<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission File Number 1-13388
GUIDANT CORPORATION
(Exact name of Registrant as specified in its charter)
INDIANA 35-1931722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204-5129
(Address of principal executive offices)
Registrant's telephone number, including area code: (317) 971-2000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of common stock outstanding as of July 29, 1996:
Class Number of Shares Outstanding
Common 74,138,005
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Net sales $265.5 $224.1 $517.6 $448.9
Cost of sales 100.0 73.6 177.0 144.4
----- ----- ----- -----
Gross profit 165.5 150.5 340.6 304.5
Research and development 37.0 34.4 73.0 67.8
Sales, marketing
and administrative 82.4 69.7 159.7 139.3
----- ----- ----- -----
119.4 104.1 232.7 207.1
----- ----- ----- -----
Income from operations 46.1 46.4 107.9 97.4
Other income (expenses):
Interest--net (6.6) (7.4) (13.9) (14.9)
Royalties--net 2.3 2.8 2.4 1.1
Amortization of goodwill and
other intangible assets (6.4) (5.3) (12.3) (11.0)
Other--net (1.9) (0.6) (3.5) (1.0)
Impairment charges (66.9) -- (66.9) --
------ ------ ------ ------
(79.5) (10.5) (94.2) (25.8)
------ ------ ------ ------
Income (loss) before income taxes (33.4) 35.9 13.7 71.6
Income taxes 12.8 14.7 31.4 29.3
----- ----- ----- -----
Net income (loss) ($46.2) $21.2 ($17.7) $42.3
===== ===== ===== =====
Earnings (loss) per share ($0.64) $0.30 ($0.25) $ 0.59
====== ===== ====== =====
Weighted average shares outstanding 72.05 71.86 72.02 71.86
Dividends paid per share $0.025 -- $0.05 --
======= ===== ====== ======
See notes to consolidated financial statements.
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
June 30, December 31,
1996 1995
---------- ------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $0.9 $3.4
Accounts receivable, net of allowances
of $7.6 (1996) and $5.7 (1995) 208.8 181.6
Other receivables 13.5 18.4
Inventories 104.6 124.7
Deferred income taxes 51.9 46.1
Prepaid expenses 18.8 14.8
Income taxes recoverable 8.0 --
----- -----
Total Current Assets 406.5 389.0
Other Assets
Goodwill, net of allowances of $75.0 (1996)
and $84.7 (1995) 204.7 263.6
Other intangible assets, net of allowances
of $6.8 (1996) and $18.9 (1995) 11.0 33.0
Investments 39.5 16.4
Sundry 16.4 25.3
Deferred income taxes 3.6 13.7
Property and equipment 306.5 316.4
----- ------
$988.2 $1,057.4
====== ========
See notes to consolidated financial statements.
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
June 30, December 31,
1996 1995
---------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable 27.0 45.8
Employee compensation 53.5 63.3
Restructuring liabilities 13.7 12.9
Income taxes payable -- 22.0
Other liabilities 63.0 64.7
Short-term borrowings 448.7 70.0
----- -----
Total Current Liabilities 605.9 278.7
Noncurrent Liabilities
Long-term debt -- 385.0
Other 9.1 9.5
---- -----
9.1 394.5
Commitments and contingencies -- --
Shareholders' Equity
Common stock-no par value;
Authorized shares: 250,000,000
Issued shares: 72,098,000 (1996) 192.5 192.5
71,961,000 (1995)
Additional paid-in capital 150.9 146.8
Retained earnings 82.1 103.4
Currency translation adjustments (9.8) (1.2)
Deferred cost, ESOP (54.3) (57.3)
Net unrealized appreciation on investments 11.8 --
----- -------
373.2 384.2
------ -------
$988.2 $1,057.4
====== ========
See notes to consolidated financial statements.
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in millions)
Six Months Ended
June 30,
----------------
1996 1995
----- -----
(unaudited)
Cash Provided by Operating Activities:
Net income (loss) ($17.7) $42.3
Adjustments to Reconcile Net Income (Loss) to Cash
Provided by Operating Activities:
Depreciation 22.1 21.5
Amortization of goodwill and other intangibles 12.3 11.0
Provision for inventory and related losses 36.9 5.1
Impairment charges 66.9 --
Other noncash expenses 5.0 6.0
----- -----
125.5 85.9
Changes in Operating Assets and Liabilities:
Receivables, (increase) decrease (25.8) 2.5
Inventories, increase (7.8) (4.0)
Prepaid expenses, increase (4.0) (1.0)
Accounts payable and accrued
liabilities, decrease (28.6) (43.3)
Income taxes payable/recoverable,
increase (decrease) (30.0) 0.8
Other liabilities, decrease (1.3) (4.7)
----- ------
Net Cash Provided by Operating Activities 28.0 36.2
(Used for) Provided by Investing Activities:
Additions of property and equipment, net (25.6) (28.2)
Acquisitions -- (9.4)
Reductions of other assets, net 5.1 1.5
----- ------
Net Cash Used for Investing Activities (20.5) (36.1)
(Used for) Financing Activities:
Reductions of short-term borrowings (6.3) (54.3)
Reductions of long-term borrowings -- (15.0)
Dividends (3.6) --
------ ------
Net Cash Used for Financing Activities (9.9) (69.3)
Effect of Exchange Rate Changes on Cash (0.1) (0.4)
------ ------
Net Decrease in Cash and Cash Equivalents (2.5) (69.6)
Cash and Cash Equivalents at Beginning of Period 3.4 113.0
------ ------
Cash and Cash Equivalents at End of Period $0.9 $43.4
====== ======
See notes to consolidated financial statements.
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes necessary for a fair presentation of results of
operations, financial position, and cash flows in conformity with
generally accepted accounting principles. In the opinion of manage-
ment, 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 included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
NOTE 2 - INVENTORIES
Inventories consisted of the following:
June 30, December 31,
1996 1995
-------- ------------
Finished products $51.7 $45.8
Work in process 30.3 43.9
Raw materials and supplies 22.6 35.0
------ ------
$104.6 $124.7
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NOTE 3 - IMPAIRMENT AND OBSOLESCENCE CHARGES
The Company took two separate noncash pretax charges totaling
$95.7 million during the period. The first was an impaired asset
charge against the Company's atherectomy-related goodwill and
other intangible assets of $66.9 million. This impairment loss
was based on an analysis performed in accordance with Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 121 requires certain long-lived assets,
which meet prescribed impairment tests, to be written down to
their fair values. The goodwill and other intangible assets were
recorded as part of the purchase of Devices for Vascular
Intervention, Inc. by Eli Lilly and Company in 1989, prior to the
formation of Guidant Corporation.
The second charge was a $28.8 million noncash charge to cost of
sales as a result of obsolescence of older generation cardiac
rhythm management products and programmers. The charge was
primarily due to accelerated United States regulatory approval
for market release and customer acceptance of new cardiac rhythm
management products, particularly the VENTAK MINI, VENTAK MINI
HC, and VENTAK MINI II families of implantable cardioverter
defibrillator systems. The after-tax impact on earnings of these
charges was $84.1 million.
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
(unaudited)
NOTE 4 - INVESTMENTS
Marketable equity securities are classified as available-for-
sale in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Available-for-sale
securities are carried at fair value, with unrealized gains and
losses, net of tax reported in a separate component of
shareholders' equity.
NOTE 5 - CONTINGENCIES
The Company is a party to various legal actions which have
occurred in the normal course of business. In May 1995,
Intermedics, Inc., a division of Sulzermedica USA, Inc., filed
suit against Guidant alleging patent infringement related to
certain Guidant defibrillator and pacemaker models.
Intermedics is seeking injunctive and monetary relief of an
unspecified amount.
The Company has also been named as a defendant, along with
Schneider (USA), Inc. and Schneider (Europe), AG, wholly owned
subsidiaries of Pfizer, Inc., in an action brought in 1995 by
Boston Scientific Corporation and its subsidiary, SCIMED Life
Systems, Inc. The lawsuit alleges violation of federal and
state antitrust laws, as well as state unfair competition and
abuse of process laws. Boston Scientific and SCIMED allege
that the violations are based on the misuse of the United
States patent laws as a result of agreements concerning certain
rapid exchange catheter patents. The lawsuit seeks injunctive
relief, unspecified monetary damages and a declaration that
certain patents are unenforceable.
In August 1995, the Company received a letter from Pacesetter,
Inc. ("Pacesetter") advising the Company that Pacesetter
believes that certain Pacesetter patents are being used by the
Company in connection with the Company's VIGOR
pacemaker/programmer combination. The Pacesetter letter and a
subsequent letter also advise that it appears to Pacesetter
that the Company may also be using certain patents licensed to
Pacesetter in connection with the Company's VENTAK MINI. On
May 3, 1996, Pacesetter filed suit against the Company in the
United States District Court for the District of Delaware. The
complaint, as subsequently amended, alleges infringement of six
of the patents referred to in the previous letters and seeks
injunctive relief and unspecified monetary damages.
While it is not possible to predict or determine the outcome of
the legal actions brought against it, the Company 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.
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
(unaudited)
NOTE 5 - CONTINGENCIES (continued)
Further, product liability claims may be asserted in the future
relative to events currently unknown to management. Management
believes that the Company's risk management practices,
including insurance coverage, are reasonably adequate to
protect against potential product liability losses.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Guidant Corporation (Guidant or the Company) was created after
the Board of Directors of Eli Lilly and Company (Lilly) approved
a plan under which Lilly transferred to Guidant its ownership
interests in five businesses. Guidant was incorporated in
September 1994, and consummated an initial public offering of its
common stock in December 1994. Upon completion of the initial
public offering, Lilly's beneficial ownership of Guidant's common
stock was reduced to approximately 80%. Lilly disposed of its
remaining ownership interest in Guidant in September 1995, by
means of a split-off, an exchange offer pursuant to which Lilly
shareholders were given the opportunity to exchange some or all
of their Lilly common shares for shares of Guidant common stock
on a tax-free basis.
Guidant is a multinational company that designs, develops,
manufactures and markets a broad range of products for use in:
(i) cardiac rhythm management (CRM); (ii) vascular intervention,
and (iii) minimally invasive surgery (MIS).
<PAGE>
The following tables are summaries of the Company's net sales and
major costs and expenses:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
($ in millions)
(unaudited)
Net sales:
CRM $144.2 $105.6 $278.0 $209.5
Vascular intervention 109.1 111.0 216.0 225.0
MIS 12.2 7.5 23.6 14.4
------ ------ ------ ------
Total net sales $265.5 $224.1 $517.6 $448.9
Cost of sales 100.0(1) 73.6 177.0(1) 144.4
------ ------ ------ ------
Gross profit 165.5 150.5 340.6 304.5
Research and development 37.0 34.4 73.0 67.8
Sales, marketing and administrative 82.4 69.7 159.7 139.3
------ ------ ------ ------
Income from operations $46.1 $46.4 $107.9 $97.4
====== ====== ====== ======
As a Percent of Net Sales
--------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Net sales:
CRM 54.3% 47.1% 53.7% 46.7%
Vascular intervention 41.1 49.5 41.7 50.1
MIS 4.6 3.4 4.6 3.2
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 37.7 32.8 34.2 32.2
----- ----- ----- -----
Gross profit 62.3 67.2 65.8 67.8
Research and development 13.9 15.4 14.1 15.1
Sales, marketing and administrative 31.0 31.1 30.9 31.0
----- ----- ----- -----
Income from operations 17.4% 20.7% 20.8% 21.7%
====== ====== ====== ======
(1) Includes the impact of $28.8 million in noncash obsolescence
charges in 1996 resulting from the accelerated regulatory
approval for market release and customer acceptance of new
generation CRM products and programmers.
<PAGE>
Operating Results -- Three and Six Months Ended June 30, 1996
The Company had worldwide net sales of $265.5 million for the
three months ended June 30, 1996, reflecting an increase of
$41.4 million or 18% over the same period in 1995. Growth in
unit volume of 17% and sales price increases of 3% increased
worldwide net sales, offset somewhat by fluctuations in
foreign currency exchange rates which decreased net sales 2%.
The Company had worldwide net sales of $517.6 million for the
six months ended June 30, 1996, an increase of $68.7 million
or 15% over the six months ended June 30, 1995. This growth
in worldwide net sales was due to unit volume growth of 12%
and sales price increases of 4%, offset somewhat by foreign
currency exchange rate changes which decreased net sales 1%
during this period.
Net sales of CRM products grew $38.6 million or 36.6% for the
three months ended June 30, 1996 as compared to the same
period in 1995. CRM product net sales grew $68.5 million or
32.7% for the six months ended June 30, 1996 as compared to
the same period in 1995. This growth was led by strong
worldwide sales of the VENTAK MINI family of advanced, tiered-
therapy automatic implantable cardioverter-defibrillators
(AICD) released in the United States in January 1996, and the
VENTAK MINI HC released in May 1996. The technologically
advanced VENTAK MINI family of CRM products is significantly
smaller and lighter than the Company's previous products. In
addition, the VENTAK MINI HC incorporates the Company's
exclusive TRIAD defibrillation energy delivery system which
is designed to simplify the device implant procedure and
reduce the energy needed for defibrillation. The Company's
adaptive-rate pacemaker products also contributed to sales
growth during the period, led by the VIGOR DR and VIGOR SR
which were released to the United States market in June 1995.
Net sales of vascular intervention products for the three
months ended June 30, 1996 decreased $1.9 million or 1.7% from
the same period in 1995. For the six months ended June 30,
1996, net sales of vascular
<PAGE>
intervention products decreased $9.0 million or 4.0% from
1995. The Company experienced sales growth in angioplasty
products primarily due to the ACS MULTI-LINK Coronary Stent
system, launched in Europe in November 1995, increased sales
of over-the-wire catheters such as the ACS CONCORDE and the
high pressure ACS ENDURA which were market released in March
1996, and continued growth in guidewires and accessory
products. The Company also experienced increased sales
resulting from its direct operations in Japan. This growth
was offset by sales volume declines in atherectomy and
dilatation catheters, and lower net average selling prices of
most dilatation catheters in the United States. These lower
domestic net average selling prices of dilatation catheters
include the impact of product mix changes due to the
acceptance of the recently launched over-the-wire catheters
discussed above. The Company believes that net average
selling prices may continue to decline due to this shift in
product mix. Atherectomy sales declines were primarily due
to increasing usage of coronary stents, a competing
alternative therapy. Management believes that atherectomy
products will continue to experience sales declines in 1996
compared to 1995.
Net sales of MIS products for the three months ended June 30,
1996 were $12.2 million, an increase of $4.7 million or
62.7% over the same period in the previous year. MIS net
sales for the six months ended June 30, 1996 were $23.6
million, an increase of 63.9% over the comparable period in
1995. The Company experienced MIS sales growth in both
United States and international markets as the Company
continued to expand the marketing of its innovative
laparoscopic technologies. Sales growth was primarily driven
by the ORIGIN TACKER endoscopic fixation device and custom
procedural kits which incorporate these devices and other MIS
products.
Sales growth occurred in both the United States and
international markets. United States net sales increased
11.5% to $164.2 million and international net sales increased
31.7% to $101.3 million for the three months ended June 30, 1996
as compared to the same period in 1995. For the six months
ended June 30, 1996, United States net sales increased 9.1% to
$324.9 million and international net sales increased 27.4% to
<PAGE>
$192.7 million, as compared to the six months ended June 30,
1995. United States net sales growth was primarily due to CRM
sales of VENTAK MINI, VIGOR DR, and VIGOR SR. International net
sales growth was primarily driven by strong European and Japanese
sales of the VIGOR family of pacemakers and strong European
sales of the VENTAK MINI product family. The VIGOR family of
pacemakers, which includes conventional and adaptive-rate
pacemaker products, represents a majority of the Company's
bradycardia revenues in the United States, Europe, and Japan.
The commencement of new distribution arrangements in Japan,
Italy and the Benelux countries, and sales of the ACS MULTI-
LINK Coronary Stent, guidewires and the recently introduced
ACS RX COMET (rapid exchange catheter) in Europe contributed
to the international sales growth. Perfusion catheter and
guidewire sales in Europe and Japan also contributed to the
international sales growth.
Cost of sales was $100.0 million for the three months ended
June 30, 1996, an increase of $26.4 million or 35.9% from the
comparable period in 1995. Cost of sales as a percentage of
net sales for the three months ended June 30, 1996 was
37.7% as compared to 32.8% for the same period in 1995.
The Company took noncash obsolescence charges of $28.8
$28.8 million on certain CRM products and programmers due
to accelerated United States regulatory approval for
market release and customer acceptance of new CRM products,
particularly the VENTAK MINI, VENTAK MINI HC, and VENTAK
MINI II families of AICD devices. Cost of sales, without
considering the effect of these special obsolescence
charges, would have been $71.2 million or 26.8% of net sales
for the three months ended June 30, 1996 compared to
$73.6 million or 32.8% of net sales for the same period in
1995. This reduction in cost of sales as a percentage of net
sales resulted from enhanced vascular intervention
manufacturing efficiencies, and reduced manufacturing costs
of newer generation CRM products. For the six months ended
June 30, 1996 and 1995, cost of sales, without the effect of
the obsolescence charges in 1996, would have been $148.2
million or 28.6% of net sales and $144.4 million or 32.2% of
net sales, respectively. Including the effect of the $28.8
million special obsolescence charges, cost of sales was
$177.0 million or 34.2% of net sales for the six months ended
June 30, 1996.
<PAGE>
The Company has continued investing significant resources in
research and development to develop new innovative products.
Research and development expenses of $37.0 million for the
three months ended June 30, 1996 increased $2.6 million or
7.6% compared to the same period in 1995. These expenses
represented 13.9% and 15.4% of net sales in 1996 and 1995,
respectively. For the six months ended June 30, 1996,
research and development expenses increased $5.2 million or
7.7% and decreased as a percentage of net sales to 14.1% from
15.1% for the same period last year. Increased new product
development costs, related to the VENTAK MINI II, which had
its first implant in Europe in March 1996, and the
ACS MULTI-LINK Coronary Stent, were partially offset by
certain other research and development spending reductions,
primarily involving atherectomy products.
Sales, marketing and administrative expenses grew $12.7
million or 18.2% for the three months ended June 30, 1996
compared to the same period in the prior year. These
expenses represented approximately 31.0% of net sales in both
periods. For the six months ended June 30, 1996, sales,
marketing and administrative expenses increased 14.6% in
comparison to the same period in 1995. Variable CRM selling
expenses associated with the recent United States market
release of VENTAK MINI were among the primary reasons for
this increased spending during the period. The commencement,
primarily in the last half of 1995, of new distribution
arrangements in Japan, Italy and the Benelux countries also
contributed to the increase in sales and marketing expenses.
Increased compensation accruals due to the Company's
performance-based bonus program and related stock price
appreciation contributed to an increase in general and
administrative expenses during the period.
Total research and development, and sales, marketing and
administrative spending decreased to 45.0% of net sales for
the three months ended June 30, 1996 compared to 46.5% for
the same period in 1995. These expenses for the six months
ended June 30, 1996, decreased to 45.0% of net sales
compared to 46.1% for the six months ended June 30, 1995.
<PAGE>
Income from operations of $46.1 million and $107.9 million
for the three and six months ended June 30, 1996,
respectively, represented a 0.6% decrease and 10.8% increase
respectively, from the comparable periods in 1995. Income
from operations was negatively affected by the aforementioned
special obsolescence charges on CRM inventory and
programmers. Income from operations, without considering
these noncash charges in 1996, would have increased 61% and
40% for the three and six months ended June 30, 1996
respectively, over the same periods in 1995. Increased net
sales combined with lower costs of sales due to manufacturing
efficiencies and controlled growth in operating expenses
resulted in this growth in income from operations.
For the three months ended June 30, 1996, the Company had net
other expenses of $79.5 million compared to $10.5 million for
the same period in the prior year. The Company had net other
expenses of $94.2 million and $25.8 million for the six
months ended June 30, 1996 and 1995, respectively. Included
in net other expenses are noncash impairment charges taken by
the Company of $66.9 million against its atherectomy-related
goodwill and other intangible assets. This impairment loss
was based on an analysis performed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 121 requires
certain long-lived assets, which meet prescribed impairment
tests, to be written down to their fair values. The goodwill
and other intangible assets were recorded as part of the
purchase of Devices for Vascular Intervention, Inc. by Lilly
in 1989, prior to the formation of Guidant.
The Company's effective income tax rate, without considering
the effect of the obsolescence and impairment charges
discussed above, was 39.2% and 39.3% for the three and six
months ended June 30, 1996, respectively, compared to 40.9%
for each of the same periods in 1995. The reduced impact of
nondeductible goodwill amortization and increased benefits
from reduced state income taxes and the Company's operations
in Puerto Rico contributed to the reduced effective income
tax rate.
<PAGE>
The Company experienced a net loss for the three months ended
June 30, 1996 of $46.2 million, and a corresponding loss per
share of $0.64. For the comparable period in 1995, net
income was $21.2 million, and earnings per share was $0.30.
For the six months ended June 30, 1996 and 1995 the Company
experienced a net loss of $17.7 million and net income of
$42.3 million, respectively. Without the noncash impairment
and obsolescence charges totaling $95.7 million, net income
would have been $37.9 million, and earnings per share would
have been $0.53 for the three months ended June 30, 1996.
For the six months ended June 30, 1996, net income would
have been $66.4 million and $0.92 per share without
these charges.
LIQUIDITY AND FINANCIAL CONDITION
The Company generated cash flows which were sufficient to
fund operations. For the six months ended June 30, 1996,
cash provided by operating activities was $28.0 million
compared to $36.2 million for the same period in 1995. This
decrease of $8.2 million resulted from the timing of income
tax payments under a tax-sharing agreement with Lilly and
increased receivables due to record sales growth during the
period. These uses of cash were partially offset by higher
operating income without the effect of the noncash special
obsolescence and impairment charges.
Net cash used for investing activities totaled $20.5 million
for the six months ended June 30, 1996, compared to $36.1
million for the same period in 1995. The most significant
use of cash for investing activities in 1996 related to net
additions of property and equipment of $25.6 million. The
Company paid approximately $9.4 million to complete certain
distributor acquisitions during the six months ended June 30,
1995.
Net cash used for financing activities totaled $9.9 million
for the six months ended June 30, 1996, compared to $69.3
million for the same period in 1995. The Company's reduction
of its short-term borrowings and payment of dividends
comprise the cash used for financing activities during 1996.
Payments of its loans payable to Lilly of $54.3 million was
<PAGE>
the Company's most significant use of cash for financing
activities during the six months ended June 30, 1995.
At June 30, 1996, the Company had outstanding borrowings of
$448.7 million through the issuance of commercial paper and
bank borrowings at a weighted average interest rate of 6.08%.
The commercial paper borrowings are supported by a credit
facility which permits borrowings up to $600.0 million
through January 8, 2001. This credit facility, under which
there are currently no outstanding borrowings, carries a
variable market rate of interest.
The Company has recently filed a registration statement with
the Securities and Exchange Commission for a public offering
of approximately 10.0 million shares of common stock. The
Company intends to use the net proceeds from this offering to
reduce temporarily its outstanding commercial paper
indebtedness and bank borrowings, with a view towards
possibly reborrowing when necessary for acquisitions, and
general corporate purposes in support of the Company's
previously disclosed acquisition strategy. As a result,
these borrowings are classified as a current liability, and
current liabilities exceed current assets by $199.4 million
at June 30, 1996.
The Company expects its cash from operations to be adequate
to meet its obligations to make interest payments on its debt
and other anticipated cash needs including capital
expenditures which are expected to be approximately $60.0
million in 1996.
The Company has recognized net deferred tax assets aggregating
$55.5 million at June 30, 1996 and $59.8 million at December
31, 1995. The assets relate principally to the establishment
of inventory and product related reserves, the acquisition of
certain intangible assets, and charges associated with the
1993 restructuring. In view of the consistent profitability
of its past operations, the Company believes that all these
assets will be substantially recovered and that no
significant additional valuation allowances are necessary.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On August 28, 1995, the Company received a letter from
Pacesetter, Inc. ("Pacesetter") advising the Company that
Pacesetter believes that certain Pacesetter patents are being
used by the Company in connection with the Company's VIGOR
pacemaker/programmer combination. The Pacesetter letter and a
subsequent letter also advise that it appears to Pacesetter that
the Company may also be using certain patents licensed by Angeion
Corporation to Pacesetter in connection with the Company's VENTAK
MINI. On May 3, 1996, Pacesetter filed suit against CPI in the
United States District Court for the District of Delaware. The
complaint, as subsequently amended, alleges infringement of six
of the patents referred to in the previous letters and seeks
injunctive relief and unspecified monetary damages.
On May 15, 1996, The Johns Hopkins University ("Johns Hopkins")
filed suit against the Company and CPI in the District of
Maryland, Northern Division. The complaint alleges that certain
of the Company's defibrillators infringe a patent owned by Johns
Hopkins, that the Company has breached an agreement originally
entered into by Johns Hopkins and Medrad, Inc., and that the
Company has been unjustly enriched. Johns Hopkins is seeking
injunctive relief, specific performance, unspecified monetary
damages, and an award of attorneys' fees.
On June 4, 1996, General Surgical Innovations, Inc. ("GSI") filed
suit against the Company's subsidiary, Origin Medsystems, Inc.
("Origin") in the Northern District of California alleging that
Origin's making, using, offering to sell and selling certain
Origin Preperitoneal Distention Balloon Systems infringed and is
continuing to infringe a patent owned by GSI. GSI is seeking
injunctive relief, unspecified monetary damages and an award of
costs and attorneys' fees.
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Company's annual meeting of shareholders was held on
May 20, 1996.
(c) The following matters were voted on at the meeting:
Election of Directors:
Name For Withheld
-------------- ---------- --------
J. B. King 63,679,858 131,304
Susan B. King 63,706,588 104,574
J. Kevin Moore 63,713,643 97,519
Ruedi E. Wager 63,675,545 135,617
<PAGE>
Approval of the Guidant Corporation 1996 Nonemployee Directors
Stock Plan:
For Against Abstain No Vote
---------- ---------- --------- -------
52,322,487 10,242,682 1,245,992 1
Ratification of appointment of Ernst & Young LLP as Independent
Auditors:
For Against Abstain No Vote
---------- ---------- --------- -------
63,721,585 48,581 40,996 0
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K. During the quarter for which this
Report on Form 10-Q is filed, the Registrant filed no Report on
Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly
authorized.
GUIDANT CORPORATION
-------------------
(Registrant)
Date: August 1, 1996 /s/ Keith E. Brauer
--------------------------------
Keith E. Brauer
Vice President, Finance and
Chief Financial Officer
Date: August 1, 1996 /s/ Roger Marchetti
-------------------------------
Roger Marchetti
Chief Accounting Officer
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 900
<SECURITIES> 0<F1>
<RECEIVABLES> 222,300
<ALLOWANCES> 7,600
<INVENTORY> 104,600
<CURRENT-ASSETS> 406,500
<PP&E> 306,500
<DEPRECIATION> 226,000
<TOTAL-ASSETS> 988,200
<CURRENT-LIABILITIES> 605,900
<BONDS> 0<F1>
0<F1>
0<F1>
<COMMON> 192,500
<OTHER-SE> 180,700
<TOTAL-LIABILITY-AND-EQUITY> 988,200
<SALES> 517,600
<TOTAL-REVENUES> 0<F1>
<CGS> 177,000
<TOTAL-COSTS> 0<F1>
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 13,900
<INCOME-PRETAX> 13,700
<INCOME-TAX> 31,400
<INCOME-CONTINUING> 0<F1>
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (17,700)
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