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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 1-13388
GUIDANT CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1931722
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 317-971-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.
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,
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in the definitive proxy or information statement incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock of the registrant held
by non-affiliates as of March 3, 1997 (Common Stock) was
approximately $4.8 billion.
The number of shares of Common Stock outstanding as of March 3, 1997:
CLASS NUMBER OF SHARES OUTSTANDING
Common 74,099,252
Portions of the following documents have been incorporated by
reference into this report:
DOCUMENT PARTS INTO WHICH INCORPORATED
Registrant's Annual Report to Parts I, II and IV
Shareholders for fiscal year
ended December 31, 1996
Registrant's Proxy Statement Part III
for the Annual Meeting of Shareholders
to be held May 19, 1997
Part I
Item 1. BUSINESS
Overview
Guidant Corporation (the "Company")* 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 Eli Lilly and Company, an Indiana corporation ("Lilly"). Prior
to the consummation of the initial public offering of the Company's
common stock on December 20, 1994 (the "Offering"), the Company
was a wholly-owned subsidiary of Lilly. Pursuant to the
Offering, approximately 19.8 percent of the Company's common
stock was issued to the public. Lilly continued to own
approximately 80.2 percent of the Company's common stock after
the Offering. On September 25, 1995, Lilly disposed of its
remaining ownership interest in the Company by means of a split-
off, an exchange offer pursuant to which Lilly shareholders were
given the opportunity to exchange some, all or none of their
Lilly common stock for the Company's common stock owned by Lilly
(the "Exchange Offer"). The consummation of the Exchange Offer
resulted in Lilly distributing all of its Company common stock to
Lilly shareholders. As a result, Lilly no longer owns any
Company common stock.
The Company is a multinational company that designs,
develops, manufactures and markets a broad range of products for
use in cardiac rhythm management ("CRM"), vascular intervention
("VI"), and other forms of minimally invasive systems ("MIS").
In CRM, the Company is a worldwide leader in automatic
implantable cardioverter defibrillator ("AICD") systems. The
Company also designs, manufactures and markets a full line of
implantable pacemaker systems used in the treatment of slow or
irregular arrhythmias. In VI, the Company is a worldwide leader
in minimally invasive procedures used for opening blocked
coronary arteries. In addition, the Company develops,
manufactures and markets products for use in MIS procedures with
products for access, vision, dissection, retraction and fixation,
focusing on laparoscopic market opportunities in general and
cardiovascular surgeries. The Company's net sales for the year
ended December 31, 1996 were $1,048.5 million.
The Company'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.
Cardiovascular disease is the leading cause of death in the
United States. In implementing this strategy, the Company
focuses on the following three areas, which the Company believes
are critical to its future success: (1) global product
innovation, (2) economic partnership with customers worldwide and
(3) organizational excellence.
The Company recently decided to pursue a strategy that
includes the potential acquisition of one or more businesses in
the medical device industry. The Company plans to acquire
technologies that are complementary to its existing technology
base, products that serve the Company's existing customer base
and businesses that expand its geographical presence. However,
there can be no assurance that any acquisition will be
consummated or, if consummated, as to the timing and terms of any
transaction.
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*The terms, "Company," "Guidant," and "Registrant" are used
interchangeably herein to refer to Guidant Corporation or to
Guidant Corporation and its consolidated subsidiaries, as the
context requires.
Cardiac Rhythm Management
In the CRM market, implantable device systems are used to
detect and treat abnormally fast and abnormally slow or irregular
heart rhythms or arrhythmias. The Company's CRM product line is
organized into two major product categories. The tachycardia
("Tachy") product category includes AICDs, endocardial
defibrillation leads, programmers and accessories used primarily
in the treatment of fast arrhythmias. The bradycardia ("Brady")
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
products include electrophysiologists, implanting cardiologists
and cardiovascular surgeons. Customers for Tachy products are
primarily electrophysiologists. Sales of the Company's CRM
products, as a percentage of the Company's total consolidated net
sales for the years ended December 31, 1996, 1995 and 1994, were
55%, 49% and 44%, respectively.
Tachycardia ("Tachy")
AICD 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. Tachyarrhythmias often
result from the presence of abnormal cardiac tissue. This tissue
interferes with the normal electrical activity of the heart.
Approximately 34,000 AICDs were implanted worldwide during 1996.
Tachy products range from shock-only devices to more complex
devices and systems, including tiered-therapy devices offering
multiple therapeutic options. 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.
The Company is also developing electrophysiology catheters
and systems to diagnose and treat cardiac arrhythmias using
minimally invasive procedures. The Company believes that these
systems may be able to cure certain types of tachyarrhythmias by
locating and destroying the tissue that causes the arrhythmia.
However, there can be no assurance that these products will be
successful or that the Company will obtain the regulatory
approvals necessary for commercial marketing of these products.
In May 1996, the U.S. Food and Drug Administration ("FDA")
approved expanded product labeling claims for the Company's AICD
systems. The new labeling claims cover patients identified by
the Multicenter Automatic Defibrillator Implantation Trial
("MADIT") to be at high risk for sudden cardiac death. The
Company believes that it is the only manufacturer to currently
have approval for these labeling claims. MADIT is the first
large, randomized clinical trial comparing implantable
defibrillators with conventional antiarrhythmia drug therapy.
The study was terminated in March 1996 because of the significant
improvement in survival of patients with implantable
defibrillators. According to the principal investigator of the
study, Arthur J. Moss, M.D., professor of medicine and director
of the Heart Research Follow-Up Program at the University of
Rochester Medical Center, patients with implantable
defibrillators had 54% fewer deaths and significantly better
overall survival than patients who did not receive the device.
Dr. Moss estimates that about 800,000 Americans survive a heart
attack each year and, of those who survive, approximately 40,000-
60,000 could benefit from an AICD.
Bradycardia ("Brady")
Cardiac pacemaker systems, or Brady 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. Approximately 467,000
pacemakers were implanted worldwide during 1996.
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 through the atrium 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.
Vascular Intervention
The Company offers its customers a wide range of VI
products, including coronary dilatation catheters, stent systems,
atherectomy catheters, guide wires, guiding catheters and related
accessories. Customers for VI products are primarily
interventional cardiologists. Sales of VI products, as a
percentage of the Company's total consolidated net sales for the
years ended December 31, 1996, 1995 and 1994 were 41%, 48% and
54%, respectively.
More than six million Americans have been diagnosed with
coronary artery disease ("CAD"), which is the formation of blood
flow restrictions (atherosclerotic lesions) within the coronary
arteries. If untreated, CAD can lead to a heart attack, or cause
chest pain that may interfere with normal activities. Worldwide,
over one million patients annually undergo a minimally invasive
CAD intervention (angioplasty, stenting, atherectomy or
mechanical or laser ablation), which are less invasive and less
expensive alternatives to coronary artery bypass graft surgery.
In a percutaneous transluminal coronary angioplasty ("PTCA")
procedure, a local anesthetic is administered and a small
incision is made in the patient's groin area to gain access to
the femoral artery. The physician inserts a guiding catheter
through the femoral artery into the entrance of the coronary
blood vessel and then advances a small guide wire 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 guide wire through the inside of the guiding
catheter into the blood vessel and across the site of the
blockage. The dilatation catheter is then inflated to compress
the atherosclerotic plaque against the artery wall, thereby
enlarging the opening of the vessel and increasing blood flow to
the heart. At the end of the PTCA procedure, all of the devices
are withdrawn.
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. A number of
other technologies have evolved to treat these conditions, often
in combination with a coronary dilatation catheter, including
stenting, atherectomy and ablation. Like coronary dilatation
catheters, coronary stents, atherectomy catheters and ablation
catheters are delivered through a guiding catheter and over a
guide wire.
Coronary stents are metal tubes or coils that are mounted on
coronary dilatation catheters. Coronary stents are permanently
deployed at the blockage by inflating the coronary dilatation
catheter to expand the stent in the artery. When the coronary
dilatation catheter is removed from the artery, the stent stays
in place, which provides a "mechanical" way of keeping the artery
open. In August 1996, the Company completed enrollment of more
than 1,000 patients at 59 North American sites in a randomized
clinical trial of the Company's ACS OTW MULTI-LINK Coronary Stent
System. In addition, in December 1996, the Company received
Investigational Device Exemption (IDE) approval from the FDA to
clinically evaluate its ACS RX MULTI-LINK Coronary Stent System
in the U.S. However, no assurance can be given that the Company
will obtain the regulatory approval necessary for commercial
marketing of these products in the United States.
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.
Minimally Invasive Systems
The Company is involved in the development and marketing of
innovative surgical devices and systems which alter the surgeon's
approach to surgical procedures and may provide improved clinical
benefit, reduced operative time and better patient outcomes. The
primary customers for the Company's MIS products are surgeons who
specialize in general, gynecological, urologic and vascular
surgery. Sales of the Company's MIS products, as a percentage of
the Company's total consolidated net sales for the years ended
December 31, 1996 and 1995, were 4% and 3%, respectively. Prior
to 1995, the percentage was less than 3%. Certain of these
devices were developed for and manufactured under original
equipment manufacturer (OEM) distribution arrangements.
MIS uses small incisions to gain access to the surgical
site. Minimally invasive surgical techniques significantly
decrease the patient's postoperative 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 techniques. In May
1996, the Company announced that the strategic focus for its MIS
business would be on cardiovascular applications.
Products
Tachy Products
The Company 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.
The Company's key Tachy products include:
Category Description Product Name Date of Commercial Release
- -------- ----------- ------------ --------------------------
First
U.S. International
Release Release
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Shock-Only AICDs that provide VENTAK MINI+HC/S May 1996 Dec. 1995
low and high energy VENTAK MINI+S Jan. 1996 Dec. 1995
shock therapy, VENTAK P3 Sep. 1995 Oct. 1994
but do not provide
antitachycardia
pacing. Some
devices also
provide Brady
pacing.
Tiered- AICDs that provide VENTAK AV (1) Nov. 1996
Therapy low and high VENTAK MINI II+ July 1996 June 1996
energy shock VENTAK MINI II July 1996 June 1996
therapy, Brady VENTAK MINI+HC May 1996 Dec. 1995
pacing and VENTAK MINI HC May 1996 Dec. 1995
antitachycardia VENTAK MINI + Jan. 1996 Dec. 1995
pacing. VENTAK MINI Jan. 1996 Dec. 1995
VENTAK PRx III May 1995 Oct. 1994
Endocardial Insulated wires, ENDOTAK DSP Jan. 1996 Oct. 1994
Defibril- inserted through ENDOTAK 70 Series Aug. 1994 Nov. 1992
lation a vein into the
Leads heart, which allow
energy to be trans-
mitted to and from
the implanted AICD,
allowing arrhythmias
to be detected and
treated.
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(1) This product is not currently available in the United States. There can be
no assurance that the Company will obtain the regulatory approval necessary
for commercial marketing of this product in the United States.
Brady Products
The Company offers a broad 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. The Company's key Brady
products include:
Category Description Product Name Date of Commercial Release
- -------- ----------- ------------ --------------------------
First
U.S. International
Release Release
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Single Pacemakers that VIGOR SSI March 1995 May 1993
Chamber pace one chamber VISTA VVI Apr. 1988 Dec. 1987
(SSI) of the heart,
typically the
ventricle, at a
programmed rate.
Single Pacemakers that VIGOR SR June 1995 May 1993
Chamber pace one chamber
Adaptive- of the heart,
Rate and incorporate
(SSIR) a sensor that
modifies the pacing
rate in response
to physical
activity.
Dual Chamber Pacemakers that VIGOR DDD Oct. 1994 May 1993
(DDD) pace both chambers VISTA DDD June 1990 Oct. 1989
of the heart,
thereby improving
heart synchroni-
zation and
cardiac output.
Dual Chamber Pacemakers that VIGOR DR June 1995 May 1993
Adaptive- pace both chambers
Rate (DDDR) of the heart, and
incorporate a
sensor that
modifies the pacing
rate in response
to physical
activity.
Endocardial Insulated wires, SELUTE May 1996 Dec. 1994
Pacemaker inserted through SELUTE Atrial (1) June 1996
Leads a vein into the SWEET TIP RX (1) June 1996
heart, which allow
energy to be
transmitted to and
from the implanted
pacemaker.
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(1) This product is not currently available in the United States. There can be
no assurance that the Company will obtain the regulatory approval necessary
for commercial marketing of this product in the United States.
Vascular Intervention Products
The Company offers its customers a wide range of VI products, including
coronary dilatation catheters, stents, atherectomy catheters, guide wires and
accessories. The Company's key VI products include:
Date of U.S.
Commercial
Category Description Product Name Release
- -------- ----------- ------------ ------------
Perfusion Perfusion coronary ACS OTW LIFESTREAM Dec. 1995
Coronary dilatation catheters ACS RX LIFESTREAM Mar. 1995
Dilatation allow continuous ACS RX FLOWTRACK Mar. 1993
Catheter blood flow during ACS RX PERFUSION Dec. 1990
the PTCA procedure,
offering flexibility
in inflation times.
Perfusion catheters
are available in RX
and OTW configurations.
Rapid RX coronary ACS RX COMET VP Feb. 1997
Exchange dilatation catheters ACS RX COMET Nov. 1996
("RX") allow for easy RX ELIPSE Oct. 1993
Coronary exchange of the
Dilatation catheter without
Catheter removing the
original guide wire.
Over the OTW coronary ACS Tx2000 Nov. 1996
Wire dilatation catheters ACS ENDURA Mar. 1996
("OTW") are delivered ACS CONCORDE Feb. 1996
Coronary over a separate ACS OMEGA Mar. 1992
Dilatation guide wire to PINKERTON .018 Sept. 1989
Catheter position the balloon
across the lesion.
Fixed-Wire Fixed-wire catheters SLALOM PLUS Jan. 1991
Coronary permit access
Dilatation through tortuous and
Catheter very small vessels.
Stents Stents are ACS OTW MULTI-LINK (1)
implantable metal ACS RX MULTI-LINK (1)
devices that are ACS RX MULTI-LINK HP (1)
permanently
deployed to provide
a "mechanical" way
to keep an artery
open.
Vascular Intervention Products (continued)
Date of U.S.
Commercial
Category Description Product Name Release
- -------- ----------- ------------ ---------
Guide wires Individual ACS HI-TORQUE IRON MAN Jan. 1997
guide wires are HI-TORQUE BALANCE Oct. 1994
inserted through ACS HI-TORQUE EXTRA S'PORT Sept. 1994
coronary and HI-TORQUE EXTRA SUPPORT Feb. 1992
peripheral vessels HI-TORQUE TRAVERSE Nov. 1991
before the dilatation DOC Feb. 1988
catheter, facilitating HI-TORQUE FLOPPY II June 1986
the placement of the
dilatation catheter
or atherectomy
catheter.
Atherectomy Catheters which ATHEROCATH-BANTAM Dec. 1996
Products allow for the ATHEROCATH-GTO Sept. 1994
excision and removal ATHEROCATH SCA-EX Sept. 1992
of atherosclerotic
plaque.
Accessories Accessories are INDEFLATOR 20/30 Sept. 1996
products that ACS ANCHOR Apr. 1996
facilitate the TOURGUIDE Dec. 1995
delivery or INDEFLATOR 20/20 March 1990
operation of a
device.
Imaging Imaging systems SONICATH (2) Dec. 1996
that allow for an MICRORAIL (2) Dec. 1996
ultrasound scan MICROVIEW (2) Dec. 1996
of the coronary ULTRACROSS (2) Dec. 1996
arteries.
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(1) This product is released in select international markets and is not
currently available in the United States. There can be no assurance that
the Company will obtain the regulatory approval necessary for commercial
marketing of this product in the United States.
(2) The products are offered by the Company through a distribution agreement
with Hewlett Packard Company. The product names are trademarks of Boston
Scientific Corporation.
MIS Products
The Company markets a broad portfolio of minimally invasive systems
products ranging from basic laparoscopic tools to innovative enabling
technologies. The Company's key MIS products include:
Date of
First
Commercial
Category Description Product Name Release
- -------- ----------- ------------ -------
Access Trocars provide CHOICE TIP Trocar System Oct. 1996
minimally invasive Sensing Tip Trocars Nov. 1993
access to the GASLESS Trocars June 1993
abdominal cavity. Blunt Tip Trocars Apr. 1993
CLASSIC TIP Trocars Jan. 1993
Balloon Balloon dissection EXTRA VIEW Balloons Jan. 1996
Dissection/ atraumatically -Oval
Stabilization creates -Round
extraperitoneal Structural Balloons Sept. 1994
working space PDB 1000 Dec. 1993
that facilitates PDB 2 Nov. 1993
advanced
laparoscopic
procedures.
Fixation Devices utilized ORIGIN STAT-TACK Sept. 1996
to position and ORIGIN TACKER Sept. 1995
secure prosthetic Polypropylene Mesh May 1995
materials.
Retraction Devices that employ AIRLIFT Jr. Balloon Retractor Nov. 1996
a mechanical arm EXTRAHAND Balloon Retractor Nov. 1996
and retractors AIRLIFT Balloon Retractor May 1995
to lift the LAPAROFAN Retractors Sept. 1993
abdominal wall LAPAROLIFT Mechanical Arm Dec. 1992
to create working
space.
Vessel Devices for VASOVIEW Balloon Sept. 1996
Harvesting minimally invasive Dissection System
access to the VASOVIEW 5mm Sept. 1996
saphenous vein. Endoscope
Wound Closure Multiple fire clip ACUCLIP Right Angle Nov. 1992
appliers dispense Clip Applier
titanium clips that
ligate vessels and
ducts during
laparoscopic
procedures.
Sales and Marketing
The Company 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 the Company serves, the Company's
distribution system includes both direct sales forces and
independent distributors. The Company utilizes separate sales
forces to sell its CRM, VI and MIS products in order to take
advantage of specific clinical and technical expertise. 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 the Company's products. The Company is not dependent
on any single customer and no single customer accounted for more
than 5% of the Company's net sales in 1996.
Sales personnel work closely with the primary decision
makers who purchase the Company's products, whether physicians,
material managers, biomedical staff, hospital administrators or
purchasing managers. Additionally, the sales forces actively
pursue approval of the Company as a qualified supplier for
hospital group purchasing organizations that negotiate contracts
with suppliers of medical products. The Company 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, the Company has contracted with a number of
hospitals to provide VI products under a predictable procedural
cost program.
The sales organization compensation and incentive packages
includes a mix of base salary, commissions and bonus plans that
are based upon specific targets and/or corporate goals and are
tailored to meet local market needs and business practices.
United States
In the United States, the Company sells substantially all of
its products through its direct sales forces. The different uses
of the Company's product lines and the different physicians
performing the corresponding procedures necessitate focused sales
organizations that can utilize their specific clinical and
technical knowledge. In 1996, 61% of the Company's consolidated
net sales were derived from sales in the United States.
The Company's sales operations for its CRM and VI products
are divided into three geographic areas within the United States,
under a single management structure to which all sales and
distribution operations report. The Company believes this
geographic organizational structure provides the opportunity to
leverage the Company's resources across the individual business
unit sales organizations by facilitating rapid decision making
and development of sales and marketing strategies at the customer
level, while retaining its clinical focus.
International
In 1996, 39% of the Company's net sales were derived from
its international operations through its direct sales forces and
independent distributors. The Company sells its products in over
70 countries. Major international markets for the Company's
products include: Japan, Germany, France, Spain, Italy, the
United Kingdom, Australia, Belgium, The Netherlands, and Canada.
The sales and marketing approach in international markets varies
depending on market size and stage of development. The Company's
geographic-based sales organization gives the Company greater
flexibility in responding to each of these markets.
Manufacturing
The Company's manufacturing operations are carried out in
facilities in Menlo Park, Santa Clara and Temecula, California;
St. Paul, Minnesota; Dorado, Puerto Rico; and Basingstoke,
England.
In general, the Company'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. In addition,
manufacturing employees are trained in the necessary production
operations and in the Quality System Regulation requirements
(regulations adopted by the FDA in October, 1996 which replace
the requirements previously known as Good Manufacturing
Practices) applicable to the production process. The Company
uses various production and quality performance measures to
provide high manufacturing quality and efficiency.
The Company vertically integrates its operations where it
believes such integration provides significant cost, supply or
quality benefits. In some areas, the Company is highly
vertically integrated. In other cases, the Company purchases
components. In all cases, the Company attempts to work closely
with its suppliers to ensure the cost-effective delivery of high
quality materials and components. The Company's major
considerations used in the selection and retention of suppliers
are supplier technology, quality, reliability, consistent on-time
deliveries, value-added services and cost. The Company tries to
select and build long-term relationships with suppliers who have
demonstrated a commitment to these factors. To date, the Company
has been able to obtain all required components and materials for
all market released products and for all products under
development.
Raw Materials
The Company purchases certain of the materials and
components used in manufacturing its products, some of which are
custom-made for the Company. In addition, the Company 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, they intend to limit or terminate sales to the medical
device industry. In addition, agreements with certain suppliers
can be terminated by either party upon short notice. The Company
has agreed to indemnify certain suppliers against certain
potential product liability exposure. 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
the Company.
Patents, Trademarks, Proprietary Rights and Licenses
The Company believes that patents and other proprietary
rights are important to its business. The Company also relies
upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain
its competitive position. The Company reviews third-party
patents and patent applications in an effort to develop an
effective patent strategy, identify licensing opportunities and
monitor the patent claims of others.
The Company owns numerous patents and has numerous patent
applications pending in the United States and in certain foreign
countries which relate to aspects of the technology used in many
of the Company's products. The Company's policy is generally to
file patent applications in the United States and foreign
countries where rights are available and the Company believes it
is commercially advantageous to do so. In addition, the Company
is 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. The Company has also granted various rights in
its own patents to others under license agreements. There can be
no assurance that pending patent applications will result in
issued patents, that patents issued to or licensed by the Company
will not be challenged or circumvented by competitors, that such
patents will not be found to be invalid or that such patents will
be found to be sufficiently broad to protect the Company's
technology or provide the Company with a competitive advantage.
The Company actively monitors the products of its
competitors for possible infringement of the Company's owned
and/or licensed patents. Historically, litigation has been
necessary to enforce certain patent rights held by the Company
and the Company plans to continue to defend and prosecute its
rights with respect to such patents. There can be no assurance,
however, that the Company's efforts in this regard will be
successful. In addition, patent litigation could result in
substantial cost to and diversion of effort by the Company. The
Company also relies upon trade secrets 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 the
Company's trade secrets.
It is the Company's policy to require certain of its
employees, consultants and other parties to execute
confidentiality and invention assignment agreements upon the
commencement of employment or consulting relationships with the
Company. There can be no assurance, however, that these
agreements will provide meaningful protection against, or
adequate remedies for, the unauthorized use or disclosure of the
Company's trade secrets.
The Company has registered trademarks in the following names
and products that are referred to herein: ACS, ACS EDGE, ACS
OMEGA, ACUCLIP, AICD, ATHEROCATH, ATHEROCATH-GTO, CPI, DOC,
ENDOTAK, ENDOTAK DSP, EXCEL, HI-TORQUE BALANCE, HI-TORQUE EXTRA
SUPPORT, HI-TORQUE FLOPPY II, HI-TORQUE TRAVERSE, INDEFLATOR,
LAPAROFAN, LAPAROLIFT, ORIGIN, PDB, PRx, RX ELIPSE, SELUTE,
SLALOM PLUS, VENTAK, VIGOR and VISTA. The following are
trademarks of the Company: ACS ANCHOR, ACS CONCORDE, ACS ENDURA,
ACS HI-TORQUE EXTRA S'PORT, ACS HI-TORQUE IRON MAN, ACS OTW
LIFESTREAM, ACS OTW MULTI-LINK, ACS RX MULTI-LINK, ACS RX MULTI-
LINK HP, ACS OTW LIFESTREAM, ACS RX FLOWTRACK, ACS RX LIFESTREAM,
ACS RX PERFUSION, ACS RX COMET, ACS Tx 2000, AIRLIFT, AIRLIFT
JR., ATHEROCATH-BANTAM, CLASSIC TIP, CHOICE TIP, EXTRAHAND,
EXTRAVIEW, GASLESS, INDEFLATOR PLUS 20, INDEFLATOR 20/30, ORIGIN
TACKER, PINKERTON .018, SCA-EX, STAT-TACK, SWEET TIP RX,
TOURGUIDE, VASOVIEW and VENTAK MINI.
There has been substantial litigation regarding patent and
other intellectual property rights in the medical device
industry. From time to time, the Company is subject to claims
of, and legal actions alleging, infringement by the Company of
the patent rights of others. The Company believes that it has
been vigilant in reviewing the patents of others with regard to
the Company's products. However, an adverse outcome with respect
to any one or more of these claims or actions could have a
material adverse effect on the Company.
Competition
The medical devices market is highly competitive. The
Company competes with many companies, some of which may have
access to greater financial and other resources than the Company.
Furthermore, the medical devices market is characterized by rapid
product development and technological change. The present or
future products of the Company could be rendered obsolete or
uneconomic by technological advances by one or more of the
Company's present or future competitors or by other therapies
such as drugs. The Company must continue to develop and acquire
new products and technologies to remain competitive with other
developers of medical devices and therapies.
The Company faces substantial competition from a number of
other companies in the markets for its products. The Company's
primary competitors in the Brady pacemaker market are Medtronic,
Inc., Pacesetter, Inc. (St. Jude Medical, Inc.), Sulzer
Intermedics, Inc. (Sulzer Brothers Ltd.) and Telectronics Pacing
Systems (St. Jude Medical). In the Tachy market, the Company
competes primarily with Medtronic, Inc. and Ventritex, Inc. The
Company's primary competitors in VI are SciMed Life Systems, Inc.
and Heart Technologies, Inc. (Boston Scientific), Cordis
Corporation and Johnson & Johnson Interventional Systems (Johnson
& Johnson), Schneider (Pfizer), USCI (C. R. Bard, Inc.), and
Medtronic, Inc. With respect to MIS devices, the principal
competitors of the Company are the United States Surgical
Corporation and Ethicon Endo-Surgery, Inc. (Johnson & Johnson).
The Company believes that it competes primarily on the basis of
product features, product quality, customer support, field
services and cost-effectiveness.
Government Regulation
As a manufacturer of medical devices, the Company 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 design, manufacture,
testing, labeling and promotion of such devices, the maintenance
of certain records, the ability to track devices, the reporting
of potential product defects, the export of devices and other
matters. The Company believes that it is in substantial
compliance with such governmental regulations.
From time to time, the Company has received notifications,
including warning letters, from the FDA of alleged deficiencies
in the Company's compliance with FDA requirements. To date, the
Company has been able to address or correct such deficiencies to
the satisfaction of the FDA and, to the extent deficiencies arise
in the future, the Company 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, the Company 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 the
Company, but there can be no assurance that a future recall or
safety alert would not have such an effect.
All of the Company's medical devices introduced in the
United States market since 1976, which include substantially all
of the Company's products, are required by the FDA, as a
condition of marketing, to secure a premarket notification
clearance pursuant to Section 510(k) of the federal Food, Drug
and Cosmetic Act, an approved pre-market approval ("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 addition to
requiring clearance for new products, FDA rules may require a
filing and FDA approval, usually through a PMA supplement or a
510(k) pre-market notification clearance, prior to marketing
products that are modifications of existing products.
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, if at all. Delays in receipt
of or failure to receive such approvals could have a material
adverse effect on the Company's business. Moreover, after
clearance is given, if the product is shown to be hazardous or
defective, the FDA and foreign regulatory agencies have the power
to withdraw such clearance or require the Company to change the
device, its manufacturing process or its labeling, to supply
additional proof of its safety and effectiveness or to recall,
repair, replace or refund the cost of the medical device. In
addition, federal, state and foreign regulations regarding the
manufacture and sale of medical devices are subject to future
changes. The Company cannot predict what impact, if any, such
changes might have on its business. However, such changes could
have a material impact on the Company's business.
The Company is also required to register with the FDA as a
device manufacturer. As such, the Company is subject to periodic
inspection by the FDA for compliance with the FDA's Quality
System Regulation and other regulations. These regulations
require that the Company manufacture its products and maintain
its documents in a prescribed manner with respect to design,
manufacturing, testing and control activities. Further, the
Company is required to comply with various FDA requirements for
labeling and promotion. The Medical Device Reporting regulation
requires that the Company 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,
if a malfunction were to recur, could cause or contribute to a
death or serious injury. In addition, the FDA prohibits the
Company 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 warning letter,
issue a recall order, impose operating restrictions, enjoin
future violations and assess civil 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.
Medical device laws are also in effect in many of the
countries in which the Company does business outside the United
States. These laws range from comprehensive device approval
requirements for some or all of the Company's medical device
products to simpler requests for product data or certifications.
The number and scope of these requirements are increasing. In
addition, the Company is required to notify the FDA if it exports
medical devices manufactured in the United States that have not
been approved by the FDA for distribution in the United States.
The Company is also required to maintain certain records relating
to these exports and make the records available to the FDA for
inspection, if required.
Health Care Cost Containment; Third-Party Reimbursement
During the past several years, the major third-party payors
of hospital services in the United States (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 the Company's
products, the Company 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. Certain states have already made significant
changes to their Medicaid programs and have also adopted health
care reform. Similar initiatives to limit the growth of health
care costs, including price regulation, are also underway in
several other countries in which the Company does business.
Implementation of health care reform may limit the price of, or
the level at which reimbursement is provided for, the Company's
products.
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 have attempted to
dramatically reshape reimbursement policies affecting medical
devices. Further restrictions on reimbursement of the Company's
customers will likely have an impact on the products purchased by
customers and the prices they are willing to pay.
Product Liability and Insurance
The design, manufacture and marketing of medical devices of
the types produced by the Company entail an inherent risk of
product liability claims. The Company's products are often used
in intensive care settings with seriously ill patients. In
addition, many of the medical devices manufactured and sold by
the Company are designed to be implanted in the human body for
long periods of time or indefinitely. The occurrence of a
problem with one of the Company's products could result in
product liability claims and/or a recall of, or safety alert
relating to, the product. While the amount of product liability
insurance maintained by the Company has been adequate in relation
to claims made against the Company in the past, there can be no
assurance that the amount of such insurance will be adequate to
satisfy claims made against the Company in the future or that the
Company 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 the
Company's business, financial condition and reputation, and on
the Company's ability to attract and retain customers for its
products.
Environmental Compliance
The Company is subject to various federal, state and local
laws and regulations relating to the protection of the
environment. In the course of its business, the Company is
involved in the handling, storage and disposal of certain
chemicals. While the Company 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.
Research and Development
The Company 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
uses of its products are appropriate. The Company 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.
The Company's research and development activities are
carried out primarily in facilities located in Santa Clara, Menlo
Park, and Temecula, California; St. Paul, Minnesota; and
Basingstoke, England. The Company's research and development
staff is focused on product design and development, quality,
clinical research and regulatory compliance. To pursue primary
research efforts, the Company has developed alliances with
several leading research institutions and universities, including
a CRM research laboratory at the University of Alabama at
Birmingham. The Company also works with leading clinicians
around the world in conducting scientific studies on the
Company's products. These studies include clinical trials which
provide data for use in regulatory submissions and post market
approval studies involving applications of the Company's
products.
The Company evaluates developing technologies in areas where
it may have technological or marketing expertise for possible
investment or acquisition. The Company has invested in several
start-up ventures. In return for funding and technology, the
Company has received equity interests in these ventures.
Quality Assurance Systems
The Company is committed to providing high quality products
to its customers. To meet this commitment, the Company has
implemented modern quality systems and concepts throughout the
organization. The Company'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.
Certain of the Company's operations are certified under ISO
9001 and 9002 international quality system standards. 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. The
Company's CRM facilities have been audited by British Standards
Institute and have obtained and continue to maintain ISO 9001 and
9002 certifications. These certifications require that these
facilities undergo periodic reexamination. The Company's VI
facilities in California and England have been audited and
approved for ISO 9001 certification. The Company's MIS
facilities have also received ISO 9001 certification.
Executive Officers of the Company
Name Position Age
- ---- -------- ---
James M. Cornelius Chairman of the Board of 53
Directors and Director
Ronald W. Dollens President, Chief Executive 50
Officer and Director
J.B. King Vice President, 67
General Counsel,
Secretary and Director
James R. Baumgardt President, Western Hemisphere 49
Sales
Keith E. Brauer Vice President, Finance and 48
Chief Financial Officer
A. Jay Graf President, Cardiac Rhythm 49
Management Group
Ginger L. Howard President, Vascular 41
Intervention Group
Cynthia L. Lucchese Treasurer 36
Roger Marchetti Corporate Controller and 39
Chief Accounting Officer
Richard M. van Oostrom President of Operations, 52
Europe, Middle East and Africa
F. Thomas (Jay) President, Minimally Invasive 44
Watkins, III Systems Group
Joseph A. Yahner Vice President, Human Resources 49
and Corporate Affairs
A brief summary of the recent business and professional
experience of each executive officer is set forth below.
JAMES M. CORNELIUS Mr. Cornelius is Chairman of the Board
of Directors and a Director of the Company. Previously, he was
Vice President, Finance and Chief Financial Officer of Lilly from
1983 until his retirement in October 1995 and was a Director for
Lilly. Mr. Cornelius has served as Treasurer of Lilly and as
President of IVAC Corporation, a former Lilly medical device
subsidiary. He joined Lilly in 1967. Mr. Cornelius is a
director of American United Life Insurance Company, Lilly
Industries, Inc., and the National Bank of Indianapolis. Mr.
Cornelius also serves as a trustee of the University of
Indianapolis.
RONALD W. DOLLENS Mr. Dollens is President, Chief Executive
Officer and a Director of the Company. Previously, he served as
President of Lilly's MDD Division from 1991 until 1995. Mr.
Dollens served as Vice President of Lilly's MDD Division and
Chairman of the Company's subsidiary, Advanced Cardiovascular
Systems, Inc. ("ACS") from 1990 to 1991. He also held the
position of President and Chief Executive Officer of ACS. Mr.
Dollens joined Lilly in 1972. Mr. Dollens currently serves on the
boards of Physio-Control International Corporation, the Health
Industry Manufacturers Association, the Eiteljorg Museum, and the
Indiana State Symphony Society Board. He is also the President
of the Indiana Health Industry Forum.
J. B. KING Mr. King is Vice President, General Counsel,
Secretary and a Director of the Company. Mr. King also acts as
counsel to the law firm of Baker & Daniels, which provides legal
services to the Company. 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, IWC Resources, Inc., and the James Whitcomb
Riley Memorial Association.
JAMES R. BAUMGARDT Mr. Baumgardt is a Vice President of the
Company and President, Western Hemisphere Sales. Previously he
held the position of Vice President, Corporate Resources from
1994 to 1995. Mr. Baumgardt has also served as Executive
Director of Human Resources and Business Development for the MDD
Division of Lilly from 1992 to 1994. Mr. Baumgardt was Director
of Personnel for Lilly 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.
KEITH E. BRAUER Mr. Brauer is Vice President, Finance and
Chief Financial Officer for the Company. Previously, 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.
A. JAY GRAF Mr. Graf is a Vice President of the Company and
President of the Cardiac Rhythm Management Group. He has been
President and Chief Executive Officer of the Company's
subsidiary, Cardiac Pacemakers, Inc. ("CPI") since 1992. He
joined CPI as Executive Vice President and Chief Operating
Officer in 1990. Mr. Graf has also held the position of Senior
Vice President of Operations at Physio-Control Corporation.
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 ATS Corporation and the
St. Paul Area United Way.
GINGER L. HOWARD Ms. Howard is a Vice President of the
Company and President of the Vascular Intervention Group. She
has been President of ACS since 1993. She served as a 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
Amylin Pharmaceuticals, Inc. and the California Healthcare
Institute. She also serves on the advisory board for the
California Institute for Federal Policy Research and is a member
of the Committee of 200.
CYNTHIA L. LUCCHESE Ms. Lucchese is Treasurer of the
Company. She served as Worldwide Treasury Planning Manager for
Lilly from 1992 to 1994. She served as Audit Manager for Lilly
from 1990 to 1992. Ms. Lucchese joined Lilly in 1987. Prior to
joining Lilly, she was on the audit staff of Ernst & Young from
1982 to 1986. Ms. Lucchese is a Certified Public Accountant.
She is also a director for MEDMARC Mutual Insurance Company, Inc.
ROGER MARCHETTI Mr. Marchetti is Corporate Controller and
Chief Accounting Officer of the Company. 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 1988 as
General Accounting Manager. Prior to joining ACS, 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.
RICHARD M. VAN OOSTROM Mr. van Oostrom is a Vice President
of the Company and President of Operations, Europe, Middle East
and Africa. 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 for Lilly 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.
F. THOMAS (JAY) WATKINS, III Mr. Watkins is a Vice
President of the Company and President of the Minimally Invasive
Systems Group. He has also been President of the Company's
subsidiary, Origin Medsystems, Inc. ("Origin") since 1995. 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. He is
a director of Gynecare, Inc. and CardioGenesis Corporation.
JOSEPH A. YAHNER Mr. Yahner is Vice President of Human
Resources and Corporate Affairs for the Company. Previously, he
was Vice President of Human Resources for CPI and U.S.
Operations, positions he held from 1992 and 1994, respectively,
to 1995. He served as Director of Operations at Lilly's
Tippecanoe Laboratories from 1988 to 1992. Mr. Yahner has also
served in various positions in Personnel, Research,
Manufacturing, Quality Control and Technical Services for Lilly.
Mr. Yahner joined Lilly in 1971.
Employees
As of December 31, 1996, the Company had 4,449 full-time
employees. The Company maintains compensation, benefits, equity
participation and work environment policies intended to assist in
attracting and retaining qualified personnel. The Company
believes that the success of its business will depend, in
significant part, on its ability to attract and retain such
personnel. In addition, the Company contracts for services where
appropriate. 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 the Company's employees are represented by a labor
union. The Company has never experienced an organized work
stoppage or strike and considers its relations with its employees
to be excellent.
Prior Relationship with Lilly
The Company was incorporated on September 9, 1994 as a
wholly-owned subsidiary of Lilly. In November 1994, Lilly
transferred all of its outstanding capital stock of ACS, CPI and
Devices for Vascular Intervention, Inc. to the Company in
exchange for shares of the Company's common stock. As part of
this transfer, the Company agreed to indemnify Lilly for any
losses arising out of or otherwise related to the ownership or
operation at any time of the businesses conducted by the Company.
Also in November 1994, the Company purchased from Lilly all of
the capital stock of Heart Rhythm Technologies Incorporated and
Origin and certain assets used in the Company's international
businesses. In connection with these transactions, the Company
and Lilly also entered into a Tax Sharing Agreement which
provides, among other things, that should the Exchange Offer,
which was intended to qualify as a tax-free distribution pursuant
to Section 355 of the Internal Revenue Code of 1986, subsequently
fail to qualify under Section 355 as a result of any event wholly
or partially within the control of the Company and its
subsidiaries (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 Exchange Offer, then
the Company is obligated to indemnify and hold Lilly harmless
from any tax liability imposed on Lilly in connection with the
Exchange Offer, which liability would be material.
Financial Information Relating to Classes of Products
Financial information relating to classes of products, set
forth in the Company's 1996 Annual Report to Shareholders under
"Management's Discussion and Analysis of Results of Operations
and Financial Condition," at page 13, is incorporated herein by
reference.
Due to several factors, including the introduction of new
products by the Company and other manufacturers, the relative
contribution of any particular Company product to consolidated
net sales is not necessarily constant from year to year, and its
contribution to consolidated net income is not necessarily the
same as its contribution to consolidated net sales.
Financial Information Relating to Foreign and Domestic Operations
Financial information relating to foreign and domestic
operations, set forth in the Company's 1996 Annual Report to
Shareholders at page 28 under "Notes to Consolidated Financial
Statements--Geographic Information," is incorporated herein by
reference.
Local restrictions on the transfer of funds from branches
and subsidiaries located abroad (including the availability of
dollar exchange) have not to date been a significant deterrent in
the Company's overall operations abroad. The Company cannot
predict what effect these restrictions or the other risks
inherent in foreign operations, including possible
nationalization, might have on its future operations or what
other restrictions may be imposed in the future.
Item 2. PROPERTIES
As of December 31, 1996, the Company owned or leased the following
facilities:
Approximate Leased or
Location Type of Facility Square Feet Owned
- -------- ---------------- ----------- ---------
Basingstoke, UK Administration, VI 24,000 Leased
manufacturing and
product development
Brussels, Belgium Administration 17,000 Leased
Dorado, PR CRM manufacturing, research 54,000 Owned
and administration
Indianapolis, IN Administration 18,000 Leased
Menlo Park, CA MIS manufacturing, research 63,000 Leased
and development, admini-
stration, sales and marketing
and warehouse
Santa Clara, CA VI manufacturing, research 370,000 Owned
and development, admini-
stration, and sales and
marketing
St. Paul, MN CRM manufacturing, research 315,000 Owned
and development, admini-
stration and sales and
marketing
St. Paul, MN CRM lead development and 100,000 Leased
administration
St. Paul, MN CRM packaging, shipping 25,000 Leased
and warehouse
Temecula, CA VI manufacturing; CRM 500,000 Owned
manufacturing, research
and development and
administration
Tokyo, Japan Administration 10,000 Leased
The Company currently maintains its executive offices at 111
Monument Circle, 29th Floor, Indianapolis, Indiana. Subject to
normal expansion, the Company believes that its facilities are
adequate to meet its present and reasonably foreseeable needs.
The Company believes that none of its properties is subject
to any encumbrance, easement or other restriction that would
detract materially from its value or materially impair its use in
the operation of the business of the Company. The buildings
owned by the Company are of varying ages and are in good
condition.
Item 3. LEGAL AND REGULATORY PROCEEDINGS
On May 31, 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. In
addition, on November 17, 1995, SciMed filed suit against ACS in
the Northern District of California, San Francisco Division,
alleging that the ACS RX LIFESTREAM catheter infringed certain
SciMed patents. Both cases seek injunctive relief and
unspecified monetary damages. ACS exercised its rights under a
settlement agreement between ACS and SciMed (the "Settlement
Agreement") and initiated arbitration proceedings claiming that
these catheters are licensed products under the Settlement
Agreement. The Court granted ACS' request that the two lawsuits
be stayed pending the outcome of the arbitration. In March 1997,
the Arbitration Panel ruled that the ACS RX FLOWTRACK 40 and
ACS RX LIFESTREAM were licensed products under the Settlement
Agreement. However, the Arbitration Panel ruled that the ACS RX
ELIPSE was not a licensed product. As a result, the lawsuit
regarding the ACS RX ELIPSE will proceed.
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 lawsuit was subsequently
transferred to the United States District Court for Minnesota.
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 or sold by CPI). Intermedics is seeking
injunctive and monetary relief of an unspecified amount.
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 be using certain patents licensed to Pacesetter
in connection with the Company's VENTAK MINI family of
defibrillators. On May 3, 1996, Pacesetter filed suit against
CPI in the United States District Court for the District of
Delaware. The lawsuit was subsequently transferred to the United
States District Court for Minnesota. The complaint, as
subsequently amended, alleges infringement of certain of the
patents referred to in the previous letters and seeks injunctive
relief, unspecified monetary damages, and an award of attorneys'
fees.
On December 15, 1995, Boston Scientific Corporation and its
subsidiary, SciMed (collectively, "BSC"), filed suit against ACS
in the United States District Court of Massachusetts alleging
violation of federal and state antitrust laws, as well as state
unfair competition and abuse of process laws. The lawsuit seeks
injunctive relief, unspecified monetary damages and a declaration
that certain patents are unenforceable. BSC alleges 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.
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.
The Company is a party to certain other legal actions
arising in the ordinary course of its business. While it is not
possible to predict or determine the outcome of the legal actions
brought against the Company, the Company believes that the costs
associated with all of these actions will not have a material
adverse effect on the Company's consolidated financial position
or liquidity, but could possibly be material to the consolidated
results of operations in any one accounting period.
On August 23, 1996, following the filing with the French
Ministry of Labor and Social Affairs of a small number of
reported incidents concerning the use in France of the ACS RX
MULTI-LINK Coronary Stent System, the Company in cooperation with
the French Ministry voluntarily suspended sales of this product
and recalled units in France.
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matters were submitted
to a vote of security holders.
Part II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock
Exchange ("NYSE") and the Pacific Stock Exchange ("PSE").
Information relating to the high and low sales prices per share
of the Company's common stock, as reported in the consolidated
transactions reporting system on the NYSE set forth in the
Company's 1996 Annual Report to Shareholders under "Notes to
Consolidated Financial Statements--Selected Quarterly Information
(Unaudited)," at page 30 is incorporated herein by reference.
During each quarter of 1996 and the third and fourth
quarters of 1995, the Company paid a quarterly cash dividend of
$0.025 per share of the Company's common stock. The declaration
and payment of future dividends to holders of the Company's
common stock will be at the discretion of the Board and will
depend upon many factors, including the Company's competitive
position, financial condition, earnings and capital requirements.
Accordingly, there is no requirement or assurance that dividends
will be declared or paid.
As of March 3, 1997, the number of record holders of the
Company's common stock was 3,271.
Item 6. SELECTED FINANCIAL DATA
Selected financial data for each of the Company's five most
recent fiscal years, set forth in the Company's 1996 Annual
Report to Shareholders under "Selected Consolidated Financial
Data," at page 12, are incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Management's Discussion and Analysis of Results of
Operations and Financial Condition, set forth in the Company's
1996 Annual Report to Shareholders under "Operating Results"
(pages 13-16), "Liquidity and Financial Condition" (pages 16-17),
and "Regulatory and Other Matters" (page 17), is incorporated
herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its
subsidiaries, listed in Item 14(a)1 and included in the Company's
1996 Annual Report to Shareholders at pages 18-21 (Consolidated
Statements of Income, Consolidated Balance Sheets, Consolidated
Statements of Shareholders' Equity and Consolidated Statements of
Cash Flows), and pages 22-30 (Notes to Consolidated Financial
Statements) and the Report of Independent Auditors set forth in
the Company's 1996 Annual Report to Shareholders at page 31, are
incorporated herein by reference.
Information on quarterly results of operations, set forth in
the Company's 1996 Annual Report to Shareholders under "Notes to
Consolidated Financial Statements--Selected Quarterly Information
(Unaudited)," at page 30, is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Company's directors, set forth
in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 19, 1997, under "Election of
Directors--Nominees for Election," is incorporated herein by
reference. Information relating to the Company's executive
officers is set forth at pages 18-20 of this Form 10-K under
"Executive Officers of the Company."
Item 11. EXECUTIVE COMPENSATION
Information relating to executive compensation, set forth in
the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held May 19, 1997, under "Election of
Directors--Executive Compensation," is incorporated herein by
reference, except that the Compensation Committee Report and
Performance Graph are not so incorporated.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of the Company's common
stock by persons known by the Company to be the beneficial owners
of more than 5% of the outstanding shares of common stock and by
management, set forth in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held May 19, 1997, under
"Election of Directors--Ownership of Company Common Stock by
Directors and Executive Officers," and "Election of Directors--
Principal Holders of Company Common Stock," is incorporated
herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The following consolidated financial statements of the
Company and its subsidiaries, included in the Company's 1996
Annual Report to Shareholders at the pages indicated in
parentheses, are incorporated by reference in Item 8:
Consolidated Statements of Income--Years Ended December 31,
1996, 1995 and 1994 (page 18)
Consolidated Balance Sheets--December 31, 1996 and 1995
(page 19)
Consolidated Statements of Shareholders' Equity--Years Ended
December 31, 1996, 1995 and 1994 (page 20)
Consolidated Statements of Cash Flows--Years Ended December
31, 1996, 1995 and 1994 (page 21)
Notes to Consolidated Financial Statements (pages 22-30)
(a)2. Financial Statement Schedules
The following consolidated financial statement schedule of
the Company and its subsidiaries is included in this Form 10-K:
Schedule II Valuation and Qualifying Accounts (page F-1)
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions, are
inapplicable or are adequately explained in the financial
statements and, therefore, have been omitted.
Financial statements of interests of 50% or less, which are
accounted for by the equity method, have been omitted because
they do not, considered in the aggregate as a single subsidiary,
constitute a significant subsidiary.
The report of the Company's independent auditors with
respect to the schedule listed above is contained herein as part
of Exhibit 23.1, Consent of Independent Auditors.
(a)3. Exhibits
3.1 Amended and Restated Articles of Incorporation of the
Registrant. (1)
3.2 By-Laws of the Registrant. (1)
4.1 Specimen of Certificate for Common Stock. (1)
10.1 Rights Agreement dated as of October 17, 1994 between the
Company and Bank One, Indianapolis, N.A. (1)
10.2 Form of International Services Agreement between
international subsidiary of Eli Lilly and Company and
international subsidiary of the Company. (1)
10.3 United States Services Agreement dated as of October 31,
1994 between Eli Lilly and Company and the Company. (1)
10.4 Transfer Agreement dated as of November 30, 1994 between
Eli Lilly and Company and the Company. (1)
10.5 Tax Sharing Agreement dated as of November 30, 1994
between Eli Lilly and Company and the Company. (1)
10.6 Form of International Asset Purchase Agreement between
international subsidiary of Eli Lilly and Company and
international subsidiary of the Company. (1)
10.7 Sublicense Agreement dated as of October 18, 1994 between
Eli Lilly and Company and Cardiac Pacemakers, Inc. (1)
10.8 Purchase and Sale Agreement and Escrow Instructions dated
as of October 18, 1994 between Eli Lilly and Company and
Advanced Cardiovascular Systems, Inc. (1)
10.9 Assignment of Leases dated as of October 25, 1985 between
Seaport Centre Venture Phase II and Metropolitan Life
Insurance Company. (1)
10.10 Settlement Agreement dated as of December 1, 1991 among
Advanced Cardiovascular Systems, Inc., Eli Lilly and
Company and SciMed Life Systems, Inc. (1)
10.11 Distribution Agreement dated as of December 31, 1992 among
Advanced Cardiovascular Systems, Inc., Peripheral Systems
Group and Mallinckrodt Medical, Inc. (1)
10.12 Settlement Agreement dated as of January 13, 1992 between
Advanced Cardiovascular Systems, Inc. and C. R. Bard, Inc. (1)
10.13 Settlement and License Agreement dated as of December 17,
1991 among Schneider (Europe) A.G., Schneider (USA) Inc.
and Advanced Cardiovascular Systems, Inc. (1)
10.14 Amendment to Settlement and License Agreement dated as of
April 9, 1992 among Schneider (Europe) A.G., Schneider
(USA) Inc. and Advanced Cardiovascular Systems, Inc. (1)
10.15 Amended License Agreement dated as of September 26, 1988
between Paul Yock, M.D. and Advanced Cardiovascular
Systems, Inc. (1)
10.16 First Amendment to Amended License Agreement dated as of
January 1, 1992 between Paul Yock, M.D. and Advanced
Cardiovascular Systems, Inc. (1)
10.17 Second Amendment to Amended License Agreement dated as of
January 13, 1992 between Paul Yock, M.D. and Advanced
Cardiovascular Systems, Inc. (1)
10.18 Agreement dated as of January 31, 1994 between E. I.
DuPont de Nemours and Company, Cardiac Pacemakers, Inc.
and Eli Lilly and Company. (1)
10.19 Agreement dated as of July 1, 1994 between E. I. DuPont de
Nemours and Company, Minco Products, Inc., Cardiac
Pacemakers, Inc. and Eli Lilly and Company. (1)
10.20 Override Agreement between Motorola, Inc., Cardiac
Pacemakers, Inc. and Eli Lilly and Company. (1)
10.21 Material Supply Agreement dated as of January 1, 1995 between
Dow Corning Corporation and Cardiac Pacemakers, Inc. (2)
10.22 Purchase Contract dated as of January 1, 1991 between
Wilson Greatbatch Ltd. and Cardiac Pacemakers, Inc. (1)
10.23 Purchase Contract Extension between Wilson Greatbatch Ltd. and
Cardiac Pacemakers, Inc., effective as of January 1, 1996. (2)
10.24 Exclusive License Agreement dated as of January 30, 1973
between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.25 Amendment to Exclusive License Agreement dated as of January
10, 1975 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.26 First Addendum to the Exclusive License Agreement dated as of
June 17, 1974 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.27 Second Addendum to the Exclusive License Agreement dated as of
April 11, 1975 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.28 Third Addendum to the Exclusive License Agreement dated as of
December 22, 1976 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.29 Fourth Addendum to the Exclusive License Agreement dated as of
January 1, 1979 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.30 Fifth Addendum to the Exclusive License Agreement dated as of
June 24, 1981 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.31 Sixth Addendum to the Exclusive License Agreement dated as of
September 16, 1983 between Medrad, Inc., Mieczyslaw Mirowski,
Medrad/Intec., Inc. and Intec Systems, Inc. (1)
10.32 Guidant Corporation 1994 Stock Plan, as amended. * #
10.33 Guidant Corporation Economic Value Added (EVA) Bonus Plan dated
January 1, 1995. (2) #
10.34 Stock Purchase Agreement dated as of October 31, 1994 between Eli
Lilly and Company and Advanced Cardiovascular Systems, Inc. (1)
10.35 Standard Form Office Lease dated December 27, 1994 between
Zell/Merrill Lynch Real Estate Opportunity Partners Limited
Partnership II and the Company. (3)
10.36 Guidant Corporation Change in Control Plan for Select Employees. (4)
10.37 Credit Agreement dated as of January 8, 1996 among the Company,
certain banks and Morgan Guaranty Trust Company of New York,
as agent. (5)
11.1 Computation of Earnings Per Share. *
13.1 Annual Report to Shareholders for the year ended December 31, 1996
(portions incorporated by reference into this Form 10-K). *
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Independent Auditors. *
27.1 Financial Data Schedule. *
99.1 Factors Affecting Future Operating Results. *
- ------------
(1) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Registration Statement on
Form S-1, File No. 33-83934.
(2) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
(3) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
(4) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1995.
(5) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Registration Statement on
Form S-3, File No. 333-00014.
* Filed herewith.
# Management compensation plan.
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the fourth
quarter of 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By s/James M. Cornelius
---------------------------
James M. Cornelius,
Chairman of the Board
March 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------------------------------------------------
s/James M. Cornelius
- ----------------------- Chairman of the Board March 18, 1997
James M. Cornelius and Director (principal
executive officer)
s/Ronald W. Dollens
- ----------------------- President, Chief Executive March 18, 1997
Ronald W. Dollens Officer and Director
(principal executive officer)
s/Keith E. Brauer
- ----------------------- Vice President, Finance and March 18, 1997
Keith E. Brauer and Chief Financial Officer
(principal financial officer)
s/Roger Marchetti
- ----------------------- Corporate Controller and March 18, 1997
Roger Marchetti Chief Accounting Officer
(principal accounting officer)
s/Maurice A. Cox, Jr.
- ----------------------- Director March 18, 1997
Maurice A. Cox, Jr.
s/Enrique C. Falla
- ----------------------- Director March 18, 1997
Enrique C. Falla
s/J.B. King
- ----------------------- Director March 18, 1997
J.B. King
s/Susan B. King
- ----------------------- Director March 18, 1997
Susan B. King
s/J. Kevin Moore
- ----------------------- Director March 18, 1997
J. Kevin Moore
s/Mark Novitch, M.D.
- ----------------------- Director March 18, 1997
Mark Novitch, M.D.
s/Eugene L. Step
- ----------------------- Director March 18, 1997
Eugene L. Step
s/Ruedi E. Wager, Ph.D.
- ----------------------- Director March 18, 1997
Ruedi E. Wager, Ph.D.
Guidant Corporation and Subsidiaries
<TABLE>
Schedule II. Valuation and Qualifying Accounts
(in millions)
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Balance at Charges Balance at
Beginning and End of
Description of Period Expenses Deductions(1) Period
<S> <C> <C> <C> <C>
- ----------- ---------- --------- ---------- ----------
Year Ended December 31, 1994
Allowance for inventory obsolescence $ 7.5 $10.7 $ (9.2) $ 9.0
Allowance for doubtful accounts 4.5 0.9 (0.9) 4.5
------ ----- ------- -----
Totals $12.0 $11.6 $(10.1) $13.5
====== ===== ======= =====
Year Ended December 31, 1995
Allowance for inventory obsolescence $ 9.0 $17.7 $ (20.4) $ 6.3
Allowance for doubtful accounts 4.5 1.7 (0.5) 5.7
----- ----- ------- -----
Totals $13.5 $19.4 $(20.9) $12.0
====== ====== ======= =====
Year Ended December 31, 1996
Allowance for inventory obsolescence $ 6.3 $29.6 $(12.9) $23.0
Allowance for doubtful accounts 5.7 2.2 (0.6) 7.3
----- ----- ------ -----
Totals $12.0 $31.8 $(13.5) $30.3
===== ===== ======= =====
</TABLE>
(1) Write-offs of obsolete units.
F-1
Exhibit List
10.32 Guidant Corporation 1994 Stock Plan
11.1 Computation of Earnings Per Share
13.1 Annual Report to Shareholders for the Year Ended
December 31, 1996 (portions incorporated by reference)
21.1 List of Subsidiaries and Affiliates
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results
Exhibit 10.32
As Amended 10/96
GUIDANT CORPORATION 1994 STOCK PLAN
The Guidant Corporation 1994 Stock Plan ("1994 Plan")
authorizes the Compensation Committee ("Committee") of the Board
of Directors of Guidant Corporation to provide employees and
consultants of Guidant Corporation and its subsidiaries with
certain rights to acquire shares of Guidant Corporation common
stock ("Guidant Stock"). The Company believes that this
incentive program will benefit the Company's shareholders by
allowing the Company to attract, motivate, and retain employees
and consultants and by causing employees and consultants, through
stock-based incentives, to contribute materially to the growth
and success of the Company. For purposes of the 1994 Plan, the
term "Company" shall mean Guidant Corporation and its
subsidiaries, unless the context requires otherwise.
1. Administration.
The 1994 Plan shall be administered and interpreted by the
Committee consisting of not less than three persons appointed by
the Board of Directors of the Company from among its members. A
person may serve on the Committee only if he or she (i) is a
nonemployee director as defined in Rule 16b-3(b)(3) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and (ii) satisfies the requirements of an "outside director" for
purposes of Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"). The Committee shall determine the fair
market value of Guidant Stock for purposes of the 1994 Plan. The
Committee may, subject to the provisions of the 1994 Plan, from
time to time establish such rules and regulations as it deems
appropriate for the proper administration of the Plan. The
Committee's decisions shall be final, conclusive, and binding
with respect to the interpretation and administration of the 1994
Plan and any Grant made under it. Except to the extent expressly
prohibited by the 1994 Plan or applicable law, the Committee may
delegate to one or more of its members, or to one or more agents,
such responsibility or duties as it deems desirable.
2. Grants.
Incentives under the 1994 Plan shall consist of incentive
stock options, nonqualified stock options, performance awards,
and restricted stock grants (collectively, "Grants"). All Grants
shall be subject to the terms and conditions set out herein and
to such other terms and conditions which are not inconsistent
with the 1994 Plan as the Committee deems appropriate. The
Committee shall approve the form and provisions of each Grant.
Grants under a particular section of the 1994 Plan need not be
uniform and Grants under two or more sections may be combined in
one instrument.
3. Eligibility for Grants.
Grants may be made to any employee (including any officer)
or consultant of the Company ("Eligible Person"). The Committee
shall select the persons to receive Grants ("Grantees") from
among the Eligible Persons and determine the number of shares
subject to any particular Grant.
4. Shares Available for Grant.
(a) Shares Subject to Issuance or Transfer. Subject to
adjustment as provided in Section 4(b), the aggregate number of
shares of Guidant Stock that may be issued or transferred under
the 1994 Plan is 7,000,000. The shares may be authorized but
unissued shares or treasury shares. The number of shares
available for Grants at any given time shall be 7,000,000,
reduced by the aggregate of all shares previously issued or
transferred and of shares which may become subject to issuance or
transfer under then-outstanding Grants. Payment in cash in lieu
of shares shall be deemed to be an issuance of the shares for
purposes of determining the number of shares available for Grants
under the 1994 Plan as a whole or to any individual Grantee.
(b) Adjustment Provisions. If any subdivision or
combination of shares of Guidant Stock or any stock dividend,
reorganization, recapitalization, or consolidation or merger with
Guidant Corporation as the surviving corporation occurs, or if
additional shares or new or different shares or other securities
of the Company or any other issuer are distributed with respect
to the shares of Guidant Stock through a spin-off, exchange
offer, or other extraordinary distribution, the Committee shall
make such adjustments as it determines appropriate in the number
of shares of Guidant Stock that may be issued or transferred in
the future under Sections 4(a) and 5(f). The Committee shall
also adjust as it determines appropriate the number of shares and
Option Price in outstanding Grants made before the event.
5. Stock Options.
The Committee may grant options qualifying as incentive
stock options under the Code ("Incentive Stock Options"), and
nonqualified options (collectively, "Stock Options"). The
following provisions are applicable to Stock Options:
(a) Option Price. The Committee shall determine the price
at which Guidant Stock may be purchased by the Grantee under a
Stock Option ("Option Price") which, except in the case of
substitute grants as described in Section 10(b), shall be not
less than the fair market value of Guidant Stock on the date the
Stock Option is granted (the "Grant Date"). In the Committee's
discretion, the Grant Date of a Stock Option may be established
as the date on which Committee action approving the Stock Option
is taken or any later date specified by the Committee.
(b) Option Exercise Period. The Committee shall determine
the option exercise period of each Stock Option. The period
shall not exceed ten years from the Grant Date.
(c) Exercise of Option. A Grantee may exercise a Stock
Option by delivering a notice of exercise to the Company or its
representative as designated by the Committee, either with or
without accompanying payment of the Option Price. The notice of
exercise, once delivered, shall be irrevocable.
(d) Satisfaction of Option Price. The Grantee shall pay or
cause to be paid the Option Price in cash, or with the
Committee's permission, by delivering shares of Guidant Stock
already owned by the Grantee and having a fair market value on
the date of exercise equal to the Option Price, or a combination
of cash and shares. In addition, the Committee may permit the
exercise of an option by delivery of written notice, subject to
the Company's receipt of a third-party payment in full in cash
for the Option Price prior to the issuance of shares of Guidant
Stock, in the manner and subject to the procedures as may be
established by the Committee. Unless the Committee establishes a
shorter period which is set forth in the Stock Option, the
Grantee shall pay the Option Price not later than 30 days after
the date of a statement from the Company following exercise
setting forth the Option Price, fair market value of Guidant
Stock on the exercise date, the number of shares of Guidant Stock
that may be delivered in payment of the Option Price, and the
amount of withholding tax due, if any. If the Grantee fails to
pay the Option Price within the specified period, the Committee
shall have the right to take whatever action it deems
appropriate, including voiding the option exercise. The Company
shall not issue or transfer shares of Guidant Stock upon exercise
of a Stock Option until the Option Price and any required
withholding tax are fully paid.
(e) Share Withholding. With respect to any nonqualified
option, the Committee may, in its discretion and subject to such
rules as the Committee may adopt, permit or require the Grantee
to satisfy, in whole or in part, any withholding tax obligation
which may arise in connection with the exercise of the
nonqualified option by having the Company withhold shares of
Guidant Stock having a fair market value equal to the amount of
the withholding tax.
(f) Limits on Individual Grants. No individual Grantee may
be granted Stock Options under the 1994 Plan for more than
700,000 shares of Guidant Stock during any three consecutive
calendar years.
(g) Limits on Incentive Stock Options. The aggregate fair
market value of the stock covered by Incentive Stock Options
granted under the 1994 Plan or any other stock option plan of the
Company or any subsidiary or parent of the Company that become
exercisable for the first time by any employee in any calendar
year shall not exceed $100,000. The aggregate fair market value
will be determined at the Grant Date. An Incentive Stock Option
shall not be granted to any Eligible Person who, on the Grant
Date, owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any
subsidiary or parent of the Company.
6. Performance Awards.
The Committee may grant Performance Awards which shall be
denominated at the time of grant either in shares of Guidant
Stock ("Stock Performance Awards") or in dollar amounts ("Dollar
Performance Awards"). Payment under a Stock Performance Award or
a Dollar Performance Award shall be made, at the discretion of
the Committee, in shares of Guidant Stock ("Performance Shares"),
or in cash or in any combination thereof, if the financial
performance of the Company or any subsidiary, division, or other
unit of the Company ("Business Unit") selected by the Committee
for the Award Period (as defined below). The following
provisions are applicable to Performance Awards:
(a) Award Period. The Committee shall determine and
include in the Grant the period of time (which shall be four or
more consecutive fiscal quarters) for which a Performance Award
is made ("Award Period"). Grants of Performance Awards need not
be uniform with respect to the length of the Award Period. Award
Periods for different Grants may overlap. A Performance Award
may not be granted for a given Award Period after one half (1/2)
or more of such period has elapsed.
(b) Performance Goals and Payment. Before a Grant is made,
the Committee shall establish objectives ("Performance Goals")
that must be met by the Business Unit during the Award Period as
a condition to payment being made under the Performance Award.
The Performance Goals, which must be set out in the Grant, may
include earnings per share, return on assets, return on
shareholders' equity, divisional income, net income, or any other
financial measurement established by the Committee. The
Committee shall also set forth in the Grant the number of
Performance Shares or the amount of payment to be made under a
Performance Award if the Performance Goals are met or exceeded,
including the fixing of a maximum payment.
(c) Computation of Payment. After an Award Period, the
financial performance of the Business Unit during the period
shall be measured against the Performance Goals. If the
Performance Goals are not met, no payment shall be made under a
Performance Award. If the Performance Goals are met or exceeded,
the Committee shall determine the number of Performance Shares or
the amount of payment to be made under a Performance Award in
accordance with the grant for each Grantee. The Committee, in
its sole discretion, may elect to pay part or all of the
Performance Award in cash in lieu of issuing or transferring
Performance Shares. The cash payment shall be based on the fair
market value of Guidant Stock on the date of payment. The
Company shall promptly notify each Grantee of the number of
Performance Shares and the amount of cash, if any, he or she is
to receive.
(d) Revisions for Significant Events. At any time before
payment is made, the Committee may revise the Performance Goals
and the computation of payment if unforeseen events occur during
an Award Period which have a substantial effect on the
Performance Goals and which in the sole discretion of the
Committee make the application of the Performance Goals unfair
unless a revision is made.
(e) Requirement of Employment. To be entitled to receive
payment under a Performance Award, a Grantee who is an employee
of the Company must remain in the employment of the Company to
the end of the Award Period, except that the Committee may
provide for partial or complete exceptions to this requirement as
it deems equitable in its sole discretion.
7. Restricted Stock Grants.
The Committee may issue or transfer shares of Guidant Stock
to a Grantee under a Restricted Stock Grant. Upon the issuance
or transfer, the Grantee shall be entitled to vote the shares and
to receive any dividends paid. The following provisions are
applicable to Restricted Stock Grants:
(a) Requirement of Employment. If the employment of a
Grantee who is an employee of the Company terminates during the
period designated in the Grant as the "Restriction Period," the
Restricted Stock Grant terminates and the shares of Guidant Stock
must be returned immediately to the Company. However, the
Committee may provide for partial or complete exceptions to this
requirement as it deems equitable.
(b) Restrictions on Transfer and Legend on Stock
Certificate. During the Restriction Period, a Grantee may not
sell, assign, transfer, pledge, or otherwise dispose of the
shares of Guidant Stock except to a Successor Grantee under
Section 10(a). Each certificate for shares issued or transferred
under a Restricted Stock Grant shall contain a restricted legend
or be held in escrow by the Company until the expiration of the
Restriction Period.
(c) Lapse of Restrictions. All restrictions imposed under
the Restricted Stock Grant shall lapse (i) upon the expiration of
the Restriction Period if all conditions, including those stated
in Sections 7(a) and (b) have been met or (ii) as provided under
Section 9(a)(ii). The Grantee shall then be entitled to delivery
of the certificate.
8. Amendment and Termination of the 1994 Plan.
(a) Amendment. The Company's Board of Directors may amend
or terminate the 1994 Plan, subject to shareholder approval to
the extent necessary for the continued applicability of Rule 16b-
3 under the Exchange Act, but no amendment shall withdraw from
the Committee the right to select Grantees under Section 3.
(b) Termination of 1994 Plan. The 1994 Plan shall
terminate on May 31, 2000, unless terminated earlier by the Board
or unless extended by the Board.
(c) Termination and Amendment of Outstanding Grants. A
termination or amendment of the 1994 Plan that occurs after a
Grant is made shall not result in the termination or amendment of
the Grant unless the Grantee consents or unless the Committee
acts under Section 11(e). The termination of the 1994 Plan shall
not impair the power and authority of the Committee with respect
to outstanding Grants. Whether or not the 1994 Plan has
terminated, an outstanding Grant may be terminated or amended
under Section 11(e) or may be amended (i) by agreement of the
Company and the Grantee consistent with the 1994 Plan or (ii) by
action of the Committee provided that the amendment is consistent
with the 1994 Plan and is found by the Committee not to
materially impair the rights of the Grantee under the Grant.
9. Change of Control.
(a) Effect on Grants. Unless the Committee shall otherwise
expressly provide in the agreement relating to a Grant, upon the
occurrence of a Change of Control (as defined below):
(i) In the case of Stock Options, (A) each outstanding Stock
Option that is not then fully exercisable shall automatically
become fully exercisable until the termination of the option
exercise period of the Stock Option (as modified by subsection
(i)(B) that follows, and (B) in the event the Grantee's
employment is terminated within two years after a Change of
Control, his or her outstanding Stock Options at that date of
termination shall be immediately exercisable for a period of
three months following such termination, provided, however, that,
to the extent the Stock Option by its terms otherwise permits a
longer option exercise period after such termination, such longer
period shall govern, and provided further that in no event shall
a Stock Option be exercisable more than 10 years after the Grant
Date;
(ii) The Restriction Period on all outstanding Restricted
Stock Grants shall automatically expire and all restrictions
imposed under such Restricted Stock Grants shall immediately
lapse; and
(iii) Each Grantee of a Performance Award for an Award
Period that has not been completed at the time of the Change of
Control shall be deemed to have earned a minimum Performance
Award equal to the product of (A) such Grantee's maximum award
opportunity for such Performance Award and (B) a fraction, the
numerator of which is the number of full and partial months that
have elapsed since the beginning of such Award Period to the date
on which the Change of Control occurs, and the denominator of
which is the total number of months in such Award Period.
(b) Change of Control. For purposes of the 1994 Plan, a
Change of Control shall mean the happening of any of the
following events:
(i) The acquisition by any "person," as that term is used in
Sections 13(d) and 14(d) of the Exchange Act (other than (A) the
Company, (B) any subsidiary of the Company, (C) any employee or
directors' benefit plan or stock plan of the Company or a
subsidiary of the Company, or any trustee or fiduciary with
respect to any such plan when acting in that capacity, or (D) any
person who acquires such shares pursuant to a transaction or
series of transactions approved prior to such transaction(s) by
the Board of Directors of the Company) of "beneficial ownership"
as defined in Rule 13d-3 under the Exchange Act, directly or
indirectly, of 20% or more of the shares of the Company's capital
stock the holders of which have general voting power under
ordinary circumstances to elect at least a majority of the Board
of Directors of the Company (or which would have such voting
power but for the application of the Indiana Control Share
Statute) ("Voting Stock");
(ii) the first day on which less than two-thirds of the
total membership of the Board of Directors of the Company shall
be Continuing Directors (as that term is defined in Article 6(f)
of the Company's Articles of Incorporation;
(iii) approval by the shareholders of the Company of a
merger, share exchange, or consolidation of the Company (a
"Transaction"), other than a Transaction which would result in
the Voting Stock of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding
or by being converted into voting securities of the surviving
entity) more than 50% of the Voting Stock of the Company or such
surviving entity immediately after such Transaction; or
(iv) approval by the shareholders of the Company of a
complete liquidation of the Company or a sale or disposition of
all or substantially all the assets of the Company.
10. Eligible Persons Resident Outside the United States.
The following provisions shall apply to each Eligible Person
who is resident outside the United States:
(a) Determination of Eligible Locations. The Committee
shall determine whether it is feasible or desirable under local
law, custom and practice to make Grants at each location outside
the United States. In making this determination as of any Grant
Date, the Committee may differentiate among classes of
individuals (including expatriates, third country nationals or
international assignees) and locations within a particular
country.
(b) Special Terms Applicable to Grants. In order to
facilitate the making of Grants under this Section 10, the
Committee may provide for such special terms for Grants to
Grantees who are foreign nationals or who are employed outside
the United States as the Committee may consider necessary or
desirable to accommodate differences in local law, policy or
custom, or to take advantage of special tax or social insurance
regimes applicable in a particular jurisdiction. The Committee
may approve such supplements, restatements or alternate versions
of the Plan as it may consider necessary or desirable for such
purposes, without thereby affecting the terms of the Plan as in
effect for any other purpose. Without limiting the generality of
the foregoing, the Committee may adopt special sub-plans
applicable to individuals in particular jurisdictions (e.g.,
French or U.K. qualified plans), may provide for accelerated
vesting with restrictions on the shares received under a Grant,
and may condition Grants on acknowledgments or agreements by
Grantees tailored to local law.
(c) No Acquired Rights. Nothing in the 1994 Plan or in
this Section 10 shall confer upon any individual in any country
the right to receive (or to continue to receive) any Grant, any
form of Grant or to receive any benefit in lieu of a Grant
hereunder, nor to have any special tax treatment apply to any
Grant.
11. General Provisions.
(a) Transfer of Grants. Only a Grantee or his or her
authorized legal representative or valid transferee may exercise
rights under a Grant. Such persons may not transfer those
rights. Except as set forth below, the rights under a Grant may
not be disposed of by transfer, alienation, pledge, encumbrance,
assignment, or any other means, whether voluntary, involuntary,
or by operation of law, and any such attempted disposition shall
be void. Notwithstanding the foregoing and solely to the extent
permitted by the Committee in an agreement relating to a Grant,
rights under a Grant (other than pursuant to an Incentive Stock
Option) may be transferred to members of a Grantee's immediate
family, charitable institutions, or trusts or partnerships whose
beneficiaries are any of the foregoing, or to such other persons
or entities as may be approved by the Committee, in each case
subject to the condition that the Committee be satisfied that
such transfer is being made for estate or tax planning purposes
or for donative purposes without consideration being received
therefor. In addition, when a Grantee dies, the personal
representative or other person entitled to succeed to the rights
of the Grantee may exercise the rights. A successor to the
rights under a Grant pursuant to the foregoing ("Successor
Grantee") must furnish proof satisfactory to the Company of his
or her right to receive the Grant, whether as a result of a
transfer from the Grantee, under the Grantee's will or under the
applicable laws of descent and distribution.
(b) Substitute Grants. The Committee may make a Grant to
an employee of another corporation who becomes an Eligible Person
by reason of a corporate merger, consolidation, acquisition of
stock or property, reorganization or liquidation involving the
Company in substitution for a stock option, performance award, or
restricted stock grant granted by such other corporation
("Substituted Stock Incentive"). The terms and conditions of the
substitute Grant may vary from the terms and conditions required
by the 1994 Plan and from those of the Substituted Stock
Incentives. The Committee shall prescribe the exact provisions
of the substitute Grants, preserving to the extent the Committee
deems practical the provisions of the Substituted Stock
Incentives. The Committee shall also determine the number of
shares of Guidant Stock to be taken into account under Section 4.
(c) Subsidiaries. The term "subsidiary" means a
corporation of which Guidant owns directly or indirectly 50% or
more of the voting power.
(d) Fractional Shares. Fractional shares shall not be
issued or transferred under a Grant, but the Committee may pay
cash in lieu of a fraction or round the fraction.
(e) Compliance with Law. The 1994 Plan, the exercise of
Grants, and the obligations of the Company to issue or transfer
shares of Guidant Stock under Grants shall be subject to all
applicable laws and regulations and to approvals by any
governmental or regulatory agency as may be required. The
Committee may revoke any Grant if it is contrary to law or modify
a Grant to bring it into compliance with any valid and mandatory
law or governmental regulation. The Committee may also adopt
rules regarding the withholding of taxes on payment to Grantees.
(f) Ownership of Stock. A Grantee or Successor Grantee
shall have no rights as a stockholder of the Company with respect
to any shares of Guidant Stock covered by a Grant until the
shares are issued or transferred to the Grantee or Successor
Grantee on the Company's books.
(g) No Right to Employment. The 1994 Plan and the Grants
under it shall not confer upon any Grantee the right to continue
in the employment of the Company or affect in any way the right
of the Company to terminate the employment of a Grantee at any
time, with or without notice or cause.
(h) Foreign Jurisdictions. The Committee may adopt, amend,
and terminate such arrangements, not inconsistent with the intent
of the 1994 Plan, as it may deem necessary or desirable to make
available tax or other benefits of the laws of foreign
jurisdictions to Grantees who are subject to such laws.
(i) Governing Law. The 1994 Plan and all Grants made under
it shall be governed by and interpreted in accordance with the
laws of the State of Indiana, regardless of the laws that might
otherwise govern under applicable Indiana conflict-of-laws
principles.
(j) Effective Date of the 1994 Plan. The 1994 Plan shall
become effective on October 17, 1994.
***
Guidant Corporation and Subsidiaries
Exhibit 11.1
Statement Regarding Computation of Per Share Earnings
(In millions, except per share data)
Year Ended December 31,
PRIMARY: 1996 1995 1994
---- ---- ----
Net income $65.8 $101.1 $92.1
Weighted average number of common shares outstanding 72.08 71.88
----- -----
Primary earnings per share $ 0.91 $ 1.41
===== ======
Pro forma adjustments (1):
Additional interest expense - net 26.9
Tax effect of interest expense - net (11.0)
----
Pro forma net income $76.2
----
Pro forma weighted average common shares outstanding 71.86
-----
Pro forma earnings per share $ 1.06
=====
FULLY DILUTED:
Net income $65.8 $101.1
Weighted average number of common shares outstanding 72.08 71.88
Add-incremental shares under option 1.66 0.66
----- -----
Adjusted weighted average number of common
shares outstanding 73.74 72.54
----- -----
Fully diluted earnings per share $ 0.89 $ 1.39
====== ======
(1) Pro forma net income and earnings per share for 1994 have been
determined assuming that Guidant was formed and capitalized on
January 1, 1994. The pro forma adjustments give effect to an increase
in net interest expense. 71.86 million shares are assumed to have been
outstanding for the entire year of 1994. Historical primary and
fully diluted earnings per share are not meaningful due to the
change in capital structure during 1994.
Guidant Corporation and Subsidiaries
Exhibit 13.1
Annual Report to Shareholders
for the Year Ended December 31, 1996
(portions incorporated by reference)
<TABLE>
Guidant Corporation and Subsidiaries
Selected Consolidated Financial Data
(Dollars in millions, except per-share and other data)
<CAPTION>
Year Ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations:
Net sales:
Cardiac rhythm management $574.6 $452.4 $378.6 $336.5 $329.9
Vascular intervention 425.6 447.9 464.5 451.6 423.7
Minimally invasive systems 48.3 31.0 19.3 6.6 1.2
----- ----- ----- ----- -----
Total net sales 1,048.5 931.3 862.4 794.7 754.8
Cost of sales 314.5(1) 283.4 270.9 236.2 211.8
----- ----- ----- ----- -----
Gross profit 734.0(1) 647.9 591.5 558.5 543.0
Research and development 152.5 134.7 130.9 129.1 117.9
Sales, marketing, and administrative 326.0 291.8 268.9 255.1 251.0
Restructuring charges -- -- -- 81.5 32.9
----- ----- ----- ----- -----
Income from operations 255.5(1) 221.4 191.7 92.8 141.2
Other expenses, net 106.0(2) 51.6 35.8 5.8 20.1
Net income $65.8(3) $101.1 $92.1 $50.6 $76.8
Earnings per share $0.91(3) $1.41 --
Pro forma net income (4) $76.2
Pro forma earnings per share (4) $1.06
Cash dividends declared per share $0.10 $0.05 --
Weighted average shares outstanding 72.08 71.88 71.86(4)
<CAPTION>
December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Position:
Working capital $110.9 $110.3 $116.8 $143.3 $136.9
Total assets 1,003.9 1,057.4 1,103.6 1,288.6 1,118.0
Borrowings 363.5 455.0 473.0 -- 2.1
Shareholders' equity 448.2 384.2 264.4(5) 1,048.3 942.7
Other Data:
Net sales per employee $211,500 $185,600 $164,000 $153,900 $164,400
Income from operations per employee(6) 57,400 44,100 36,500 33,800 37,900
Effective income tax rate 38.4%(7) 40.5% 40.9% 39.8% 36.6%
Capital expenditures, net 62.1 64.7 51.1 43.5 72.1
Borrowings as a percentage of total capitalization 44.8% 54.2% 64.1% -- 0.2%
Book value per share $6.22 $5.34 $3.68
Full-time employee equivalents 4,933 4,980 5,055 5,462 4,864
Common shareholders of record 3,185 3,139 106
</TABLE>
Guidant Corporation's common stock is listed on the New York and
Pacific Stock Exchanges under the symbol GDT.
- -------------------------------------
(1) Includes the impact of special obsolescence charges of $28.8
million reported in the second quarter of 1996. Excluding
the effect of these charges, cost of sales was $285.7
million, gross profit was $762.8 million and income from
operations was $284.3 million for the year ended December
31, 1996. See Note 3 to Consolidated Financial Statements.
(2) Includes impact of the impairment of atherectomy-related
goodwill and other intangible assets of $66.9 million
reported in the second quarter of 1996. Without the effect
of these special charges, other expenses were $39.1 million
for the year ended December 31, 1996. See Note 3 to
Consolidated Financial Statements.
(3) Excluding the effect of the aforementioned special
obsolescence and impairment charges, net income and earnings
per share were $149.9 million and $2.08, respectively, for
the year ended December 31, 1996.
(4) Pursuant to the formation of Guidant Corporation and
resultant transfer of assets from Eli Lilly and Company
(Lilly) and subsequent Initial Public Offering (IPO), the
Company reported 1994 earnings per share and weighted
average shares outstanding on a pro forma basis. 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 IPO.
(5) The decline in shareholders' equity from December 31, 1993
to December 31, 1994, was primarily attributable to
dividends to Lilly.
(6) Excludes impact of special obsolescence charges in 1996, and
restructuring and special charges in 1993 and 1992.
(7) Excludes impact of impairment charges recorded in the second
quarter of 1996. See Note 3 to Consolidated Financial
Statements.
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Guidant Corporation (Guidant or the Company), an Indiana
corporation, 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 in its Medical Devices and Diagnostics Division.
Guidant, incorporated in September 1994, 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
(VI), and (iii) other forms of minimally invasive surgery
systems (MIS). In CRM, the Company is a worldwide leader in
automatic implantable cardioverter defibrillator (AICD) systems.
The Company designs, manufactures, and markets a full line of
implantable pacemaker systems used in the treatment of slow or
irregular heartbeats. In VI, the Company is also a worldwide
leader in minimally invasive procedures used for opening blocked
coronary arteries. In addition, the Company develops,
manufactures, and markets products for use in MIS procedures
with products for access, vision, dissection, retraction, and
fixation, focusing on laparoscopic market opportunities in both
general and cardiovascular surgeries.
The following tables are summaries of the Company's net sales and
major costs and expenses:
Year Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in millions)
Net Sales:
Cardiac rhythm management $574.6 $452.4 $378.6
Vascular intervention 425.6 447.9 464.5
Minimally invasive systems 48.3 31.0 19.3
----- ----- -----
Total net sales 1,048.5 931.3 862.4
Cost of sales 314.5(1) 283.4 270.9
----- ----- -----
Gross profit 734.0(1) 647.9 591.5
Research and development 152.5 134.7 130.9
Sales, marketing, and administrative 326.0 291.8 268.9
----- ----- -----
478.5 426.5 399.8
------ ----- -----
Income from operations $255.5(1) $221.4 $191.7
===== ===== =====
As a Percent of Net Sales
---------------------------
1996 1995 1994
---- ---- ----
Net Sales:
Cardiac rhythm management 54.8% 48.6% 43.9%
Vascular intervention 40.6 48.1 53.9
Minimally invasive systems 4.6 3.3 2.2
---- ---- -----
Total net sales 100.0% 100.0% 100.0%
Cost of sales 30.0(1) 30.4 31.4
----- ----- -----
Gross profit 70.0(1) 69.6 68.6
Research and development 14.5 14.5 15.2
Sales, marketing, and administrative 31.1 31.3 31.2
----- ----- -----
45.6 45.8 46.4
----- ----- -----
Income from operations 24.4%(1) 23.8% 22.2%
===== ===== =====
(1) Includes the impact of $28.8 million in special noncash
obsolescence charges in the second quarter of 1996 resulting
from the accelerated regulatory approval for market release
and customer acceptance of new-generation CRM products and
programmers.
Operating Results -- 1996
The Company had worldwide net sales of $1,048.5 million for the
year ended December 31, 1996, reflecting an increase of $117.2
million or 13% over 1995. Growth in unit volume of 13% and net
sales price increases of 2% were offset by 2% unfavorable impact
of foreign currency exchange rates. The effect of changes in
product mix are included in the net sales price increase.
Net sales of CRM products for 1996 were $574.6 million, an
increase of $122.2 million or 27.0% over 1995. This growth was
led by strong worldwide sales of the VENTAK MINI II advanced,
tiered-therapy automatic implantable cardioverter-defibrillators
(AICD), released in the United States in July 1996; the VENTAK
MINI HC, released in the United States in May 1996; the VENTAK
MINI, released in the United States in January 1996; and the
VENTAK AV, released in Europe in November 1996. The
technologically advanced VENTAK MINI II, one of the world's
smallest full-featured AICD's, along with 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 1996 were $425.6
million, a decrease of $22.3 million or 5.0% from 1995. The
Company experienced sales growth in angioplasty systems,
primarily due to: (i) the ACS RX MULTI-LINK Coronary Stent
System (rapid exchange stent delivery), and the ACS OTW (over-
the-wire stent delivery) MULTI-LINK Coronary Stent System
launched in Europe and other international markets in April 1996
and November 1995, respectively; (ii) increased sales of over-
the-wire catheters such as the ACS CONCORDE and the high
pressure ACS ENDURA, which were released to the United States
market in March 1996, and the ACS Tx2000, released to
international markets in June 1996 and to the United States
market in November 1996; (iii) the ACS RX COMET (rapid exchange
catheter), also released to international markets in June 1996
and to the United States market in November 1996; and (iv)
growth in guide wires. This sales growth was offset by sales
declines in perfusion, rapid exchange, and atherectomy
catheters, and lower net average selling prices of most
dilatation catheters in the United States and Europe. These
lower net average selling prices of dilatation catheters include
the impact of product mix changes due to the sales growth in
over-the-wire catheters discussed above. The Company believes
that, in addition to this shift in product mix, net average
selling prices in the market may continue to decline.
Atherectomy sales declines were primarily due to increasing
usage of coronary stents, which are a competing alternative
therapy.
Net sales of MIS products for 1996 were $48.3 million, an
increase of $17.3 million or 55.8% over 1995. MIS sales growth
was experienced both in the United States and international
markets as the Company continued to expand the marketing of its
innovative laparoscopic technologies. Sales growth was driven
by the ORIGIN TACKER endoscopic fixation device; custom
procedural kits which incorporate this device along with other
MIS products; and, to some degree, the VASOVIEW Balloon
Dissection system, market released in May 1996. The VASOVIEW
system provides physicians with a novel, less invasive technique
for endoscopic harvesting of the saphenous vein.
The Company experienced sales growth both in the United States
and international markets during 1996. Net sales in the United
States increased 6.4% to $641.7 million, and international net
sales increased 24.0% to $406.8 million from 1996 as compared to
1995. United States net sales growth was primarily due to CRM
sales of the VENTAK MINI II, VENTAK MINI, VENTAK MINI HC, VIGOR
DR, and VIGOR SR. International net sales growth was primarily
driven by European sales of the ACS RX MULTI-LINK Coronary Stent
System, VENTAK MINI II, VENTAK MINI HC, VENTAK AV, and the
VIGOR family of pacemakers. The commencement of new
distribution arrangements in Japan, Italy, and the Benelux
countries and sales of guide wires and the ACS RX COMET in
Europe, and of the ACS Tx2000 in Japan, also contributed to the
international sales growth.
Cost of sales increased 11.0% to $314.5 million in 1996. The
Company took noncash obsolescence charges of $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. A
portion of the CRM inventory included in the special
obsolescence charges taken in the second quarter of 1996 was
sold later in the year as a result of unanticipated demand. An
additional portion of this inventory may be sold in 1997. Cost
of sales without the effect of the special obsolescence charges
in 1996 would have been 27.2% of net sales compared to 30.4% in
1995. This reduction in cost of sales as a percentage of net
sales was due to the following: (i) enhanced manufacturing
efficiencies in CRM and vascular intervention, (ii) reduced
manufacturing costs of newer generation CRM and VI products, and
(iii) increased manufacturing volume.
The Company continued its commitment to achieving long-term
growth by investing significant resources in research and
development. Research and development expenses, which increased
$17.8 million or 13.2% in 1996 compared to 1995, represented
14.5% of net sales in both years. Increased research and
development spending during these periods primarily resulted
from new product development costs related to: (i) the United
States clinical evaluation of the ACS MULTI-LINK Coronary Stent
Systems; (ii) the development of the VENTAK AV AICD system,
which had its first implants in September 1996 and its European
market release in November 1996; (iii) the clinical evaluation
of implantable device systems for the treatment of congestive
heart failure; and (iv) the development of future generations of
pacemaker products.
Sales, marketing, and administrative expenses grew 11.7% in 1996
compared to 1995. Variable selling expenses, such as commissions
and bonuses, associated with the United States market releases
of VENTAK MINI II, VENTAK MINI, VENTAK MINI HC, ACS Tx2000, ACS
RX COMET, ACS CONCORDE, and ACS ENDURA were among the primary
reasons for this increased spending during 1996. The
commencement of new distribution arrangements in Japan, Italy,
and the Benelux countries, and, to a lesser degree, the
transition to direct sales operations in Australia and in the
Czech Republic also contributed to the increase in sales and
marketing expenses. Increased compensation accruals due to the
Company's performance-based compensation programs contributed to
the increase in general and administrative expenses during the
year.
Income from operations for 1996 of $255.5 million represented a
15.4% increase from 1995 and was negatively affected by the
special obsolescence charges on CRM inventory and programmers
discussed above. Income from operations, without considering
these special charges in 1996, would have increased $62.9
million or 28.4% over 1995. This increase was primarily due to
net sales growth in 1996 combined with reduced manufacturing
costs, enhanced manufacturing efficiency, and controlled growth
in sales, marketing, and administrative spending.
For 1996, the Company had net other expenses of $106.0 million
as compared to $51.6 million in 1995. Included in net other
expenses are noncash impairment charges of $66.9 million taken
by the Company against its atherectomy-related goodwill and
other intangible assets. This impairment loss primarily
resulted from declining sales and profitability of the Company's
atherectomy business. The goodwill and other intangible assets
were recorded as part of the purchase of Devices for Vasular
Intervention, Inc., in 1989, prior to the formation of Guidant.
Without these noncash impairment charges, net other expenses
were $39.1 million in 1996 as compared to $51.6 million in 1995.
This decrease of $12.5 million or 24.2% was primarily due to the
following: (i) lower interest expenses due to the decline in
outstanding borrowings and lower interest rates during 1996;
(ii) increased net royalty income due to royalties received on
certain vascular intervention technology patents; and (iii)
reduced amortization expense resulting from lower intangible
balances after the impairment charges.
The nondeductible impact of the impairment charges resulted in a
significant increase in the Company's effective income tax rate
to 56.0% in 1996. The Company's effective income tax rate,
without considering the effect of the impairment charges
discussed above, was 38.4% for 1996 compared to 40.5% in 1995.
The lower effective income tax rate resulted primarily from
increased tax benefits from the Company's operations in Puerto
Rico and the reduced impact of nondeductible goodwill
amortization. The Company expects current tax strategies will
allow its 1997 effective income tax rate to decrease from the
adjusted rate of 38.4% above.
Net income for 1996 was $65.8 million compared to $101.1 million
in 1995. Earnings per share of $0.91 for 1996 decreased
approximately 35% in comparison to 1995 earnings per share of
$1.41. Without the noncash special obsolescence and impairment
charges (totaling $84.1 million after tax) recorded in the
second quarter of 1996, net income would have been $149.9
million and earnings per share would have been $2.08 for 1996.
This adjusted net income and earnings per share growth from 1995
was primarily due to operating income growth, decreased net
other expenses, and the reduced effective income tax rate.
Operating Results -- 1995
The Company had worldwide net sales of $931.3 million for the
year ended December 31, 1995, reflecting an increase of $68.9
million or 8% over 1994. Increased worldwide net sales was due
to growth in unit volume of 4%, sales price increases of 2%, and
fluctuations in foreign currency exchange rates of 2%.
Net sales of CRM products for 1995 were $452.4 million, an
increase of $73.8 million or 19.5% over 1994. This growth was
led by strong sales of recently introduced implantable
cardioverter-defibrillators. In the United States, product
introductions included the VENTAK PRx III tiered-therapy
implantable cardioverter-defibrillator in May 1995; VENTAK P2
and VENTAK P3 multi-therapy defibrillators in March 1995 and
September 1995, respectively; and ENDOTAK 70 single-pass
endocardial lead system in June 1995. European sales growth was
led by VENTAK PRx III, VENTAK P3, ENDOTAK DSP, and VENTAK MINI
products. The VENTAK MINI family of advanced tiered-therapy
cardiac rhythm management products, introduced in Europe during
November 1995 and approved for United States market release
during December 1995, is significantly smaller than the
Company's most recently market-released predecessor product.
The Company's conventional and adaptive-rate pacemaker products
also contributed to this sales growth, led by the United States
market releases of VIGOR DR and VIGOR SR in June 1995.
Net sales of vascular intervention products for 1995 were $447.9
million, a decrease of $16.6 million or 3.6% from 1994. The
Company had sales growth in angioplasty products primarily due
to the following: (i) increased unit volume from the worldwide
introduction of ACS RX LIFESTREAM (rapid exchange catheter with
perfusion) in March 1995, (ii) increased unit volume of
guidewires, (iii) ACS MULTI-LINK Coronary Stent System launched
in Europe in November 1995, and (iv) ACS OTW LIFESTREAM (over-
the-wire catheter with perfusion), introduced in the United
States in December 1995. This growth was offset by volume
declines in atherectomy and over-the-wire catheters, and lower
average selling prices of angioplasty products. Atherectomy
sales declines were primarily due to usage of the stent, a
competing alternative therapy.
Net sales of MIS products for 1995 were $31.0 million, an
increase of $11.7 million or 61% over 1994. MIS sales growth
was experienced in both United States and international markets
as the Company continued to expand the marketing of its
innovative laparoscopic technologies. Sales growth was driven
by the ORIGIN TACKER Endoscopic Fixation Device, the PDBS
Preperitoneal Distention Balloon Systems, and custom procedural
kits which incorporate these products and other MIS products.
The Company experienced sales growth both in the United States
and international markets during 1995. Net sales in the United
States increased 1.7% to $603.2 million and international net
sales increased 21.8% to $328.1 million for 1995 as compared to
1994. United States net sales growth was primarily due to CRM
sales of VENTAK PRx III, VIGOR DR, VIGOR SR, VENTAK P3, 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, as well as by continued strong sales of VENTAK PRx
III, VENTAK P3, and ENDOTAK DSP in Europe. 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.
Increased guidewire and perfusion catheter sales in Japan and
Europe; the commencement of new distribution arrangements in
Japan, Italy, and the Benelux countries; and the introduction of
the ACS MULTI-LINK Coronary Stent in Europe also contributed to
the international sales growth.
Cost of sales increased 4.6% in 1995, a rate less than the
growth rate in net sales for the year. Cost of sales as a
percentage of net sales for 1995 was 30.4% compared to 31.4% in
1994. Unit manufacturing cost reductions, primarily in vascular
intervention and MIS, resulting from increased manufacturing
efficiencies, were partially offset by inventory obsolescence
charges of $12.9 million taken on certain CRM products affected
by the recent introductions of newer generation products such as
VENTAK PRx III and VENTAK P3.
Research and development expenses, which increased $3.8 million
or 2.9% in 1995 compared to 1994, represented 14.5% and 15.2% of
net sales, respectively, for these years. Increased research
and development costs in connection with CRM and vascular
intervention new product development, including development of
the VENTAK MINI family of products and the ACS MULTI-LINK
Coronary Stent System, were partially offset by certain other
research and development spending reductions, primarily
involving atherectomy products.
Sales, marketing, and administrative expenses grew 8.5% in 1995
compared to 1994. Increased sales and marketing expenses were
primarily driven by the transition from the use of independent
distributors to direct sales in Japan, Italy, and the Benelux
countries; variable selling expenses such as commissions; and
the Company's launch of 25 new products to the United States
market during 1995, particularly the VENTAK PRx III, VIGOR DR,
VIGOR SR, ACS RX LIFESTREAM, ACS OTW LIFESTREAM, and TOURGUIDE
Guiding Catheter; and European market releases of the VENTAK
MINI and the ACS MULTI-LINK Coronary Stent System.
Increased net sales combined with controlled growth in cost of
sales and research and development spending resulted in an
increase in income from operations of 15.5% in 1995 compared to
1994.
For 1995, the Company had net other expenses of $51.6 million as
compared to $35.8 million in 1994. The increase in net other
expenses was primarily a result of a full year of interest
expense on the credit agreements, which was offset slightly by
increased net royalty income. Net royalty income increased $5.3
million to $6.8 million in 1995. This increase was due
primarily to royalties received on certain vascular intervention
technology patents.
The Company's effective income tax rate for 1995 was 40.5%,
compared to 40.9% in 1994. Higher income taxes in certain
international locations and the loss of available research tax
credits were offset by the reduced impact of nondeductible
expenses, primarily goodwill amortization, and lower state
income taxes.
Net income for 1995 was $101.1 million, an increase of $9.0
million or 9.8% over 1994. Operating income growth of 15.5% in
1995 was offset by net other expenses, as discussed above.
Net income of $101.1 million and earnings per share of $1.41 for
1995 increased approximately 33% in comparison to pro forma net
income and pro forma earnings per share for 1994. This increase
was primarily due to operating income growth, increased royalty
income, and reduced net interest expense incurred by the Company
on its credit facility in 1995, in comparison to pro forma net
interest expense on long-term debt for 1994. Average
outstanding borrowings during 1995 were $463.8 million, while
pro forma average outstanding borrowings for 1994 were $513.0
million.
The Company reported 1994 earnings per share on a pro forma
basis. 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
Company's credit facility, (ii) dividends to Lilly, and (iii)
receipt of proceeds from Guidant's initial public offering of
its common stock.
Liquidity and Financial Condition
The Company strengthened its financial condition in 1996 and
generated cash flows which were sufficient to fund operations.
For the year ended December 31, 1996, cash provided by operating
activities was $161.9 million compared to $72.8 million in 1995.
This increase of $89.1 million resulted from: (i) higher
operating income without the effect of the noncash special
obsolescence and impairment charges; (ii) reduced payments on
restructuring liabilities in 1996; (iii) reduced payments to
Lilly of $39.5 million in 1995 to settle outstanding payables
pursuant to the split-off; and (iv) reduced growth rate in
inventories compared to 1995. Working capital of $110.9 million
at December 31, 1996, increased slightly from the prior year-end
level. The current ratio at December 31, 1996 and 1995, was
1.4:1. The Company expects to generate sufficient cash to fund
future working capital needs.
Net cash used for investing activities totaled $63.2 million for
1996 compared to $88.4 million in 1995. The most significant
use of cash for investing activities related to net additions of
property and equipment of $62.1 million in 1996 compared to
$64.7 million in 1995. During 1995, the Company paid
approximately $10.8 million to complete the acquisitions of
three European distributors and increased other assets $12.9
million.
Net cash used for financing activities totaled $100.3 million in
1996 compared to $88.6 million in 1995. Reduction of its
borrowings of $89.7 million was the Company's most significant
use of cash for financing activities. The Company repaid these
borrowings using cash flow generated by operations. Borrowings
and payments of dividends of $7.2 million represent nearly all
the cash used for financing activities during 1996.
In November 1996, the Company commenced a systematic stock
repurchase program to buy back up to $175.0 million of its
common shares over the next several years. During the year,
82,000 shares were repurchased at an average cost of $49.52 per
share. The share repurchase program is intended to partially
offset dilution resulting from the issuance of stock under the
Company's stock plans and other employee benefit plans.
The Company's capital structure consists of equity and interest-
bearing debt. At December 31, 1996, the Company had outstanding
borrowings of $363.5 million through the issuance of commercial
paper and bank borrowings at a weighted average interest rate of
5.34%. At December 31, 1995, outstanding borrowings were $455.0
million. 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. Borrowings as a percent of
total capitalization were 44.8% at December 31, 1996 compared
with 54.2% and 64.1% at December 31, 1995 and 1994,
respectively.
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 planned capital
expenditures of approximately $70.0 million in 1997.
The Company has recognized net deferred tax assets aggregating
$61.9 million at December 31, 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 valuation allowances are necessary.
The Company conducts its business in various foreign currencies
and, as a result, is subject to the exposures that arise from
foreign exchange rate movements. The Company's risk-management
objectives are to reduce earnings volatility and protect the
Company's assets from fluctuating foreign currencies and
interest rates. Simple derivative instruments, including
foreign currency forward contracts; purchased options; and
interest rate swap agreements are used as hedges to meet these
objectives. The primary feature of Guidant's risk-management
philosophy is that all hedging activity must be designed to
reduce financial risks associated with commercial and financial
transactions which arise in the ordinary course of business.
All hedging activities are entered into for purposes "other than
trading" as defined by SFAS No. 119. The contracts are
initiated within the guidelines of documented corporate risk-
management policies and do not create additional risk because
gains and losses on these instruments generally offset losses
and gains on the assets, liabilities,and transactions being
hedged. In 1996 and 1995, the net impact of the Company's risk-
management activities were not material.
Interest rate swap agreements have been used to reduce the
Company's exposure to interest rate fluctuations. Currency
forward contracts and currency option contracts are used to
reduce the impact of foreign exchange rate movements on
transactions denominated in foreign currencies, primarily
intercompany loans and export intercompany purchases of
inventory. Instruments related to transactional exposures are
carried in the financial statements at current rates, with rate
changes reflected directly in income. Gains and losses on
instruments designed to hedge anticipated foreign currency
transactions are deferred and recognized in the same period as
the hedged transactions.
Regulatory and Other Matters
Government and private sector initiatives to limit the growth of
healthcare costs, including price regulation, competitive
pricing, and managed-care arrangements, are continuing in
several countries where the Company does business, including the
United States. These changes have caused healthcare providers
to put increased emphasis on the delivery of more cost-effective
medical therapies. Although management believes the Company is
well positioned to respond to this worldwide trend toward cost
containment, uncertainty as to the outcome of current and
prospective legislative and regulatory initiatives and changes
in the marketplace preclude the Company from predicting the
impact these initiatives and changes may have on future
operating results.
The Company's products are subject to extensive regulation by
the United States Food and Drug Administration (FDA) and, in
some jurisdictions, by state and foreign governmental
authorities. The Company 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 the Company will be granted on a timely basis, if at
all.
The current trend among hospitals and other customers of medical
device manufacturers is to consolidate into larger purchasing
groups to enhance purchasing power and become more cost-
effective in the delivery of healthcare. The medical device
industry also has been consolidating rapidly, partly in order to
offer a broader range of products to large purchasers. As a
result, transactions with customers tend to be more significant,
more complex, and involve more long-term contracts than in the
past. While this enhanced purchasing power may increase the
pressure on product pricing, management is unable to estimate
the potential future impact at this time.
The operations of the Company, like those of other medical
device companies, involve the use of substances regulated under
environmental laws, primarily in manufacturing and sterilization
processes. While it is difficult to quantify, the Company
believes that the potential impact of compliance with
environmental protection laws and regulations will not have a
material impact on the Company's financial position or results
of operations.
The Company operates in an industry susceptible to product
liability claims. Such claims may be asserted against the
Company in the future related to events not known at the present
time. Management believes that its risk-management practices,
including insurance coverage, are adequate to protect the
Company against any material product liability losses. The
Company, along with other medical device companies, is concerned
that, because of inequities in United States tort law, suppliers
of raw materials and component parts used in the manufacture of
Company products have indicated a desire to withdraw from the
market. Management cannot estimate the possible future impact
at this time.
From time to time, the Company is subject to claims of, and
legal actions alleging, infringement by the Company of patent
rights of others. While it is not possible to predict or
determine the outcomes of legal actions brought against it, the
Company believes that the ultimate outcomes of such actions will
not have a material impact on its financial position.
Under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions investors
that any forward-looking statements or projections made by the
Company, including those made in this document, are subject to
risks and uncertainties which may cause actual results to differ
materially from those projected. Economic, competitive,
governmental, technological, and other factors which may affect
the Company's operations are discussed in the Company's most
recent reports on Forms 10-Q and 10-K filed with the Securities
and Exchange Commission.
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Income
(In millions, except per-share data)
Year Ended December 31,
-------------------------------
1996 1995 1994
-------------------------------
Net sales $1,048.5 $931.3 $862.4
Cost of sales 314.5 283.4 270.9
----- ----- -----
Gross profit 734.0 647.9 591.5
Research and development 152.5 134.7 130.9
Sales, marketing, and administrative 326.0 291.8 268.9
----- ----- -----
478.5 426.5 399.8
----- ----- -----
Income from operations 255.5 221.4 191.7
Other income(expenses):
Interest, net (24.2) (30.2) (7.6)
Royalties, net 10.0 6.8 1.5
Amortization of goodwill and
other intangible assets (20.8) (23.1) (20.4)
Other, net (4.1) (5.1) (9.3)
Impairment charges (66.9) -- --
----- ----- -----
(106.0) (51.6) (35.8)
------ ----- -----
Income before income taxes 149.5 169.8 155.9
Income taxes 83.7 68.7 63.8
----- ----- -----
Net income $65.8 $101.1 $92.1
===== ===== =====
Earnings per share $0.91 $1.41
===== =====
Weighted average shares outstanding 72.08 71.88
Pro forma earnings per share
information (unaudited):
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
See notes to consolidated financial statements.
GUIDANT CORPORATION and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
December 31,
------------------
1996 1995
------------------
Assets
Current Assets
Cash and cash equivalents $1.5 $3.4
Accounts receivable, net of allowances of
$7.3 (1996) and $5.7 (1995) 212.4 181.6
Other receivables 17.5 18.4
Inventories 102.8 124.7
Deferred income taxes 62.1 46.1
Prepaid expenses 22.6 14.8
---- ----
Total Current Assets 418.9 389.0
Other Assets
Goodwill, net of allowances of
$82.1 (1996) and $84.7 (1995) 197.3 263.6
Other intangible assets, net of allowances
of $8.8 (1996) and $18.9 (1995) 9.1 33.0
Deferred income taxes -- 13.7
Investments 41.3 19.9
Sundry 16.3 21.8
---- ----
264.0 352.0
Property and equipment, net 321.0 316.4
---- ----
$1,003.9 $1,057.4
======== ========
GUIDANT CORPORATION and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
December 31,
------------------
1996 1995
------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $21.9 $45.8
Employee compensation 77.5 63.3
Restructuring liabilities 8.8 17.9
Other liabilities 67.2 59.7
Income taxes payable 2.6 22.0
Current portion of long-term debt 130.0 70.0
----- -----
Total Current Liabilities 308.0 278.7
Noncurrent Liabilities
Long-term debt 233.5 385.0
Other 14.2 9.5
----- ----
247.7 394.5
Commitments and contingencies -- --
Shareholders' Equity
Common stock, no par value;
Authorized shares: 250,000,000
Issued and outstanding shares:
1996 - 72,154,000
1995 - 71,961,000 192.5 192.5
Additional paid-in capital 150.5 146.8
Retained earnings 162.0 103.4
Deferred cost, ESOP (51.2) (57.3)
Treasury stock, at cost:
Shares: 1996 - 66,763 (3.3) --
Unrealized gain on investments, net 9.4 --
Cumulative translation adjustments (11.7) (1.2)
------ -----
448.2 384.2
----- -----
$1,003.9 $1,057.4
======== ========
See notes to consolidated financial statements.
<TABLE>
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Income
(In millions, except per-share data)
<CAPTION>
Shareholder's Additional
Net Common Stock Paid-In Retained
Investment Issued Shares Amount Capital Earnings
-------------- ------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
December 31, 1993 $ 1,048.3
Net Income 86.2
Dividends to Lilly (1,097.0)
Capital contributions from Lilly, net 54.7
Cancellation of net receivable from Lilly (31.4)
Currency translation adjustments 3.7
-------------- ------------- -------- --------- --------
December 14, 1994 64.5
Impact of Initial Public Offering:
Reclassification of Lilly's net investment (64.5) 57,600,000 $ 64.5
Net proceeds 14,260,000 $ 192.5
Net income $ 5.9
Currency translation adjustments
-------------- ------------- -------- --------- --------
December 31, 1994 - 71,860,000 192.5 64.5 5.9
Net income 101.1
Cash dividends ($0.05 per share) (3.6)
Capital contributions from Lilly, net 21.5
Shares issued to ESOP 2,247,000 60.0
ESOP transactions 0.8
Currency translation adjustments
-------------- ------------- -------- --------- --------
December 31, 1995 - 74,107,000 192.5 146.8 103.4
Net income 65.8
Cash dividends ($0.10 per share) (7.2)
Repurchase of common stock
ESOP transactions 5.7
Unrealized gain on investments, net of tax
Currency translation adjustments
Other 31,000 (2.0)
-------------- ------------- -------- --------- --------
December 31, 1996 - 74,138,000 $ 192.5 $ 150.5 $ 162.0
============== ============= ======== ========= ========
</TABLE>
<TABLE>
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Income
(In millions, except per-share data)
(Continued)
<CAPTION>
Unrealized Cumulative
Deferred Cost, ESOP Treasury Gain on Translation
Shares Amount Stock Investments Adjustments Total
---------- ------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993 $ 1,048.3
Net Income 86.2
Dividends to Lilly (1,097.0)
Capital contributions from Lilly, net 54.7
Cancellation of net receivable from Lilly (31.4)
Currency translation adjustments 3.7
---------- ------- -------- ----------- ----------- ---------
December 14, 1994 64.5
Impact of Initial Public Offering:
Reclassification of Lilly's net investment
Net proceeds 192.5
Net income 5.9
Currency translation adjustments $ 1.5 1.5
---------- ------- -------- ----------- ----------- ---------
December 31, 1994 1.5 264.4
Net income 101.1
Cash dividends ($0.05 per share) (3.6)
Capital contributions from Lilly, net 21.5
Shares issued to ESOP (2,247,000) $(60.0) -
ESOP transactions 101,000 2.7 3.5
Currency translation adjustments (2.7) (2.7)
---------- ------- ------- ----------- ----------- ---------
December 31, 1995 (2,146,000) (57.3) (1.2) 384.2
Net income 65.8
Cash dividends ($0.10 per share) (7.2)
Repurchase of common stock $ (4.0) (4.0)
ESOP transactions 229,000 6.1 11.8
Unrealized gain on investments, net of tax $ 9.4 9.4
Currency translation adjustments (10.5) (10.5)
Other 0.7 (1.3)
---------- ------- -------- ----------- ----------- ---------
December 31, 1996 (1,917,000) $(51.2) $ (3.3) $ 9.4 $ (11.7) $ 448.2
========== ======= ======== =========== =========== =========
</TABLE>
GUIDANT CORPORATION and Subsidiaries
<TABLE>
Consolidated Statements of Cash Flows
(In millions)
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
Cash Provided by Operating Activities:
<S> <C> <C> <C>
Net income $65.8 $101.1 $92.1
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation 44.7 44.7 44.0
Amortization of goodwill and other intangible assets 21.5 23.1 20.7
Impairment of long-lived assets 66.9 -- --
---- ---- ----
Provision for inventory and other losses 41.4 17.7 10.7
Other noncash expenses, net 6.4 10.8 19.8
---- ---- ----
246.7 197.4 187.3
Changes in Operating Assets and Liabilities:
Receivables, increase (36.2) (32.1) (23.1)
Inventories, increase (13.0) (22.1) (10.8)
Prepaid expenses, increase (7.7) (0.3) (6.2)
Accounts payable and accrued liabilities, (decrease) increase(11.5) 26.1 15.7
Income taxes payable, (decrease) increase (19.3) 9.3 29.4
Restructuring liabilities, decrease (9.1) (55.5) (13.5)
Payables to affiliated companies, decrease -- (39.5) (7.9)
Other liabilities, increase (decrease) 12.0 (10.5) 5.0
---- ---- ----
Net Cash Provided by Operating Activities 161.9 72.8 175.9
Used for Investing Activities:
Additions to property and equipment, net (62.1) (64.7) (51.1)
Additions to other assets, net (1.1) (12.9) (11.8)
Acquisitions -- (10.8) (8.8)
---- ---- ----
Net Cash Used for Investing Activities (63.2) (88.4) (71.7)
Used for Financing Activities:
(Decrease) increase in borrowings (89.7) (78.0) 78.0
Proceeds from long-term borrowings -- -- 648.0
Reductions of long-term borrowings -- (18.0) (175.0)
Capital contribution from Lilly -- 11.0 --
Advances to Lilly, net -- -- (111.7)
Dividends (7.2) (3.6) (652.4)
Proceeds from initial public offering of common stock -- -- 192.5
Purchase of common stock and other capital transactions(3.4) -- -- --
------ ----- -----
Net Cash Used for Financing Activities (100.3) (88.6) (20.6)
Effect of Exchange Rate Changes on Cash and Cash Equivalents (0.3) (5.4) 4.4
------ ----- -----
Net (Decrease) Increase in Cash and Cash Equivalents (1.9) (109.6) 88.0
Cash and Cash Equivalents at Beginning of Year 3.4 113.0 25.0
---- ----- ----
Cash and Cash Equivalents at End of Year $1.5 $3.4 $113.0
==== ===== =====
</TABLE>
See notes to consolidated financial statements.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per-share data)
NOTE 1 - GENERAL INFORMATION
Operations: Guidant Corporation (Guidant or the Company)
designs, develops, manufactures, and markets a broad range of
devices for use in: (i) cardiac rhythm management, (ii) vascular
intervention, and (iii) other forms of minimally invasive
surgery. Guidant is a global company with principal operations
in the United States, Europe, and Japan. The Company generally
markets its products through a direct sales force in the United
States and a combination of direct sales representatives and
independent distributors in international markets. The Company
sells its products in over 70 countries with its most
significant sales in the United States, Western Europe, and
Japan.
Organization: In June 1994, the Board of Directors of Eli Lilly
and Company (Lilly) approved a plan to form a new subsidiary,
Guidant. Under the plan, Lilly transferred to Guidant its
ownership interests in five businesses in its Medical Devices
and Diagnostics Division. Guidant, which was incorporated in
September 1994, consummated an initial public offering (IPO) of
its common stock in December 1994. Upon completion of the IPO,
Lilly's beneficial ownership of Guidant's common stock was
reduced to approximately 80%. Lilly disposed of its remaining
ownership in September 1995, by means of a split-off, an
exchange offer whereby 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.
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. Significant intercompany transactions and
balances have been eliminated in consolidation.
Basis of Presentation: The consolidated financial statements
reflect the results of operations, financial positions, and cash
flows of Guidant as a component of Lilly through December 14,
1994, the effective date of the Company's IPO, and as an
independent enterprise from the aforementioned date through
December 31, 1996. The 1994 results may not be indicative of
actual results under other ownership.
Lilly and Guidant executed various service agreements, which
generally became effective in late 1994, under which Lilly
provided administrative support, primarily information systems
and human resources, to Guidant at fees determined on an arm's-
length basis. Guidant paid Lilly $0.2 million and $3.9 million
for these services during 1996 and 1995, respectively. These
service agreements terminated on March 31, 1996.
Prior to the IPO, Guidant was allocated corporate administrative
costs incurred by Lilly. These allocations of corporate
expenses were $14.2 million in 1994. 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 that were incurred by
Lilly on behalf of Guidant. These expenses were $4.8 million
and $18.7 million in 1995 and 1994, respectively. These costs,
including the allocated corporate expenses in 1994 discussed
above, have been reflected in the consolidated income statements
as follows:
1995 1994
---- ----
Research and development -- $ 1.6
Sales, marketing, and administrative 4.8 31.3
---- ----
$4.8 $32.9
===== =====
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Prior to the IPO, Lilly did not require Guidant to pay these
allocated expenses. Accordingly, the cancellation of this
liability has been reflected by Guidant as a contribution to
capital for periods prior to that date.
Revenue Recognition: Revenue is primarily recognized at the
time product is shipped to customers.
Research and Development: Research and development costs are
charged to expense as incurred.
Foreign Currency Translation: Sales and expenses denominated in
foreign currencies are translated at average exchange rates in
effect during the period. Assets and liabilities of foreign
operations are translated into United States dollars using the
exchange rates in effect at year-end. Adjustments arising from
the translation of most net assets located outside the United
States (gains and losses) are accumulated as a component of
Shareholders' Equity. Foreign currency transaction gains and
losses are included in the Consolidated Statements of Income as
other income (expenses).
Cash and Cash Equivalents: All highly liquid investments,
generally with original maturities of three months or less, are
considered to be cash equivalents. These investments are valued
at cost, which approximates fair value.
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:
1996 1995
---- ----
Finished products $48.4 $45.8
Work in process 28.8 43.9
Raw materials and supplies 25.6 35.0
----- -----
$102.8 $124.7
====== ======
Goodwill and Other Intangible Assets: Goodwill represents the
excess of cost over the fair value of identifiable net assets of
businesses acquired. Other intangible assets consist primarily
of purchased technology and patents, and organization costs.
Goodwill and other intangible assets are amortized using the
straight-line method over their estimated useful lives, of which
periods up to 27 years remain.
Property and Equipment: Property and equipment are stated at
historical cost. Additions and improvements are capitalized.
Expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation is computed by the straight-line
method at rates which are intended to depreciate the cost of
these various assets over their estimated useful lives. At
December 31, property and equipment consisted of the following:
1996 1995
---- ----
Land $26.6 $26.3
Buildings 193.3 189.1
Equipment 275.6 288.9
Construction in progress 36.1 28.7
----- -----
531.6 533.0
Less allowances
for depreciation 210.6 216.6
----- -----
$321.0 $316.4
====== ======
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Long-Lived Assets: 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, requires
that long-lived assets be reviewed for possible impairment
whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. SFAS No. 121, adopted
by the Company in 1996, requires that certain long-lived assets,
which meet prescribed impairment tests, be written down to their
fair values.
Income Taxes: All income tax amounts reflect the use of the
liability method, as prescribed by SFAS No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on temporary differences
between the carrying amount of assets and liabilities for
financial and income tax reporting purposes.
Prior to the split-off, certain of the Company's operations were
historically included in the consolidated income tax returns
filed by Lilly. The Company also entered into a tax-sharing
agreement with Lilly in November 1994 for the period of time
during which Guidant was to be included in Lilly's consolidated
tax returns. Income tax expense has been computed assuming the
Company filed separate income tax returns worldwide. Through
the split-off date, differences between income taxes payable and
amounts reported in the consolidated financial statements have
been reflected as a reduction of additional paid-in capital.
Earnings Per Share: Earnings per share of common stock for 1996
and 1995 has been computed by dividing net income by the
weighted average common shares outstanding during the year.
Historical earnings per share for 1994 is not meaningful due to
the changes in the capital structure during that year. Pro
forma earnings per share for 1994 was computed by dividing pro
forma net income by the pro forma weighted average shares
outstanding during the year. Pro forma net income and earnings
per share have been determined assuming the December 31, 1994,
capital structure was in place and 71.86 million common shares
were outstanding for the entire year. The pro forma adjustment
to net income gives effect to an increase in net interest
expense, net of tax.
Use of Estimates: Preparation of the consolidated financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from these estimates.
Reclassification: Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the
current year presentation.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 3 - SPECIAL AND RESTRUCTURING CHARGES
Special Charges: The Company recorded two separate noncash
charges totaling $95.7 million during the second quarter of
1996. The first was an impaired asset charge against the
Company's atherectomy-related goodwill and other intangible
assets of $66.9 million. This charge was based on a discounted
cash flow analysis performed in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, and primarily resulted from
declining sales and profitability of the Company's atherectomy
business. The goodwill and other intangible assets were
originally recorded as part of the purchase of Devices for
Vascular Intervention, Inc., by Lilly in 1989, prior to the
formation of Guidant.
The second charge was a $28.8 million noncash charge to cost of
sales resulting from the obsolescence of older-generation
cardiac rhythm management products and programmers. The charge
resulted from accelerated regulatory approval for market release
and customer acceptance of new-generation CRM products.
Restructuring Charges: In 1993, Guidant and Lilly took actions
designed to enhance Guidant's competitiveness in the changing
healthcare markets, reduce expenses, and improve efficiencies.
As a result of these actions, Guidant recognized restructuring
charges of $81.5 million in 1993. Restructuring costs include
those amounts resulting from management's commitment to revised
strategic actions. The remaining reserve balances at December
31, 1996 and 1995, were $11.8 million and $20.9 million,
respectively. All such actions are underway. During 1996,
management reevaluated and extended its estimate of the time
necessary to complete the restructuring actions. Management now
believes all such actions will be completed by 1998. The
strategic actions relate principally to significantly changing
the manner of distributing the Company's products in overseas
markets, and consolidating and relocating certain manufacturing
and administrative operations within the United States.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 4 - STOCK PLANS
Stock Plans: In October 1994 and May 1996, the Company adopted
stock plans (Stock Plans) pursuant to which the Company grants
nonqualified stock options and restricted stock grants to
outside members of its Board of Directors and may grant
incentive stock options, nonqualified stock options, performance
awards, and restricted stock grants to officers, other
executives, employees, and consultants of the Company. The
Stock Plans allow grants of up to 7,250,000 shares of authorized
but unissued shares of the Company's common stock.
Stock options are granted at 100% of the fair market value of
the underlying stock at the date of grant and have 10-year
terms. The stock options granted to outside directors vest and
become fully exercisable after approximately one year from the
date of grant. All other stock options granted by the Company
vest and become fully exercisable after three years from the
date of grant or vest in increments over three years.
At December 31, 1996, there were 3,484,382 additional shares
(after option-equivalent grants of 423,813 used for performance
awards and restricted stock) available for grant under the Stock
Plans.
<TABLE>
Stock option activity is summarized below:
<CAPTION>
Weighted Average Weighted Average Weighted Average
1996 Exercise Price 1995 Exercise Price 1994 Exercise Price
---- -------------- ---- -------------- ---- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 2,066,636 $25.53 841,500 $14.50 N/A
Granted 1,403,250 43.26 1,332,636 31.63 841,500 $14.50
Exercised (5,653) 31.50 -- -- --
Cancelled (122,428) 27.39 (107,500) 14.77 --
---------- --------- -------
Outstanding at December 31 3,341,805 32.81 2,066,636 $25.53 841,500 $14.50
Exercisable at December 31 419,550 $31.28 -- -- --
</TABLE>
Exercise prices for options outstanding as of December 31, 1996,
ranged from $14.50 to $59.25. The weighted average remaining
contractual life of options outstanding at December 31, 1996, is
approximately 9.5 years.
The Company follows the provisions of Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations, in accounting for its
stock options which require compensation expense for stock
options to be recognized only if the market price of the
underlying stock exceeds the exercise price on the date of
grant. Accordingly, the Company has not recognized compensation
expense for its stock options granted.
In 1995, the Company adopted the disclosure provisions of SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
permits companies to recognize as expense, over the vesting
period, the fair value of all stock-based awards on the date of
grant. The alternative fair value accounting provided for under
SFAS No. 123 requires the use of stock option valuation models.
In management's opinion, existing stock option valuation models,
developed for estimating the fair value of transferable traded
options with no vesting restrictions, do not necessarily provide
a reliable measure of fair value. Therefore, as permitted, the
Company continues to apply the existing accounting rules under
APB No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants
made as if the fair value method in measuring compensation cost
for stock options granted subsequent to December 31, 1994, had
been applied.
The per-share weighted average fair value of stock options
granted in 1996 and 1995 was $18.87 and $13.76, respectively.
The fair value was estimated as of the grant date using the
Black-Scholes option pricing model with the following weighted
average assumptions:
1996 1995
---- ----
Risk-free interest rate 6.7% 6.0%
Dividend yield 0.2% 0.3%
Volatility factor 26.3% 29.4%
Option life 7 years 7 years
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 4 - STOCK PLANS - (Continued)
The pro forma impact on income assumes a forfeiture rate of
approximately 10%. Had compensation expense for stock options
granted in 1996 and 1995 been recorded based on the fair market
value at the grant date, the Company's net income and earnings
per share would have been reduced by $7.5 million and $0.10,
respectively, in 1996 and $1.1 million and $0.02, respectively,
in 1995.
The pro forma effects are not representative of the effects on
reported net income for future years, as most of the stock
option grants vest in cumulative increments over a period of
three years.
Performance award shares are dependent upon continued employment
and achievement of certain performance objectives. Performance
awards of approximately 233,300 shares were outstanding at
December 31, 1996. Prior to 1996, Guidant employees continued
to participate in the Lilly performance award plan and,
accordingly, Guidant shares were not used to satisfy these
obligations. The estimated cost of performance award shares is
expensed as earned. Such expenses were $10.4 million in 1996
and $7.9 million in 1995.
Shareholder Rights Plan: A shareholder rights plan exists which
would entitle all shareholders to a preferred stock purchase
right entitling them to purchase from the Company one one-
hundredth of a share of Series A Preferred Stock at an exercise
price of $43.50. The Company 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 or group of
affiliated or associated persons (Acquiring Person) has acquired
ownership of common stock having 10% or more of the Company's
general voting power (Stock Acquisition Date). The plan
provides that, if the Company is acquired in a business
combination at any time after a Stock Acquisition Date,
generally each holder of a right will be entitled to purchase at
the exercise price a number of the acquiring Company'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 an Acquiring Person of stock having 15% or more
of the Company's general voting power, generally each holder of
a right will be entitled to purchase at the exercise price a
number of shares of the Company'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 the Company.
NOTE 5 - BORROWINGS
At December 31, 1996, the Company had outstanding commercial
paper borrowings of $238.8 million and bank borrowings of $124.7
million at a weighted average interest rate of 5.34%. The
Company expects that a minimum of approximately $233.5 million
of borrowings will remain outstanding throughout 1997, and,
accordingly, has classified this portion as long-term at
December 31, 1996. The weighted-average interest rate on
borrowings outstanding during 1996 was 5.89%. The Company's
commercial paper borrowings are supported by a credit facility
with certain banks, which permits borrowings of up to $600.0
million through January 8, 2001. There are currently no
outstanding borrowings under the credit facility. This credit
facility carries a variable market rate of interest.
Restrictive covenants in the borrowing agreements include
limitations on additional borrowings, consolidations, mergers,
and certain sales of assets and maintenance of certain financial
performance measures. At December 31, 1996, unused committed
lines of credit were $600.0 million. Compensating balances and
commitment fees are not material.
At December 31, 1995, the Company had outstanding borrowings of
$455.0 million under a $700.0 million credit facility which
expired January 8, 1996. Borrowings under the facility carried
a variable interest rate of 6.39% at December 31, 1995. On
January 8, 1996, the Company refinanced this credit facility
through the issuance of commercial paper and the new credit
facility. At December 31, 1995, the Company expected that a
minimum of $385.0 million of borrowings would remain outstanding
throughout 1996 and, therefore, classified that portion of
borrowings as long-term at that time. The weighted-average
interest rate on borrowings outstanding during 1995 was 6.55%.
Interest expense, which is included in other expenses and
approximates cash payments of interest on borrowings, was $25.7
million, $33.1 million, and $18.8 million in 1996, 1995, and
1994, respectively.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 6 - ACQUISITIONS
In August 1995, the Company completed the acquisition of its
German distributor, Danimed GmbH und Co. KG. (Danimed), by
purchasing the remaining 20% ownership interest. In connection
with this transaction, Lilly made a net capital contribution to
Guidant of $11.0 million. The total purchase price of
approximately $24.0 million was determined based upon the
operating results of Danimed during the two-year period ended
August 31, 1995. This acquisition is accounted for by the
purchase method and related goodwill is being amortized using
the straight-line method over seven years.
NOTE 7 - TRANSACTIONS WITH AFFILIATED COMPANIES
Transactions with affiliated companies relate primarily to costs
and expenses (other than the amounts discussed in Note 2)
initially incurred by Lilly on behalf of the Company and
subsequently charged to the Company. An analysis of significant
expense items follows:
1995 1994
---- ----
Personnel and benefits $13.2 $14.8
Information systems -- 3.0
Insurance 4.5 6.5
Interest income, net (0.3) (3.2)
Royalties 5.9 6.5
Miscellaneous 2.1 1.9
---- ----
$25.4 $29.5
===== =====
During 1994, the Company declared dividends to Lilly of $1,097.0
million, including $444.6 million which was recorded as a
reduction of long-term advances to affiliated companies, $158.3
million as payment for certain assets that have historically
been recorded on the Company's books, and $494.1 million in cash
dividends.
NOTE 8 - LEASES
The Company leases various manufacturing and office facilities
and certain equipment using operating leases. Future minimum
lease commitments are as follows:
1997 $ 7.9
1998 7.1
1999 6.4
2000 6.1
2001 5.5
Thereafter 7.3
-----
$40.3
=====
Rent expenses for all leases, including contingent rentals, which were
not material, amounted to approximately $9.0 million, $7.2 million,
and $6.8 million for 1996, 1995, and 1994, respectively.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 9 - INCOME TAXES
Following is the composition of income tax expense:
1996 1995 1994
---- ---- ----
Current:
Federal $75.4 $47.8 $49.9
State 11.7 6.2 11.9
Foreign 4.8 12.7 3.8
---- ---- ----
Total currently payable 91.9 66.7 65.6
Deferred:
Federal (7.1) 0.3 0.2
State (1.6) 3.2 (2.0)
Foreign 0.5 (1.5) --
---- ---- ----
Total deferred tax expense (benefit) (8.2) 2.0 (1.8)
---- ---- ----
Income tax expense $83.7 $68.7 $63.8
===== ===== =====
Deferred tax assets and liabilities reflect the future tax consequences
of events that have already been recognized in the consolidated financial
statements or tax returns. At December 31, deferred tax assets and
liabilities consisted of the following:
1996 1995
---- ----
Deferred tax assets:
Inventory and product-related reserves $43.6 $30.7
Acquisition of intangible assets 15.0 15.8
Net operating loss carryforwards 6.6 5.8
Restructuring and special charges 5.8 8.8
Employee compensation and benefits 3.3 6.3
Litigation 2.8 2.8
Accounts receivable related 2.8 1.7
State income taxes 0.8 0.6
Other 9.5 5.8
---- ----
90.2 78.3
Valuation allowances (6.6) (5.6)
---- ----
Total deferred tax assets 83.6 72.7
Deferred tax liabilities:
Property and equipment (11.6) (7.2)
Prepaid employee benefits -- (1.3)
Long-term equity investments (6.1)
Other (4.0) (4.4)
------ ------
Total deferred tax liabilities (21.7) (12.9)
------ ------
Deferred tax assets, net $61.9 $59.8
====== ======
Income taxes paid were $103.1 million, $56.2 million, and $41.1 million
in 1996, 1995, and 1994, respectively.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 9 - INCOME TAXES - (Continued)
Following is a reconciliation of the effective income tax rate:
1996 1995 1994
---- ---- ----
United States federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting from:
State income taxes, net 3.5 3.6 4.1
Benefit from operations in Puerto Rico (2.7) (1.0) (1.0)
Effect of international operations 1.7 1.8 0.8
Effect of impairment charges 17.6 -- --
Nondeductible expenses, primarily goodwill amortization 2.7 3.1 4.0
Research credit -- -- (0.2)
Other, net (1.8) (2.0) (1.8)
---- ---- ----
Effective income tax rate 56.0% 40.5% 40.9%
==== ==== ====
No provision has been made for United States federal and state
or foreign taxes that may result from future remittances of
undistributed earnings of foreign subsidiaries ($26.5 million at
December 31, 1996) because it is expected that such earnings
will be permanently reinvested in these foreign operations. It
is not practical to estimate the amount of taxes that might be
payable on the eventual remittance of these earnings.
At December 31, 1996, approximately $3.2 million of foreign tax
losses were available for carryforward. These carryforwards are
subject to valuation allowances and generally expire within a
period of one to seven years.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 10 - EMPLOYEE BENEFIT PLANS
Employee Savings and Stock Ownership Plan: In 1995, Guidant
created a defined contribution savings plan that covers its
eligible United States employees. The plan includes both an
employee savings component and an employee stock ownership
component. The purpose of the plan is generally to provide
additional financial security to employees during retirement.
Participants in the savings plan may elect to contribute, on a
before-tax basis, a certain percent of their annual earnings.
The Company matches a portion of these employee contributions
with Guidant common stock. In addition, the Company contributes
(in Guidant common stock) a fixed percentage of employees'
annual base pay to the plan regardless of whether the employee
contributes to the Plan. Prior to the establishment of the
Guidant plan, eligible employees participated in Lilly's defined
contribution savings plans. Contributions to those plans were
determined by Lilly based on employee contributions and the
level of Lilly's match. The accounts of employees previously
participating in the Lilly defined contribution savings plans
were transferred to the Guidant plan during 1995.
The Company established an Employee Stock Ownership Plan (ESOP)
as a funding vehicle for the savings plan. This internally
leveraged ESOP acquired approximately 2.2 million shares of
newly issued Guidant common stock at a cost of $60.0 million
($26.70 per share) in September 1995. Common shares held by the
ESOP are allocated to Guidant employees on a periodic basis
until these shares are exhausted (approximately seven years,
assuming the year-end price per-share of Guidant common stock
of $57.00 remains constant). At December 31, 1996, the
ESOP held approximately 0.3 million allocated shares and 1.9
million unallocated shares. The cost of shares transferred to
the ESOP and not yet allocated to employees is reported as a
reduction of shareholders' equity. Allocated shares of the ESOP
are treated as outstanding in the computation of earnings per
share. Compensation expense under these plans was $13.9 million,
$5.8 million, and $6.2 million for 1996, 1995, and 1994,
respectively.
Retirement Plan: The Company previously sponsored
noncontributory defined benefit retirement plans which covered
the majority of United States employees. Benefits under the
domestic plans were calculated by using one of several formulas.
These formulas were based on a combination of the following: (i)
years of service, (ii) final average earnings, (iii) primary
social security benefit, and (iv) age.
On September 25, 1995, the Company froze benefits under its
defined benefit retirement plans. Concurrently, the Guidant
Retirement Plan (Plan) was created and assumed the accumulated
benefit obligation associated with the frozen plans. As a
result of these actions, the Company recognized a $2.7 million
pretax curtailment gain in 1995. Certain employees who met
eligibility requirements at September 25, 1995, continue to
accrue benefits for projected future salary increases under the
Plan.
The Company's funding policy for all plans is consistent with
United States employee benefit and tax-funding regulations.
Plan assets, which are maintained in a trust, consist primarily
of equity and fixed income instruments.
Net pension expense for the Company's United States retirement
plans includes the following components:
1996 1995 1994
---- ---- ----
Service cost, benefits earned during the year $ -- $3.0 $5.3
Interest cost on projected benefit obligation 2.8 3.0 2.7
Return on assets (5.6) (6.7) (0.4)
Net amortization and deferral 1.8 3.5 (1.9)
---- ---- ----
Net pension (credit) cost $(1.0) $2.8 $5.7
====== ==== ====
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 10 - EMPLOYEE BENEFIT PLANS - (Continued)
The funded status and amounts recognized in the consolidated
balance sheets for the Plan at December 31 were as follows:
1996 1995
---- ----
Plan assets at fair value $45.6 $40.2
Actuarial present value of benefit obligations:
Vested benefits (34.1) (23.5)
Nonvested benefits (1.9) (6.6)
---- ----
Accumulated benefit obligation (36.0) (30.1)
Effect of projected future salary increases (6.8) (5.2)
---- ----
Projected benefit obligation (42.8) (35.3)
---- ----
Plan assets in excess of projected
benefit obligation 2.8 4.9
Unrecognized loss (gain), net 0.4 (0.4)
Unrecognized prior service cost, net 2.2 --
---- ----
Prepaid pension cost $5.4 $4.5
==== ====
The assumptions used to develop net periodic pension expense and the
actuarial present value of projected benefit obligations are shown below:
1996 1995 1994
---- ---- ----
(percent)
Discount rate (weighted average) 7.5 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 10.5 10.5 11.0
The impact of the plan curtailment resulted primarily in the decrease
in net pension cost in 1995 and realization of a credit in 1996.
Certain employees outside the United States participate in
retirement plans maintained by the Company. 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 and are not material. The maintenance of these plans
was transferred from Lilly to the Company during 1995.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 11 - GEOGRAPHIC INFORMATION
The Company operates in one industry segment the development,
manufacture, and marketing of products and services for
minimally invasive medical procedures. Net sales, income before
taxes, and assets by major geographic area are summarized below.
1996 1995 1994
---- ---- ----
Net sales:
United States:
Sales to unaffiliated customers $714.1 $672.2 $694.5
Transfers to other geographic areas 239.2 183.1 92.9
----- ------ -----
953.3 855.3 787.4
Sales to other unaffiliated customers 334.4 259.1 167.9
Eliminations and transfers (239.2) (183.1) (92.9)
------ ------ -----
$1,048.5 $931.3 $862.4
======== ====== ======
Income (loss) before income taxes:
United States $149.0 $173.1 $165.4
Other 9.5 29.4 (10.0)
Eliminations and adjustments (9.0) (32.7) 0.5
------ ------ -------
$149.5 $169.8 $155.9
====== ====== ======
Assets:
United States $997.9 $1,063.3 $996.1
Other 219.2 213.1 132.7
Eliminations and adjustments (213.2) (219.0) (25.2)
----- ------ -----
$1,003.9 $1,057.4 $1,103.6
======== ======== ========
Sales between geographic areas are made at transfer prices that,
in general, approximate prices to unaffiliated third parties.
Remittances to the United States are subject to various
regulations of the respective governments as well as to
fluctuations in exchange rates. United States export sales to
unaffiliated customers were approximately $72.4 million, $69.0
million, and $101.4 million for 1996, 1995, and 1994,
respectively.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 12 - FINANCIAL INSTRUMENTS
In the normal course of business, operations of the Company are
exposed to continuing fluctuations in currency values and
interest rates. These fluctuations can vary the costs of
financing, investing, and operating. The Company addresses
these risks through a controlled program of risk management that
includes the use of derivative financial instruments. The
Company'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
paragraphs do not represent amounts exchanged by the parties.
They indicate the extent of the Company's involvement in such
agreements but do not represent its exposure to market risk
through the use of derivatives.
Foreign Exchange Risk Management: A portion of the Company's
cash flows is derived from transactions denominated in foreign
currencies (principally European currencies and the Japanese
Yen). The United States dollar value of transactions
denominated in foreign currencies fluctuates as a result of a
strengthening or weakening United States dollar. In order to
reduce the uncertainty of foreign exchange rate movements on
transactions denominated in foreign currencies, the Company
enters into derivative financial instruments in the form of
foreign exchange forward and option contracts with major
international financial institutions. These forward and option
contracts, which typically mature within one year, are designed
to hedge anticipated foreign currency transactions, primarily
intercompany inventory purchases, and intercompany loans, for
periods consistent with commitments. Realized and unrealized
gains and losses on these contracts that qualify as hedges are
deferred and recognized in the same period as the transactions
occur. The Company's foreign exchange contracts do not subject
it to material risk due to exchange rate movements because gains
and losses on these contracts offset losses and gains on the
assets, liabilities, and transactions being hedged. The Company
had contracts to exchange foreign currencies in the following
notional amounts:
1996 1995
---- ----
Forward exchange contracts $111.9 $ 80.7
Purchased foreign currency options $217.7 $113.5
Fair values exceeded the carrying amounts of these instruments
at December 31, 1996 by approximately $2.0 million. The
estimated fair values of derivative financial instruments used
to hedge the Company's risks will fluctuate over time. The fair
value of forward exchange contracts is estimated by obtaining
quoted market prices. The fair value of foreign currency option
contracts is estimated using option pricing models used widely
in financial markets. The increase in the notional amounts of
purchased foreign currency options primarily relates to
increased foreign exchange exposure particularly in Germany and
Japan and the Company's expanded commitment to its risk
reduction strategy.
Interest Rate Risk Management: The Company enters into interest
rate swaps to lower funding costs or reduce exposures to
interest rate fluctuations. Under interest rate swaps, the
Company agrees with other parties to exchange, at specified
intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional
principal amount. There were no interest rate swaps outstanding
at December 31, 1996. The notional amount of interest rate
swaps outstanding at December 31, 1995, was $150.0 million, and
these swaps had an unrealized loss of $9.5 million. These swaps
were terminated during 1996 without loss.
Concentrations of Credit Risk: Financial instruments that
potentially subject the Company to credit risk consist
principally of interest-bearing investments, foreign currency
exchange contracts, interest rate swaps, and trade receivables.
The Company maintains cash and cash equivalents, investments,
and certain other financial instruments with various major
financial institutions. The Company performs periodic
evaluations of the
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 12 - FINANCIAL INSTRUMENTS - (Continued)
relative credit standing of these financial institutions and
limits the amount of credit exposure with any one institution.
Hospitals and other healthcare providers 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. The Company
monitors the creditworthiness of its customers to which it
grants credit terms in the normal course of business.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but
management believes credit risk exposure to such contracts is
limited by periodically reviewing the creditworthiness of the
counterparties to the transactions.
Investments: Investments in marketable equity securities are
accounted for in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. SFAS No. 115
requires that all investments in debt and equity securities that
have readily determinable fair values be classified and
accounted for in one of three categories: held-to-maturity,
trading, or available-for-sale. Available-for-sale securities
are carried at fair value, with unrealized gains and losses
excluded from earnings and recorded, net of tax, as a separate
component of shareholders' equity. All other noncurrent
investments, primarily interest bearing deposits, are classified
as held-to-maturity. Held-to-maturity investments are stated at
amortized cost and included in long-term investments. The
Company owns no investments that are considered trading
securities.
At December 31, 1996, available-for-sale investments, which
included only marketable equity securities, had a cost of $3.5
million and a fair value of $19.1 million. The gross unrealized
gain associated with available-for-sale securities of $15.6
million, net of tax of $6.2 million, was included as a separate
component of shareholders' equity. At December 31, 1995, the
carrying value of the available-for-sale securities was $3.5
million and this approximated their fair value. There were no
sales of available-for-sale securities in 1996 or 1995. The
Company determines fair values primarily based on quoted market
values.
The carrying value of held-to-maturity investments, which
include bank certificates of deposit held in Puerto Rico, were
$22.2 million and $16.4 million at December 31, 1996 and 1995,
respectively. The carrying values of these investments
approximate their fair values.
NOTE 13 - 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.
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 13 - CONTINGENCIES - (Continued)
On May 3, 1996, Pacesetter, Inc., filed suit against the Company
in the United States District Court for the District of
Delaware. The lawsuit was subsequently transferred to the
United States District Court for Minnesota. The complaint, as
subsequently amended, alleges infringement of six of the patents
related to the Company's VIGOR pacemaker/programmer and the
VENTAK MINI and seeks injunctive relief, unspecified monetary
damages, and an award of attorneys' fees.
On August 23, 1996, following the filing with the French
Ministry of Labor and Social Affairs of a small number of
reported incidents concerning the use in France of the 15mm ACS
RX MULTI-LINK Coronary Stent System, the Company, in cooperation
with the French Ministry, voluntarily suspended sales of this
product and recalled units in France.
The Company is a party to certain other legal actions arising in
the ordinary course of its business. 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 all
of these actions 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.
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.
<TABLE>
Note 14 - SELECTED QUARTERLY INFORMATION (Unaudited)
The following table summarizes the Company's operating results by quarter:
1996 1995
----------------------------------- ----------------------------------------
<CAPTION>
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Cardiac rhythm management $151.9 $144.7 $144.2 $133.8 $123.6 $119.3 $105.6 $103.9
Vascular intervention 104.9 104.7 109.1 106.9 114.5 108.4 111.0 114.0
Minimally invasive systems 14.0 10.7 12.2 11.4 10.2 6.4 7.5 6.9
----- ----- ----- ----- ----- ----- ----- -----
Total net sales 270.8 260.1 265.5 252.1 248.3 234.1 224.1 224.8
Cost of sales 68.4 69.1 100.0(1) 77.0 70.9 68.1 73.6 70.8
----- ----- ----- ----- ----- ----- ----- -----
Gross profit 202.4 191.0 165.5 175.1 177.4 166.0 150.5 154.0
Research and development 41.9 37.6 37.0 36.0 34.7 32.2 34.4 33.4
Sales, marketing, and administrative 87.6 78.7 82.4 77.3 80.0 72.5 69.7 69.6
----- ----- ----- ----- ----- ----- ----- -----
Income from operations 72.9 74.7 46.1 61.8 62.7 61.3 46.4 51.0
Other expenses, net 5.0 6.8 12.6 14.7 11.8 14.0 10.5 15.3
Impairment charge -- -- 66.9 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes 67.9 67.9 (33.4) 47.1 50.9 47.3 35.9 35.7
Income taxes 25.6 26.7 12.8 18.6 20.1 19.3 14.7 14.6
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) $42.3 $41.2 $(46.2) $28.5 $30.8 $28.0 $21.2 $21.1
----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) per share $0.59 $0.57 $(0.64) $0.40 $0.43 $0.39 $0.30 $0.29
Cash dividends declared $0.025 0.025 $0.025 $0.025 0.025 $0.025 -- --
Common stock prices:
High $57.25 $56.25 $61.38 $54.63 $42.63 $29.25 $24.50 $19.88
Low $40.00 $47.00 $46.50 $39.50 $27.50 $22.63 $18.25 $15.50
</TABLE>
(1) Includes the impact of $28.8 million in obsolescence charges
in second quarter resulting from the accelerated regulatory
approval and customer acceptance of new generation CRM products
and programmers. See Note 3.
Report of Independent Auditors
Board of Directors and Shareholders
Guidant Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Guidant Corporation and Subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Guidant Corporation and Subsidiaries at
December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
s/Ernst & Young LLP
Indianapolis, Indiana
February 4, 1997
Guidant Corporation and Subsidiaries
Exhibit 21.1 List of Subsidiaries and Affiliates
The following are the subsidiaries and affiliated corporations
of the Company at December 31, 1996:
State or Jurisdiction
of Incorporation or %
Name Organization Owned
- ---- ---------------------- -----
Guidant Corporation Indiana
Advanced Cardiovascular Systems, Inc. California 100
Heart Rhythm Technologies Incorporated California 100
Origin Medsystems, Inc. Delaware 100
Guidant Canada Corporation Canada 100
ACS GmbH Germany 100
Guidant Beteiligungs GmbH Germany 100
Guidant GmbH & Co. Medizintechnik KG Germany 100
Cardiac Pacemakers, Inc. Minnesota 100
Guidant B.V. Netherlands 100
Elmedin-Guidant S.A. Spain 100
Guidant Limited (U.K.) England 100
Guidant France S.A. France 100
Guidant Belgium S.A. Belgium 100
Guidant Skandinavia A.B. Sweden 100
Guidant Nederland B.V. Netherlands 100
Guidant Japan T.K.* Japan 100
Guidant GmbH (Austria) Austria 100
Guidant International B.V. Netherlands 100
Guidant Japan K.K.* Japan 100
CPI del Caribe, Ltd. Minnesota 100
CPI Delaware, Inc. Delaware 100
Guidant Australia Pty Ltd. Australia 100
Guidant Italy, S.r.l. Italy 100
Guidant Sales Corporation Indiana 100
Devices for Vascular Intervention, Inc. California 100
Guidant Europe S.A. Belgium 100
Guidant International Sales, Inc. Barbados 100
*Guidant Nederland B.V. and Guidant International B.V. own 90% and 10%,
respectively, of Guidant Japan K.K.
GUIDANT CORPORATION
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of Guidant Corporation of our report dated February 4, 1997,
included in the 1996 Annual Report to Shareholders of Guidant Corporation.
Our audit also included the financial statement schedule of Guidant
Corporation listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also consent to the incorporation by reference in Registration
Statement Number 333-00014 on Form S-3 dated January 17, 1996,
Registration Statement Number 333-02334 on Form S-8 dated March 14,
1996 and in Registration Statement Number 333-17897 on Form S-8
dated December 16, 1996 of our report dated February 4, 1997, with
respect to the consolidated financial statements of Guidant
Corporation incorporated by reference in the 1996 Annual Report
(Form 10-K) for the year then ended December 31, 1996.
s/Ernst & Young LLP
Indianapolis, Indiana
March 18, 1997
GUIDANT CORPORATION
Exhibit 99.1
Factors Possibly Affecting Future Operating Results
From time to time, the Company may publish forward-looking
statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new
products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order
to comply with the terms of the safe harbor, the Company notes
that a variety of factors could cause the Company's actual
results and experience to differ materially from the anticipated
results or other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may affect
the operations, performance, development and results of the
Company's business include the following:
1. Economic factors over which the Company has no control,
including changes in inflation, interest rates and foreign
currency exchange rates.
2. Delays and uncertainties in the regulatory approval process
in the United States and other countries, resulting in lost
market opportunities.
3. Unexpected safety, performance or efficacy concerns arising
with respect to marketed products, whether or not scientifically
justified, leading to product recalls, withdrawals or declining
sales.
4. Unexpected interruptions of manufacturing operations as a
result of regulatory enforcement actions by the FDA or other
regulatory authorities.
5. The difficulties and uncertainties inherent in new product
development, including new products that appear promising during
development but fail to reach the market as a result of safety,
performance or efficacy concerns, inability to obtain necessary
regulatory approvals, unanticipated restrictions imposed on
approved indications, excessive costs to manufacture,
infringement of patents or other intellectual property rights of
others, or technological advances by a competitor of the Company.
6. Litigation and other legal factors which could preclude
commercialization of products or negatively affect the level of
sales or profitability of existing products, including
unanticipated litigation of product liability claims, antitrust
litigation, environmental matters and patent disputes.
7. Future difficulties obtaining necessary components or
materials used in manufacturing the Company's products.
8. Future difficulties obtaining or the inability to obtain
appropriate levels of product liability insurance.
9. Competitive factors including the ability of the Company to
obtain patent rights or other intellectual property rights
sufficient to keep competitors from marketing competing products,
the introduction of new products or therapies by competitors or
scientific or medical developments that render the Company's
products obsolete, uneconomical or otherwise non-competitive or
the acquisition of patents by competitors that prevent the
Company from selling a product or including key features in the
Company's products.
10. Governmental factors including laws and regulations and
judicial decisions that affect the regulation of medical devices,
product liability, health care reform or tax laws.
11. Health care industry factors, including increased customer
demands for price concessions, reductions in third-party
(Medicare, Medicaid and other governmental programs, private
health care insurance and managed care plans) reimbursement
levels for procedures using the Company's products and limits
imposed by customers on the number of manufacturers or vendors
which the customer will purchase products from.
12. Accounting requirements to write off obsolete inventory or
goodwill which reduces reported earnings or changes in accounting
standards applicable to the Company.
13. Internal factors such as retention of key employees, change
in business strategies and the impact of restructuring and
business combinations.
14. The ability of the Company to implement its strategy that
includes the potential acquisition of one or more businesses.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,500
<SECURITIES> 0<F1>
<RECEIVABLES> 219,700
<ALLOWANCES> 7,300
<INVENTORY> 102,800
<CURRENT-ASSETS> 418,900
<PP&E> 531,600
<DEPRECIATION> 210,600
<TOTAL-ASSETS> 1,003,900
<CURRENT-LIABILITIES> 308,000
<BONDS> 233,500
0<F1>
0<F1>
<COMMON> 192,500
<OTHER-SE> 255,700
<TOTAL-LIABILITY-AND-EQUITY> 1,003,900
<SALES> 1,048,500
<TOTAL-REVENUES> 1,048,500
<CGS> 314,500
<TOTAL-COSTS> 314,500
<OTHER-EXPENSES> 152,500
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 24,200
<INCOME-PRETAX> 149,500
<INCOME-TAX> 83,700
<INCOME-CONTINUING> 0<F1>
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 65,800
<EPS-PRIMARY> .91
<EPS-DILUTED> 0<F1>
<FN>
<F1>Does not apply.
</FN>
</TABLE>
