pro forma weighted average shares outstanding during 1994.
Pro forma net income and earnings per share have been determined assuming the
capital structure at December 31, 1994 was in place January 1, 1994.
The pro forma adjustment gives effect to an increase in net interest expense,
net of tax. 71.86 million shares are assumed to have been outstanding for the
entire year. Historical earnings per share are not meaningful for 1994 due to
the change in the capital structure during the year.
F-22
<PAGE>
GLOSSARY OF SELECTED MEDICAL TERMS
<TABLE>
<S> <C>
ABLATION...................... A minimally invasive vascular intervention
procedure which involves the mechanical or laser
reduction of blockages without the removal of
tissue.
ACUTE MYOCARDIAL INFARCT
("AMI")...................... Heart attack.
ANTITACHYCARDIA PACING........ A method of treating ventricular tachycardia (a
fast heartbeat) by stimulating the heart with a
preset rapid series of small electrical pulses.
ATHERECTOMY................... A minimally invasive vascular intervention
procedure which involves the excision and
removal of blockages by catheters with miniature
cutting systems.
ATHEROSCLEROTIC LESIONS....... Deposits of plaque, which contains cholesterol
and lipoid materials, within coronary arteries.
BRADY PACING.................. A method of treating a slow or irregular
heartbeat by periodically stimulating the heart
with small electrical pulses.
CARDIAC RHYTHM MANAGEMENT
("CRM")...................... The field of cardiovascular disease which
relates to the detection and treatment of
abnormally fast tachycardia (Tachy) and
abnormally slow bradycardia (Brady) heart
rhythms.
CLINICAL RESTENOSIS........... Renarrowing of the blood vessel at the site of
the initial interventional treatment requiring
an additional procedure within 6 months of the
initial treatment.
CORONARY ARTERY BYPASS GRAFT
("CABG")..................... A highly invasive procedure which involves the
grafting of blood vessels from the leg or chest
to bypass blocked coronary arteries.
CORONARY ARTERY DISEASE
("CAD")...................... The formation of blockages or atherosclerotic
lesions within coronary arteries which results
in restricted blood flow.
ENDOCARDIAL LEAD.............. A long, thin insulated wire that runs from a
pulse generator through a vein into the heart.
The lead transmits signals from the heart to the
pulse generator and transmits therapy from the
pulse generator to the heart.
IMPLANTABLE CARDIOVERTER
DEFIBRILLATOR ("ICD")........ Devices implanted in the abdomen or pectoral
region which are used to treat potentially fatal
fast heart rhythms by delivering electrical
energy to the heart to restore the heart's
normal rhythms.
LAPAROSCOPY................... A form of minimally invasive surgery in which
viewing endoscopes and small diameter surgical
instruments are inserted into the abdominal
cavity through multiple small incisions instead
of through large abdominal incisions.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
MINIMALLY INVASIVE SURGERY
("MIS")...................... Procedural techniques which limit the size of
abdominal incisions by using small incisions to
gain access to the surgical site.
OVER-THE-WIRE ("OTW")
CATHETERS.................... Balloon catheters which are delivered over a
separate guidewire to position the balloon
across the lesion.
PERFUSION..................... Balloon catheters where holes in the catheter
shaft on either side of the balloon allow
uninterrupted blood flow to the heart muscle
during inflation.
PRE-MARKET APPROVAL ("PMA")... An FDA prerequisite to marketing for certain
medical devices introduced to the United States,
which is obtained through an application
process.
PERCUTANEOUS TRANSLUMINAL
CORONARY ANGIOPLASTY
("PTCA")..................... Percutaneous (through the skin) transluminal
(through the blood vessel) coronary (of the
heart) angioplasty (plastic repair of blood
vessels) is a minimally invasive procedure which
uses balloon catheters to enlarge and treat
blocked coronary arteries.
RAPID EXCHANGE ("RX")......... Balloon catheters, also known as monorail or
rail segment, which allows for easy exchange of
the balloon catheter without removal of the
original guidewire.
STENTING...................... A minimally invasive vascular intervention
procedure which typically involves the
deployment of permanent implantable metal
devices to "scaffold" the site of a blocked
artery.
</TABLE>
G-2
<PAGE>
Manually signed facsimile copies of the Letter of Transmittal will be
accepted. A Letter of Transmittal, certificates for shares of Lilly Common
Stock and any other required documents should be sent by each holder of Lilly
Common Stock or his or her broker, dealer, commercial bank, trust company or
other nominee to the Exchange Agent as follows:
The Exchange Agent is:
The First National Bank of Boston
By Mail: By Overnight Courier: By Hand:
The First National The First National BancBoston Trust Company
Bank of Boston Bank of Boston of New York
Shareholder Services Shareholder Services Division 55 Broadway
Division Mail Stop 45-01-19 Third Floor
P.O. Box 1889 150 Royall Street New York, New York
Mail Stop 45-01-19 Canton, Massachusetts 02021
Boston, Massachusetts
02105
By Facsimile Transmission:
(617) 575-2232
(617) 575-2233
For Confirmation:
(617) 575-2700
Any questions or requests for assistance or additional copies of the Offer-
ing Circular - Prospectus and the Letter of Transmittal may be directed to
the Information Agent or the Dealer Manager at their respective telephone
numbers and locations listed below. You may also contact your broker, deal-
er, commercial bank or trust company for assistance concerning the Exchange
Offer.
The Information Agent is:
D.F. King & Co., Inc.
United States Europe
77 Water Street Royex House, Aldermanbury Square
New York, New York 10005 London, England EC2V 7HR
(800) 207-3158 (44) 171-600-5005 (COLLECT)
Outside United States and Europe
(212) 269-5550 (COLLECT)
The Dealer Manager in the United States for the Exchange Offer is:
MORGAN STANLEY & CO.
Incorporated
1251 Avenue of the Americas
New York, New York 10020
(212) 703-7918
<PAGE>
EXHIBIT(a)(3)
[LOGO OF ELI LILLY AND COMPANY APPEARS HERE]
ELI LILLY AND COMPANY
LILLY CORPORATE CENTER
INDIANAPOLIS, INDIANA 46285
August 21, 1995
Dear Shareholder:
I am pleased to inform you that Eli Lilly and Company ("Lilly") is commencing
an Exchange Offer to its shareholders to exchange 3.49 shares of the common
stock of Guidant Corporation ("Guidant") owned by Lilly for each share of
common stock of Lilly up to an aggregate of 16,504,298 shares of Lilly common
stock. The Exchange Offer will provide our shareholders with an opportunity to
adjust, on a tax-free basis, their investment between Lilly's pharmaceutical
business and Guidant's medical device business.
The Exchange Offer will expire, unless extended by Lilly, at Midnight, New
York City time, on September 18, 1995. The terms and conditions of the Exchange
Offer are contained in the enclosed Offering Circular - Prospectus. The
materials also include information relating to the business and management of
Guidant, information regarding the adjustments to tax basis resulting from
exchanging shares of Lilly common stock for shares of Guidant common stock and
other information that will assist you in considering the Exchange Offer.
Please read these materials carefully before making your decision as to whether
or not to exchange your shares of Lilly common stock.
In addition, please read carefully the enclosed Letter of Transmittal, which
explains in detail the proper procedure to tender shares of Lilly common stock.
In addition, we have prepared a Question and Answer Letter that responds to
commonly asked questions about the Exchange Offer.
Neither Lilly nor the Board of Directors of Lilly makes any recommendation as
to whether or not to tender shares of Lilly common stock. Each shareholder must
make his or her own decision whether to tender such shares and, if so, how many
shares to tender.
If fewer than 16,504,298 shares of Lilly common stock are tendered and the
Exchange Offer is consummated, Lilly will distribute the remaining shares of
Guidant common stock owned by Lilly on a pro rata basis to the holders of
record of Lilly common stock as of a date following the expiration of the
Exchange Offer.
Lilly has retained the services of D.F. King & Co., Inc. as Information Agent
to assist shareholders in connection with the Exchange Offer. Requests for
additional documents, questions regarding the terms and conditions of the
Exchange Offer, and information on tendering shares should be directed to D.F.
King & Co., Inc. at the following number: in the United States, (800) 207-3158;
in Europe, (44) 171-600-5005 (call collect); and from outside the United States
and Europe, (212) 269-5550 (call collect).
On behalf of the Board of Directors, I thank you for your support.
Sincerely,
/s/ Randall L. Tobias
Randall L. Tobias
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT(a)(4)
--------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT,
NEW YORK CITY TIME, ON MONDAY, SEPTEMBER 18, 1995, UNLESS OTHERWISE EXTENDED
--------------------------------------------------------------------------------
ELI LILLY AND COMPANY
LETTER OF TRANSMITTAL
FOR SHARES OF COMMON STOCK,
WITHOUT PAR VALUE,
OF ELI LILLY AND COMPANY
TO: THE FIRST NATIONAL BANK OF BOSTON, EXCHANGE AGENT
By Mail: By Overnight Courier: By Hand:
The First National The First National BancBoston Trust Company
Bank of Boston Bank of Boston of New York
Shareholder Services Division Shareholder Services 55 Broadway
P.O. Box 1889 Division Third Floor
Mail Stop 45-01-19 Mail Stop 45-01-19 New York, New York
Boston, Massachusetts 02105 150 Royall Street
Canton, Massachusetts 02021
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
D.F. KING & CO., INC.
UNITED STATES EUROPE
77 Water Street Royex House, Aldermanbury Square
New York, New York 10005 London, England EC2V 7HR
(800) 207-3158 (44) 171-600-5005 (Collect)
OUTSIDE UNITED STATES AND EUROPE:
(212) 269-5550 (Collect)
The undersigned acknowledges receipt of the Offering Circular - Prospectus
dated August 21, 1995 (the "Offering Circular - Prospectus") of Eli Lilly and
Company, an Indiana corporation ("Lilly"), and this Letter of Transmittal which
together constitute Lilly's offer (the "Exchange Offer") to exchange 3.49
shares of common stock, without par value, of Guidant Corporation ("Guidant
Common Stock"), an Indiana corporation ("Guidant"), for each share of common
stock, without par value, of Lilly ("Lilly Common Stock") up to an aggregate of
16,504,298 shares of Lilly Common Stock.
Capitalized terms used but not defined herein have the meanings given to them
in the Offering Circular - Prospectus.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action he or she desires to take with respect to
the Exchange Offer.
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS OF CERTIFICATED AND DIVIDEND
REINVESTMENT AND STOCK PURCHASE PLAN SHARES OF LILLY COMMON STOCK REGARDLESS OF
WHETHER SUCH SHARES ARE BEING PHYSICALLY DELIVERED HEREWITH
DELIVERY OF THIS LETTER OF TRANSMITTAL TO A PERSON OTHER THAN THE EXCHANGE
AGENT AT AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH HEREIN WILL NOT
CONSTITUTE VALID DELIVERY
-----------------------------------------------------------------------------
DO NOT COMPLETE OR RETURN THIS LETTER OF TRANSMITTAL IF YOUR SHARES ARE HELD
IN AN ACCOUNT WITH A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER
NOMINEE AND ARE NOT CERTIFICATED IN YOUR NAME. THIS LETTER OF TRANSMITTAL IS
BEING SUPPLIED FOR YOUR INFORMATION ONLY. THE INSTITUTION HOLDING YOUR
SHARES WILL SUPPLY YOU WITH SEPARATE INSTRUCTIONS REGARDING THE TENDER OF
YOUR SHARES.
-----------------------------------------------------------------------------
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE CHECKING ANY BOX BELOW
This Letter of Transmittal is to be used if (i) certificate(s) representing
shares of Lilly Common Stock are to be forwarded herewith, (ii) if tenders are
to be made by book-entry transfer to the account maintained by the Exchange
Agent at The Depository Trust Company ("DTC"), the Midwest Securities Trust
Company ("MSTC") or the Philadelphia Depository Trust Company ("PHILADEP," and
together with DTC and MSTC, the "Book-Entry Transfer Facilities"), unless an
Agent's Message is utilized, or (iii) guaranteed delivery procedures are being
used, according to the procedures set forth in the Offering Circular -
Prospectus under "The Exchange Offer--Guaranteed Delivery Procedures."
Delivery of documents to DTC, MSTC or PHILADEP does not constitute delivery to
the Exchange Agent.
Your broker can assist you in completing this form. The instructions
included with this Letter of Transmittal must be followed. Questions and
requests for assistance or for additional copies of the Offering Circular -
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery
may be directed to D.F. King & Co., Inc. (the "Information Agent") at (800)
207-3158. See Instruction 13.
I. TENDER OF CERTIFICATED SHARES ISSUED IN YOUR NAME AND SHARES HELD IN THE
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN.
Holders of shares of Lilly Common Stock ("Shareholders") tendering shares of
Lilly Common Stock pursuant to this Section I must also complete Section V
herein.
2
<PAGE>
A. CERTIFICATED SHARES - Complete this Section I.A. if You Wish to Tender
Certificated Shares Issued in Your Name.
----------------------------------------------------------------------------
THE UNDERSIGNED, BY COMPLETING THIS SECTION I.A., SIGNING THIS LETTER OF
TRANSMITTAL AND DELIVERING THIS LETTER OF TRANSMITTAL AND THE CERTIFICATE(S)
FOR LILLY COMMON STOCK TO THE EXCHANGE AGENT, WILL BE DEEMED TO HAVE
TENDERED THE SHARES OF LILLY COMMON STOCK INDICATED BELOW
----------------------------------------------------------------------------
List below the certificate(s) representing shares of Lilly Common Stock that
you wish to tender. If the space provided below is inadequate, the certificate
and number of shares represented thereby should be listed on a separate signed
schedule affixed hereto. The following section should not be completed by
holders tendering by book-entry transfer. In addition to the following
section, to tender Dividend Reinvestment and Stock Purchase Plan Shares,
please complete section I.B.
DESCRIPTION OF SHARES OF LILLY COMMON STOCK TENDERED
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL NUMBER NUMBER OF
OF SHARES OF SHARES OF
LILLY COMMON LILLY
STOCK COMMON
NAME(S) AND ADDRESS(ES) CERTIFICATE REPRESENTED BY STOCK
OF REGISTERED HOLDER(S)(1) NUMBERS(2) CERTIFICATE(S) TENDERED(2)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Name(s) and Address(es) on Back
Cover -------------- -------------- --------------
(or, if incorrect, indicate
changes below) -------------- -------------- --------------
-------------- -------------- --------------
-------------- -------------- --------------
-------------- -------------- --------------
-------------- -------------- --------------
-------------- -------------- --------------
-------------- -------------- --------------
TOTAL
-----------------------------------------------------------------------------
</TABLE>
(1) If the name or address shown on the back cover of this Letter of
Transmittal is incorrect, cross out the incorrect information and insert
the correct information in this box.
(2) Unless otherwise indicated in the last column, and subject to the terms
and conditions of the Offering Circular - Prospectus, you will be deemed
to have tendered all the shares of Lilly Common Stock represented by the
certificate(s) listed above. See Instruction 2.
Shareholders who wish to tender and whose shares of Lilly Common Stock are
not immediately available or who cannot deliver their shares of Lilly Common
Stock and all other documents required hereby to the Exchange Agent on or
before the Expiration Date must tender shares of Lilly Common Stock according
to the guaranteed delivery procedures set forth in the Offering Circular -
Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures." See Instruction 1.
3
<PAGE>
[_] CHECK HERE IF THE CERTIFICATE(S) REPRESENTING TENDERED SHARES OF LILLY
COMMON STOCK ARE ENCLOSED HEREWITH.
[_] CHECK HERE IF TENDERED SHARES OF LILLY COMMON STOCK ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s): ____________________________________________
Date of Execution of Notice of Guaranteed Delivery: _________________________
Name of Institution that guaranteed delivery: _______________________________
-------------------------------------------------------------------------------
B. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN SHARES - Complete this
Section I.B. if You Wish to Tender Shares Held in the Dividend
Reinvestment and Stock Purchase Plan.
THE UNDERSIGNED, BY COMPLETING THIS SECTION I.B. AND SIGNING AND DELIVERING
THIS LETTER OF TRANSMITTAL TO THE EXCHANGE AGENT, WILL BE DEEMED TO HAVE
TENDERED THE SHARES OF LILLY COMMON STOCK INDICATED BELOW.
[_] CHECK HERE IF YOU ARE A PARTICIPANT IN LILLY'S DIVIDEND REINVESTMENT AND
STOCK PURCHASE PLAN (THE "DRP") AND WISH TO TENDER SHARES OF LILLY COMMON
STOCK HELD IN YOUR ACCOUNT UNDER THE DRP ("DRP SHARES") AND COMPLETE THE
FOLLOWING:
[_] Tender all DRP Shares; or
[_] Number of whole shares tendered from DRP (if less than
all): _______________________________________________________ .
A tender of all DRP Shares will include fractional shares and any shares
credited to the participant's account after the date hereof and prior to the
Expiration Date.
IF THE PARTICIPANT AUTHORIZES THE TENDER OF HIS OR HER DRP SHARES, BUT DOES
NOT INDICATE THE NUMBER OF SHARES TO BE TENDERED, THE PARTICIPANT WILL BE
DEEMED TO HAVE TENDERED ALL DRP SHARES OWNED BY SUCH PARTICIPANT PURSUANT TO
THE DRP. SEE INSTRUCTION 5.
-------------------------------------------------------------------------------
C. ODD LOT SHARES - Complete this Section I.C. if You Hold Fewer than 100
Shares and Wish to Tender All Such Shares.
[_] CHECK HERE IF (i) YOU ARE THE OWNER BENEFICIALLY AND OF RECORD OF LESS
THAN 100 SHARES OF LILLY COMMON STOCK IN THE AGGREGATE AS OF AUGUST 16,
1995, AND (ii) YOU WISH TO TENDER ALL YOUR SHARES OF LILLY COMMON STOCK.
If you are the owner, beneficially and of record, of less than 100 shares of
Lilly Common Stock (an "Odd Lot") and you tender all your shares, you will
receive preferential treatment if the Exchange Offer is oversubscribed. See
Instruction 9.
4
<PAGE>
II. TENDER OF SHARES HELD BY A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY
OR OTHER NOMINEE.
If your shares of Lilly Common Stock are held in an account with a broker,
dealer, commercial bank, trust company or other nominee and you wish to tender
all or part of those shares, do not return this Letter of Transmittal to the
Exchange Agent. This Letter of Transmittal is being supplied for your
information only. The institution holding your shares will supply you with
separate instructions regarding the tender of your shares. If you have not
received instructions regarding the tender of your shares, please contact a
representative of the institution holding your shares.
ONLY BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES AND OTHER NOMINEES
SHOULD COMPLETE THIS SECTION II.
A. BOOK-ENTRY TRANSFER SHARES - Complete this Section II.A. if You Wish To
Tender Shares Held By a Book-Entry Transfer Facility.
[_]CHECK HERE IF TENDERED SHARES OF LILLY COMMON STOCK ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH A BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ____________________________________________
Account Number: ___________________________________________________________
[_] DTC [_] MSTC [_] PHILADEP Transaction Code Number: ______
[_]CHECK HERE IF TENDERED SHARES OF LILLY COMMON STOCK ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Date of Execution of Notice of Guaranteed Delivery: _______________________
Name of Institution that Guaranteed Delivery: _____________________________
-------------------------------------------------------------------------------
B. ODD LOT SHARES - Complete this Section II.B. if You Wish To Tender on
Behalf of an Owner of an Odd Lot.
[_]CHECK HERE IF (i) YOU ARE TENDERING ON BEHALF OF THE OWNER BENEFICIALLY AND
OF RECORD OF AN ODD LOT, (ii) YOU BELIEVE, BASED UPON REPRESENTATIONS MADE
TO YOU BY SUCH OWNER, THAT SUCH OWNER OWNED BENEFICIALLY AND OF RECORD LESS
THAN 100 SHARES OF LILLY COMMON STOCK IN THE AGGREGATE AS OF AUGUST 16,
1995 AND (iii) SUCH OWNER WISHES TO TENDER ALL HIS OR HER SHARES OF LILLY
COMMON STOCK.
Owners of Odd Lots who tender all such shares of Lilly Common Stock will
receive preferential treatment if the Exchange Offer is oversubscribed. See
Instruction 9.
5
<PAGE>
III. SPECIAL ISSUANCE INSTRUCTIONS - To Be Completed Only if Shares of Guidant
Common Stock, a Fractional Share Check and Shares of Lilly Common Stock
Tendered But Not Accepted For Exchange Are To Be Issued in the Name of
Someone Other Than the Shareholder Tendering Shares of Lilly Common Stock.
Note: If this Section is completed, the signature in Section V must be
guaranteed by an Eligible Institution. See Instruction 3.
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if Guidant
Certificate(s), a Fractional Share
Check issued in connection
therewith, if any, and shares of
Lilly Common Stock not accepted
for exchange, if any, are to be
ISSUED in the name of someone
other than the undersigned.
Issue:
[_] all of the following to:
Guidant Certificate(s):
Fractional Share Check:
Lilly Certificate(s):
Name(s): ____________________________
(Please Print)
_____________________________________
(Please Print)
Address: ____________________________
_____________________________________
Zip Code
_____________________________________
Employer Identification or Social
Security No.
6
<PAGE>
IV. SPECIAL DELIVERY INSTRUCTIONS - To Be Completed Only if Shares of Guidant
Common Stock, a Fractional Share Check and/or Shares of Lilly Common Stock
Are To Be Mailed To an Address Other Than that Shown in the Box Entitled
"Description of Shares of Lilly Common Stock Tendered" or in Section III
above.
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if Guidant
Certificate(s), a Fractional Share
Check issued in connection
therewith, if any, and/or shares of
Lilly Common Stock not tendered or
any shares of Lilly Common Stock
tendered but not accepted for
exchange, if any, are to be MAILED
to someone other than the
undersigned, or to the undersigned
at an address other than that shown
in the box entitled "Description of
Shares of Lilly Common Stock
Tendered" or in Section III above,
as applicable.
Mail:
check appropriate box(es):
[_] Guidant Certificate(s) to:
[_] Fractional Share Check to:
Lilly Certificate(s):
[_] Not Tendered to:
[_] Not Accepted to:
Name(s): ____________________________
(Please Print)
_____________________________________
(Please Print)
Address: ____________________________
_____________________________________
Zip Code
7
<PAGE>
V. SIGNATURE - To Be Completed By All Shareholders Who Are Tendering Shares of
Lilly Common Stock and Who Completed Sections I.A., I.B. or I.C. SIGNATURES
MUST BE PROVIDED BELOW.
IMPORTANT
ALL TENDERING SHAREHOLDERS PLEASE SIGN HERE
(PLEASE ALSO COMPLETE THE FOLLOWING SUBSTITUTE FORM W-9
SEE INSTRUCTIONS 1 AND 3)
X__________________________________________________________________________
X__________________________________________________________________________
Signature(s) of Owner(s)
Date: ______________________ , 1995
(Must be signed by registered holder(s) of shares of Lilly Common Stock
as their name(s) appear(s) on certificate(s) for shares of Lilly Common
Stock or on a security position listing or by person(s) authorized to
become registered holder(s) by endorsements and documents transmitted with
this Letter of Transmittal.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, please set forth full title. See Instruction 3.)
Name(s): __________________________________________________________________
__________________________________________________________________
(Please Print)
Capacity: _________________________________________________________________
Address: __________________________________________________________________
__________________________________________________________________
(Include Zip Code)
Area Code and Telephone No.: ________________
Date:______________________, 1995
By signing this Letter of Transmittal, the signator hereby represents that
he or she is not acting pursuant to a plan, alone or in conjunction with any
other person, to acquire 50% or more of the outstanding shares of Guidant
Common Stock, unless indicated to the contrary below.
Check the following box ONLY IF the above statement is NOT true: [_]
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
(TOGETHER WITH SHARES OF LILLY COMMON STOCK AND ALL OTHER REQUIRED
DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED ON
OR PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE OFFERING
CIRCULAR - PROSPECTUS).
8
<PAGE>
SIGNATURE GUARANTEE
(IF REQUIRED--SEE INSTRUCTIONS 1 AND 3)
FOR USE BY ELIGIBLE INSTITUTIONS ONLY.
PLACE MEDALLION GUARANTEE IN SPACE BELOW.
Signature(s) Guaranteed by an Eligible Institution: ________________________
(Authorized Signature)
Name: ______________________________________________________________________
(Please Print)
Title: _____________________________________________________________________
Name of
Firm: ______________________________________________________________________
Address: ___________________________________________________________________
(Include Zip Code)
Area Code and Telephone No.: _________________
Date: _____________________ , 1995
All tendering shareholders must complete the Substitute Form W-9 on page 10
of this Letter of Transmittal. If a person other than the tendering Shareholder
has been named in Section III, such other person, rather than the person
tendering the shares of Lilly Common Stock, must complete the following
substitute Form W-9. See Instruction 6 and the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9.
9
<PAGE>
PAYER'S NAME: THE FIRST NATIONAL BANK OF BOSTON
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER AND CERTIFICATION
--------------------------------------------------------------------------------
SUBSTITUTE
FORM W-9
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER AND CERTIFICATION FOR PAYEES
EXEMPT FROM BACKUP WITHHOLDING (SEE GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9)
PLEASE PROVIDE YOUR TAXPAYER
IDENTIFICATION NUMBER IN THE ----------------------
BOX AT RIGHT AND CERTIFY BY (Social Security
SIGNING AND DATING BELOW Number or
Employer
Identification
Number)
--------------------------------------------------------------------------------
PLEASE CHECK THE BOX AT RIGHT IF YOU HAVE APPLIED FOR AND ARE AWAITING RECEIPT
OF YOUR TAXPAYER IDENTIFICATION NUMBER [_]
--------------------------------------------------------------------------------
CERTIFICATION--Under penalties of perjury, I
certify that:
(l) The number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a Taxpayer Identification Number to be issued to me),
and
(2) I am not subject to backup withholding either because I have not been
notified by the Internal Revenue Service ("IRS") that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or the IRS has notified me that I am no longer subject to backup
withholding.
You must cross out item (2) above if you have been notified by the IRS you are
subject to backup withholding because of underreporting interest or dividends
on your tax return. However, if after being notified by the IRS that you were
subject to backup withholding you received another notification from the IRS
that you are no longer subject to backup withholding, do not cross out item
(2).
PRINT YOUR NAME: ___________________________________________________________
ADDRESS: ___________________________________________________________________
SIGNATURE:_____________________________________________DATE: _______________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% ON ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. FOR
ADDITIONAL DETAILS, PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9. IF YOU CHECKED THE ABOVE
BOX OF THIS SUBSTITUTE FROM W-9 INDICATING THAT YOU ARE AWAITING RECEIPT OF
YOUR TAXPAYER IDENTIFICATION NUMBER, YOU MUST SIGN AND DATE THE FOLLOWING
CERTIFICATION.
CERTIFICATION OF PAYEE AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury, that a Taxpayer Identification Number has
not been issued to me, and that I mailed or delivered an application to receive
a Taxpayer Identification Number to the appropriate IRS Center or Social
Security Administration Office for I intend to mail or deliver an application
in the near future). I understand that if I do not provide a Taxpayer
Identification Number within 60 days, 31% of all reportable payments made to me
thereafter will be withheld until I provide a number.
SIGNATURE: ___________________________________________________________________
DATE: ________________________________________________________________________
10
<PAGE>
VI. NOTICE OF SOLICITED TENDERS - To Be Completed if a Soliciting Dealer Fee is
To Be Paid in Connection With This Tender.
NOTICE OF SOLICITED TENDERS
Lilly will pay to a Soliciting Dealer, as defined in Instruction 10 herein,
a solicitation fee of $1.00 per share, up to a maximum of 1,000 shares, for
each share of Lilly Common Stock tendered and exchanged pursuant to the
Exchange Offer in cases where such tenders are affirmatively solicited by the
Soliciting Dealer, except that no solicitation fee shall be payable (i) in
connection with a tender of Lilly Common Stock by a Shareholder (x) tendering
more than 10,000 shares of Lilly Common Stock or (y) tendering from a country
outside of the United States; or (ii) to the Dealer Manager. In addition, no
such fee shall be payable to a Soliciting Dealer if such Soliciting Dealer is
required for any reason to transfer the amount of such fee to a tendering
holder (other than itself). No broker, dealer, bank, trust company or
fiduciary shall be deemed to be the agent of Lilly, Guidant, the Exchange
Agent, the Information Agent or the Dealer Manager for purposes of the
Exchange Offer. See Instruction 10.
The undersigned represents that this tender was affirmatively solicited and
obtained by the Soliciting Dealer listed below:
Name of Firm: ________________________________________________________________
(Please Print)
Name of Individual Broker or Financial Consultant: ___________________________
Identification Number (if known): ____________________________________________
Address: _____________________________________________________________________
(Include Zip Code)
The following is to be completed ONLY if customer's Lilly Common Stock held
in nominee name are tendered.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF LILLY
BENEFICIAL OWNERS COMMON STOCK TENDERED
----------------- -------------------------------------------
(ATTACH ADDITIONAL LIST IF NECESSARY)
<S> <C>
Beneficial Owner No. 1..........
-------------------------------------------
Beneficial Owner No. 2..........
-------------------------------------------
Beneficial Owner No. 3..........
-------------------------------------------
</TABLE>
The acceptance of a solicitation fee by such Soliciting Dealer will
constitute a representation by it that: (i) it has complied with the
applicable requirements of the Securities Exchange Act of 1934, as amended,
and the applicable rules and regulations thereunder, in connection with such
solicitation; (ii) it has affirmatively solicited and obtained this tender
and is entitled to such compensation for such solicitation under the terms
and conditions of the Offering Circular - Prospectus; and (iii) in soliciting
tenders of shares of Lilly Common Stock, it has used no soliciting materials
other than those furnished by Lilly.
SOLICITING DEALERS ARE NOT ENTITLED TO A FEE WITH RESPECT TO SHARES OF
LILLY COMMON STOCK BENEFICIALLY OWNED BY SUCH SOLICITING DEALER OR WITH
RESPECT TO ANY SHARES THAT ARE REGISTERED IN THE NAME OF A SOLICITING DEALER
UNLESS SUCH SHARES ARE HELD BY SUCH SOLICITING DEALER AS NOMINEE AND ARE
TENDERED FOR THE BENEFIT OF BENEFICIAL HOLDERS IDENTIFIED IN THE LETTER OF
TRANSMITTAL.
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<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to Lilly the shares of Lilly Common Stock
represented by the certificate(s) described above. Subject to, and effective
upon, the acceptance for exchange of the shares of Lilly Common Stock tendered
herewith, the undersigned hereby sells, exchanges, assigns and transfers to, or
upon the order of, Lilly, all right, title and interest in and to the shares of
Lilly Common Stock tendered hereby (and any and all other shares of Lilly
Common Stock or other securities issued or issuable in respect thereof on or
after August 21, 1995) and accepted for exchange pursuant to the Exchange
Offer. The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as its true and lawful agent and attorney-in-fact (with full knowledge
that the Exchange Agent also acts as the agent of Lilly) with respect to the
shares of Lilly Common Stock tendered herewith, with full power of substitution
(such power of attorney being deemed to be an irrevocable power coupled with an
interest) (a) to deliver stock certificates representing the shares of Lilly
Common Stock tendered herewith or transfer ownership of such shares of Lilly
Common Stock on the account books maintained by DTC, MSTC or PHILADEP,
together, in any such case, with all accompanying evidences of transfer and
authenticity, to or upon the order of Lilly upon receipt by the Exchange Agent,
as the undersigned's agent, of certificate(s) representing shares of Guidant
Common Stock ("Guidant Certificate(s)") and shares of Lilly Common Stock not
exchanged to which the undersigned is entitled upon the acceptance for exchange
by Lilly of the shares of Lilly Common Stock tendered herewith under the
Exchange Offer; (b) to present certificate(s) representing such shares of Lilly
Common Stock for transfer on the books of Lilly; and (c) to receive all
benefits and otherwise exercise all rights of beneficial ownership of such
shares of Lilly Common Stock, all in accordance with the terms and conditions
of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, exchange, assign and transfer the shares
of Lilly Common Stock tendered hereby (and any and all other shares of Lilly
Common Stock or other securities issued or issuable in respect thereof on or
after August 21, 1995) and that when such shares of Lilly Common Stock are
accepted by Lilly for exchange pursuant to the Exchange Offer, Lilly will
acquire good, marketable and unencumbered title thereto, free and clear of all
liens, restrictions, charges and encumbrances and that none of such shares of
Lilly Common Stock will be subject to any adverse claim or right when the same
are accepted for exchange by Lilly. The undersigned will, upon request, execute
and deliver any additional documents deemed by the Exchange Agent or Lilly to
be necessary or desirable to complete the sale, exchange, assignment and
transfer of the shares of Lilly Common Stock tendered hereby (and all such
other shares of Guidant Common Stock or securities). All authority conferred or
agreed to be conferred in this Letter of Transmittal and every obligation of
the undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned.
The undersigned understands that if more than 16,504,298 shares of Lilly
Common Stock are validly tendered and not properly withdrawn in the Exchange
Offer as provided in the Offering Circular - Prospectus, the shares of Lilly
Common Stock so tendered and not withdrawn shall be accepted for exchange on a
pro rata basis in accordance with the terms set forth in the Offering Circular
- Prospectus under "The Exchange Offer--Terms of the Exchange Offer," except
for odd lot tenders as described in the Offering Circular - Prospectus under
"The Exchange Offer - Tenders for Exchange by Holders of Fewer than 100 Shares
of Lilly Common Stock." The
12
<PAGE>
undersigned understands that, upon acceptance by Lilly of the shares of Lilly
Common Stock tendered herewith, the undersigned will be deemed to have accepted
the shares of Guidant Common Stock exchanged therefor and will be deemed to
have relinquished all rights with respect to the shares of Lilly Common Stock
so accepted.
The undersigned understands that Lilly may accept the undersigned's tender at
any time on or after the Expiration Date (as defined in the Offering Circular -
Prospectus) by delivering oral or written notice of acceptance to the Exchange
Agent. Tenders of shares of Lilly Common Stock may be withdrawn at any time
prior to the Expiration Date and, unless theretofore accepted for exchange as
provided in the Exchange Offer, at any time after October 17, 1995. This tender
may be withdrawn only in accordance with the procedures set forth in the
Offering Circular - Prospectus under "The Exchange Offer--Withdrawal Rights"
and the Instructions contained in this Letter of Transmittal.
The undersigned recognizes that, under certain circumstances and subject to
certain conditions to the Exchange Offer (which Lilly, in its sole discretion,
may waive) set forth in the Offering Circular - Prospectus, Lilly may not be
required to accept for exchange any of the shares of Lilly Common Stock
tendered herewith or any shares of Lilly Common Stock tendered after the
Expiration Date. The shares of Lilly Common Stock delivered to the Exchange
Agent and not accepted for exchange will be returned to the undersigned as
promptly as practicable following expiration or termination of the Exchange
Offer at the address set forth above under "Description of Shares of Lilly
Common Stock Tendered," unless otherwise indicated under "Special Delivery
Instructions."
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death or incapacity of the undersigned and every
obligation of the undersigned under this Letter of Transmittal shall be binding
upon his or her heirs, personal representatives, successors and assigns.
Tenders may be withdrawn only in accordance with the procedures set forth in
the Instructions contained in this Letter of Transmittal and the Offering
Circular - Prospectus.
Unless otherwise indicated under "Special Issuance Instructions," please
issue (i) the Guidant Certificate(s) to which the undersigned is entitled; (ii)
if applicable, a check in lieu of a fractional share equal to such fraction
multiplied by the average gross selling price per share of Guidant Common Stock
obtained by the Exchange Agent upon the sale of all fractional shares on behalf
of those tendering Lilly shareholders otherwise entitled to receive fractional
shares (a "Fractional Share Check"); and (iii) if applicable, the
certificate(s) representing any shares of Lilly Common Stock tendered herewith
that are not accepted for exchange, in each case in the name(s) of the
tendering holder(s) shown above under "Description of Shares of Lilly Common
Stock Tendered." Unless otherwise indicated under "Special Delivery
Instructions," please send (i) Guidant Certificate(s) to which the undersigned
is entitled; (ii) if applicable, a Fractional Share Check; (iii) if applicable,
the certificate(s) representing any shares of Lilly Common Stock not tendered;
and/or (iv) if applicable, the certificate(s) representing any shares of Lilly
Common Stock tendered herewith and not accepted for exchange, in each case
issued in the name(s) of the tendering holder(s) shown above under "Description
of Shares of Lilly Common Stock Tendered" together with accompanying documents,
as appropriate to the address(es) of the tendering holder(s) shown above under
"Description of Shares of Lilly Common Stock Tendered." Any shares of Lilly
Common Stock delivered by book-entry transfer that are not tendered or any
shares of Lilly Common Stock tendered herewith delivered by book-entry transfer
that are not accepted for exchange will be credited to the account at the Book-
Entry Transfer Facility designated above under Section II.A. The undersigned
recognizes that Lilly has no obligation pursuant to the
13
<PAGE>
"Special Issuance Instructions" to transfer any shares of Lilly Common Stock
from the name of the tendering holder hereof if Lilly does not accept for
exchange such shares. In the event that the boxes entitled "Special Issuance
Instructions" and "Special Delivery Instructions" are both completed, please
issue (i) the Guidant certificate(s) to which the undersigned is entitled; (ii)
if applicable, a Fractional Share Check; and (iii) if applicable, the
certificates(s) representing any shares of Lilly Common Stock tendered herewith
and not accepted for exchange in the name(s) of, and mail such certificate(s)
and check (and accompanying documents, as appropriate) to, the person(s) so
indicated. Certificate(s) representing any shares of Lilly Common Stock not
tendered by the undersigned will be returned in the name(s) of the tendering
holder(s) shown above to the address(es) shown above under "Description of
Shares of Lilly Common Stock Tendered," unless otherwise instructed under
"Special Delivery Instructions."
The undersigned understands that the delivery and surrender of the shares of
Lilly Common Stock tendered herewith is not effective, and the risk of loss of
the shares of Lilly Common Stock (including shares of Lilly Common Stock
tendered herewith) does not pass to the Exchange Agent, until receipt by the
Exchange Agent of this Letter of Transmittal, or a manually signed facsimile
hereof, duly completed and signed, or an Agent's Message (as defined in the
Offering Circular - Prospectus under "The Exchange Offer--Procedures for
Tendering Shares of Lilly Common Stock) in connection with a book-entry
transfer of shares, together with all accompanying evidences of authority in
form satisfactory to Lilly and any other required documents. ALL QUESTIONS AS
TO VALIDITY, FORM AND ELIGIBILITY AND ACCEPTANCE FOR EXCHANGE OF ANY SURRENDER
OF SHARES OF LILLY COMMON STOCK TENDERED HEREWITH WILL BE DETERMINED BY LILLY
IN ITS SOLE DISCRETION AND SUCH DETERMINATION SHALL BE FINAL AND BINDING UPON
ALL TENDERING SHAREHOLDERS.
The undersigned understands that a tender of shares of Lilly Common Stock and
the acceptance by Lilly for exchange of such shares pursuant to the procedures
described in the Offering Circular - Prospectus under "The Exchange Offer--
Procedures for Tendering Shares of Lilly Common Stock" and in the Instructions
hereto will constitute a binding agreement between the undersigned and Lilly
upon the terms and subject to the conditions of the Exchange Offer, including
the tendering shareholder's representation and warranty that (i) such holder
owns the shares of Lilly Common Stock being tendered within the meaning of Rule
14e-4 promulgated under the Securities Exchange Act of 1934, as amended, and
(ii) the tender of such shares of Lilly Common Stock complies with Rule 14e-4.
14
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS OF AND CONDITIONS
TO THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES OR BOOK-ENTRY
CONFIRMATIONS. Certificate(s) for shares of Lilly Common Stock or any book-
entry transfer into the Exchange Agent's account at a Book-Entry Transfer
Facility of shares of Lilly Common Stock tendered electronically, as well as a
properly completed and duly executed copy or manually signed facsimile of this
Letter of Transmittal, or an Agent's Message in the case of a book-entry
transfer of shares, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to the Expiration Date (as defined in the Offering
Circular - Prospectus). THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL,
CERTIFICATE(S) FOR SHARES OF LILLY COMMON STOCK, AND ANY OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE SHAREHOLDERS AND, EXCEPT AS
OTHERWISE PROVIDED, THE DELIVERY WILL BE DEEMED MADE WHEN ACTUALLY RECEIVED OR
CONFIRMED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, THE USE OF REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS SUGGESTED AND
SUFFICIENT TIME TO ENSURE TIMELY RECEIPT SHOULD BE ALLOWED.
Shareholders whose shares of Lilly Common Stock are not immediately available
or who cannot deliver their shares of Lilly Common Stock and all other required
documents to the Exchange Agent on or prior to the Expiration Date, as may be
extended, may tender their shares of Lilly Common Stock pursuant to the
guaranteed delivery procedures set forth in the Offering Circular - Prospectus.
Pursuant to such procedures (i) tender must be made through a participant in
the Security Transfer Agents Medallion Program or the New York Stock Exchange
Medallion Signature Guarantee Program or the Stock Exchange Medallion Program
(an "Eligible Institution"); (ii) on or prior to the Expiration Date, the
Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) (x) setting forth the name and address of
the Shareholder and the number of shares of Lilly Common Stock being tendered,
(y) stating that the tender is being made thereby and (z) guaranteeing that,
within three New York Stock Exchange trading days after the date of execution
of such Notice of Guaranteed Delivery, this Letter of Transmittal together with
the certificate(s) representing the shares of Lilly Common Stock and any other
documents required by this Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) the certificate(s) for
all tendered shares of Lilly Common Stock, or a confirmation of a book-entry
transfer of such shares of Lilly Common Stock into the Exchange Agent's account
at a Book-Entry Transfer Facility, together with a properly completed and duly
executed copy of this Letter of Transmittal (or manually signed facsimile
thereof) and any required signature guarantees, or an Agent's Message, as well
as all other documents required by this Letter of Transmittal, must be received
by the Exchange Agent within three New York Stock Exchange trading days after
the date of execution of such Notice of Guaranteed Delivery, all as provided in
the Offering Circular - Prospectus under the caption "The Exchange Offer--
Guaranteed Delivery Procedures."
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered shares of Lilly Common Stock
will be determined by Lilly, in its sole discretion, which determination shall
be final and binding on all tendering shareholders. Lilly reserves the absolute
right to reject any or all tenders of shares of Lilly Common Stock determined
by it not to be in proper form or the acceptance of which may, in the opinion
of Lilly's counsel, be unlawful. Lilly also reserves the absolute right to
waive any defect or irregularity in any tender of shares of Lilly Common Stock.
All tendering Shareholders, by execution of this Letter of Transmittal (or
facsimile thereof), waive any right to receive notice of the acceptance of
their shares of Lilly Common Stock for exchange.
None of Lilly, the Exchange Agent, or any other person shall be under any
duty to give notification of any defect or irregularity in any tender, or incur
any liability for failure to give any such notification.
15
<PAGE>
2. PARTIAL TENDERS (NOT APPLICABLE TO SHAREHOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER); WITHDRAWALS. If less than all the shares of Lilly Common Stock
evidenced by a submitted certificate are tendered, the tendering Shareholder
must fill in the number of shares tendered in the fourth column of the box
entitled "Description of Shares of Lilly Common Stock Tendered." All the shares
of Lilly Common Stock represented by certificates delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated. Partial
tenders are not applicable to holders of shares of Lilly Common Stock who
tender by book-entry transfer. If all the shares of Lilly Common Stock are not
tendered, (i) a reissued certificate representing the number of shares of Lilly
Common Stock not tendered will be issued in the name of such tendering
Shareholders, and sent to, unless otherwise indicated under "Special Delivery
Instructions," such tendering Shareholders and (ii) certificate(s) for shares
of Guidant Common Stock will be issued in the name of, and sent to, such
tendering Shareholders unless otherwise indicated above under "Special Issuance
Instructions" or "Special Delivery Instructions," promptly after the shares of
Lilly Common Stock are accepted for exchange.
A tender pursuant to the Exchange Offer may be withdrawn, subject to the
procedures described in this Letter of Transmittal and in the Offering
Circular - Prospectus, at any time prior to the Expiration Date and subsequent
to October 17, 1995, if not theretofore accepted for exchange. To be effective
with respect to the tender of shares of Lilly Common Stock, a written facsimile
transmission notice of withdrawal must (i) be received by the Exchange Agent
before the Expiration Date, (ii) specify the name of the person who tendered
the shares of Lilly Common Stock to be withdrawn, (iii) contain the serial
numbers shown on the particular certificate(s) evidencing the shares of Lilly
Common Stock to be withdrawn and the name of the registered holder thereof (if
certificates have been delivered or otherwise identified to the Exchange Agent)
or the name and number of the account at the Book-Entry Transfer Facility from
which the shares were transferred and the number of shares of Lilly Common
Stock withdrawn and (iv) be signed by the Shareholder in the same manner as the
original signature on this Letter of Transmittal (including the required
signature guarantee(s)) or be accompanied by evidence satisfactory to Lilly
that the person withdrawing the tender has succeeded to the beneficial
ownership of the shares of Lilly Common Stock. If the certificate(s) for shares
of Lilly Common Stock to be withdrawn have been delivered to the Exchange
Agent, a signed notice of withdrawal with (except in the case of shares of
Lilly Common Stock tendered by an Eligible Institution) signatures guaranteed
by an Eligible Institution must be submitted prior to the release of such
certificate(s) for shares of Lilly Common Stock. Withdrawals may not be
rescinded, and shares of Lilly Common Stock withdrawn will thereafter be deemed
not validly tendered for purposes of the Exchange Offer. However, withdrawn
shares of Lilly Common Stock may be retendered by again following the
procedures described in this Letter of Transmittal and the Offering Circular -
Prospectus.
All questions as to the form and validity (including time of receipt) of any
notice of withdrawal will be determined by Lilly, in its sole discretion, which
determination shall be final and binding. None of Lilly, the Exchange Agent or
any other person will be under any duty to give notification of any defect or
irregularity in any notice of withdrawal or incur any liability for failure to
give any such notification.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the
holder(s) of the shares of Lilly Common Stock tendered hereby, the signature
must correspond with the name(s) as written on the face of the certificate(s)
without alteration, enlargement or any change whatsoever.
If any of the shares of Lilly Common Stock tendered hereby are owned by two
or more joint owners, all such owners must sign this Letter of Transmittal. If
any tendered shares of Lilly Common Stock are held in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal as there are names in which
certificates are held.
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<PAGE>
If this Letter of Transmittal is signed by the tendering Shareholder(s) of
the shares of Lilly Common Stock listed and tendered hereby, no signature
guarantees are required, unless Guidant Certificate(s) are to be issued and, if
applicable, certificate(s) for any shares of Lilly Common Stock not accepted
for exchange are to be reissued, in the name of a person other than the
tendering holder(s), in which case, the signature guarantee in Section V of
this Letter of transmittal must be completed. Such signature guarantees must be
provided by an Eligible Institution.
If this Letter of Transmittal or any certificates or stock powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing and, unless waived by Lilly,
proper evidence satisfactory to Lilly of their authority to so act must be
submitted.
All signatures on this Letter of Transmittal must be guaranteed by an
Eligible Institution unless the shares of Lilly Common Stock tendered pursuant
hereto are tendered: (i) by the registered holder of the shares of Lilly Common
Stock (which term, for purposes of this Letter of Transmittal, shall include
any participant in a Book-Entry Transfer Facility whose name appears on a
security position listing as the owner of the shares of Lilly Common Stock) who
has not completed the box entitled "Special Issuance Instructions" on this
Letter of Transmittal, or (ii) for the account of an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If special issuance and/or
special delivery instructions are requested, tendering Shareholders should
indicate, in the applicable box, the name and address to which Guidant
Certificate(s), a Fractional Share Check, if any, and substitute certificate(s)
for shares of Lilly Common Stock tendered but not accepted for exchange, if
any, are to be issued or the name and address to which Guidant Certificate(s),
a Fractional Share Check, if any, and/or substitute certificate(s) for shares
of Lilly Common Stock not tendered or shares of Lilly Common Stock tendered and
not accepted for exchange, if any, are to be sent if different from the name
and address of the person signing this Letter of Transmittal. In the case of
issuance of shares of Guidant Common Stock or Lilly Common Stock in a different
name, the employer identification or the social security number of the person
named must be identified and a Substitute Form W-9 must be completed for the
new owner.
5. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN SHARES. Shareholders who are
participants in Lilly's Dividend Reinvestment and Stock Purchase Plan (the
"DRP") and who wish to tender shares of Lilly Common Stock held in their
account under the DRP ("DRP Shares") pursuant to the Exchange Offer must so
indicate by completing Section I.B. and returning to the Exchange Agent the
properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof) with any required signature guarantees and any other
documents required by this Letter of Transmittal. If the participant authorizes
the tender of his or her DRP Shares, but does not indicate the number of shares
to be tendered, the participant will be deemed to have tendered all DRP Shares
owned by such participant, including fractional shares and any shares credited
to the participant's account after the date hereof and prior to the Expiration
Date. If a participant authorizes the tender of his or her DRP Shares and such
DRP Shares are actually exchanged under the terms and subject to the conditions
of the Exchange Offer, Lilly, as administrator of the DRP, will reduce the
number of shares of Lilly Common Stock in the participant's DRP account by the
number of DRP Shares that are accepted for exchange. Any DRP shares tendered
but not exchanged will be returned to the participant's DRP account.
6. TAXPAYER IDENTIFICATION NUMBER. Federal income tax law requires that a
Shareholder whose tendered shares of Lilly Common Stock are accepted for
exchange must provide his or her correct taxpayer identification number ("TIN")
which, in the case of a Shareholder who is an individual, is his or her social
security number. If
17
<PAGE>
the Shareholder does not provide the correct TIN, the Shareholder may be
subject to a penalty imposed by the Internal Revenue Service ("IRS") and
dividends paid to such Shareholder may be subject to 31% backup withholding. If
backup withholding results in an overpayment of taxes, a refund may be obtained
from the IRS. Exempt Shareholders (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding
requirements. In order for a foreign individual to qualify as an exempt person,
that individual must submit a statement, signed under penalty of perjury,
attesting to that individual's exempt status. A Form W-8 for such a statement
can be obtained from the Exchange Agent.
To prevent backup withholding, each tendering Shareholder must provide his or
her correct TIN by completing "Substitute Form W-9" set forth above, certifying
that the TIN provided is correct (or that the Shareholder is awaiting a TIN)
and that (a) the Shareholder has not been notified by the IRS that he or she is
subject to backup withholding as a result of failure to report all interest or
dividends or (b) the IRS has notified the Shareholder that he or she is no
longer subject to backup withholding. To prevent possible erroneous backup
withholding, exempt Shareholders (other than certain foreign individuals)
should certify in accordance with the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 that such Shareholder is
exempt from backup withholding. If a Shareholder has been notified by the IRS
that he or she is subject to backup withholding because of underreporting
interest or dividends on his or her tax return, he or she should nevertheless
complete and sign Substitute Form W-9 but should (unless after being so
notified by the IRS he or she received a notification from the IRS that he or
she is no longer subject to backup withholding) cross out item (2) of the
certification on the form. In such case, backup withholding may apply to
dividends paid on the shares of Guidant Common Stock issued to such
Shareholder. If the shares of Lilly Common Stock are in more than one name or
are not in the name of the actual owner, consult the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 for
information on which TIN to report.
See enclosed "Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9" for additional instructions.
7. TRANSFER TAXES. Lilly shall pay all transfer taxes, if any, applicable to
the transfer and exchange of shares of Lilly Common Stock to it or its order,
and the transfer of shares of Guidant Common Stock to Shareholders, pursuant to
the Exchange Offer. If, however, shares of Guidant Common Stock or shares of
Lilly Common Stock not exchanged are to be delivered to or are to be issued in
the name of, any person other than the tendering Shareholder, or if tendered
certificates are recorded in the name of any person other than the person
signing this Letter of Transmittal, then the amount of such transfer taxes
(whether imposed on the registered holder or any other person) will be payable
on account of the transfer to such person by the tendering Shareholder unless
evidence satisfactory to Lilly of the payment of such taxes or exemption
therefrom is submitted.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the certificates in this Letter of
Transmittal.
8. OTHER TAX INFORMATION. Holders of shares of Lilly Common Stock who
acquired their shares at different times may have different tax bases in their
shares of Lilly Common Stock, and may wish to consult with their tax advisors
regarding the possible tax basis consequences of the Transaction.
9. ODD LOTS. As described in the Offering Circular - Prospectus, if fewer
than all shares of Lilly Common Stock tendered on or prior to the Expiration
Date are to be purchased by Lilly, the shares of Lilly Common Stock purchased
first will consist of all shares of Lilly Common Stock validly tendered by any
Shareholder who owned beneficially and of record as of August 16, 1995 an
aggregate of less than 100 shares of Lilly Common Stock and who tendered all of
such shares of Lilly Common Stock. This preference will not be available unless
Section I.C. or II.B. of this Letter of Transmittal and the Notice of
Guaranteed Delivery, if applicable, is completed.
18
<PAGE>
10. SOLICITED TENDERS. Lilly will pay to a Soliciting Dealer a solicitation
fee of $1.00 per share, up to a maximum of 1,000 shares, for each share of
Lilly Common Stock tendered and accepted for exchange pursuant to the Exchange
Offer, covered by the Letter of Transmittal which designates, in the box
captioned "Notice of Solicited Tenders," as having affirmatively solicited and
obtained the tender, the name of (i) any broker or dealer in securities which
is a member of any national securities exchange or of the National Association
of Securities Dealers, Inc. or (ii) any bank or trust company (each, a
"Soliciting Dealer"), except that no solicitation fee shall be payable (i) in
connection with a tender of Lilly Common Stock by a Shareholder (x) tendering
more than 10,000 shares of Lilly Common Stock or (y) tendering from a country
outside of the United States; or (ii) to the Dealer Manager. In addition,
Soliciting Dealers are not entitled to a fee with respect to shares of Lilly
Common Stock beneficially owned by such Soliciting Dealer or with respect to
any shares that are registered in the name of a Soliciting Dealer unless such
shares are held by such Soliciting Dealer as nominee and are tendered for the
benefit of beneficial holders identified in this Letter of Transmittal. No such
fee shall be payable to a Soliciting Dealer if such Soliciting Dealer is
required for any reason to transfer the amount of such fee to a tendering
holder (other than itself). No broker, dealer, bank, trust company or fiduciary
shall be deemed to be the agent of Lilly, Guidant, the Exchange Agent, the
Information Agent or the Dealer Manager for purposes of the Exchange Offer.
11. WAIVER OF CONDITIONS. Lilly reserves the absolute right to amend or waive
any of the specified conditions to the Exchange Offer in the case of any shares
of Lilly Common Stock tendered other than certain conditions specified in the
Offering Circular - Prospectus.
12. MUTILATED, LOST, STOLEN OR DESTROYED SHARES OF LILLY STOCK. Any
Shareholder whose shares of Lilly Common Stock have been mutilated, lost,
stolen or destroyed should contact the Exchange Agent by telephone at (617)
575-2700 or at the address indicated above for further instructions. If any
certificate representing shares of Lilly Common Stock has been mutilated, lost,
stolen or destroyed, such shareholder must (i) furnish to the Exchange Agent
evidence, satisfactory to it in its discretion, of the ownership of and the
mutilation, loss, theft or destruction of such certificate, (ii) furnish to the
Exchange Agent indemnity, satisfactory to it in its discretion, and (iii)
comply with such other regulations as the Exchange Agent may prescribe.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering and requests for additional copies of the Offering
Circular - Prospectus and this Letter of Transmittal may be directed to the
Information Agent by telephone at (800) 207-3158.
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
D.F. KING & CO., INC.
UNITED STATES EUROPE
77 Water Street Royex House, Aldermanbury Square
New York, New York 10005 London, England EC2V 7HR
(800) 207-3158 (44) 171-600-5005 (Collect)
OUTSIDE UNITED STATES AND EUROPE:
(212) 269-5550 (Collect)
19
<PAGE>
NAME(S) AND ADDRESS(ES)
OF REGISTERED HOLDER(S)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
EXHIBIT(a)(5)
ELI LILLY AND COMPANY
OFFER TO EXCHANGE 3.49 SHARES OF
COMMON STOCK OF GUIDANT CORPORATION FOR
EACH SHARE OF COMMON STOCK OF ELI LILLY AND
COMPANY UP TO AN AGGREGATE OF 16,504,298
SHARES OF COMMON STOCK OF ELI LILLY AND COMPANY
To Brokers, Securities Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Eli Lilly and Company is offering, upon the terms and subject to the
conditions set forth in the enclosed Offering Circular - Prospectus dated
August 21, 1995 (the "Offering Circular - Prospectus") and the enclosed Letter
of Transmittal (the "Letter of Transmittal"; and together with the Offering
Circular - Prospectus, the "Exchange Offer"), to exchange 3.49 shares of common
stock, without par value ("Guidant Common Stock"), of Guidant Corporation
("Guidant") for each share of common stock, without par value, of Lilly ("Lilly
Common Stock") up to an aggregate of 16,504,298 shares of Lilly Common Stock.
We are asking you to contact your clients for whom you hold shares of Lilly
Common Stock registered in your name or in the name of your nominee. You will
be reimbursed for customary mailing and handling expenses incurred by you in
forwarding any of the enclosed materials to your clients. Lilly will pay all
transfer taxes, if any, applicable to the transfer and exchange of shares of
Lilly Common Stock to it or its order, except as otherwise provided in
Instruction 7 of the Letter of Transmittal.
Lilly will pay to a Soliciting Dealer (as defined herein), a solicitation fee
of $1.00 per share, up to a maximum of 1,000 shares, for each share of Lilly
Common Stock tendered and accepted for exchange pursuant to the Exchange Offer
if such Soliciting Dealer has affirmatively solicited and obtained such tender,
except that no solicitation fee shall be payable (i) in connection with a
tender of shares of Lilly Common Stock by a shareholder tendering more than
10,000 shares of Lilly Common Stock or tendering from a country outside of the
United States; or (ii) to the Dealer Manager. "Soliciting Dealer" includes (i)
any broker or dealer in securities which is a member of any national securities
exchange or of the National Association of Securities Dealers, Inc. or (ii) any
bank or trust company. In order for a Soliciting Dealer to receive a
solicitation fee with respect to the tender of shares of Lilly Common Stock,
the Exchange Agent must have received a properly completed and executed form
(from the Letter of Transmittal) entitled "Notice of Solicited Tenders."
No fee shall be paid to a Soliciting Dealer with respect to shares of Lilly
Common Stock beneficially owned by such Soliciting Dealer or with respect to
any shares that are registered in the name of a Soliciting Dealer unless such
shares are held by such Soliciting Dealer as nominee and are tendered for the
benefit of beneficial holders identified in the Letter of Transmittal. No such
fee shall be payable to a Soliciting Dealer if such Soliciting Dealer is
required for any reason to transfer the amount of such fee to a tendering
holder (other than itself). No broker, dealer, bank, trust company or fiduciary
shall be deemed to be the agent of Lilly, Guidant, the Exchange Agent, the
Dealer Manager or the Information Agent for purposes of the Exchange Offer.
Enclosed is a copy of each of the following documents:
1. The Offering Circular - Prospectus.
2. The Question and Answer Letter.
3. The Letter of Transmittal for your use and for the information of your
clients.
4. The Notice of Guaranteed Delivery.
5. A form of letter which may be sent to your clients for whose account
you hold shares of Lilly Common Stock registered in your name or the
name of your nominee with space provided for obtaining the clients'
instructions with regard to the Exchange Offer.
1
<PAGE>
6. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
7. A return envelope addressed to The First National Bank of Boston, the
Exchange Agent.
Your prompt action is requested. The Exchange Offer will expire at Midnight,
New York City time, on September 18, 1995, or if extended by Lilly, the latest
date and time to which extended (the "Expiration Date"). Shares of Lilly Common
Stock tendered pursuant to the Exchange Offer may be withdrawn, subject to the
procedures described in the Offering Circular - Prospectus, at any time prior
to the Expiration Date and after October 17, 1995, if not theretofore accepted
for exchange.
To participate in the Exchange Offer, certificates for shares of Lilly Common
Stock (or evidence of a book-entry delivery into the Exchange Agent's account
at The Depository Trust Company, the Midwest Securities Trust Company or the
Philadelphia Depository Trust Company) and a duly executed and properly
completed Letter of Transmittal or a manually signed facsimile thereof together
with any other required documents must be delivered to the Exchange Agent as
indicated in the Exchange Offer.
If holders of shares of Lilly Common Stock wish to tender, but it is
impracticable for them to forward their shares of Lilly Common Stock prior to
the Expiration Date, a tender may be effected by following the guaranteed
delivery procedures described in the Offering Circular - Prospectus under "The
Exchange Offer--Guaranteed Delivery Procedures."
Additional information concerning the Exchange Offer and additional copies of
the enclosed material may be obtained from D.F. King & Co., Inc., the
Information Agent at: in the United States, (800) 207-3158; in Europe, (44)
171-600-5005 (call collect); and outside the United States and Europe, (212)
269-5550 (call collect).
Very truly yours,
Eli Lilly and Company
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF LILLY, GUIDANT, THE EXCHANGE AGENT, THE DEALER MANAGER OR
THE INFORMATION AGENT OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY
STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT
FOR STATEMENTS EXPRESSLY MADE IN THE OFFERING CIRCULAR - PROSPECTUS OR THE
LETTER OF TRANSMITTAL.
2
<PAGE>
EXHIBIT(a)(6)
ELI LILLY AND COMPANY
OFFER TO EXCHANGE 3.49 SHARES OF
COMMON STOCK OF GUIDANT CORPORATION FOR
EACH SHARE OF COMMON STOCK OF ELI LILLY AND
COMPANY UP TO AN AGGREGATE OF 16,504,298
SHARES OF COMMON STOCK OF ELI LILLY AND COMPANY
To Our Clients:
Enclosed for your consideration is an Offering Circular - Prospectus dated
August 21, 1995 (the "Offering Circular - Prospectus") and a form of Letter of
Transmittal (the "Letter of Transmittal"; and together with the Offering
Circular - Prospectus, the "Exchange Offer") relating to the offer by Eli Lilly
and Company ("Lilly") to exchange 3.49 shares of common stock, without par
value, of Guidant Corporation ("Guidant Common Stock") for each share of common
stock, without par value, of Lilly ("Lilly Common Stock") up to an aggregate of
16,504,298 shares of Lilly Common Stock.
The material is being forwarded to you as the beneficial owner of shares of
Lilly Common Stock carried by us in your account but not registered in your
name. A tender of such shares of Lilly Common Stock may only be made by us as
the registered holder and pursuant to your instructions. Therefore, Lilly urges
holders of shares of Lilly Common Stock registered in the name of a broker,
dealer, commercial bank, trust company or other nominee to contact such
registered holder promptly if they wish to accept the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to tender any
or all such shares of Lilly Common Stock held by us for your account pursuant
to the terms and conditions set forth in the enclosed Offering Circular -
Prospectus and the related Letter of Transmittal.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to tender shares of Lilly Common Stock in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at Midnight,
New York City time, on Monday, September 18, 1995, or if extended by Lilly, the
latest date and time to which extended (the "Expiration Date"). Shares of Lilly
Common Stock tendered pursuant to the Exchange Offer may be withdrawn, subject
to the procedures described in the Offering Circular - Prospectus, at any time
prior to the Expiration Date and after October 17, 1995, if not theretofore
accepted for exchange.
Your attention is directed to the following:
1. The Exchange Offer is for up to an aggregate of 16,504,298 shares of
Lilly Common Stock.
2. Lilly's obligation to accept shares of Lilly Common Stock tendered in
the Exchange Offer is subject to certain conditions specified in the
Offering Circular - Prospectus.
3. Any transfer taxes incident to the transfer of shares of Lilly Common
Stock from the shareholder to Lilly will be paid by Lilly, except as
provided in Instruction 7 of the Letter of Transmittal.
If you wish to have us tender any or all of your shares of Lilly Common
Stock, please so instruct us by completing, executing and returning to us the
instruction form which appears on the reverse side of this letter. THE LETTER
OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY AND MAY NOT BE USED BY
YOU TO TENDER SHARES OF LILLY COMMON STOCK.
1
<PAGE>
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of Eli Lilly and
Company ("Lilly") relating to the common stock, without par value, of Lilly
("Lilly Common Stock").
This will instruct you to tender the shares of Lilly Common Stock indicated
below held by you for the account of the undersigned, pursuant to the terms of
and conditions set forth in the Offering Circular - Prospectus and the Letter
of Transmittal.
Box 1 [_] Please tender all of my shares of Lilly Common Stock held by you
for my account.
Box 2 [_] Please tender_______(number) of shares of Lilly Common Stock held
by you for my account.
Box 3 [_] Please do not tender any of my shares of Lilly Common Stock held
by you for my account.
--------------------------------------------------------------------------------
ODD LOTS
[_] By checking this box, the undersigned represents that the undersigned owned
beneficially and of record as of August 16, 1995, an aggregate of less than
100 shares of Lilly Common Stock and is tendering all such shares.
--------------------------------------------------------------------------------
NOTICE OF SOLICITED TENDERS
Lilly will pay to a Soliciting Dealer, as defined in the Offering Circular -
Prospectus, a solicitation fee of $1.00 per share, up to a maximum of 1,000
shares, for each share of Lilly Common Stock tendered and exchanged pursuant to
the Exchange Offer in cases where such tenders are affirmatively solicited by
the Soliciting Dealer, except that no solicitation fee shall be payable (i) in
connection with a tender of Lilly Common Stock by a shareholder (x) tendering
more than 10,000 shares of Lilly Common Stock or (y) tendering from a country
outside of the United States; or (ii) to the Dealer Manager. In addition, no
such fee shall be payable to a Soliciting Dealer if such Soliciting Dealer is
required for any reason to transfer the amount of such fee to a tendering
holder (other than itself). No broker, dealer, bank, trust company or fiduciary
shall be deemed to be the agent of Lilly, Guidant, the Exchange Agent, the
Information Agent or the Dealer Manager for purposes of the Exchange Offer.
[_] By checking this box, the undersigned represents that his or her tender was
affirmatively solicited by the Soliciting Dealer listed below:
Name of Firm: _________________________________________________________________
(Please Print)
Name of Individual Broker or Financial Consultant: ____________________________
Identification Number (if known): _____________________________________________
Address: ______________________________________________________________________
(Include Zip Code)
2
<PAGE>
SIGNATURE
Dated: ______________________________ _____________________________________
_____________________________________
Signature(s)
_____________________________________
_____________________________________
Please print name(s) here
UNLESS A SPECIFIC CONTRARY INSTRUCTION IS GIVEN IN THE SPACE PROVIDED, YOUR
SIGNATURE(S) HEREON SHALL CONSTITUTE AN INSTRUCTION TO US TO TENDER ALL OF YOUR
SHARES OF LILLY COMMON STOCK.
By signing these instructions, the signator hereby represents that he or she
is not acting pursuant to a plan, alone or in conjunction with any other
person, to acquire 50% or more of the outstanding shares of Guidant Common
Stock, unless indicated to the contrary below.
Check the following box ONLY IF the above statement is NOT true: [_]
3
<PAGE>
EXHIBIT(a)(7)
ELI LILLY AND COMPANY
NOTICE OF GUARANTEED DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
As set forth in the Offering Circular - Prospectus dated August 21, 1995 (the
"Offering Circular - Prospectus") in the section entitled "The Exchange Offer--
Guaranteed Delivery Procedures" and in the accompanying Letter of Transmittal
(the "Letter of Transmittal") and Instruction 1 thereto, this form or one
substantially equivalent hereto must be used to accept the Exchange Offer if
certificates for shares of common stock, without par value, of Eli Lilly and
Company ("Lilly Common Stock") are not immediately available or time will not
permit such holder's certificates or other required documents to reach the
Exchange Agent prior to the Expiration Date (as defined in the Offering
Circular - Prospectus) of the Exchange Offer. This form may be delivered by
hand or sent by facsimile transmission or mail to the Exchange Agent.
To: The First National Bank of Boston, Exchange Agent
By Mail: By Overnight Courier: By Hand:
The First National Bank The First National Bank BancBoston Trust Company
of Boston of Boston of New York
Shareholder Services Shareholder Services 55 Broadway
Division Division Third Floor
P.O. Box 1889 Mail Stop 45-01-19 New York, New York
Mail Stop 45-01-19 150 Royall Street
Boston, MA 02105 Canton, MA 02021
By Facsimile Transmission:
(617) 575-2232
(617) 575-2233
For Confirmation:
(617) 575-2700
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN
AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tenders to Eli Lilly and Company the shares of Lilly
Common Stock listed below, upon the terms of and subject to the conditions set
forth in the Offering Circular - Prospectus and the related Letter of
Transmittal and the instructions thereto (which together constitute the
"Exchange Offer"), receipt of which is hereby acknowledged, pursuant to the
guaranteed delivery procedures set forth in the Offering Circular - Prospectus,
as follows:
Certificate No. Number of Shares
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
The Book-Entry Transfer Facility Sign Here
Account Number (if the shares of
Lilly Common Stock will be tendered
by book-entry transfer) ---------------------------------------
---------------------------------------
--------------------------------------- Signature(s)
Account Number
---------------------------------------
Number of Shares ---------------------------------------
Number and Street or P.O. Box
[_] DTC [_] MSTC [_] PHILADEP ---------------------------------------
City, State, Zip Code
Dated: __________________________, 1995
1
<PAGE>
ODD LOTS
This section is to be completed ONLY if shares of Lilly Common Stock are
being tendered by or on behalf of a person owning beneficially and of record an
aggregate of less than 100 shares of Lilly Common Stock as of August 16, 1995.
The undersigned either (check one):
[_] was the owner beneficially and of record of less than 100 shares of
Lilly Common Stock in the aggregate as of August 16, 1995, all of which
are being tendered, or
[_] is a broker, dealer, commercial bank, trust company or other nominee
which (i) is tendering, for the beneficial owners thereof, shares of
Lilly Common Stock with respect to which it is the record owner, and
(ii) believes, based upon representations made to it by each such
beneficial owner, that such owner owned beneficially and of record less
than 100 shares of Lilly Common Stock as of August 16, 1995, and is
tendering all such shares.
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a participant in the Security Transfer Agents Medallion
Program or the New York Stock Exchange Medallion Signature Guarantee Program or
the Stock Exchange Medallion Program, (a) represents and guarantees that (i)
the above-named person(s) "own(s)" the shares of Lilly Common Stock tendered
hereby within the meaning of Rule 14e-4 of the Securities Exchange Act of 1934,
as amended, and (b) guarantees delivery to the Exchange Agent of certificates
for the shares of Lilly Common Stock tendered hereby, in proper form for
transfer or delivery of such shares of Lilly Common Stock pursuant to
procedures for book-entry transfer, in either case with delivery of a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) and any other required documents, unless an Agent's Message is
utilized, all within three New York Stock Exchange trading days after the date
hereof.
---------------------------------------
Printed Firm Name
---------------------------------------
Authorized Signature
---------------------------------------
Address
---------------------------------------
City, State, Zip Code
---------------------------------------
Area Code and Telephone Number
Date ___________________________ , 1995
DO NOT SEND CERTIFICATES OR ANY OTHER REQUIRED DOCUMENTS WITH THIS FORM. THEY
SHOULD BE SENT WITH THE LETTER OF TRANSMITTAL (UNLESS A BOOK-ENTRY TRANSFER
FACILITY IS USED).
2
<PAGE>
EXHIBIT(a)(8)
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the
Payer. Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
---------------------------------------------------------------
<TABLE>
<CAPTION>
Give the
For this type of account: SOCIAL SECURITY
number of --
---------------------------------------------------------------
<S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner
(joint account) of the account or,
if combined funds,
any one of the
individuals(1)
3. Husband and wife (joint The actual owner
account) of the account or,
if joint funds,
either person(1)
4. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
5. Adult and minor (joint The adult or, if
account) the minor is the
only contributor,
the minor(1)
6. Account in the name of The ward, minor,
guardian or committee or incompetent
for a designated ward, person(3)
minor, or incompetent
person
7.a. The usual revocable The grantor-
savings trust account trustee(1)
(grantor is also
trustee)
b. So-called trust The actual
account that is not a owner(1)
legal or valid trust
under State law
8. Sole proprietorship The owner(4)
account
---------------------------------------------------------------
<CAPTION>
Give the EMPLOYER
For this type of account: IDENTIFICATION
number of --
---------------------------------------------------------------
<S> <C>
9. A valid trust, estate, or Legal entity (do
pension trust not furnish the
identifying number
of the personal
representative or
trustee unless the
legal entity
itself is not
designated in the
account title)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization account
12. Partnership account held in the The partnership
name of the business
13. Association, club, or other The organization
tax-exempt organization
14. A broker or registered nominee The broker or
nominee
15. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a State
or local government, school
district, or prison) that
receives agricultural program
payments
</TABLE>
---------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name, and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name, and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
trust.
Note: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and
apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
. A corporation.
. A financial institution.
. An organization exempt from tax under section 501(a), or an individual
retirement plan.
. The United States or any agency or instrumentality thereof.
. A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
. A foreign government, a political subdivision of a foreign government, or
agency or instrumentality thereof.
. An international organization or any agency, or instrumentality thereof.
. A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
. A real estate investment trust.
. A common trust fund operated by a bank under section 584(a).
. An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
. An entity registered at all times under the Investment Company Act of 1940.
. A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
. Payments to nonresident aliens subject to withholding under section 1441.
. Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
. Payments of patronage dividends where the amount received is not paid in
money.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
. Payments of interest on obligations issued by individuals.
NOTE: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payer's trade or business and you have
not provided your correct taxpayer identification number to the payer.
. Payments of tax-exempt interest (including exempt interest dividends under
section 852).
. Payments described in section 6049(b)(5) to nonresident aliens.
. Payments on tax-free covenant bonds under section 1451.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT
TO THE PAYER, IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS,
ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045, and 6050A.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Beginning January 1, 1993, payers must generally
withhold 31% of taxable interest, dividend, and certain other payments to a
payee who does not furnish a taxpayer identification number to a payer.
Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE
<PAGE>
EXHIBIT(a)(9)
QUESTIONS AND ANSWERS
ELI LILLY AND COMPANY
EXCHANGE OFFER FOR COMMON
STOCK OF GUIDANT CORPORATION
Q1. Why is Lilly divesting itself of Guidant?
A1. Lilly decided to separate its Medical Devices and Diagnostics Division from
its core pharmaceutical business based on a comprehensive strategic review.
While both Lilly and Guidant participate in the health care market, there
are significant differences in the customers, technology and core
competencies of each business. The Lilly Board of Directors determined that
separation of the businesses would, among other things, enable each company
to better focus its managerial and financial resources, enhance the
competitive positions of the two businesses and maximize shareholder value.
In addition, the separation will allow Guidant to implement more focused
incentive compensation programs.
Q2. What is the Split-Off/Exchange Offer?
A2. The Split-Off, or the Exchange Offer, is a tax-efficient exchange which
allows shareholders to tender some, all or none of their shares of Lilly
Common Stock in return for shares of Guidant Common Stock. The number of
shares of Guidant Common Stock that Lilly will distribute for each share of
Lilly Common Stock tendered and accepted for exchange is specified by the
exchange ratio described in the Offering Circular - Prospectus. This
exchange ratio is 3.49 shares of Guidant Common Stock for each share of
Lilly Common Stock tendered and accepted for exchange.
Q3. How many shares of Guidant Common Stock will I receive if I participate in
the Exchange Offer?
A3. Generally, you will receive 3.49 shares of Guidant Common Stock for each
share of Lilly Common Stock validly tendered and accepted for exchange. The
number of your shares that will be accepted for exchange will depend on the
total number of shares of Lilly Common Stock tendered by all Lilly
shareholders. If 16,504,298 or fewer shares of Lilly Common Stock are
tendered for exchange and the Exchange Offer is consummated, all of your
tendered shares of Lilly Common Stock will be accepted.
If more than 16,504,298 shares of Lilly Common Stock are tendered for
exchange, proration will occur and less than all of your shares of Lilly
Common Stock tendered will be accepted for exchange.
Q4. How do I accept the Exchange Offer?
A4. Complete and sign the (blue) Letter of Transmittal designating the number
of shares of Lilly Common Stock you wish to tender. Send it, together with
your Lilly stock certificate(s) (or a Notice of Guaranteed Delivery) and
any other required documents (as described in the Letter of Transmittal) to
the Exchange Agent (Bank of Boston) at one of the addresses listed in the
Letter of Transmittal. Do not send your certificates to Lilly, Guidant, the
Dealer Manager (Morgan Stanley), or the Information Agent (D.F. King). If
your shares are held in an account with your broker or bank, you must ask
that institution to tender your shares for you.
Q5. What will happen if fewer than 16,504,298 shares of Lilly Common Stock are
tendered, i.e., the Exchange Offer is undersubscribed?
A5. If at least 8,252,149 shares of Lilly Common Stock (approximately 2.8
percent of the shares of Lilly Common Stock outstanding) are tendered and
the other conditions to the Exchange Offer are satisfied, the Split-Off
will proceed. This will result in a distribution of at least 50 percent of
the shares of Guidant Common Stock owned by Lilly. Any remaining shares of
Guidant Common Stock held by Lilly would be distributed to Lilly
shareholders of record as soon as practicable after the Split-Off through a
spin-off on a pro rata basis. If fewer than 8,252,149 shares of Lilly
Common Stock are tendered, Lilly is not obligated to proceed with the
Split-Off.
Q6. What if more than 16,504,298 shares of Lilly Common Stock are tendered,
i.e., the Exchange Offer is oversubscribed?
1
<PAGE>
A6. If more than 16,504,298 shares of Lilly Common Stock are validly tendered
and not withdrawn prior to the Expiration Date, Lilly will accept those
shares on a pro rata basis (except for odd-lot tenders, which will not be
subject to proration), based on the number of shares of Lilly Common Stock
each shareholder has tendered in the Exchange Offer (not based on the
shareholder's aggregate ownership of Lilly). Generally, the formula to
determine the proration factor is 16,504,298 divided by the total number of
shares of Lilly Common Stock tendered for exchange. This fraction,
multiplied by the number of shares you tendered, will determine the number
of shares of Lilly Common Stock which will be accepted for exchange. Any
tendered shares of Lilly Common Stock not accepted for exchange will be
returned to tendering shareholders unless otherwise specified.
Q7. My shares of Lilly Common Stock are held by my broker. How do I proceed if
I want to participate in the Exchange Offer?
A7. If your shares are held by your broker and are not certificated in your
name (i.e., your shares are held in "street name"), you should receive
instructions from your broker on how to participate in the Exchange Offer.
In this situation, you do not need to complete the Letter of Transmittal.
If you have not yet received instructions from your broker, please contact
your broker directly.
Q8. Is there special treatment for odd-lot holders?
A8. Yes. If you own fewer than 100 shares of Lilly Common Stock as of August
16, 1995 and tender all such shares for exchange, you may request
preferential treatment by completing Section I.C. of the Letter of
Transmittal entitled "Odd Lot Shares." If the Exchange Offer is
consummated, all of your shares will be accepted for exchange, and you will
not be subject to proration.
Q9. If I cannot find my Lilly share certificates, what should I do to
participate in the Exchange Offer?
A9. Please contact the Exchange Agent (Bank of Boston) by calling (617) 575-
2700 and inform the Exchange Agent of your situation. You will receive an
affidavit to complete and you will be informed of the amount needed to pay
for a surety bond for your lost shares (equal to 2 percent of the average
market price on the date of notification). Upon receipt of the completed
affidavit and surety bond payment, and the completed Letter of Transmittal,
your shares will be included in the Exchange Offer. You will need to act
quickly to ensure that the lost certificates can be replaced prior to
expiration of the Exchange Offer.
Q10. Can I exchange the shares I have in Lilly's Dividend Reinvestment and
Stock Purchase Plan for Guidant Common Stock?
A10. Yes. To tender Dividend Reinvestment and Stock Purchase Plan ("DRP")
shares, please check the first box found in Section I.B. of the Letter of
Transmittal entitled "Dividend Investment and Stock Purchase Plan Shares,"
then indicate whether you wish to tender all DRP shares or only a certain
number of whole shares in the applicable boxes. If you do not otherwise
indicate, you will be deemed to have tendered all shares in your DRP
account. Please remember that if your DRP share balance falls below the
required five-share minimum, you will be removed from the plan.
Q11. When does the Exchange Offer expire?
A11. The Exchange Offer is scheduled to expire at 12:00 Midnight, New York City
time, on Monday, September 18, 1995, unless extended. Lilly does not
currently anticipate extending the offer period.
To participate, registered shareholders must deliver to the Exchange Agent
(Bank of Boston) a completed Letter of Transmittal and all other required
documents specified in the Letter of Transmittal-- including the
shareholder's stock certificate(s) or, if the certificate(s) are not
immediately available, a Notice of Guaranteed Delivery -- not later than
Midnight on September 18, 1995. The documents must be received by Bank of
Boston on that day -- a postmark will not constitute a valid tender.
2
<PAGE>
If you provide a Notice of Guaranteed Delivery instead of the stock
certificate(s) and the Letter of Transmittal, you must then physically
deliver the stock certificate(s) and the Letter of Transmittal not later
than three New York Stock Exchange trading days after the expiration of the
offer period.
Your shares of Lilly Common Stock will not be accepted at Lilly or Guidant
corporate headquarters or Lilly Shareholder Services. If your shares are
held in an account with a broker or bank, we strongly recommend that you
submit your instructions to the broker or bank well in advance of the
Expiration Date.
Q12. When will tendering shareholders know the outcome of the Exchange Offer?
A12. Preliminary results of the Exchange Offer, including any preliminary
proration factor, will be announced by press release as promptly as
practicable after the expiration of the Exchange Offer. Lilly shareholders
may also contact D.F. King, Morgan Stanley or their broker to inquire
about preliminary results approximately three business days after
expiration of the Exchange Offer. Announcement of any final proration
factor should occur approximately seven business days after the expiration
of the Exchange Offer.
Q13. If I participate in the Exchange Offer, when will I receive my new Guidant
certificates?
A13. The Exchange Agent (Bank of Boston) will mail your new Guidant
certificates within approximately two weeks after the end of the Exchange
Offer.
Q14. What will happen to third-quarter dividends that I should receive on my
shares of Lilly Common Stock?
A14. The Lilly Board of Directors declared a third-quarter dividend for 1995 of
64.5 cents a share on outstanding shares of Lilly Common Stock. The
dividend is payable on September 11, 1995, to shareholders of record at
the close of business on August 15, 1995. You will receive third-quarter
dividends on September 11 as long as you were a Lilly shareholder of
record at the close of business on August 15. It does not matter if you
tender your shares prior to September 11.
You will receive dividend payments on your certificated shares unless you
have specified that these dividends are to purchase additional shares in
your DRP account. In that case, the dividends from both your certificated
shares and shares in your DRP account will be credited to your DRP account
prior to the end of the Exchange Offer.
Q15. Will the exchange of shares of Lilly Common Stock for shares of Guidant
Common Stock be taxable to Lilly shareholders? Do shareholders have to pay
taxes on Guidant Common Stock received in the Exchange Offer?
A15. No. The IRS has issued a Letter Ruling to Lilly stating that the exchange
of shares of Lilly Common Stock for Guidant Common Stock will generally
not be taxable to Lilly shareholders for United States federal income tax
purposes. However, the receipt of cash in lieu of fractional shares of
Guidant Common Stock will be taxable as capital gain if your Lilly Common
Stock was a capital asset.
Q16. If I tender all of my Lilly Common Stock (and all are accepted for
exchange by Lilly), what will be my tax basis in the Guidant Common Stock
I receive in exchange for my Lilly Common Stock?
A16. The total tax basis in the Guidant Common Stock you receive in the
Exchange Offer will equal your total tax basis in the Lilly Common Stock
you tendered in the Exchange Offer.
3
<PAGE>
Q17. If I tender less than all of my Lilly Common Stock (or less than all
shares are accepted for exchange by Lilly), what will be my tax basis in
the Lilly Common Stock and Guidant Common Stock, respectively, I hold
immediately after the Exchange?
A17. The Letter Ruling issued by the IRS for this transaction provides that the
total tax basis in your Lilly Common Stock held immediately before the
transaction should be allocated between your retained Lilly Common Stock
and the Guidant Common Stock you receive in the transaction. This
allocation should be made in proportion to the relative fair market values
of the Lilly Common Stock and the Guidant Common Stock.
The portion of your total tax basis allocated to the Guidant Common Stock
you receive will equal your aggregate tax basis in all of your Lilly Common
Stock owned prior to the Exchange Offer multiplied by a fraction. The
numerator of the fraction will be the aggregate fair market value of the
Guidant Common Stock you receive and the denominator will be the aggregate
fair market values of (i) the Guidant Common Stock you receive and (ii) the
Lilly Common Stock you hold after the Exchange Offer. Stated as a formula,
the basis in your shares of Guidant Common Stock may be determined as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Aggregate Tax Aggregate Tax Aggregate FMV of the Guidant
Basis in Basis in All Common Stock Received in the Exchange
Guidant Common Lilly Common Offer
Stock Received Stock Prior to ------------------------------------------
in the = the Exchange x Aggregate FMV of the Guidant Common Stock
Exchange Offer Offer Received Plus Aggregate FMV of the Lilly
Common Stock Held After the Exchange Offer
</TABLE>
The total tax basis in your unexchanged shares of Lilly Common Stock after
the Exchange Offer will equal your basis before the Exchange Offer, less
the basis allocated to Guidant Common Stock as determined under the
calculation described above.
Q18. What will be the tax basis in my retained Lilly Common Stock held
immediately after the transaction if, before the transaction, I have
blocks of Lilly Common Stock that have different per share tax bases?
A18. While the proper tax treatment is not clear, under the proper
circumstances, Lilly believes it is reasonable to take the position that
the tax basis of each block of Lilly Common Stock may be reduced
proportionately for the basis allocated to your shares of Guidant Common
Stock. SHAREHOLDERS HAVING BLOCKS OF LILLY COMMON STOCK WITH DIFFERENT TAX
BASES ARE STRONGLY ENCOURAGED TO CONSULT THEIR OWN TAX ADVISORS TO
DETERMINE THE APPLICABILITY OF THIS METHOD, OR OTHER METHODS FOR
ALLOCATING TAX BASIS, TO THEIR SPECIFIC SITUATION.
Q19. Who should I contact for additional information?
A19. You can obtain additional information by calling the Information Agent,
D.F. King at: in the United States, (800) 207-3158; in Europe, (44) 171-
600-5005 (call collect); and from outside the United States and Europe,
(212) 269-5550 (call collect).
These questions and answers contain summaries of more detailed information
found in the Offering Circular - Prospectus and the Letter of Transmittal, and
are qualified in their entirely by reference to the Offering Circular -
Prospectus and the Letter of Transmittal.
4
<PAGE>
August 21, 1995 EXHIBIT(a)(10)
This announcement is neither an offer to exchange nor a solicitation of an offer
to exchange the securities. The Exchange Offer is made solely by the Offering
Circular - Prospectus dated August 21, 1995 and the related Letter of
Transmittal and is not being made to Eli Lilly and Company shareholders in any
jurisdiction in which the making of the Exchange Offer or acceptance thereof
would not be in compliance with the securities, blue sky or other laws of such
jurisdiction. In those jurisdictions in the United States where the securities,
blue sky or other laws require the Exchange Offer to be made by a licensed
broker or dealer; the Exchange Offer shall be deemed to be made on behalf of Eli
Lilly and Company by Morgan Stanley & Co. Incorporated.
Notice of Offer to Exchange
3.49 Shares of Common Stock
of
Guidant Corporation
for each share of Common Stock of
Eli Lilly and Company
up to 16,504,298 shares of Common Stock of
Eli Lilly and Company
THE EXCHANGE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, SEPTEMBER 18, 1995, UNLESS THE EXCHANGE
OFFER IS EXTENDED.
Eli Lilly and Company, an Indiana corporation ("Lilly"), is offering to
exchange, and Lilly will exchange, 3.49 shares of Common Stock, without par
value, of Guidant Corporation, an Indiana Corporation ("Guidant" and such
shares, "Guidant Common Stock"), for each share of Common Stock, without par
value, of Lilly ("Lilly Common Stock"), up to a maximum of 16,504,298 shares of
Lilly Common Stock, that is validly tendered and not properly withdrawn by 12:00
Midnight, New York City time, on Monday, September 18, 1995, unless the Exchange
Offer is extended (the "Expiration Date"), upon the terms and subject to the
conditions set forth in the Offering Circular - Prospectus dated August 21,
1995 (the "Offering Circular - Prospectus") and in the related Letter of
Transmittal (which together constitute the "Exchange Offer"). Lilly is making
the Exchange Offer as part of a transaction to separate Guidant's medical device
business from Lilly's core pharmaceutical business, as described in the Offering
Circular-Prospectus. The Exchange Offer also provides Lilly's shareholders with
an opportunity to adjust, in a tax-efficient manner, their investment between
Lilly's remaining life sciences business and Guidant's medical device business.
The Exchange Offer is conditioned upon, among other things, at least
8,252,149 shares of Lilly Common Stock (approximately 2.8% of the outstanding
Lilly Common Stock and a sufficient number of shares to result in at least 50%
of the Guidant Common Stock to be distributed being exchanged pursuant to the
Exchange
<PAGE>
Offer) being validly tendered and not withdrawn on or prior to the Expiration
Date.
Lilly currently holds 57,600,000 shares of Guidant Common Stock, all of
which are being offered pursuant to the Exchange Offer. If all such shares are
not exchanged in the Exchange Offer and the Exchange Offer is consummated, the
remaining shares will be distributed by Lilly on a pro rata basis to the Lilly
shareholders remaining after the Exchange Offer. If more than 16,504,298 shares
of Lilly Common Stock are validly tendered and not withdrawn on or prior to the
Expiration Date, Lilly will accept such shares for exchange on a pro rata basis,
except that any holder of Lilly Common Stock who beneficially owns an aggregate
of fewer than 100 shares of Lilly Common Stock and who validly tenders all such
shares, and does not withdraw any such shares, on or prior to the Expiration
Date, will not be subject to proration if such holder elects, as described in
the Offering Circular-Prospectus.
NEITHER LILLY NOR THE BOARD OF DIRECTORS OF LILLY MAKES ANY RECOMMENDATION TO
ANY SHAREHOLDER WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES OF LILLY
COMMON STOCK PURSUANT TO THE EXCHANGE OFFER. EACH SHAREHOLDER MUST MAKE HIS OR
HER OWN DECISION WHETHER TO TENDER SHARES OF LILLY COMMON STOCK PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, HOW MANY SHARES TO TENDER.
For purposes of the Exchange Offer, Lilly shall be deemed, subject to the
proration provisions of the Exchange Offer, to have accepted for exchange and
exchanged shares of Lilly Common Stock validly tendered for exchange when, as
and if Lilly gives oral or written notice thereof to The First National Bank of
Boston (the "Exchange Agent"). Exchange of shares of Lilly Common Stock accepted
for exchange pursuant to the Exchange Offer will be made by deposit of tendered
shares of Lilly Common Stock with the Exchange Agent, which will act as agent
for the tendering shareholders for the purpose of receiving shares of Guidant
Common Stock from Lilly and transmitting such shares to tendering shareholders.
In all cases, exchange of shares of Lilly Common Stock will be made only after
timely receipt by the Exchange Agent of (i) certificates for such shares of
Lilly Common Stock (or timely confirmation of a book-entry transfer of such
Lilly Common Stock into the Exchange Agent's account at a Book-Entry Transfer
Facility (as defined in the Offering Circular-Prospectus)) and (ii) a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) or an Agent's Message (as defined in the Offering Circular-Prospectus)
in connection with a book-entry transfer of shares, together with any other
documents required by the Letter of Transmittal. Under no circumstances will
interest be paid by Lilly pursuant to the Exchange Offer, regardless of any
delay in making such exchange.
Lilly expressly reserves the right, at any time or from time to time, in
its sole discretion and regardless of whether any of
<PAGE>
the conditions specified in the Offering Circular-Prospectus under the caption
"The Exchange Offer-Certain Conditions of the Exchange Offer" have been
satisfied, (i) to extend the period of time during which the Exchange Offer is
open by giving oral or written notice of such extension to the Exchange Agent,
and by making a public announcement of such extension or (ii) to amend the
Exchange Offer in any respect by making a public announcement of such amendment.
Tenders of shares of Lilly Common Stock made pursuant to the Exchange Offer
are irrevocable provided that tenders of shares may be withdrawn as set forth in
the Offering Circular-Prospectus under the caption "The Exchange Offer-
Withdrawal Rights" and in the Letter of Transmittal. Tendered shares may be
withdrawn at any time prior to the Expiration Date and may also be withdrawn
after the expiration of 40 business days from the commencement of the Exchange
Offer, unless theretofore accepted for exchange. To be effective, a written or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent at one of its addresses set forth in the Letter of Transmittal
and must specify the name of the person who tendered the shares of Lilly Common
Stock to be withdrawn and the number of shares of Lilly Common Stock to be
withdrawn precisely as they appear in the Letter of Transmittal. All questions
as to the form of documents (including notices of withdrawal) and the validity,
form, eligibility (including time of receipt) and acceptance for exchange of any
tender of shares of Lilly Common Stock will be determined by Lilly in its sole
discretion, which determination will be final and binding on all tendering
shareholders. None of Lilly, Guidant, the Dealer Manager, the Exchange Agent,
the Information Agent or any other person will be under any duty to give
notification of any deficit or irregularity in tenders or notices of withdrawal
or incur any liability for failure to give any such notification.
The information required to be disclosed by Rule 13e-4(d)(l) of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended, is contained in the Offering Circular-Prospectus and is incorporated
herein by reference.
The Offering Circular - Prospectus, the Letter of Transmittal and other
relevant materials are being mailed to record holders of Lilly Common Stock and
furnished to brokers, dealers, banks, trust companies and similar persons whose
names, or the names of whose nominees, appear on the shareholder list of Lilly
or, if applicable, who are listed as participants in a clearing agency's
security position listing for subsequent transmittal to beneficial owners of
Lilly Common Stock. The Offering Circular-Prospectus, the Letter of Transmittal
and the related materials contain important information which should be read
carefully before any decision is made with respect to the Exchange Offer.
Questions and requests for assistance or for additional
<PAGE>
copies of the Offering Circular-Prospectus, the Letter of Transmittal and other
Exchange Offer materials may be directed to the Information Agent or the Dealer
Manager, at their respective addresses and telephone numbers set forth below,
and copies will be furnished promptly at Lilly's expense.
The Information Agent for the Exchange Offer is:
D.F. King & Co., Inc.
United States
77 Water Street
New York, NY 10005
(800) 207-3158
Europe
Royex House, Aldermanbury Square
London, England EC2V 7HR
(44) 171-600-5005 (Collect)
Outside the United States and Europe
(212) 269-5550 (Collect)
The Dealer Manager in the United States for the
Exchange Offer is:
MORGAN STANLEY & CO.
Incorporated
1251 Avenue of the Americas
New York, NY 10020
(212) 703-7918
August 21, 1995
